I read this question a lot of times on social media. It’s a very tough question, especially for new traders.
If you go to cash and sell all your positions, it’s always because your edge disappeared temporarily. That means you have low odds to make money with your approach. Don’t worry about that, because every trader works in a small niche and the chance to make money disappears from time to time. It’s your job to asses when it’s time to make money and time to stay at the sidelines.
You must have a feeling or rule-set to analyze the market situation and to decide if the time is right to get back to the stock market again.
7 things I am monitoring actively
- I do my analysis of stocks and the general stock market everyday. I go trough my watchlists and ask myself: Are the stocks I am monitoring strong? Do they lead the market? If yes, it’s a good sign that my stock selection process is working.
- How many stocks do I have on my watchlist? Am I adding new stocks to my watchlist everyday or every week? If I add a few stocks every week to my watchlists, it’s a good sign because the chances increases to catch a good winner.
- How do the leading large cap stocks look like? Are they close to all-time highs or are they broken down without any recovery? If all charts look like a catastrophe it shows me that nobody is buying glamour, large cap stocks (like $AMZN, $AAPL, $NFLX etc.).
- Do the indices show a bottoming pattern? If yes, it’s a good sign. Especially if the updays show higher volume.
- Are the indices in a long-term uptrend? You can have a look at the weekly and monthly chart. If you have a solid uptrend, the odds are higher for a continuation instead of a reversal. Maybe a correction is just a small pause in a long-term bull market.
- I monitor the % of stocks above the 50 MA and 200 MA. They gave me clues about the broad trend of the markets. In a strong bull market, everything is above the 50 MA and 200 MA.
- Are the indices in synch with each other? You always want to see a broad market trend. That means small and mid caps should lead. Use the Russell 2000 for an analysis. This index should be in synch with the large cap indices like Nasdaq and S&P 500.
Make sure you look from different angles at the market. But most important for me is my own watchlist and my stock screener. If everything on my list looks good, the chances are high that I can make money. That’s my niche and I try to know my niche as best as nobody else.
Buy small test positions first
Don’t jump back into the market with both feet! Always buy small test positions and increase them if they show a profit:
- If you normally buy 10% positions, buy 5%.
- After they show a profit and moved up a few percent (f.e. 3%), add another 5%. Now you have the full position.
Of course you pay a higher average price, but see it from the risk side: If the market is ripe, you will save a lot of money because your losers are smaller. Often it takes multiple attempts to get back into the market and reducing losses is the key. Lose small!
Don’t underestimate the psychological side
As I wrote above, sometimes it takes multiple attempts to get back into the market. If you have 5 losses in a row it will have an impact on your confidence. The smaller the losses you have to bear, the less the damage of your confidence as a trader. Losing 0,5% of your capital is better than 1% or more.
Do everything to secure your „mental capital“. It’s much more important as your monetary capital. If the odds are increasing to make money, you must be able to pull the trigger again. In that situation your mindset must be in a good shape.