I've had many people ask me, "When should I go 'big' on the market, and when should I sit out and wait for things to calm down?"
This is an important concept. Jesse Livermoore, an infamous stock trader, talks about the fact that he made more money sitting than he did actually trading...
I go back to my concept of trading: the act of buying and selling. Jesse Livermore had two different meanings behind his phrase, "I made more money sitting than I did actually trading."
Waiting for Appropriate Setups
Some are waiting patiently for the appropriate set-ups (for the stocks to reach a certain level), for the chart to set up, for people to change their mind about a company, or for a company to bring a new product to the forefront.
In the Trade
If you're already in the trade and have a position, you'll make a lot more money sitting and letting that stock ride...
Let the stock ride as high as it can go until it stops moving. Using technical analysis, you can try to predict or project how high a stock will go – but you can never be sure. Some will go higher and lower than expectations.
When thinking of this concept of "sitting out," you probably are asking yourself: Should I sit out more often?
The answer is yes. Most people tend to overtrade, especially at the beginning due to the rush and high of trading. You must be patient and wait for the right setups.
If you wait for the right setups, you may only need 2-3 stocks to make your year; maybe only 4-5 different trades will make your year on a specific stock or company.
You want to 1) wait for the right setups and 2) hold the setups for as long as possible when in the trade. How do you know when to get out of the trade and when to go aggressively?
When the market is going up but there is no juice behind it, people don't understand why it's rising. Chances are it will retrace. The market typically takes a few months to reach its high and roll back over...
You need this digesting period for people to battle it out. It takes multiples months, years, etc. for everything to pan out. After this period, you will see the consequence of who won – the bulls or the bears.
You're waiting for this consolidation and digestion period. If there is no fuel behind, there is nothing support the market as it goes higher. Always think of these things; when you see fuel, fantastic earnings, great new companies and products – that's when the market can be moved higher.
Otherwise, be aware of what is truly driving the prices higher. Typically the stock market leads the economy by approximately 6 months' time. If people are still hesitant to purchase homes or spending money, you need to pay attention to what will take the market higher.
This concept applies to today and in the future. Remember to sit out of the market if it's going up with no support, but participate as early as possible if the market is rising with backing and fuel. Once the general public gets involved, it may be too late.