{"id":3243,"date":"2013-10-11T11:46:22","date_gmt":"2013-10-11T15:46:22","guid":{"rendered":"http:\/\/www.morpheustrading.com\/blog\/?p=3243"},"modified":"2022-04-06T15:05:05","modified_gmt":"2022-04-06T19:05:05","slug":"psychology-trading-market-reversals","status":"publish","type":"post","link":"https:\/\/morpheustrading.com\/blog\/psychology-trading-market-reversals\/","title":{"rendered":"How Top Stock Traders Mentally Deal With Sudden Market Reversals"},"content":{"rendered":"

\"CalmAfter suffering a nasty, two-day decline on October 8 and 9, the stock market ripped higher on October 10, closing the day with massive gains of more than 2% across the board.<\/p>\n

Feeling a bit of whiplash lately?<\/p>\n

While the big gains with bullish closing action on October 10 were a positive sign for the market, that powerful and sudden reversal immediately<\/em> put traders who just\u00a0stopped out<\/a> of stock trades into\u00a0regret mode, <\/strong>one of the Four Most Dangerous Emotions For Traders<\/em><\/a>.<\/p>\n

Driving A Car While Staring In The Rear-View Mirror Is Hazardous To Your Health<\/strong><\/h3>\n

Regardless of whether or not you sold your stocks at lower prices and are now feeling regret, let’s get one thing straight…<\/p>\n

This is not<\/em> the time to be worrying about what happened in the past because you must be focused on what is happening NOW!<\/strong><\/p>\n

Whenever traders mentally struggle over whether or not they made a correct trading decision, such as if they bought or sold at the right time, they will often be wrong…but that’s completely okay!<\/p>\n

What is not okay is to STAY wrong!\u00a0<\/strong>If you’re wrong, simply move along.<\/em><\/p>\n

During the whipsaw action of October 8-10, you may have found yourself stopped out of a stock position that subsequently made an abrupt u-turn and once again looks to be in good shape.<\/p>\n

If this happened to you, the correct thing to do is to calmly and objectively jump back into the trade (even if you need to reduce your share size a bit to make that happen).<\/p>\n

The current daily chart of Michael Kors ($KORS) is a good example of a stock that can be re-entered,<\/strong> even if the trader was recently forced to sell:<\/p>\n

\"$KORS<\/p>\n

When $KORS sliced through key support of its 50-day moving average on October 8, it undoubtedly triggered many sell stops (which was the correct thing to do).<\/p>\n

However, just two days later, $KORS jumped back above support of 20 and 50-day moving averages, and back into its prior range.<\/p>\n

As long as $KORS holds the newly reclaimed support levels, it is valid to re-enter the stock (regardless of one’s previous outcome in the trade).<\/p>\n

Remember that each new trade entry is completely independent of itself.<\/p>\n

Furthermore, we have learned over the years that trade re-entries (after stopping out because we bought too early) are often the most profitable trades<\/strong> because the “shakeout” absorbs overhead supply that would have otherwise created additional resistance on the way back up.<\/p>\n

Just one note of caution, though, with regard to re-entering trades: Don’t confuse re-entering a bullish stock with “revenge trading,”<\/strong> which occurs when a trader re-enters a stock that fell apart, but still has not shown a valid technical reason to get back in\u00a0(ego, be damned).<\/p>\n

Now What?<\/strong><\/h3>\n

The strong gap up on October 10 was certainly a bullish sign, and we could see a solid, broad-based rally develop if<\/em> the recent lows in the major averages hold up.<\/p>\n

Unfortunately, the October 10 volume was lighter in both exchanges, meaning the rally was not led by banks, mutual funds, hedge funds, and other institutions.<\/p>\n

Nevertheless, with so many stocks changing hands the past few days, it’s quite apparent that buyers were stepping in to accumulate leading stocks off the lows. <\/em>Just check out the charts of\u00a0$LNKD, $KORS, and $TSLA to see what we mean.<\/p>\n

Although we reduced our long exposure on October 8<\/a>, our remaining stock positions are still in pretty good shape.<\/p>\n

U.S. Silica Holdings ($SLCA)<\/strong>, for example, has shown incredible relative strength over the past few days, as the stock basically ignored the October 8 sell-off.<\/p>\n

Below is an annotated chart of $SLCA that we recently posted on our new Google+ page<\/a>:<\/p>\n

\"$SLCA<\/p>\n

When a stock breaks out with strong price and volume action, it is always a very bullish sign. In fact, price and volume are the two most important and powerful technical indicators<\/strong> at a trader’s disposal.<\/p>\n

We all have the urge to lock in profits at times, but to make the big money in trading, one’s focus must simply be on consistently doing the right thing.<\/p>\n

If a trader does so, the large profits will eventually follow.<\/strong><\/p>\n

Overall, we feel that $LNKD, $KORS, $YELP, and $TSLA are the top dogs in this market right now, and are “must own” stocks for institutions.<\/p>\n

As of now, we view the recent shakeout action as a buying opportunity (with stops placed beneath that week’s lows).<\/p>\n

Either the lows of October 8 and 9 hold up, or<\/em> the market will end up going much lower over the next few months.<\/p>\n

As always, remember to trade what you see, not what you think!<\/strong><\/p>\n

Ready to take your trading education to the next level, while profiting from the best stocks to buy? If so, sign up now<\/a><\/strong> for your risk-free subscription to our flagship Wagner Daily swing trader newsletter.<\/em><\/p>\n