Why buying bounces is a lot easier and safer than most people think

By Jani Ziedins | End of Day Analysis

May 17

Free After-Hours Analysis:

The S&P 500 added 2% Tuesday and finds itself more than 200 points above Thursday’s intraday lows. Not bad, not bad at all.

Blink and you missed a great trade. But that was always going to be the case. Stocks snap back from oversold levels quickly. Wait a day or two for confirmation and you missed a whole lot of gains. And more than just lost profits, buying this late leaves a person vulnerable to a routine intraday step back, like the 40-point retreat we saw Tuesday morning.

As risky as it feels, buying the bounce early is the safest place to jump aboard. Distilled to its core, risk is nothing more than a function of height. The higher we are, the more room we have to fall. And on the other end, the further we fall, the less room we have left to fall.

It never feels this way in the heat of the moment. Most people are most confident at the top and scared at the bottom. But savvy traders know real risk is the exact opposite of perceived risk.

Everything felt great in January, but with 20/20 hindsight, obviously, January was a terrible time to be buying and holding stocks.

Now that the index is nearly 900 points lower, everyone is terrified of stocks, but common sense tells us it is far safer to be buying stocks down here than it was back in January.

It never feels good buying stocks after big pullbacks and buying Thursday’s late bounce was anything but easy. But three sessions later and the index is dramatically higher. It’s gotten to the point where my stops are already comfortably above my entry points, making this mostly a free trade for myself.

Keep going and I make a pile of money. Retreat and I get out at my stops and collect a few bucks for my time. Not a bad way to be wrong. But the only reason this trade is working so well for me is because I had the courage to get in early.

But none of this will surprise readers of this blog. As I wrote last Thursday:

While I feel a little silly buying [Thursday’s] bounce given how many false bottoms we’ve had over the last several weeks, I did it anyway because that’s what my trading plan told me to do. I started with a small position and a stop under intraday lows.

Will Thursday’s late rebound stick? Probably not. But I buy all of the bounces because I’m not psychic and I don’t know which one will work. The only way to make sure I don’t get left behind is to buy all of them. And by starting small, getting in early, keeping a nearby stop, and only adding to a trade that is working, I can buy these bounces with very little risk.

Well, here we are a few days later and I’m sitting on a nice pile of profits.

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As for what comes next, most of the market’s failed bounces turned tail within days, so four days into this bounce and it already looks different than the ones that let us down.

There are no guarantees in the market and this one can fail at any moment too, but it looks good so far and that means I will continue giving it the benefit of doubt. Anything above 4k and we are doing well.

I’m lifting my stops and watching to see how far this rebound goes. Hopefully, you are right there with me.

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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.