The S&P 500 added 0.7% on Tuesday, bouncing back from Monday’s ominous intraday reversal. Not bad given how poor Monday’s price action appeared.
If there is one hard and fast rule in the stock market, it is there are no hard and fast rules in the stock market.
Monday morning’s impressive breakout above 3,900 resistance fizzled and evaporated by the close. That intraday reversal is about as bearish as price action gets. But as is always the case, trading signals operate in probabilities, not absolutes.
While a majority of the time price action like Monday’s leads to further declines, it didn’t happen this time, which is normal and expected. Even something that works 80% of the time will still fail one time for every four times it succeeds.
The lack of guarantees in the markets is why I always trade with contingencies in mind. Even though I liked the short setup Monday afternoon, I started with a partial position and placed a stop nearby. That way, if I was wrong, I had an exit plan in place. And it’s a good thing because I ended up using that exit plan Tuesday and that is the only reason my losses were so modest.
No one is ever right all the time, but traders that succeed over the long term make sure their trading plan limits their losses when they are wrong.
While seeing how things turned out Tuesday, it would be easy to say shorting Monday’s intraday reversal was a mistake, but starting with a small position and a nearby stop, my loss was far smaller than the potential reward if I got it right.
I will take that trade every day of the week because while it didn’t work this time, it will produce big profits more often than not.
Small losses and big rewards are how we make money in the market.
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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.