How to profit sensibly from this volatility

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On Monday, the S&P 500 recovered a chunk of Friday’s trade war tumble. Last week Trump “ordered” U.S. companies to stop doing business in China and that sent traders scrambling for the exits. But as bad as a 2.6% loss seems, it wasn’t the biggest loss this month. Heck, it wasn’t even the second-biggest loss of in Agust. While three 2.5%+ losses in as many weeks is terrifying, the market is actually holding up remarkably well and is still within 150-points of all-time highs.

Is this a stubbornly bullish market that refuses to breakdown, or a market teetering on the edge of collapse? That’s what we want to know.

Today’s strength was a good sign. The trade war didn’t get worse over the weekend and rather than continue selling the fear, traders were more inclined to buy last week’s discounts. Major selloffs are dominated by “sell first, ask questions later”. Any break in the selling gives people time to analyze the situation and almost always the calm allows people to realize things are not as bad as feared. The trade war has been brewing for a year and a half and it hasn’t killed this bull. That’s doesn’t count as proof these escalations cannot break this market, but odds are a trend is more likely to continue than reverse. Until further notice, expect the market to keep withstanding these trade war headwinds.

Currently, the market finds itself in between two psychologically significant levels, 2,800 and 2,900. While this is a stubbornly resilient market, it is also extremely volatile and that means we should resist the urge to rush in. Wait for the market to prove itself before buying the dip. If prices recover 2,900, that is the signal to jump in. If prices tumble and under 2,800, wait to buy until prices bounce back above this support level.

A big part of the reason to wait until prices recover a key support level is that lets us place a stop close by. The tighter our stop, the less money we have at risk. Another important strategy in volatile markets is reducing our position size so that a big opening gap doesn’t leave us with an uncomfortable loss. While making money is great, long-term success comes from limiting our losses. This volatility is giving us a lot of great trading opportunities, just make sure you keep your risks in check.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM