How to Survive a Pullback

by Darrin Donnelly on April 6, 2011

Click on chart to enlarge.

Click on chart to enlarge.

One of the hardest things for a trend trader to do is hold onto a winning position during an aggressive pullback.

We experience this situation often.  A stock we buy jumps out of its base and races to big gains.  But just when we start counting up all the money we’ve made and smiling about what brilliant traders we are, our big winner reverses on us. 

First it’s just a point or two in one session.  But then, we see the same thing happen on Day 2, then on Day 3, again on Day 4. 

Each day, we see all that profit we had “earned” just days before shrink down to the level that we’re nearing a break-even point or perhaps even LOSING money on this once brilliant trade.

We start asking those agonizing questions:  Should I exit now, locking in at least SOME profits?  Should I wait for a bounce and sell as soon as I see just one day higher?  Should I double-down on my position, hoping (and praying) that I can recover some of this pullback’s losses? 

The logical answer to these questions, of course, is a resounding NO!

These questions are all based on emotions and not reality. 

It’s only natural to ask these questions, but if you start ACTING on these fear-based emotions, you’ll quickly join the masses of losing traders.

Holding through a pullback is never pleasant.  It can be agonizing if you allow it to be.

But instead of reacting to such unpleasantness with erratic and emotionally-based decisions, the successful trend trader must take a step back, detach himself from the emotions of the situation, rationally analyze all the data he has, and rely on a proven system of rules for making these tough decisions.

This is why legendary traders like Nicolas Darvas spoke so often about how his best trading occurred when he removed himself from all the Wall Street noise. 

This is why I encourage traders to spend less time in front of their monitors and to take simple steps to ensure that they avoid the Wall Street noise machine.  You must do everything possible to take a step back, look at the big picture, and make rational decisions based on what the market is ACTUALLY doing and not what your ego fears it MIGHT do next.

It really comes down to DISCIPLINE and DETACHMENT.

The DISCIPLINE to trust the rules established by a proven system.

The DETACHMENT to calmly evaluate the market from afar.

A perfect example of discipline and detachment paying off can be seen in the recent example of GPOR.

As you can see in the chart that accompanies this article, GPOR was a stock that broke out of a nearly perfect base and raced to a rapid gain of 35% in just one month.  However, in early March, this stellar performer suddenly started reversing on us.

In a matter of two weeks, GPOR had fallen more than 20% and was nearing our original buy point.  At this time, it was only natural to contemplate all those questions mentioned above.  It was only natural to listen to the opinions of others saying it was time to exit this stock.

However, GPOR never triggered any of our Darvas System sell rules during this pullback.  And sure enough, right as it neared a potential selling point, GPOR bounced off the 50-day moving average line and continued its incredible run higher. 

So here is a stock that has gained 60% from its buy point in just over two months.  Yet, during this 60% run, we had to withstand a pullback of more than 20%.

It’s a perfect example of using discipline and detachment to succeed as a trader.

* You can start trading the Darvas System today.  To access the full portfolio of Darvas stocks, with EXACT buy points and sell points, check out the latest issue of Darvas Trader PRO by clicking here.

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