If there is one single rule one should always follow, its to follow the direction of the market. If the market is up only trade long. If the market direction is down trade shorts. Markets can only be in 3 states.
- Up – The market is in bull moving up
- Down – The market is in a correction moving down.
- Side Ways – Market is range bound
80 percent of stocks follow the market direction. So to increase your chance of success , one needs to know the direction of the market. Remember trading is about increasing your chances of success (see lesson 1 analogy gambling with coin toss), and your chances increase if you trade in the market direction.
How does one find the direction of the market.
1) Apply technical analysis on the market index. e.g apply the concept of moving average i.e. strategy 1 on the whole market e.g. on the Dow Jones Industrial Index or Nasdaq, or S&P 500. See if the moving average for each of the market points up or down or sideways.
2) Read market news. e.g. Investor Business Daily publishes daily news and tells the overall market condition as confirmed uptrend, confirmed downtrend or market under pressure. The daily videos also mention the market direction.