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Wednesday, June 18th, 2008

The importance of anticipation in trading

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It is common advice that traders should let the market tip its hand before making a trade.

That’s wise, but true speculation requires anticipation of future events.

A trader should constantly be positioning themselves psychologically and tactically for the resumption of the primary trend during counter-trend moves. This is when the best trade set-ups occur.

An example is a bear-market rally. If the market is in a steep downtrend, strong rallies are quite frequent.

If your strategy is to avoid longs and go short during bear markets, rallies are tough to handle; as the market keeps rising and rising, you begin to think you’re missing out and are tempted to go long.

But as shown in the chart above it’s at the the toughest moment psychologically that a trader should be anticipating the next downward move; that doesn’t mean putting on trades; it means getting prepared and looking for stocks setting up shortable patterns.

As I mentioned, this is psychologically the toughest time to be anticipating, because you’re being dogged by thoughts such as ‘the bear market is over’ etc. But when the downtrend resumes, if you haven’t anticipated and prepared, you will miss the boat.

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This entry was posted on Wednesday, June 18th, 2008 at 4:00 am and is filed under Technical analysis, Trend following. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.