CMU: How I traded Monday’s tumble

By Jani Ziedins | Free CMU

Sep 21

Cracked.Market University:

Spend any time on the internet and it sounds like everyone makes a killing trading stocks because all you ever hear is people bragging about their big scores. But those of us that have been around the block a few times know better. Unsurprisingly, very few people mention their losses. In fact, most people hide from them. And not just from other people, but also from themselves when they refuse to acknowledge a bad trade by either selling it or tallying the true cost after they close it. But as a matter of transparency, I’m willing to let everyone see what the other side of my personal trading looks like.

First, let’s roll the clock back to Friday afternoon. As I wrote in last week’s free post, I liked the way the S&P 500 bounced back above 3,300 after briefly violating the weekly lows earlier in the day. Big money makes their moves late in the day and they were clearly more interested in buying Friday’s dip than selling it. That resilient price action was a buy signal for me. But rather than rush in with everything I’ve got, I start every trade with defense in mind. My trading plan clearly dictates I start small, get in early, keep a nearby stop, and only add to what is working.

What this means in practice is I prefer being aggressive when buying bounces and that means getting in not long after the bounce. I protect myself by testing the market with a smaller 1/3 position. I further back this up by placing a stop nearby, typically under the recent lows. And I only add to a trade that is working. (I never “average down”)

This recipe often leads to nice opening pops like we saw the previous two Mondays, but I wasn’t as lucky this morning. There was a perfect headline storm over the weekend. Ruth Bader Ginsburg’s death and subsequent nomination fight likely ruins any chance for a near-term Covid stimulus. Then China retaliated against Trump’s Tik-Tok ban by threatening to do the same against foreign companies operating inside China. And finally, parts of Europe are considering a second round of economically devastating shutdowns. Put all of this together and it is no surprise stocks tumbled at the open.

That meant I started the day playing defense. But since I only had a partial position, the losses were very manageable. The one exception I have to my otherwise rigid stop-loss policy follows opening gaps. Rather than sell the open when a gap leaps over my stops, I give the market 10 or 20 minutes to find a near-term bottom and bounce. That new low becomes my new stop and I will sell a violation of that no matter what. If I find myself already down 2% at the open, it isn’t that big of a risk to give the market another 0.25% or 0.5% of slack to see if there will be an early bounce. And most of the time, the market does bounce. Whether that bounce sticks or not is less consistent, at least I gave myself the opportunity to ride a rebound higher. If the early bounce fails, no big deal, I get out nearly where the market opened.

This morning the market attempted a modest bounce following the opening gap, but within an hour, it undercut the early lows and I was out. I even took a stab at a small short following my standard trading plan of starting small, getting in early, keeping a nearby stop, and only adding to what is working. That said, betting against a bull market is one of the hardest ways to make money and I enter these shorts with very low expectations. And just as expected, the early weakness bounced and I was out of my short in a matter of hours. No big deal. Most shorts don’t work, but the few times they do work, they make a ton of money, so they are definitely worth trying. Especially when I can enter and exit them without losing any money like I did today.

Just like Friday, I was impressed with Monday’s late surge into the close. While the market still ended down more than 1%, institutions were clearly more interested in buying the dip than selling the weakness. Right or wrong, big-money moves the market and I follow their lead. For the third time, in two days, I started small, got in early, and left a stop nearby.

Will this afternoon’s buy be any more successful? I don’t know. If it works, I will add more Tuesday and ride this wave higher. If it doesn’t, I’ll make the same defensive moves I made today.

This market is on the verge of making a big move. The only thing that matters is I am in the right place at the right time. If I have to take a few small losses along the way, no big deal. As long as I keep buying the bounces and shorting the breakdowns, I know my payday is coming. The worst thing I can do is give up now just because my last trade didn’t work. As long as my losses are small, I can keep doing this for a long, long time.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.