In yesterday's (November 15) commentary, we said the stock market may be nearing a significant short-term bottom because Wednesday's price action resembled the start of panic selling that typically precedes exhaustion in a downward trend. However, given yesterday's relatively tame price action, the stock market may still need more time to wash out the last of the remaining bulls...or maybe not. So, what plan of action does this provide us with? It comfortably puts us into "SOH mode" (sitting on hands). In swing trading, sometimes the best plan of action is doing absolutely nothing. In this educational trading psychology article, we will explain why.

After shifting from "buy" mode to "neutral" mode on October 5, then from "neutral" to "sell" mode on October 12, our rule-based system for market timing once again precisely got us out of the long side of the market within a few percent of the highs, then prompted us to sell short (and buy inverse ETFs) right as the current sell-off began. However, even though our market timing system is still in "sell" mode, as it has been since October 12, we are now in a situation where the reward to risk ratio for entering new short positions at current levels is simply not positive.

Extremely short-term traders (such as daytraders) may now be looking for entry points to go long (buy) the stock market, with the goal of profiting from a near-term counter-trend bounce to the upside. However, as professional swing traders, we are not interested in trying to pick a bottom because our stock trading strategy is NOT designed to catch every "nook and cranny" of price movement in the stock market.

Instead, the combination of our stock trading system and market timing model is designed for us to only trade in the direction of the dominant market trend and seek to capture the "meat" of every significant move in either direction. This means we are not concerned with selling at the absolute top of market rallies, nor buying at the dead lows of downtrends. Once in a while, we get lucky and this actually happens, but it is never our intention because focusing on precisely nailing the tops and bottoms of market trends is simply too risky of a trading methodology. Think of our overall stock trading system as being designed to take large bites out of the middle of a sandwich, but not eat the crust.

When our market timing model is in "buy" mode (as it was from August 16 to October 5 of this year), we exclusively buy stocks and ETFs on the long side of the market. This means we view normal, short-term pullbacks in uptrending stocks as buying opportunities to enter new long positions; our trend-following system does NOT allow us to sell short quick pullbacks of strong stocks and ETFs in an uptrending stock market. Instead, we simply focus on selling long positions into strength of each major upward thrust, then reverting back to cash while waiting for stocks to pull back and set up for the next low-risk buying opportunities.

The same is true of how we trade in downtrending markets, except in reverse. For example, now that the broad market is in a confirmed downtrend (at least two "lower highs" and "lower lows" have been set), we are NOT interested in going long (buying) counter-trend bounces into resistance of downtrending stocks. Rather, we prefer to keep our powder dry by waiting in cash for ETFs and stocks to rally into new resistance of key moving averages and prior lows, then initiate new short positions (or buy inverse ETFs after they pull back to support). This will remain the case until we eventually receive the necessary proprietary signals for our market timing system to revert back to "buy" mode.

If you are new to swing trading, you may feel the urge to be actively trading the stock market at all times, either on the long or short side. However, the most profitable stock traders we know are actually out of the market more than they are in the market. But when the proper technical signals line up, the reward to risk ratios are good, and entry points are low-risk, successful traders take action and aggressively trade in the direction of the dominant market trend. This is exactly what we have done over the past several weeks, and with winning results.

On November 14, we closed several ETF swing trade positions for a substantial net profit. One day later (yesterday), we closed our remaining two open ETF positions. ProShares UltraShort Basic Materials ETF ($SMN) rallied to our target price, so we sold and locked in a 9.2% gain with just an 8-day holding period. Subsequently, ProShares UltraShort Financial ETF ($SKF) pulled back and hit our adjusted stop price, which knocked us out of the swing trade with a decent gain as well.

Mid-way through November, we have closed six ETF trades so far this month. Four of the six trades were winners, equating to a net gain in our $50,000 model ETF trading portfolio of more than 2% (approx. $1,100). During this same time period, the Nasdaq Composite has lost 4.7%. This means, the ETF trades in our Wagner Daily newsletter have outperformed the Nasdaq by nearly 7% over the past two weeks alone. On the individual stock side, we still have two open short positions. $COH short is showing an unrealized gain of 5.7% since entry, while $SBUX short is presently 4.1% in our favor. We will be taking profits on both swing trades on today's open (approximately 1.7% net gain based on the $50,000 model stock trading portfolio).

We are now back to 100% cash in our model trading portfolios, which is a great place to be considering the current price levels of the market. There is not yet any technical reason to assume the broad market has formed a significant bottom, but it is equally risky to enter new short positions right now because stocks are due for a substantial bounce (the Nasdaq is on pace for its sixth consecutive week of losses). Now that we are flat, our plan is simply to wait for the broad market to bounce into resistance, then initiate new short positions and/or buy inverse ETFs (as previously explained). After having locked in solid gains on a string of winning ETF trades over the past few days, we are now "Flat and Happy," patiently waiting in SOH mode for the stock market to provide us with our next low-risk swing trading opportunities.

Subscribers to our Wagner Daily newsletter who have been mirroring our swing trades over the past several weeks have probably already made enough money to pay for their newsletter subscription cost many times over. Even subscribers who have only been using our market timing system to time their own trades (not following our actual trade picks) should have stayed out of harm's way by being alerted to exit their long positions before the recent decline began.

If you are not a newsletter subscriber and have been losing money in recent weeks, we highly suggest you pause and take the time to do an honest, personal reflection of what you did wrong. Were you fighting the dominant market trend? Were you clinging to long positions that should have been sold weeks ago, but you ignored the stops? These are the types of questions you need to ask yourself if you have been losing money lately. Unless you learn from your mistakes and devise a way to prevent repeating them, you will never be a successful trader. Without taking the time for honest self-reflection when losing money, you will not even be aware of any trading mistakes are making.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.