[smartads]
Whenever we see green after a long stretch of consecutive red days, it can be really enticing to start buying. The drop is over, right? Well it could be and it could not… that’s why its always important to look for confirmation.
Depending on your time frame and risk thresold maybe you can afford to take the risk, but green after a bunch of red can always be misleading. Is it a real change in trend or is it just a dead cat bounce?
Ultimately we can never really know until we see some sort of confirmation, which generally involves another push higher in the days following… but this would seem to contradict the common principle of stock trading: be early to the punch. Rest assured that its actually good risk management.
See examples of stock trading confirmations.
Regardless of whether it is a 3 year or a 1 week trend, the odds of calling the EXACT bottom (bottom 15%) or top (top 15%) are pretty rare. Instead we should aim to capture somewhere within the middle 70% of the trend. In this specific case, our confirmations will at least give us a better probability of making our assumptions right that the markets are indeed heading higher.
Why does this matter?
We just experienced a stretch of consecutive down days followed with a massive positive day. It would be easy to say, the worst is behind time to buy up, but this can actually cost you more money because its less riskier to buy on red days than green. In fact, you should really be looking for buying opportunities on down days, so you can actually experience these massive green movements.
So over the next couple of trading days, follow your watch list and see what develops. Now don’t wait too long, just long enough to see some sort of confirmation be it a move higher or some other similar event.
The length of your time frame will determine what type of confirmation you should see. Obviously, if you’re a short-term trader, then you can’t wait as long as someone with a longer time frame. In the end, we’re really just trying to prevent the markets from tricking us.