When Should Traders Be In or Out of Markets?

I met Joe Fahmy a few years ago (at a StockTwits event) and I have been impressed with his trading skills and diligence in refining his craft. He has been trading for 16 years, and has developed a rigorous investment strategy. As a hedge fund manager, he has successfully outperformed the markets for the past 13 quarters. You can read more about him at the end of this post.

His writing tends to be a little technical and chart focused; We spent some time chatting on the phone last week about his approach, and I suggested breaking a few topics into bite size, easy to understand, bullet points. This is the first of what hopefully turns into an ongoing series.

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When should traders be in or out of the market?

There are times when traders should NOT be in the market. There are other times when the market is rocking and traders should get aggressive. How can you tell the difference? Here are 5 helpful tips.

Note: I’m a trader, not an investor. I am looking for superior out-performance by being in the best stocks I can find during healthy times.

1) Accumulation and Distribution Days: When should traders go to cash? Follow the big boys! The big institutions control the market, so pay attention to their actions by tracking accumulation and distribution days. When institutional selling builds up over a short period of time (2-4 weeks) AND leading stocks start to break down, that is a great sign to start raising cash. Why? Because 4 out of 5 stocks move in the general direction of the market. I don’t care how good the company is, when the market’s in a downtrend, you don’t want to fight it.

2) Uptrends and Downtrends: Don’t get caught up with the terms Bull and Bear market. Just recognize if we are in an uptrend or a downtrend. For example, use the 50-day moving average on the NASDAQ Composite as a general indicator to be in or out of the market. Above the line usually means we’re in an uptrend and it’s a green light to be in stocks…below the line, downtrend and red light.

3) Scale In: When conditions start to improve, SLOWLY scale back in. There’s no reason to rush. Take a few positions and test the waters. If the rally is for real, there will be PLENTY OF TIME to make money. If you are wrong, at least you can get out quick with minimal damage and protect your portfolio. Think Defense First!

4) Buy the Strongest Earnings & Sales Growth: When markets are in a confirmed uptrend, what stocks should you buy? Be in the best! Don’t settle for low rate stocks. Look for companies that have strong earnings and sales growth. Why be in dead-money stocks with little growth potential? We’re in this to make money, right? So be in stocks that have a higher probability of moving up!

5) Fundamentals AND Technicals: Why does it only have to be one or the other? Why not USE BOTH! We want as many factors as possible in our favor when trading the market. Therefore, start with strong fundamental companies AND combine the proper technical timing to identify ideal entry points to effect your best risk vs reward trades.

These are my 5 measures for when to be in or out of the market. Note I do not rely on a single factor, but instead use multiple disciplines to facilitate trading, protect my capital and maximize returns.

Using every weapon available significantly improves your chances of surviving — and thiving — as a trader.

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Fahmy holds seminars for active traders who want to improve their returns (I will be discussing trader psychology and cognitive errors at the next NY seminar). Readers of the Big Picture who are interested will get a $500 discount on the full day event. Go to TradingBigWinners.com and enter the promotional code: “bigpicture500” for either the Los Angeles (2/18) or the New York (3/3) seminars. (I am only speaking at the NY event, and cannot get to the LA event — maybe next time).