Every experienced trader knows that a bull market is much easier to trade than a bear market. In fact, in a strong bull market a trader can actually have a bad entry or even be out of the money on a trade and eventually the trader will get bailed out by the market trend. Often, traders will think that they made a great move because they made money, but really the market up-trend bailed them out. This has happened to me personally many times. Hence the old saying, a rising tide lifts all boats. Truthfully, this is exactly why you want to trade with the trend, especially if you are new to the trading business.
It is important for traders to identify signals of a potential change in trend when that finally does occur. Remember, trends do not last forever and there is always a correction that will take place even in the strongest bullmarkets. When markets that are about to change trend we see a big move in a lot of small and micro cap stocks. Recently, there have been a lot of microcap stocks trading higher by 100 to 200% in a day or two. This is what I like to call a dash for trash. When you see this happening you must realize that markets have moved into a euphoric state and that will eventually end. I must admit, this can last a while. If anyone remembers the trading environment in the late 1990’s it lasted longer than most people would have believed.
We also saw something very similar in 2006 and 2007. In fact, back then everyone knew there was a credit and housing bubble, but people were still flipping houses well into 2008 before finally getting crushed by the downturn. Shortly afterward, there were record foreclosures and a surge in unemployment. When that bull market ended not many people were able to recognize the change in trend and we all know the outcome for the masses.
These days everyone is looking at the reopening play since there is a vaccine being distributed for the coronavirus. All we keep hearing is how the travel stocks are great buys right now and how the hotels are going to soar as the economy reopens. What many novice traders fail to realize is that these stocks made their lows a long time ago. The market is ahead of the news, often by 6 months or more. When everyone jumps on board the majority of the move has already been made. This is a classic buy the rumor sell the news event. Remember, the markets are tricky and they anticipate the future well in advance. This is why you must be careful in late stage bull markets. Remember, bull markets have a tendency to make everyone look like a genius until they end.
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