Last In A Series You don't have to predict the future to be a successful investor.
Yet as this 10-part series has attempted to communicate, you do have to learn to understand what the market and specific stocks are telling you right here and now. You need to learn to speak the language in which a stock says, "Buy me" or "Sell me.
It's a not-so-easy-to-grasp concept. But there is a big difference between investing in a future you've imagined or guessed at and buying a stock that is right now demonstrating fundamental strength, institutional accumulation and characteristics — or the exact opposite.
The same is true with the overall market. When it corrects, you don't hold and hope. You step back, take profits, rotate into cash and wait for the market to signal it is launching a new uptrend.
"Your objective is to agree 100% with what is actually happening in the market, rather than try to tell it what you think it ought to be doing," IBD founder William O'Neil wrote in "The Successful Investor.
This can be difficult near market tops. A bull run's momentum can have a mesmerizing effect. An investor's desire for higher ground often affects the ability to recognize signals the market or individual stocks are sending.
You break that spell by carefully studying the major indexes. Being aware of distribution days — days when a major index declines more than 0.2% in higher than the previous session — is crucial. They indicate large-scale liquidation of shares by institutional investors. When an index gathers four or five distribution days in a four- to five-week span or less, it nearly always signals a pending downturn.
Watch IBD's Market Pulse every day. It tracks distribution days on the S&P 500 and the NYSE and Nasdaq composites. It also flags uptrends under pressure, a caution flag which sometimes prefaces a turn to "Market in Correction.
You may feel in your heart of hearts that the market is headed higher. But to preserve your profit and protect your capital, discipline yourself to act according to what the indexes tell you.
The psychological noise distracting investors is different at market bottoms. Here, the feeling might be that you are impatient to get back into the game. Maybe the stocks on your watch list are near buy points, maybe even starting to break out. Or maybe you are of the mind that the market is headed lower. Intellectually, you are predicting a negative future, and part of you wants to be right.
Then a major index turns and begins to climb. You need to be ready to shift emotional gears. Within four days, as long as the index doesn't cut back to a new low, a follow-through session is possible.
A follow through occurs when a major index posts a significant gain, generally 1.3% or more, in higher trade. The broad market may have reverted into a confirmed uptrend. Learning to read and mark the signals yourself helps to better tune your intuition to the market.
"Once you learn to recognize reality — what is actually occurring while it's occurring — you've acquired a skill and developed an awareness most people will never have," O'Neil wrote.