Ah, a trend. Each day the market moves in your favor. The retracements are shallow and non-threatening. Time passes quickly, in a low-stress fashion. The money piles up. Life is good. And then ... the trend changes. Abruptly. How to deal with it?
The perfect answer is an announcement, preferably over a loudspeaker, that tells us, “Heads up, the trend will be ending in 15 minutes. Close out your positions, book your profits, and start setting up opposing trades.”
Of course, when you find that indicator, the one that works 100% of the time, let me know.
The other school of thought is, “Sell too soon, and then wait for the turn.” I’m not a huge fan of this. First, there is no way to know when a trend is going to end. Imagine the people who got long $PCLN in November 2008 at $49 – and sold three weeks later at $62. What happens next? Justification. As in, more time spent debating why it was a good move to get out, instead of just getting back to the task at hand. “I closed out my longs just in time. It’s obviously overextended here. So I’ll start shorting.” $PCLN closed today at $1261.
In this case – we start taking trades to justify our earlier decision, instead of just taking a deep breath and waiting for the next setup.
At the end of the day, I’ve found the best way to play a trend is to simply ride that horse. The horse being the timeline you are trading. Playing the hourly chart? Then that is where your trend lives and dies. If the hourly trend is broken, don’t go looking to the daily chart for justification.
Yes, at the end of the trend, especially if it is violent and happens overnight, you will lose money. But, you will have particpated in most of the move, and you won’t have gotten out way too soon – which is another way of losing money.
The markets are a gigantic riptide. When we are on our game, then 75% of the time we are swimming with the tide. When we are distracted, we think we can fight it. The simple solution? When it feels like you are fighting the riptide, get out of the water. Cash is a position.