A common condition affects almost all new stock market investors. This condition is best shown by example:

Assume you buy stocks in two companies as your first trades. You invest $250 in each company’s stock. After two weeks, one stock’s market price has increased to $285, while the other’s market value has decreased to $220. Don’t panic. However, what is your first reaction?

Is your first thought to sell your winner, take your profit, and wait until your loser regains value? This is the LOSER’S mentality! Yet, this game plan is usually the first one followed by newer investors. At first glance, it may appear to make sense. If you sell your winner, you can take some profit. Holding your loser and waiting for a big comeback appears to be smart.

However, experienced investors would disagree with your plan – strongly disagree. Hang with your winner and rid yourself of your loser. This cuts your losses (and you will have some losses as everyone does). If your winner is “hot,” it’s likely that its market value will increase further.

Conversely, if your “problem child” is having market value issues, the value declines will probably continue, causing you to suffer further losses.

• Closely watch the Dow 30, NASDAQ Composite, and S&P 500 as they increase. Pay particular attention to the volume and the average. At some point, the volume will continue to be strong, but – the average will climb little or even drop. The increase will be less than in the immediate days preceding this condition.
• Market liquidation (selling) takes place for one to three weeks indicating the market has peaked and sales of securities now predominate.
• Track the above noted activity over a four or five day period. This trend often precedes an overall market downturn. Feeding upon itself, as an almost a self-fulfilling prophecy, the “mood” of the market also tends to change, becoming a bit of a bear rather quickly.

Try not to miss these market top indicators. You may lose profits you’ve already achieved. If you have been on a good streak, you don’t want to quickly change from offense to defense if you can avoid doing so. Identifying market tops can be a profitable component to your market strategy in both the short and long term.