Monday, September 20, 2010

Should we worry about an impending top?

The Nifty has rallied 550 points from 5350 - in barely two weeks. This is a ten percent gain in two weeks - as good as it gets. The market is in an uptrend, therefore the trade should be to buy on dips.

Traders should be looking for a dip rather than an impending top. The use of trailing stops is needed to ensure that existing long positions are not caught up inside a correction, whenever it starts.

Should you trade a correction? The answer for most traders is: a correction is a messy affair, not worth trading. Also, it goes against the main trend, therefore the risks are probably larger than the rewards. But, a day trader could still catch a down day.This is an exception rather than the rule.

Stocks are not the only market we can trade in. There has been a roaring bull market in Silver. For professional traders, there are many opportunities.

The question was: Should we worry about an impending top? My answer would be: If my positions are protected by appropriate exit strategies (trailing stops, targets if any, rules for exits on indicator turns, etc) we do not have to worry about tops or reversals. We focus on what we need to do.

1 comment:

Student Of Market said...

I am not worrying about an impending top. But as an adherer of prudent money management philosophy, I am slowly and steadily reducing my exposure bit by bit. In other words, I do not mind selling 5% of the portfolio to generate cash and I am fine if the market still goes up after I sell ( after all, my 95% goes up along with it.) On the other hand, if the market goes down by 10-12% percent, I will have a little cash to buy again.

Sir, is that a reasonable thing to do?

But One thing for sure, I am not going to short this market and squander away the cash that I have generated.