Traders who have been around for awhile will tell you that they've had experiences like this.
Stocks that they have long positions in just keep going up, seemingly impervious to the force of gravity that encompasses us all.
The trader gets puffed up with pride. They bought the stock when everyone else was selling. They got the stock for cheap and for whatever reason the tide has turned.
The stock is a Wall Street favorite again. They watch it run up high and they don't lock in profits, thinking the run up will continue.
But what goes up must come down, and it's no different in the financial markets.
We live in an age where we have instant access to information at our very finger tips. Anyone with an internet connection can research companies, pull up stock charts, scan through financial reports, and participate in the business of buying and selling securities.
Unfortunately, information is useless if you can't properly digest it.
So here's what you have to always remember as a trader: plan your trade & respect your plan!
Trade the markets with a strategy going in and you will impose upon yourself a discipline that only a limited number of market participants live by. After all, if everyone had discipline in trading, everyone would be successful. This isn't the predominant reality unfortunately.
Trading the Plan Recap: Zillow (Z)
Let's talk about our trending move analysis from last weekend for Z and how appreciating the fact that gravity ultimately flexes its muscles would have saved us from buying after an extended run up.
Note on the daily chart that the first sign of gravity demanding respect was on the break below the $140 support area during Monday's trading session. We closed below it at $135.35
In recognizing this break of support and going in with a plan of action, traders could have assessed risk/reward and did one of two things:
- Go short, making a bet that the stock would continue to slide, and profiting by buying back at a lower price and pocketing the difference.
- Wait for a buying opportunity near the next support levels to take a long position and bet that the stock bounces back up, selling at a higher price after other buyers come in for a bargain.
By planning the trade in advance, thus knowing where to go short or go long, we would have been neutral to the pullback in Z, recognizing it as a natural occurrence after an extended run up.
Did we have to preempt the pullback to make money on the trade? Of course not.
You don't have to catch the entire downswing to profit off of a short position, and you don't have to time your long entry perfectly to profit on a bounce back up.
Even if Z didn't break support and moved up to $150 this week instead, we'd still have our support and resistance levels drawn on the chart, and would map out the next trade accordingly.
The market moves, but as best as you can, you shouldn't let those moves move you.
Stay focused, plan your trade, and respect your plan!