At this point in my trading career, I believe one of the best things I have learned so far is the virtue of buying dips and shorting bounces. This obviously is not the only way to trade but it certainly is very effective once you learn how to do it properly.
I think many traders, especially new traders fall in to the temptation of buying on new highs or shorting on new lows after a lot of momentum has already been pushing price to those points. This is different from break-out trading, which I also think is very effective. But with breakout trading, you are buying at a point where momentum and volume are just starting to take off once price has pushed through a meaningful support or resistance area. But entering the market after price has already asserted iteself in a particular direction is not the best strategy.
I think a great example for this was this past Thursday and Friday when the DOW was passing through 10,000. There was already a lot of momentum and volume in the market, and a lot of emotion and I am sure many people, again, especially novice traders were jumping on board when the pros had been entering in the weeks before while price was dipping again. Friday as we know, was a down day, so some people instantly lost money by getting into the market too late. Perhaps there is still some more gusto left in the short-term but from a probability standpoint, I believe the odds are higher that we will see a temporary pull back before another push higher by any meaningful amount.
This said, waiting for those dips in this current run up is a better strategy for entry. This takes some patience and fortitude but can certainly pay off in the long run.
I see this time and time again in my own trading where I almost excllusively focus on buying on the short-term pull backs away from the prevailing trend. Or as they say, buying the dips and selling the rips. I find it much more profitable to be trying to exit a trade when the masses are placing their market orders to enter. And it is much easier to get in to a trade when fear is high and people are willing to take anything just to get out of a trade.
Just like any strategy however, there is always a risk for loss so that is why proper money management strategies come in to play and this where I am currently focusing most of my efforts. I feel like once I master my money management and risk control, I will be in a position to make big and consistent gains. I can feel it getting closer and I am excited but not impatient.
It will be interesting to see what the market decides to do in the next few weeks but hopefully, it will present some great opportunities to enter on some nice dips that will take our profits even higher.
Good post. In this environment you have to buy when it hurts, and sell when theres too much euphoria.
BTW, lyoto vs. Rua. Who do you have?
Posted by: mvw | October 21, 2009 at 03:03 PM
Hey man, thanks for stopping by. Buying when it hurts has made me feel good in the long run but it takes practice and patience for sure.
Lyoto looks tough but Showgun looks a lot meaner. It's going to be a good fight for sure but I think Lyoto will pull the victory at the end of the day. You?
Posted by: Stan | October 22, 2009 at 09:56 AM
I think Lyoto is a more dynamic, unconvential striker and Rua will have some trouble trying to deal with him. There's not too many people who successfully integrated Karate into an MMA style so training to fight Lyoto will be difficult.
BTW, congrats on the new addition.
Posted by: mvw | October 22, 2009 at 11:01 AM