This week’s bounce is already toast as the tech sector melted down on Wednesday, dragging the index under 4,200 support. Rising Treasury yields and political gridlock in D.C. dominate financial headlines, but it was GOOGL’s poor results that became one straw too many, and the index shed another 1.4%.
As I wrote Tuesday, I was a buyer of Monday’s early rebound. While getting dumped out at my stops wasn’t the outcome I wanted, it was the one I expected. As I’ve written many times before, two bounces fail for every one that succeeds. That means the odds of Monday’s bounce failing were high.
No doubt there are traders out there who think they have to win every single time, but anyone who’s been doing this for a while knows this is a game of numbers. Approach this with a trading plan that limits our losses and maximizes our gains, it will always work out for us in the end.
In this instance, I was clearly wrong, but since I bout the bounce early, started with a partial position, and kept a nearby stop, the cost of being wrong was trivial compared to the potential profits from locking in a 100-point move in a full 3x position.
As my critics will be happy to point out, I was wrong this week, but you know what? I will happily do it again next week and the week after. It didn’t work this week, but it will work one of these weeks, and that’s when the profits will come rolling in.
Remember, stocks top when everything looks great, and they bottom when everything looks terrible. By that measure, this is definitely a good time to be bottom-fishing. To be clear, I am 100% opposed to buying on the way down. But every time we bounce, you will find me jumping in. Start small, get in early, keep a nearby stop, and only add to a position that’s working. Follow those simple rules, and bottom-fishing is extremely profitable.
I took a small loss this week, but you better believe I will be buying the next time stocks bounce. Maybe that’s Thursday or Friday. Or maybe it won’t happen until next week, or the week after. But one of these bounces is going to work, and that will make it all worthwhile.
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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.