How to Avoid Big Losses and Execute Winning Trades Without Knowing What the Market Will Do

I know this headline just sounds too good to be true and nobody could blame you if you stopped reading right here.

Consider this though: It is said that a penny saved is a penny earned. It sounds clich but it's accurate. If your stock portfolio is down by $1,000, you have to earn an extra $1,000 to bring your net worth back to even. So a penny saved really is a penny earned.

Now ask yourself; How much money did I lose since the May highs or the beginning of the year? To make up for the loss, you'll have to work extra hours. But what if you didn't lose any money? You would have preserved your purchasing power and be able to buy at lower prices (if you so chose).

In other words, knowing when to sell a position is equally - if not more - important than knowing when to buy. Buying low and selling high (or the opposite if you are shorting the market) require serious insight about the market.

Here is one simple strategy that protects your profits and helps you identify winning trades without having a clue of what the market - whether Dow Jones (DJI: ^DJI), S&P (SNP: ^GSPC), Nasdaq (Nasdaq: ^IXIC) or Russell 2000 (Chicago Options: ^RUT) - is going to do next.

Below you will find some actual trade recommendations. The number in front of the trade recommendation in the article corresponds with the number in the chart. Red numbers were sell signals, green numbers were buy signals.

Blind as a Bat but On Target

Bats have poor vision but they always find their target simply because they work effectively with what they've got. Nobody has 'stock market radar vision,' so we too have to work with what we've got. We need to identify an edge and exploit it.

Every person may have a different 'edge.' My edge is knowing the S&Ps hot buttons - levels that tend to force the S&P to change trends or confirm a trend (the red and yellow lines drawn in the chart show some hot buttons).

Imagine a car driving on a long road with a few traffic lights. If the car is going to stop, accelerate, or make a U-turn anywhere on the road, it will most likely be at a traffic light. If the S&P is going to reverse, it will likely be at support/resistance.

I spend much of my work hours identifying support/resistance levels. Trend lines, Fibonacci, pivots, sentiment, prior highs/lows, etc. are important tools to identify such hot buttons. (more)