Bottom Fish or Cut Bait?

 | Sep 22, 2011 | 1:17 PM EDT
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The big question that always arises when the market falls apart like today is this: At what point, and to what degree, do you bottom fish? Traders with a pure momentum style aren't even going to consider buying anything in an environment like this but value players, contrarians and short-term flippers may be very active.

I've always believed that there's no investing style that's inherently superior. Success depends on execution, and that tends to be highly subjective. The one thing all successful traders have in common is discipline. They don't allow bad trades to go too far off track and have some methodology to claim winnings when they are available.

It is particularly important in a downtrending market to know your style and have a clear plan to deal with it. The single-biggest mistake that folks tend to make in this sort of market is that they let short-term trades that go bad turn into long-term investments. Instead of cutting losses quickly, they let a bad trade run and then keep telling themselves it's too late to sell.

I don't think it is ever too late to sell a stock. You can always buy it back if you want and, more often than not, you have a better chance of making up the losses with other stocks. Selling is just a cheap form of insurance and can be easily undone by buying back shares. If you have to pay more, just think of it as an insurance premium.

I'm mostly a momentum trader, so I have little interest in trying to buy this market. I'll look for some bounce plays and shorts, but as far as I'm concerned, we are in a downtrend and there's little reason to build positions right now.



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