In my blog post last week, I noted that it may be time to get defensive as leading stocks have started to break down. This week, the market has deteriorated even more with the Nasdaq and S&P 500 are both below their 50-day moving averages. These type of conditions can be extremely difficult to trade through. However, they also offer the opportunity to grow as a trader if one chooses the correct path.
One of the most memorable and honestly painful periods of my trading life came in my second year of trading. Ignorant to the dangers of a stock market correction, I blindly bought through a volatile and downtrending chop-fest. With the emotional and financial scars to prove it, I quickly learned that more trading does not equate to higher returns, especially during a market correction. The truth is there are times when the best thing to do is just step away and take a break. Cash is truly a position. So what should one do during a market correction?
Build A Watchlist
While it is unwise to trade blindly during a corrective market environment, it is equally unwise to completely tune out the market all together. It is extremely important to build a watchlist during market corrections, as this is the period when the foundation for future monster winners is being built. During these times, I'm always on the lookout for the next big winner. Which stocks are holding up best? Which ones seem to be resisting the downtrend the most? Which ones have products that can drastically improve the lives of millions or billions of people around the world? Think Tesla or Zoom in 2020.
Build a watchlist of stocks that exhibit these characteristics. Look to buy them when opportunities arise. The stocks that start to move up strongly as the market bottoms are most likely to become the biggest winners during the next market uptrend.
Analyze Your Past Results
It's also very important to use times when you are not trading to conduct a quarterly review. Take a look at your results over the last 90 days. What was your winning percentage? What was your average win? What was your average loss? What type of expectancy do you have? Sometimes, we become unconscious to our incompetence. We are unaware of what's really going on with our trading. Analyze your past trades so you can see the patterns you've been engaging in. Are you buying extended stocks? Foolishly holding onto losers? Buying laggard stocks instead of true market leaders? Exiting your positions too quickly? It's going to be different for everyone, but studying your past trades is one of the most powerful exercises any trader can do and there's no better time than a market correction to see what's really going on in your trading.
Study Past Market Winners
Another powerful exercise is to study the characteristics of past winners. What type of products did they sell? When would have been a good time to buy them? How do you know when to exit the trade? In my courses, I always include a section on case studies so you can see how to handle monster stocks from the past. This will prepare you for the next big winner.
Invest In What Really Matters
Market corrections are also a great time to invest in what matters most: your friends, family, health, and happiness. Take up a new hobby. Learn a new skill. Take your wife out to dinner. Catch up with some close friends. I recently lost a very dear friend unexpectedly. She died at 42. What I would have given for just one last phone call with her. The market will always be there, but people won't. Take the time you have to reconnect with ones you love.
Equally important is to take care of your health. In 2020, I developed severe back and neck pain. My chiropractor in no uncertain terms told me excessive screen time was the cause, and I needed to make my health a priority. Now, I'm sure to get massages, visit my doctor more often, exercise consistently, and keep my diet in check. A healthy body offers the best returns you'll ever get.
Finally, invest in your mindset. Practice meditation. Start a gratitude journal. Read an inspiring book. You want to be mentally prepared for the next bull run. When you have a abundance mindset combined with proven trading tactics and a strong market at your back, you set yourself up for a phenomenal return.
Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained in this post constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned in this blog or the associated Twitter and Instagram feeds. The stock or stocks presented are not to be considered a recommendation to buy any stock or stocks. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.