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Oversold Conditions In A Downtrend Make Profits Difficult

Analyzing what the signals are telling you – There are periods in a market trend when being able to interpret what the signals are not telling you, becomes a valuable resource. Over the past few weeks, the downtrend in the markets have been spotted with potential candlestick “buy” signals. These signals, occurring in the oversold condition provide a high probability that a reversal may occur.

Being able to analyze what the parameters are for a potential reversal signal also produces the analytical format for evaluating when the downtrend has not been halted. The past two weeks has been in that description. Notice the Nasdaq forming a very strong Morning start signal on July 20, 2004. The logical conclusion should be that a potential buy signal reversal was in the making. If that were the case, the following day, which opened higher, a good confirmation of the morning star signal, should have held up by the end of the day.

The purpose of investing is to buy low and sell high. The reality of investing is that you have to commit funds when the probabilities of producing profits are in your favor. Not every attempt at making the right investment is going to work out. That becomes obvious when the result of a potential trade does not confirm the result expected. Notice the day following the Morning star signal showed continued selling. This is not what would be expected after a bullish reversal signal.

Cut your losses short and let the profits run. That is the sage advice that everybody on Wall Street gives freely. Yet nobody ever explains how to do that. Candlestick analysis provides the proper format for cutting losses short. If you enter into a trade based upon what the probabilities have indicated that a trade should be doing, and the following action does not confirm what the signal showed that the price move should be doing, then get right back out of the trade.

The trade is secondary to the purpose of the account, to produce a profit. If a trade is not resulting in what should be happening to produce that profit, evaluate it quickly and close it if it isn’t performing like it should.

This is the hardest hurdle for most investors. The act of putting on a trade means that our mental process (ego) has now evaluated the trade as a good trade. The human psyche has a very hard time coping with the reality that not every trade that is established is going to work out. The learning process for most investors does not get past this hurdle. Most investors, once placing a trade and seeing that it is not performing as their thinking process had anticipated, goes into rationalization mode. To be wrong, especially with your own investment funds, is not an understandable event.

New objectives become established immediately upon seeing that an investment is not working in the manner it was projected. “ I will close the trade once it comes back to breakeven” or “ I will just keep this long term because it is a good company, it will come back.” The candlestick signals provide a format for eliminating alternative investment goals. If the trade is not working because the potential candlestick “buy” signal was negated, then move the funds to someplace else immediately. The “ego” problem will disappear rapidly when the ‘ego’ gets satisfaction for moving out of trades that are not working and moving to trades that are.

 

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