Preparing for Market & Account Pullbacks

Do you have a plan...?

After strong trends, it's easy to get attached to monetary values. This attachment heightens emotion & can create a mental environment that isn’t conducive to sound decision-making. This is why you hear so many traders give back large amounts of profits when stocks pull in - they haven’t prepared a plan or allow their account balance to influence their decision-making.

Instead, you should always 1) have a plan and 2) focus on the price action of the individual stocks you have in your account.

Here’s how to accomplish this:

Step 1 To Mastering Pullbacks: Having A Plan

The most important action you can take to not let the swings on your account drive how you trade is by creating an action plan. Every session, you should be taking notes of the action in every single one of your positions.

As you do this, you should be highlighting:

• Areas to take profits

• Areas to add back on weakness

• Areas to sell on weakness

• Where your line in the sand is (to sell the entire position)

By doing this, you are creating a RATIONAL action plan, where you can decide on what to do while you’re in a normal mental state, not on the fly when the market is open and emotions are heightened.

Let’s quickly highlight some typical answers to the points above:

Areas to Take Profits:

Taking profits is a hard skill to master in the market. But, by creating rules & developing actionable plans around this concept, it becomes much easier to get consistent. Here are some ways I take profits:

• Average winner zone over the past 10 winners

This is a great place to take partial profits on profitable positions. Worst case scenario you take profits in this area and get stopped out even, and you still make money based on rational decision-making.

• 20% gain after buy

Most stocks within my system move up 20-25% after a large breakout before consolidating (in good markets). It makes sense to take profits in this area while you wait for a constructive area to add back on weakness (which is what I’ll cover next).

Areas to Add Back On Weakness

After you’ve sold into strength, you always want to be looking for areas to add back to your most powerful positions on weakness. For me, these areas are:

• Prior consolidation highs that were resistance and can now become support

Here’s an example using GLBE:

If you bought the low breakout and sold some shares into strength, you would have been able to add those shares back on a retest of the 20EMA + prior resistance area.

There are examples of this everywhere in the market. Be cognizant of prior resistance becoming support when studying your own positions.

• Rising 10/20EMAs

The strongest positions in my portfolio will always hold the 10 or 20EMAs if they are going to continue their uptrends. This area provides optimal R/R to add a portion of my shares back while still trading around the core position. Today, IOT offered the first opportunity to do so at its 10EMA. Here’s a visual example:

Deciding on what EMA or MA to use should always be based on the stock’s character. Picking a random EMA or MA that the stock doesn’t respect is a great way to lose money!

Here’s META trending up the rising 20EMA:

• 50DMA on Position Trades

This spot is rare, I would have to have a 50% gain in a stock or more to implement this rule. But, on these occasions, the first 1-3 bounces off of a rising 50DMA or 10-week MA is a great spot to add shares back after pullbacks. The key is to wait for the stock to reverse higher before buying.

Areas to Sell Shares on Weakness:

Now, of course, we have to be prepared to sell shares on weakness after talking about selling them on strength.

The best areas to sell shares on weakness is at places where the stock shows negative character change. This can be:

• When prior structural support is broken

AEHR below is a great example: a multi-day consolidation above the $40 level which was prior resistance broke today on an increase in volume. To me this is negative character change and I would be watching my position closely if I was long. This would be a great place to sell some of your shares — you don’t know if it’ll continue down to the 20ema or prior pivot at $36.92 or reverse higher from here…

• When the stock breaks a once-respected EMA or MA

A stock I have been tracking recently FLNC showed this action perfectly today. This is the daily chart plotted with the 10EMA - you can see how well it respected this area over the past couple of weeks & eventually closed below on volume today. This is character change and signals a good place to take some of the position off.

• Your Ultimate Line In The Sand

With every stock you own there should be your line in the sand price to sell all of your position. Often times this is breakeven or just above as you give the stock room to work, but this may come in the form of a double close below a rising moving average as well.

Step 2 to Mastering Pullbacks: Focusing On Price

Note how in every scenario we outlined above, we are determining our actions based on PRICE ACTION. This is key!

On days that our account is red, it’s easy to let emotions control your decision-making as you give back profits. In addition to focusing on price, here are the other things I do:

• Sign out of my brokerage account (this helps me reduce the focus I have on my account value, thus causing me to make less emotionally-driven decisions if I’m down on the session)

• Hide the $ value in every way if I still am in the account

• Accept that your account value does not reflect who you are as a person or trader (a lot of people get attached to the idea of a successful trader also being a successful person… this causes attachment to money and outcome rather than process. You will have down days… accept it as part of the game & detach your view of yourself from how you perform in the market).

• Study history, write, DO SOMETHING OTHER THAN WATCH EVERY TICK OF PRICE ACTION! (For example, I wrote this on Friday as my account drew down 1.5% after having a strong couple of days… focus on something else!).

Anything Can Happen… You Have To Prepare!

In conclusion, it is crucial to detach ourselves from the monetary values and emotional attachments that often come with strong markets. To make rational decisions, we must have a well-defined plan and focus on the price action of individual stocks within our portfolio. Having an action plan allows us to make rational decisions based on predetermined areas for profit-taking, adding back on weakness, selling on weakness, and establishing a line in the sand for selling the entire position.

Taking profits should be approached with defined rules and actionable plans. Identifying average winner zones and taking partial profits can help ensure consistent gains. Additionally, selling into strength provides an opportunity to add back shares on weakness. Prior consolidation highs that become support and rising 10/20EMAs are key areas to consider when adding shares back.

Selling shares on weakness requires recognizing negative character changes in the stock, such as breaking structural support or respected EMAs/MA. It's essential to have a clear line in the sand, representing the ultimate price level at which the entire position should be sold.

By focusing on price action and minimizing emotional decision-making, we can navigate market fluctuations more effectively. Steps like signing out of brokerage accounts, hiding the account value, and accepting that our self-worth is not tied to trading outcomes can help maintain a balanced perspective. Engaging in other activities, studying history, or writing can also help divert attention from obsessing over price fluctuations.

Remember, mastering pullbacks requires discipline, a well-structured plan, and a focus on rational decision-making based on price action. By implementing these strategies, we can navigate market volatility with greater confidence and resilience.

I hope this has been helpful and talk to you next week,

Greg

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