Ticker&TapeMarket direction: check it before every trade
You can pick a great stock with a perfect chart and still lose money if the general market is falling. Checking market direction first is the single most useful habit for a new trader.
Why the market matters so much
Studies of past market cycles, popularized by William O'Neil, found that about three out of four stocks move in the same direction as the general market. When the major indexes fall, most stocks fall with them, including many leaders. Breakouts fail more often, and gains are harder to keep.
That is why growth traders watch the main indexes, the S&P 500 and the Nasdaq Composite, every day, even though they trade individual stocks. See stocks, ETFs and indexes.
The three market states
Ticker&Tape shows the market in one of three states, based on index price action, distribution days and follow-through days:
- Confirmed uptrend: the indexes are rising and buyers are in control. This is the time to buy breakouts and build positions.
- Uptrend under pressure: the uptrend is intact, but selling is building (several distribution days, indexes struggling near highs or at the 50-day line). Be more selective, tighten up and buy less.
- Market in correction: the indexes have fallen meaningfully and sellers are in control. Protect capital, raise cash and avoid new buys until a new uptrend is confirmed.
How a cycle unfolds
Markets move in cycles. A correction ends with a low, then a rally attempt, then a follow-through day that confirms a new uptrend. As the uptrend matures, distribution days pile up, the market comes under pressure, and eventually a new correction begins. Recognizing each phase helps you know when to be aggressive and when to wait.
Corrections come in all sizes, from a quick 8% dip to a long bear market that cuts the indexes by a third or more. You do not need to know in advance which one it will be. You only need to follow the signals as they appear.
Check it before every trade
Make it a habit: before you place any order, look at the market direction chip on the dashboard or the Market breadth page. Then decide how much to invest. In a confirmed uptrend you might be fully invested; under pressure, partly; in a correction, mostly in cash. The lesson on exposure covers this in detail.
The market state is a guide, not a guarantee. It tells you where the odds are, so you can adjust your size and your expectations.
Common mistakes
- Buying breakouts during a correction because one stock looks strong.
- Staying fully invested when the market slips to under pressure.
- Waiting for the news to confirm a turn; price and volume usually turn first.
- Trying to predict the bottom instead of waiting for a follow-through day.
Key points
- About three out of four stocks follow the general market.
- Know the state: confirmed uptrend, under pressure or correction.
- Check market direction before every trade and size your exposure to it.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. Why should you check market direction before buying any stock?
When the indexes fall, most stocks fall with them, including many leaders, and breakouts fail more often.
2. The market status is uptrend under pressure. What is the sensible response?
Under pressure means the uptrend holds but selling is building. It is a time for caution, not for full aggression or panic.
3. A correction has just started. Do you need to know whether it will be a quick 8% dip or a long bear market?
Corrections come in all sizes and nobody knows which one it will be. The market state tells you where the odds are so you can adjust size and expectations.
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