ROH tanked on the Open yesterday. Fading it on the long side was like trying to catch a falling knife. And many of you have heard the Street expression “don’t catch a falling knife.” These tank jobs in ROH happen everyday. As we discussed during our SMB AM Meeting, it is a mistake for a new trader to try and catch the bottom. Let’s discuss.

It is human nature for some traders to try and catch the bottom of the market or a stock. Some wish to be that one trader who was correct while others on the Street were wrong. Some desire to be that guy on the desk who calls the bottom and receives the adulation from other traders. But this is just ego. And trading to stroke your ego will manifest a short trading career. The object is to make money consistently. Not try and prove you are smarter than others.

You will make the most money in a bounce after the market or a stock has stabilized and held higher. Trying to get long at 47.50 yesterday, though the bottom in ROH yesterday, is bad trading for new and most experienced traders. Often traders will comment that a stock feels like the bottom. And that may be the case. But with a stock falling quickly your feel must be confirmed by the price action.

But what is most interesting about these patterns is that there is no money trying to catch the bottom for a new trader and most experienced traders. 1) You will be wrong sometimes and take huge rips when the stock is not at the bottom. 2) Even if you catch the bottom you will be unsure whether it is the bottom. This will cause you to sell too quickly too often. A stock often looks the worst at the bottom. There will be signs of weakness near the bottom. The sellers are still concerned with dumping their shares. And buyers are still cautious to take a big position. And when you see this weakness you will most likely sell too early into the beginning of the bounce and thus miss the huge upmove.

The money trading a bounce is in waiting for the stock to bottom, seeing the stock hold higher, and then getting long. Also if the stock is going to bounce let the stock breathe when it first starts to trade higher. ROH traded up 2 1/2 points, found some support at 50, and then traded 4 points higher. You want to be in the move from 50-54. This is where the easy money is. This is where your win rate is 60-70 percent with an upside of at least 5 and a downside of 1. This is a play where you will consistently make money.

Now there are some experienced traders who pick bottoms. And they play these stocks for retracements. This is for experienced traders. And this is a very difficult trading technique. Even for an experienced trader I would suggest following trends. There is more money to be made. And your results will be more consistent trading with the trend of stocks in play.

You will see chart patterns like ROH again. Let the stock stabilize and hold higher. Then and only then should the new trader get long. And then let the stock run. Do not sell at the first sign of weakness. Play for a bigger chop than normal.

Best of luck with your trading!