Successful Trading Requires Both Offense and Defense

Editor's note: Stocks are surging higher... after months of pain. The major indexes fell 10% from their summer peaks to their recent lows. And everyone – from the professionals to mom-and-pop investors – feared that a new bear market was taking hold. But what if you could have caught the correction from the start? Our colleague Greg Diamond pointed to the warning signs back in July...

In this excerpt, which we've adapted from his July 24 issue of Ten Stock Trader, Greg showed his subscribers the technical indicators at work... outlined the best approach for the volatile months ahead... and discussed the importance of "playing defense" as a trader.

Whether it's your first time putting on gloves, or you've already won a title belt, the No. 1 rule in boxing applies to everyone...

Protect yourself at all times.

When I first stepped into a boxing ring, I learned that lesson the hard way.

I had trained for nearly a year before entering the ring... And as soon as I did, everything I had learned (or thought I had learned) vanished in the blink of an eye.

I was so focused on attacking my opponent that I forgot the No. 1 rule. As a result, I took more than a few hard punches and ended the bout with two black eyes.

From that point on, I completely changed both my mindset and my strategy. That reset allowed me to enjoy boxing much more... with fewer bruises.

You see, I had to learn when to play offense and when to play defense.

Many boxing enthusiasts call the sport the "Sweet Science," a term first used by English sports writer Pierce Egan back in 1813.

It refers to the scientific strategy boxers use, and it focuses on how to defeat your opponent before actually beating him. While the sport does require physical strength and dexterity, the mental part is just as important – if not more so.

Trading is similar to boxing. You have to train your mind, practice discipline, and figure out when to get aggressive and when to remain patient.

Too many traders lose money over the long term because they don't know when to pull back. Like my first time in the boxing ring, they're always in attack mode.

So today, I'll focus on how offense and defense strategies can help us make smart trading decisions right now... and avoid big losses.

We'll look at one important index to explain where and when we can get aggressive. And we'll discuss why patience is key right now, based on key technical setups.

Let's get started...

As my Ten Stock Trader subscribers know, there's a right time to be offensive and a right time to be defensive...

Both approaches require you to remove the "perma" bias from your mindset...

If you're a permabear, that means tempering your market pessimism. If you're a permabull, that means pulling back your staunch optimism.

In other words, you need to focus on what the market is doing rather than what it could do.

With this in mind, let's look at the Nasdaq 100 Index...

The index is well above the major moving averages. I've marked the 55-day moving average ("DMA") in blue and the 200-DMA in red. These lines show the short-term and long-term trends, respectively.

Folks, it's clear as day... We're in the middle of a bull market.

Now look at the relative strength index ("RSI") at the bottom of the chart. The RSI is an indicator that shows when assets are "overbought" or "oversold." When values have moved too far, too fast in either direction, a reversal is likely.

The red circles highlight where previous tops have led to corrections. These corrections aren't steep. But they did lead to higher prices once they ended, which is the key point.

Now combine this chart with CNN's Fear & Greed Index – which gauges investor sentiment based on seven indicators. Currently, the index is at 82 out of 100. That reading marks an "Extreme Greed" level... which means investor sentiment is likely far too optimistic.

Is this where you'd want to get aggressive as a trader?

Probably not.

Playing offense in this environment is like a tired boxer entering the ring and throwing haymakers while his opponent sits back, waits for a counterattack, and then knocks him down.

We need to know when to be patient.

Many traders only focus on how much money they could make. Others want to trade every wiggle on every technical chart without considering what could go wrong.

And in trading, things always go wrong.

Those who think it'll always be a smooth ride are in for a rude awakening. If you're out in the boxing ring for 12 rounds, there's no avoiding it – you're going to get punched.

These signals are telling us that the current rally won't be a parabolic rise higher. That means we shouldn't expect a clean vertical rise with no corrections...

So in the short term, we should think like professional boxers. We should practice patience and prepare for a counterattack. Once the correction ends, we can look to make bullish trades.

Right now, it's better to be patient, wait for the correction to run its course... and then get aggressive.

That's exactly what I plan on doing.

Good investing,

Greg Diamond, CMT

Editor's note: Since Greg's call in July, we've seen the market correction play out. Bullish sentiment collapsed – and today, the Fear & Greed Index has pulled back to 48. If you're wondering what's next in this volatile environment, you need to hear what Greg is saying now...

Yesterday, Greg revealed the exact date he believes a massive move will take place in the markets. It could double your money up to 10 different times if you're prepared for what's coming, as he has shown before in similar conditions... thanks to an all-new strategy he's releasing now.

You can learn the time-sensitive details in his latest video, including a free recommendation to help you get positioned right away... Check it out right here.

Further Reading

Part of knowing when to play "offense" or "defense" is to cultivate the right mindset... and keep your emotions in check. Here are three specific steps that can help you build a strong, disciplined trading strategy... Learn more here.

"Few investors are bullish right now," Brett Eversole writes. "And many of those bulls are jumpy, looking for any excuse to change their minds." This is exactly the kind of sentiment we should expect right now – and it points to a contrarian opportunity for investors... Read more here.