The S&P 500 started Friday’s session off well enough, bouncing back from Wednesday’s and Thursday’s bloodbath. Unfortunately, those feelings of optimism didn’t last long, and the index fell into the red by the end of the day.
Knowing what we know now, most people would think buying Friday morning’s bounce was a mistake. But I actually think it was a brilliant move, especially since I did it!
After two days of hard selling, the market was ripe for a bounce. Even the most brutal selloffs have up hours and even up days, so Friday’s early bounce shouldn’t surprise anyone.
But what we do with those bounces is where amateur and savvy traders separate themselves. As I wrote Thursday evening, I was angling to buy the next bounce:
Without a doubt, this could be the start of the next major bear market, and we need to protect our backside because there is no excuse to ride a losing position all the way into the dirt, but until I see something more compelling, I will keep waiting for the bounce. Even if this is the start of a bear market, a bounce is still headed our way because bear markets bounce too. In fact, some of the easiest and fastest money is made trading bear market rallies.
And buying Friday morning’s bounce is exactly what I did. But I’m not an idiot, I was smart and strategic in buying. I waited for the bounce, I started small, I got in early, and I kept a nearby stop. Within hours, prices had risen enough that I could lift my stops to my entry points, and that’s when the magic happened.
Now, I’m sitting on a free trade. If the bounce takes off, I rake in piles of profits in a 3x ETF. If the index retreats, I get out at my entry point, no harm, no foul. Only a fool would pass up on a free trade, regardless of how it turned out.
Sure, the index could have retreated before I was able to lift my stops to my entry points, but since that was on a partial position with a nearby stop, it wouldn’t have hurt much. Even that was a worthwhile trade with a low risk and a high reward, especially when the market was ripe for a bounce after two days of brutal selling.
Critics will claim buying Friday morning’s bounce was a mistake, but it was a mistake I will happily make every chance I get. Bring on those free trades. While this one didn’t work, one of them will, and that’s when I will collect a mountain of free profits.
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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.