One of the primary responsibilities of a trader is to forecast the future direction of a stock; of which, there are only three options: up, down and sideways. The majority of analysts feel as though they have not completed their forecasting responsibility unless they identify a future rise or fall. However, having a strong opinion on "up" or "down" when the market is sideways is tantamount to believing you could empty the swimming pool by using a spoon.
Sure, with enough time and patience, you could probably make the pool level go down. However, the truth is, your arm is going to wear out long before an appreciable change is made in the water’s depth. So, it is with a sideways market. Your personal opinion is going to wear out long before the stock begins to move.
The challenge is being willing to adopt a neutral or sideways mindset when doing forecasting and being comfortable with forecasting a sideways move. To that end, we have a few tips for you.
IDK stands for "I Don't Know" which is actually a powerful statement. What we have learned is if we don't have a clear idea of what direction to forecast, it often means we are entering a consolidation or sideways phase. IDK often means a sideways market is ahead which can problematic to some students as they want a strong bullish or bearish opinion so they can execute a trade. However, stating a sideways trend is the truth of what they need to hear. Money has been saved because students were willing to accept a sideways analysis and had the patience to say, "I'll wait until next week to review and enter that trade."
In the Foundations of Stocks and Options class, our students learn the importance of back trading. Back Trading has two forms: documented and non-documented. The whole purpose of back trading is to condition yourself to observe and respond to various market conditions. To improve your ability to forecast sideways markets, find a stock that had a historically sideways move. Then, go back in time and practice analyzing, forecasting, and trading that environment. By using historical data, we can train ourselves to find trading patterns which support up, down, and even sideways trends.
If you are having trouble of constantly being a Perpetual Bear or Perpetual Bull, try forcing yourself to do a full analysis from the alternative perspective. Even if you are one hundred percent convinced of a bullish forecast take the time to offer up a bearish counter-analysis as there are always signals you can find which suggest a contrary perspective. If you can only find one or two then it will solidify your position; however, if you find two or more maybe you might want to rethink your perpetual stance.
One of the most profoundly important decisions you can make as a trader is to have an accountability partner or as we like to call it around here, the buddy call. A buddy which you can discuss all your trades. In our buddy system, we typically put our heads together once a week and test each other's opinions on the overall market forecast. When we first began trading, we use to walk each other through almost every single trade. If we found one was strongly bullish and the other bearish, the temptation was to place trades and see who was "right." The simple idea of working with buddy to discuss, plan, and execute your trades, is great way to work out your analysis and solidify your trading plan. After all, two sets of eyes are better than one.
In closing, as a trader knowing when a stock will trend up or down is just as important as knowing when a stock will trend sideways. Recognizing the trends in whatever direction they move will help you to correctly execute a trade when the timing is right and help you hold off on a trade when market is flat. Knowledge is power and the ability to correctly predict trends in the marketplace will protect your capital and ultimately help increase your bottom line.