CMU: Was buying Wednesday’s bounce dumb?

By Jani Ziedins | Free CMU

Sep 10

Cracked.Market University

Back when I was a novice trader, I used to look at the market and try to figure out where it was headed next. Then I would make my trades based on those predictions. Many times I was right and this approach worked well. Unfortunately, other times it didn’t go as planned and my predictions caused me to go down in flames while holding a position that “just needs a little more time.” I assume all traders have been there at one time or another.

After being handed some pretty humbling losses, I realized this was a foolish way to trade. Unfortunately, that is the way most people still trade.

In yesterday’s post, I wrote about buying the bounce and many readers were shocked. Obviously, yesterday was “a dead-cat bounce and the market was clearly headed lower.” As a seasoned trader, I don’t get that mindset. For me, if the market is going up, I buy it. If it’s going down, I sell it. It doesn’t get any more straightforward than that.

Yesterday, the market went up and regardless of how I felt about the dip and whether it went “too far” or “not far enough”, the market was going up and that created a buying opportunity.

I fully acknowledge that I will never be right all the time. Rather than try to predict the market, I simply follow its lead. When it goes up, I buy. When it goes down, I sell. Was yesterday’s bounce the real deal? Following today’s dismal reversal, obviously not. But if a person is nimble enough to get in early and has the discipline to get out early, they have the luxury of trading these swings with near impunity.

I bought yesterday morning and held the strength through the close. Things were going well enough this morning to keep holding, but a midday fizzle undercut my stops and I was out. If the trade worked, I would have made money. It didn’t work and I lost nothing more than my time.

No doubt people on social media will call me stupid for trying, but personally, I think it is stupid not to try. Especially since this approach allowed me to make a killing riding this “impossible rally” higher since the March lows.

Is the Covid rally dead? Maybe…Maybe not. All I know is if this bounces again, I will be one of the first in line to buy that bounce. If it doesn’t work next time, then maybe it will happen the time after that. As long as I’m savvy with my entries and disciplined with my exits, it doesn’t really matter when it happens. The only thing that matters is that I’m in the right place at the right time when this thing is finally ready to rip. And most likely, that will happen when most people are still predicting bigger losses.

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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.