Was the March 2009 low the absolute low in this market? A correction in the market is always healthy, and the rally that began in early March and seems to be continuing as of the end of May could very well be a bear market rally. We won’t know until after the fact, of course, but it is a good idea to keep an eye on how the market tests some of the critical support levels such as the November 2008 and the March 2009 lows.
If you look at the economic fundamentals, they can go both ways. There’s enough to suggest that there are “green shoots” in the economy, and there’s enough to suggest that there are still lots of “yellow weeds,” as US economist Nouriel Roubini says. And from a technical standpoint, you don’t know whether the market is correcting or reversing until well after it has happened. As a trader, you are looking to take advantage of any type of move in the market to make a profit. So whether it is a correction or reversal, you need to be in the market to make your returns. And the only way to do that is to prepare for any possibility. But how are you going to do that?
The key is to have some well-tested trading strategies that work for different types of market conditions. Regardless of what indicator or chart pattern you use, you must make sure that you have a system that maximizes your returns and minimizes your losses. Readers of Stocks & Commodities know that there is an abundance of trading strategies. It’s just a matter of finding those that meet your criteria and testing them to find out if they will work for you. Go ahead, give it a try. Make a list of all the trading strategies that will work for you. Then test them to see how well they perform and, if necessary, tweak them to see if their performance changes. Ernest Chan, the S&C interview subject this month, will shed some light on what you need to consider when creating a trading strategy. You may find yourself making some of the common mistakes that people make when backtesting trading strategies. Chan will be able to give you some advice on how to avoid them.
Finally, a solid trading strategy forms the backbone of your trading career. So whether the market is trending or in a trading range or the economy is seeing those green shoots or yellow weeds, with a good trading system you can get the returns you are looking for.
Jayanthi Gopalakrishnan, Editor