Do You Want the Market to Go Up or Down?

This past month was one of the most consistent months for the type of trading we do. In our Daily Plan we had 8 signals, all ETF scale-ins. All 8 trades were profitable trades.

Because we scale-into trades, (a topic I’ve covered here over the past 4 days), sometimes we are fully invested in a position and sometimes we only have a partial position. Partial positions will occur for example when we have a first day set-up, enter the first of 3 possible units, and then the position immediately moves in our favor and triggers a profitable exit signal (that is what just happened in our short SPY and FXI positions yesterday). Other trades get to be full positions. For example we scaled into the short side of the SPY’s earlier in the month with the final piece shorting at what is still the high for 2009 (we got "lucky").

So that brings me to the question which will occur whenever you start scaling into a position. After you have your first piece on, do you want the market to go up or down?

You’re short the first piece (lets use Wednesday’s Daily Battle Plan as an example). We had a first unit short signal on the SPY Wednesday on the close caused by the overbought conditions. On Thursday, did we want the market to rise further, therefore giving our first unit a loss but allowing us the opportunity to average in further at a higher price? Or did we want to have the market sell off like it did yesterday and immediately give us another profitable trade for the month?

I’ll leave you with this question:

Do you want your early position to move against you like the SPY did in early January in order to scale in at higher prices and get fully short before a big sell-off.? Or do you want to have a smaller position and then capture a quick gain like we did yesterday?

Take the weekend to think this over (or at least until kickoff late Sunday afternoon). Ask yourself which you believe is better and why. And if you want to email me your thoughts at l.connors@tradingmarkets.com, I’d love to read them. Early next week I’ll follow up with what I consider to be the best answer.

Have a great weekend (and enjoy the game!)!

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