Rule 8: Don’t Trade Against The Market
Simple as this: Don’t short the stock when the trend of the underlying market in the same time frame is up. Don’t go long when the market trend in the same time frame is down. I emphasize time frame for a reason: there is nothing wrong with doing a daytrade short-sale on a stock which is in a long-term uptrend, or vicey-versey. They’re different time frames and hence different trades. Knowing your time frame is paramount. That’s why it’s rule number 1. Or 3. I forget.
This is just a form of confirmation and is based on the idea of keeping on the correct side of probability. We want the odds stacked in our favor as much as possible. We don’t want to try to paddle upstream or swim towards the shore when the tide is receding or shoot our toe off to spite our face or pull the mask off that ole lone ranger. Whatever the cliche’ is.
I break this rule when I get too focused on a particular stock and trade solely on the stock’s action without considering what the underlying market is doing. Normally I’ll then end up with an agonizing, hard-fought small gain or, more often, a quick loss as a reminder.
Examples:
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Don’t enter a long-term short position if the related market is above its 50-day moving average which is in turn above its 200-day moving average. I say “related market” because you wouldn’t use the Nasdaq, for instance, as the underlying proxy for an oil stock. Commodities in particular usually trade independently of the major averages.
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Don’t enter a long day trade if the market is headed down intraday.
Hint: Many folks have potential day trades ready on both the long and short side, then use the market’s break of its opening range as a signal for which side to trade.