daytrades october 05 morning ..., page-49

Since the XJO bottomed on 25/5/2010 we seem to have had 3 waves. The first peak came about 21/6/2010 when the XJO peaked at 4,612, the second wave peaked about 9/8/2010 when the XJO hit 4,594. It may be we have just experienced a third peak on 29/9/2010 when the XJO finished at 4,645.
Whilst I never like making forecasts about where the market is heading it amazes me how many traders hit the downturns fully invested. Logic would seem to indicate we should harvest some of our winnings to use when the market has had a downturn & there are bargains to be had. Unfortunately many traders dont build cash reserves to take advantage of these buying opportunities, but let greed lead them into a brick wall. Greed seems to take over in good times while fear rules when we should be stepping up to the plate to buy.
Locking in some profits & being in a position to re enter the same stock at a lower entry point makes good sense & even if a re enter is not possible because the stock has gone higher there are always new candidates that will present as buying opportunities.
Strong markets for some reason seem to affect our short term memory such that we forget about the alternative to strong markets.
Trading is a bite like climbing mountains we need to be fully laden in the valleys & travelling light (well cashed up) near the peaks. That way we can handle the steep declines without huge financial damage because we are carrying larger than usual cash reserves awaiting for the buying opportunities to occur.
In some stocks that you like it may mean converting them to free carry then accumulating more at a lower price later.
This post is not meant to be a negative post because while I believe long term in the gold/China/India resources story, I also know the share market doesnt move in straight lines & we need to learn to ride the immediate waves to our advantage & having a varying cash reserve certainly lets us participate in the short term corrections that always occur along the way.
Remember a little reflection on where the market is & appropriate risk management beats being slammed into a brick wall because you got overconfident & took the eye off the ball.
Regards
Buffett