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Trader Training in the Off Season

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Those who have done their homework in the off-season will have the opportunity to benefit tremendously.

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All traders come to a point in their trading when they can successfully recognize that the odds of playing the long side are not in their favor, so they adopt a defensive posture and choose to wait it out rather than fight the trend. At this juncture hopefully you find yourself completely secure with sitting on the sidelines and avoiding any further damage.

As a trader waits, it is very common for a high level of complacency to set in as he finds himself doing very little. The danger in this is not staying sharp to what is unfolding under the surface and being prepared when the environment finally changes.

Similar to a professional athlete during the off season, a trader's level of play when he returns often correlates with how much work he did when games were not going on.

Once I learned that during rough trading cycles it was much easier to sit things out, I actually enjoyed the break. I at first slowed down my chart work and eventually stopped looking at underlying charts altogether. My feeling was that when the market finally turned, I would start to once again pick up my work ethic. Unfortunately, I learned very quickly that not only did I miss unique and fantastic pockets of opportunity along the way, but when the tide finally did turn, for weeks I felt two steps behind as I tried to search for the charts that had showed decent relative strength and were worthy of my capital. Eventually, I did catch up, however there is absolutely no telling how much money I left sitting on the table during the process.

It is during these times of lull when a trader can really hone his skills and be prepared for the next market wave. While reviewing what the major averages are doing on a daily basis is important, it is also very important to understand and recognize what is going on under the surface and which stocks are doing what. Typically, it will be the individual stocks that give you a better indication of where we are headed and observing this can keep you a step ahead.

Here are some things that I like to look for and observe when I am hiding in the bunker.


Unusual Relative Strength

Typically there will be a new wave of winning stocks during each market cycle. These stocks will start to make themselves known as they subtly buck the trend and start to set up technically while others continue to be punished. In late 2006, after an extreme sell off we had our first hint of solar strength when First Solar (FSLR) came public and acted extremely well, which was around the same time that SunPower (SPWR) finally broke out of a consolidation pattern it had been in for a full year. This is when these stocks both landed on my radar. I will typically look for common themes to emerge and make note of these trends. If they are confirmed through a series of higher highs and higher lows, I will consider entering.


Inverse Activity

One of the best signs that a stock or sector is done going down is when it actually does the opposite one would believe when poor news or information is released. While it is helpful to observe, it can be dangerous to assume the worst is over on the first sign of inverse activity. For example, we recently had an inverse reaction in some of the major banks like Bear Sterns (BSC) and Citigroup (C) when initial write downs were taken, however no new trend set in and it was only a short term anomaly. A trader should always wait for confirmation before entering.


Fundo Warriors

When a market is eventually done going down and begins a bottoming process, typically those stocks that possess superior fundamentals will attract the institutional money very quickly. I find it very helpful to keep a running list of these stocks and review them on a daily basis. Once I see that selling has dried up, I look for confirmed double bottom patterns or high volume wash out reversals to signal it may be time to start dipping a toe back in the water. In the coming weeks, I will be relaying a list of fundo warriors that I will be watching as we continue to move forward.


While there are many other exercises a trader can do, the key is to not lose ones edge regardless of how little one trades. While a tape remains in a precarious or troubled state and the prudent speculator has no business adding new inventory, it doesn't mean he or she should stop working hard. Eventually, the tape will turn and opportunities will present themselves allowing those who have done their homework in the off-season the opportunity to benefit tremendously.
Position in C

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