How often have you woken up from a deep sleep only to see that it was raining outside? Once you knew that it was raining you most likely dressed accordingly and brought an umbrella with you as you left the house to go work. Once you know the weather outside you can plan correctly. Well, traders and investors must do the same thing before they make an investment decision, they must know what type of market they are in. For example, if the major stock market indexes are in a bullish trend then traders will want to be looking for long consolidation bases on charts for break-outs to buy. They might also look for minor pullbacks to the 20-day moving average for continuation rallies. These are just a few ways to trade a bullish up trending stock market.

What happens if the stock market starts to come under distribution or enters correction mode (down-trend)? If the stock market starts to sell off and corrects then traders must play the market differently. You see, the weather has now changed in the stock market environment, therefore as a trader and investor we must change and adapt to the conditions that are present. Traders that are looking to buy stocks at major support levels should trade smaller share size, and make sure that they have a defined stop loss in place. They may also want to look at lower support levels since stocks can generally decline further than most people expect in down trends. When stocks decline they will often fall much quicker than when they were advancing higher. Have you ever heard the old market adage, stocks take the stairs up and the elevator down. Most people in the public are not used to trading downside markets so it is usually more difficult to navigate through. Savvy, and experienced traders and investors can even look to sell short stocks that are forming bearish chart patterns when the major stock indexes are in down-trends.

All bull market rallies and bear market declines will end at some point in time. Every market will become overbought in up-trends and oversold in down-trends. When these turning points occur the reversal moves are fast and furious. This is another reason why traders and investors should learn to understand how to read the charts. Simply understanding volume, moving averages, chart patterns, and support / resistance lines can make and save traders thousands of dollars. The bottom line, traders and investors should get educated, and they must always know the type of environment the markets are in.

Nicholas Santiago