Money & Risk Management

How Long Should You Wait Before Buying the Dip?

September 11th, 2018

Listen to the Podcast

 

Hey, this is Sasha, welcome to another episode of Hungry for Returns where I answer your trading and investing questions based on my own experience and knowledge.

If you have a question, be sure to submit it at https://tradersfly.com/.

Let's take a listen to today's question, which talks about buying the dip.

"Hey Sasha, I'm a subscriber for you, and my question is -- I'm a long-term investor and when the big company such as Facebook, Microsoft, and all that big companies, when they dip for meager prices, I want to buy it. But the problem is -- when should I buy it? How long I need to buy that stuff? Because you know by then, the deepest lowest price is very dangerous. How long should I wait in it? One week, two weeks, three weeks, one month, two months. Thank you very much."

If we take a look at this question, we're looking at buying the dip. When should you buy the dip on the stock?

Companies like Facebook over here, they'll have these big dips. If you take a look over here, what we just did about August 30th, we had a significant dip percentage-wise. You're looking at about 20%.

If you're looking to buy these companies into the future, this is typically what you're trying to do. When you buy the dip, there's a couple of things you need to consider. I want to share with you four main points that I jotted down when you're looking to buy the dip.

The first one answers the question directly of, how long should you wait until you buy the dip?

Let's take a look at history. Typically, a consolidation phase is six to eight weeks.

That's a typical sideways movement digestion phase. If you look at many stocks that are just moving sideways, pick any company, for example, that'll move sideways on the trend. Six to eight weeks, this is average looking at history. Sometimes this could be a little quicker, and sometimes this could be a bit shorter. Look at any pullbacks distributions, those things. Six to eight weeks is a typical guideline.

Sometimes, it could be three, four months. Five, six months. Sometimes, it could be a couple of weeks.

But overall, when you have some massive movements in stocks and companies like Facebook over here. That can take a little bit longer. The same thing can happen when we look at Netflix. These significant pullbacks can take a little bit longer. So, you need to be more patient. The more violent things are typical, the longer it takes to digest things. Just like the more food you eat, the longer it takes to digest that food.

I want to share with you a couple of other three main points beyond this.

Just the timeframe and that is watching the restraint retracement.

For example, when you look at stocks like a Netflix here, you have to be very careful with this retracement.

By that retracement, I'm talking about the bounces that come shortly after that pullback.

Typically, those bounces are about 50%.

Now, here in Netflix right now, you can see it's about a 30/34/38 percent bounce.

Look at the Fibonacci sequence and learn more about those, if you're interested in fib levels, but that's a typical sequence right there. It bounced to about a 350 level and then it pulled back even further.

If we take a look back at our Facebook example, which was directly in the question the same thing happens. We have a significant sell-off. We have a bounce of about 12%. Take a look, and we had a sell-off of about 23%. We had a bounce of about 13% and then we got further selling pressure.

I want you to be very careful here.

Get a follow-through

Point number two is that you might get a follow-through sell-off action or sell-off moment, just a couple of days or a couple of weeks later.

That's what you want to be cautious about. You don't want to be the guy buying right here -- getting in and then it comes back. Sometimes, it even goes lower.

Distribute cash amongst multiple time frames

This brings me to another point right here -- that is distributing your cash amongst numerous time frames.

If you distribute your cash, let's say a little bit here and then also a little bit at even further lower prices, that will help you avoid piling in too much risk all at one time because you'll never find and catch the bottom.

It's very rare to do so, although of course, some people do every single day because there is a bottom. Some people do end up catching the bottom every single day. But most of the time, it's tough to catch a bottom of a swing movement.

In either case, what you're trying to do is distribute your cash, and that will help eliminate your risk.

If you want to take let's say $12,000 and split it amongst 1000, every single month well that'll get you at least partly away from the last couple of crashes, as far as time goes.

Look at a Descending Trendline

You could be a little more patient and get after it breaks that descending trendline.

You can do this on shorter-term scales as well.

Let's say you're looking at 2011-2012, and you have 2011 where we have a pullback. You could get an adjustable that break out of that descending trendline.

And of course, if you're looking at individual stocks, you could use and try to get in after the breaks those points.

Looking at that Facebook example that we've used earlier, you can see the earlier 2008 February/March pullback, and the entry point was a little bit around the April/May time frame.

Now, the same thing, what you'll want to do is looking at the most recent movement, and we draw that line. It's a little steep. It's too far to create it right now because it's angled so steep. You'll want to get a line maybe around an upward slanting normal healthy pullback. Somewhere around this level could be right now looking at it about 182, 185 180, if it breaks out above that point.

Anyways that's what I would recommend is look at that kind of four points:

  • How long should you wait --> six to eight weeks is a typical average distribution
  • Distribute your money
  • Look at the retracements of potential bounce and
  • Watch the descending trendline there on this pullback

Of course, you'll never find the bottom of just about any stock. It's tough to do that very consistently, but hopefully, looking at it in this way with a couple of these points, it may help you reduce your risk.

Ep 158: 20%+ HUGE Dividend Paying Stocks & the Risks!

October 26th, 2017

Listen to the Podcast

Subscribe to the podcast

iTunes Stitcher

Today, what I'd like to do is share with you some insights on high paying dividend stocks that pay you over 20% and the risks that go along with that.

What are dividends?

  • It's a sum of money paid periodically, usually quarterly, to its shareholders from its profit

In simple terms, if you own shares of a company that's a dividend paying company, you get a sum of money that's paid to you in the form of dividends, mainly cash, into your trading account. So, every three months they pay you cash for just holding on to those shares and not getting in and out of them all the time.

  • You get paid based on the number of shares you own - in other words, the more shares that you have, the more money you get

That's the way that they make it fair. For example, if you have ten shares, you're going to get much more than if you had three shares of the company. If you had 5,000 shares, you're going to make a lot more money than if you had just a thousand shares. Merely because they pay you on a per share basis. Because you're contributing much more to the ownership of their stock.

This is how some people make a fortune in the stock market. If you have a lot of money, let's say ten million dollars, and you have some excellent dividend-paying stocks, then you can make a reasonably decent living directly from the dividend.

There are some issues, of course, that goes along with this. People get attracted to high paying dividend stocks but remember in the market. You're making money from two different ways - at least from dividend investments:

  • Number one, the dividend itself.
  • The second way is also through appreciation. As that stock heads upward or it goes to the upside, you also make money. But if the stock goes down, then you lose your account value.

Keep in mind, some stocks can shed 30/50 percent. For you to make those dividends, to make it back in dividend from that depreciation, it actually would take quite a bit of time.

Keep in mind that you're looking for appreciation and also an excellent dividend payout rate.

For many people, they get sucked into these high paying dividend stocks where they're very speculative and very risky. That's exactly what I want to cover today.

I don't want you to fall into these traps. In general big picture concept, if you're investing in dividends, look for the favorite companies - the stable companies, which have been paying out consistently time and time again. Like a Walmart, Procter & Gamble, Verizon or AT&T. Those companies have been paying out time and time back.

I want to share with you some more speculative plays where they still pay out a dividend, but you should probably be aware of them. Most people should stay away from them. These are the things to watch out for.

I'll share with you some examples so that way you can see where the issue is in the aha moment.

TOO (Teekay Offshore Partners L.P.)

You can see that this one TOO the dividend payout or the yield here is 26.35%.

This is where people get a little bit excited. They're like whoa, 26.35%, that's fantastic!

That is because of the share price. You can't see it right the second. If I zoom a little bit here, you can see the share price is $1.67. If they're paying out $0.11 ($0.44 a year), it's quite a significant percentage or rate relative to its share price.

If I look up this company TOO and we go back, you can see it used to be a reasonably popular company at around $34 a share.

What's been happening? As you can see, the stock price went up a little bit between 2009/2014 and then just started to tumble on its way to the gutter.

Over the last few years, it just continued lower and lower. If you start looking at the weekly, you can see it's just so tight to get beyond that $10 range for the stock; you go into the two days. It just continues to sink so this one is pretty much toast for you - if you're looking to invest in this one you know.

Why would you want to put your money in here because of the dividend?

Maybe that dividend is going to go away.

That's the issue, some people that are guiding this one right here lost quite a bit of their account value. It used to be around $12/13 at this price point, and now it's $1. You're losing like 80/90 percent of your account value. Yes, you're getting 11 cents for every share, but that doesn't make up the difference for that ninety percent loss.

The thing is, when you're looking at this 26%, it sounds pretty good, but really if you take a look and you look at the payout, it used to be better. But the payout isn't stable.

That's the thing about these companies. You want to be a little more careful because they are a little bit attractive since you have a high percentage of 26%. But remember depreciation matters quite a bit as well.

BPT (BP Prudhoe Bay Royalty Trust)

I've never even heard of this one, but it's a $19 company. The dividend yield around 22%.

If you look at this one, you had a little bit here of a growth stage. Then after that stock from the 115 range just continued to tumble and now it's in this gutter.

If you look at this one, on the dividend basis, you can see the dividend is not stable, and you don't know when they're going to stop paying the dividend. You don't know when they're going to reduce it, increase it. Makes it very tough because remember it comes down to how much money they have on that balance sheet. If they don't have the capital to pay you - you may not get paid right.

Long story short, be careful with the high percentage yield because they do sound attractive, but in retrospect, it's quite risky.

SDT (SandRidge Mississippian Trust)

If you look at the share price, it's a 1.31, and the dividend yield right there is 21.8%. They're getting twenty-eight times a year, and that is because the stock is cheap.

SBT, if you look at it, the stock is toast. If you look at it for the last few years, it can't even get out. If you're dreaming and hoping that this thing eventually gets out, it's a little more delusional because you're expecting and wishing because most people are getting into the more popular companies.

There's a lot of popular companies. I'd instead get into the Mattel stock even though that one's not also doing so well but at least it's been holding up.

But then you also have AT&T, or you have a Verizon. It's a little more expensive, but you know comparing it here, this stock more than likely you're not going to get anything as far as appreciation goes.

VOC (VOC Energy Trust)

You can see this is the energy trust. You can see this has an A to B, B to C, C to D pattern. It's been under that $6/7 range for quite a while it's $4.19 right now

The dividend payout VOC is 20%. It sounds phenomenal but unfortunately only 84 cents every single year.

It's still a big company, and in retrospect, any company that's listed on the stock market is quite big but compared to other vehicles where you could put your money on there, this company is not one that I would want to go for because of the stock appreciation doesn't seem to be there and the dividend is also weak.

Combining it with those two factors, there are better places to put your money. Everything is competing for your money.

MSB (Mesabi Trust)

These are just high percentage dividend yield. It's not a full 20%, and you got a 16-17% range right here. $2.20 on the payout. When you look at the dividend payout, you're looking at 46 cents, 88 cents, 54 cents, 20 cents, 10 cents, 55 cents. It fluctuates. It's not very stable.

If you look at it on the chart, I'm looking for appreciation, and this one had some trouble.

Fortunately, the good news for this stock right here, it did have a slight little bounce because of these levels right there around the $5 range. So far that's been pretty stable.

What can happen?

This stock is bouncing right now, and that eventually try the $5 range again. Bounce a little more and then break the $5 range. Sometimes, these things, what they may end up doing is just prolonging the inevitable.

I hope by now you can see that high paying dividend stocks or a high paying percentage rate are not necessarily the only thing that you want because you can see that many of the stocks, the more than they pay out on a percentage basis, the more likely that they'll continue to depreciate. That is because they're compensating for the appreciation factor that's going on underneath the surface.

Companies like an apple, they underpay their dividend. Some companies don't even pay a dividend because they believe that the stock appreciation is what investors want.

If you're looking for a dividend place, you're looking for stability. You want some companies that are also stable that are paying out a consistent amount, where the dividend continues to grow in the future. It remains to increase with time rather than fluctuating or even decreasing with time.

Of course, you want that share price also to increase. So you're making money from those to end as far as a significant dividend is concerned as well areas stock appreciation goes.

Now, of course, you could tie in some options and sell some upside calls that go along with it. And now you're looking at doing or creating an income from three different ways in the stock market, but that's getting a little more complicated.

I hope by now you see and understand that the reality is that nobody gives you anything in the market.

The more than they pay out on a percentage basis for a dividend, the more that they have to compensate for their share price or the potential depreciation in that stock.

 

Ep 125: Trading as a Contrarian + Entering Options w/ Vega In-Mind

March 2nd, 2017

Listen to the Podcast

Subscribe to the podcast

iTunes Stitcher

Today we'll focus on contrarian trading which doesn't mean you don't follow the trend. That is going to be the core of the discussion.

I'm going to also focus on a few questions that you have for me.

These are some topics:

  • how to monitor and close positions on the losses
  • more about Vega and
  • setting up the position

We'll target that for contrarian trading as well.

Disclaimer

Before we get into any examples, keep in mind that all these examples are strictly for just educational and illustrative purposes. I think you guys are smart enough and understand that. Take that with a grain of salt and look at your trades that you're doing. And apply those concepts based on your risk tolerance and levels.

What Is a Contrarian?

In the marketplace, we have two main kinds of traders. You could say if we're talking about contrarian traders or people who follow the herd - the herd mentality.

I typically don't like to use the word herd. I don't like the appeal of that word. In either case, it's people that are usually contrarian or people that follow the group of other traders.

We know that 90% of traders lose out and only 10% win (profitable in the markets). I'm not saying they don't ever lose. I'm assuming they're consistently in the game for the future to be able to make money for the long haul.

If 90% lose out and only 10% win in the markets doesn't it make sense to be a contrarian?

What is a contrarian?

Contrarian means that you go opposite of the group or the herd mentality.

But how do you do this in the marketplace if all those idioms or all those phrases always say follow the trend. It is telling you don't want to go against the trend. And that is true.

You don't want to go against the trend. The thing is you want to go with the trend, but that doesn't mean the risk management that you have on your stocks is not contrarian.

Examples That Will Help You Understand

I'm going to share with you some examples on charts as we get into this. You'll see what I'm talking about.

For many people, as they get into the marketplace, they usually will get into higher levels. I will use Amazon here as an example.

As the market starts climbing higher this is when they get interested in the stock market.

This is where they say: "Wow, things are climbing. Let me set up a trading account."

Then they start setting up a trading account. They think about their decision as this continues to move higher.

Soon they say: "Okay, I'm going to fund my account."

They slowly start getting into their positions. At this stage and this point, you may think that this is silly. But if we go to the original concept and understand that 90% of traders don't make money, then this is not such an unrealistic statement to make. Many people get in, or the retailers get in by this point or at this stage.

Even if you play a little more conservatively, you could say they're a little bit smarter. They get in somewhere at this stage. But then what ends up happening is they get this before a crush just like we have here in Amazon.

It doesn't matter which stock you apply it to; it could be:

  • Facebook
  • Amazon
  • Snapchat

They get into the stock, and they might have a few days a few weeks of a nice run. And then eventually things start to roll over. Because they have less experience, they're following the trend.

Although this was the trend, their process was incorrect. The method of making the trade was wrong. When you look at it, and they get into it eventually these things roll over. They end up selling at the lows.

They're breaking even or even losing out. If we get into daily and you can see Amazon starts climbing here.

It's going higher, and now you see it spiking. It's spiking and breaking out at a certain level, and you might decide to get in it. If you didn't bother checking the weekly charts, you don't see this stock hits some highs and had a big rollover.

When we had the support coming in that ended up getting taking out, and now you get emotional about it. And this ended up continuing going even lower to this point to the fact of you creating an even more significant loss.

This creates some significant problems with traders especially if you're new or if you don't know how to manage the trades. If you're not experienced, you're constantly taking losses.

Many beginner traders lose out, and 90% of traders lose. This is one of the big picture concepts.

The Contrarian Mindset

Let's say you were buying things when everybody was screaming to buy. You're following the herd, and you're going with everybody else. You're buying what everybody is buying.

And then what do we know what happens to stocks?

Well, they don't go straight up. They don't go straight down. When everybody is buying, and you're buying eventually, it rolls back over. That's because we know that the rubber band gets stretched so then the opposite happens.

The main question: What happens if you're the contrarian?

Well, the contrarian works opposite of this. You're typically a buyer when everybody is a seller and vice-versa. You're usually a seller when everybody's a buyer.

Even though we look at the trend that is heading higher this is what you need to do.

What do I do or what do I think about?

They call this - buy the dip mentality. But you don't want to buy like every little dip.

I think people on social media get a little bit too extreme with buying the dip. You can't think of it that way. You're looking for legitimate beautiful pullbacks that have some substance. And a pullback such as this one has some substance.

It's important to say that I don't think Amazon's going to go bankrupt in the next six weeks or the following year.

But that's a pretty lovely pullback, and this one is 14.3%. What you do as a contrarian is you're buying as things pull back. You're not going to hit it perfectly. It's evident that you're not going to hit the tops on the stocks when you're selling.

Even if you're going long and you're not going to buy at the bottoms if your bottom fishing. You might buy a third of your position here and there.

At least you have an average position of somewhere over at this price point. That way eventually as the stock comes higher you're taking off a third here a third here and a third over here.

As we get into resistance, there's your third, and there's your third. That means as we start hitting things you're taking off most of your positions. Or maybe you do two of those thirds and let the rest ride and see how far you can get. You can add on to it on the next pullback.

That's the contrarian view and the contrarian concept to trading. That doesn't mean I'm going against the trend. It means you're putting on trades at a different point in time than everybody else.

This is where you make money. This is the way money is made in the market. It is going against the majority. It also depends on your trading style. If you're more of a day trader, then you might want to play things a little bit differently. But the same concepts and theories still apply.

The reason is that because when the market is high and overstretched, you'll see prices head lower. When the market is, or prices are overextended from our moving average you're going to get that bounce.

The same thing happened when you look at the Trump era and the Brexit time. When you're too far extended you get that whip back.

And the same thing on the upside. If you're too far extended what happens while you get the pullbacks. And then again you get this little consolidation. But you get the pullback - eventually, that's what happens.

The Current Market Conditions

This market is robust and relentless. It wants to keep grinding higher. But if you watch the tulips and the bubble episode we talked about how far can they stretch it.

They can stretch it awhile, and they can keep extending it. Maybe for another year, two years, but keep that in mind that the more you stretch you want to be taking profits into these moves.

People call it the dumb money versus the smart money. The dumb money usually is the people who are getting in with this euphoria where stock is hitting highs. Then eventually it rolls over and then they're trying to buy back their shares. They take their loss. That's typically the dumb money.

The smart money is the ones try to buy on value. Then as prices continue higher, they're patient, and they are taking their thirds.

The same thing here when I look at a market like this. This is our current market situation.

I'm looking at:

  • how far stretched is it?
  • how far can we continue going?

Some people might ask:

Can we get to 2500 by the end of the year?

Well, possible. That's reasonable and realistic.

Others might ask:

Can we go to 2600?

I would say fewer people would say 2600 is reasonable.

Maybe some people think something like this:

Can we go to 3000 or 3100 - is that reasonable by the end of the year?

Once you keep stretching things further and further, you start creating that effect. And that's where you have to look at that in a bigger context.

Consider things like this:

Where am I going to take my profits?

And this goes back to our question here initially is:

How to monitor and close them to prevent losses?

Well, you're taking profits always into strength. I didn't understand this the first few years of my trading. I would get in a full position and get out a full position. I didn't realize that when having a hundred shares, I could take off thirty and another thirty and reduce my risk.

And the same thing here. If you're trading in this and you got in it here. It doesn't matter where you got in it, but you could take a third or half off or a quarter. You take your profits because you don't know if you might get a down day.

Sometimes you get a mini pullback, and they can wipe out a few months. I've seen this happen in stocks where it wipes out years of gains in one day.

That's why you're always peeling things off in the strength. The down moves are still more violent. In either case, if you're following the trend doesn't mean the way that you handle your process has to be with the same way that people follow the trend.

Most people who follow the trend if it's an up day they buy on an up day. If it's a down day, they sell on a down day. They're in panic mode.

If you're looking at this market and if you're not winning out then usually it's because of these. Think of trading differently. And doing the opposite of what it is that you're currently doing. See if that would make sense.

Pro tip: I don't know you, and I don't know how you're trading. Maybe you're doing the same things, you've been training for a year or two, and you're making the same mistakes. You're buying on green days, and you're selling on red days.

Why not try something a little different?

After a massive couple of green days eventually, you know that things pull back to reverse. It doesn't matter which stock is.

Example of Tesla stock:

Take a look at this. After you get that massive explosion eventually that stock comes back. They don't go up forever.

The Bigger Picture - Emotions Involved

In either case, that's just some insight on the contrarian side. But here comes the more significant insight. We have this concept in mind, but what do we do as far as emotions go?

Sometimes emotions get the best of us, or they start playing tricks on us. This is what will happen. Maybe you got into this market, and we're just pulling here on this down move.

Let's say we're talking about this down move. It's having this little pullback, and you get in it on day three or four. It's had a small pullback, and you got it on day three. You got in a little bit on day four. Then you got it on day five, and it's still going down. And your position continues to be harmful, and emotionally this is very difficult.

That's why trading is so difficult. It plays on these emotional concepts that are naturally against you. But you have to understand the bigger picture on the long-term scale what's going to happen to these markets.

You're buying it so far down. If prices are stretched to the bottom or low even though they're at low points doesn't mean they can't go lower. But eventually, they'll get into higher territory. That's the case because stocks are looking to appreciate. And that's what you're doing.

What you're trying is to get it at a lower range. If you can get it at that lower value eventually, we're going to snap back. And this is the hard part. Emotionally you see this day in and day out.

It's painful, and then you might want to wait. And then again it's painful. Now, this is called averaging down.

I wouldn't recommend averaging down unless you have the appropriate process in place. That means you have that plan in mind that you're doing it quarters or thirds.

For many people averaging down is something like this: If they have $10,000 they buy $10,000 of stock. Then the stock goes down and then they put in another $10,000 from their bank. They average it down again a week later.

That's emotional trading - that's trading without a plan. When I'm talking about averaging down, I'm talking about creating a position - like in chess.

You're creating your position. First, you set up your position. Once your position is set up, you attack. After that you set up that position, you further attack and then eventually you conquer, You get your trade. Here's the same thing.

You're building out your position to where eventually you get that snap up, and then you start taking shares off. And then you see if you let the rest ride. If you get a pullback, you're buying, and then again you get the snap up.

That's what you should look at. When this happens, you're emotional. Many people are constantly getting beat.

The same thing is if you're doing this on the short side. Let's say you're in this market and you're short this market, and sometimes it can be brutal. It can be emotionally damaging and emotionally tired.

You have to know when is it that you're either:

  • A - taking a loss or
  • B - where is your adjustment

Because if you have no plan in mind eventually things will burn you. You need to have a plan for what if things go against you. You might need to endure that pain for a little bit, and then you'll get that snap down.

It's something like Amazon. If you're were looking to short Amazon, you're in pain now. If this is the two times you shorted and now the stock continues to head higher, and you're short you're in pain.

You're feeling that. That can be emotionally problematic and very stressful on you. But eventually, you either have to know where that loss point is. And where you take that hit. Or you need to know where you adjust. Once things kick in and if you were able to hold out now you let things cook and let things work.

And then you have to retake your profits. It's the same thing into strength because those things can whip back.

Your Ideas - Do It Your Way

That's the nature of doing things a little bit more contrarian or thinking about things in a contrarian way.

If you're always following the herd, this is one of the main reasons why a lot of people lose out.

They follow people on stock twits on Twitter. I always say you don't want to follow me blindly. You can follow people. There's nothing wrong with that if you're looking to have a newsletter or something like this.

I know even my newsletter is not every day. I don't release a daily newsletter because stocks whip around on a day-to-day basis. But if you're following people on it day-to-day basis, you can get whipped around.

And it's okay to do that, but you have to have the bigger picture in mind for your ideas. Otherwise, the market is going to whip you around.

In either case, if you're always getting in with the herd and you're following it's the same thing. You're buying on the up days, and you're constantly getting burned only to see the stalks roll over.

You're probably buying too late. And the same thing if you're shorting. If you're shorting on down days, it might already have been too late. The time to short was probably when stocks are making incline move to the upside.

Endure a little pain to get that reward later. You sacrifice a piece or two on the chess board to get that reward then. And the same thing here. If you're looking for a long position endure a little pain so that you can get a lot more pleasure.

I hope that makes sense in today's lesson. I do want to cover this more with the Vega, the options, when it helps, when it hurts - just selecting a good position as well. You want to do the same thing when it comes to an option — the same way when you're talking about options.

Calendar Positions

I'll talk about this on a calendar position. Calendars have a pretty good Vega. Typically if you look at a calendar, we have an April, and we have a May.

We'll buy a calendar. We'll sell April and will buy the May. Then we want to analyze the trade. Let's take a look at what that looks like.

The current price is 853. Our calendar is 860, and that's ok. When it comes to a calendar here's the baseline for putting on option positions when you're looking at your Vega.

Usually, I would say you got to be a contrarian if you're putting on option positions you want to be a contrarian. Because you're typically not holding these for three days. You are generally holding these for a week, two weeks, five weeks six weeks, eight weeks. It could be half a year.

You're putting these on, and you're holding them for quite a bit of time. When you look at a calendar, this position has a positive Vega. If you look at an iron Condor, it has a negative Vega which I'll cover here real quick in a second.

When we look at a positive Vega on a calendar what is it a better time to put on this calendar?

Well, here I'll show you an example. First, let's look at how the Vega works. I want to take out this more parameters area.

When does it help you to the calendar in terms of just volatility as far as this calendar? Well, if I bump the volatility up, look at what happens.

We're up about three points on volatility. The calendar expands and grows. You can see calendar expands and grows as I bump the volatility. As I decrease the volatility of the calendar contracts.

What do we want to do?

We want to put on a calendar when the volatility is low. That's what we want because we're buying time. We sell one in April, and we buy one in May.

This is what happens:

  • we sell 51 days worth
  • we buy 79 days worth

That means we have a positive excess of 30 plus some days. Anyways you're positive time which means you're positive Vega.

You're positive volatility because you have more time - you're purchasing additional time premium. It's not in one month. You want volatility to go up.

When is it better to put these things on?

Well, with a positive Vega it's better to put on calendars when volatility is low. That's the case because we want volatility to go up. After that calendars would be better to put on when volatility is low.

The lower the volatility, the better to put on the calendar.

When do you want to do it?

On days that are massively up days - like today. Today we had a massive up day.

How is Vega related to the VIX?

When you look at the VIX, it depends on how options are priced. And maybe this will answer that question. As stocks pump higher, the VIX drops typically. If you look at the VIX today, you can see we dropped about 0.38. So as things go higher, the Vix usually drops.

That is usually an excellent time to put on a calendar because we're positive Vega. What's more, we anticipate in the future rise in volatility.

When you look at how Vega compares to the VIX is the higher the VIX, the more the option premiums are sold for. We're buying Vega, and we're buying time. It works a little opposite. Maybe with the iron Condor example, it'll answer that question a little bit better.

In simple terms, if you have a calendar and you have a positive Vega position you want to put these on massive up days. Because the VIX gets crushed and eventually we're expecting a higher VIX.

After the markets go up two, three, four days, this is an excellent time to put on a calendar. And the same thing on the opposite side is true if you're looking to create an iron condor.

Iron Condor Example

Let's do an Iron Condor. We sell an iron Condor just as an example - analyze the trade. We'll do the calls on 910, 920, 825 and 795. Let's see what this looks like.

We have volatility that's adjusted. Let me bring this volatility back to zero.

If I move this down the volatility down that means prices contract. That means the prices of the options contract. Then the speed (because the volatility refers to the speed) of the market slows down.

The more and higher you keep pushing prices the slower the market, in theory, should get. If you have a super low VIX, it means everybody knows that the market is heading higher.

We're only heading higher by like:

  • three points
  • one point
  • fifty cents
  • a dollar
  • two dollars

Not like twenty, fifteen points. Sometimes you'll get those blips of ten, twenty points but it usually slows down the market. That's why professional traders love sell-offs. They love a higher VIX because you're able to buy on the dips. Or now the option premiums go up.

If you had higher volatility, you could see how you're losing money. But that also means that this premium would cost more. This premium would cost more, and if you're a seller of premium, you would be selling this for more money.

I know it's a little bit confusing. There's a lot of elements - cause and effects. But basically, instead of selling it for 2.70 this would sell for 3.40 depending on the VIX. That's how the Vega helps or controls the VIX.

Important note: It's not directly tied into it from my understanding. It's more along the lines of how much time value you have. But if the VIX is low, you typically don't want to sell iron condors. The main reason is when you sell iron condors with a low VIX the picture would look the same with but it would be tighter.

With a high VIX (I'll make it in orange) would be right here. But with the low VIX, it would be more like right there right within the yellow. And you'd get the same amount of money.

With a higher the VIX these option premiums become more expensive.

Why does that work or why does this happen?

Well, when you have a high VIX, it's usually because well people want to buy protection. It's the put to call ratio. It's demand for those puts.

When the market is selling off in a big way, people want puts, they want puts, and you're a seller of puts it drives the prices of those puts higher. You being a seller creating an iron condor it allows you to sell those puts or calls for more money. It will enable you to sell those options for more money.

I hope that ultimately makes sense. As you can see how even relating it to options, you're still a contrarian in the marketplace. Because when everybody else over here is selling off in a big way and the market is selling off, you're selling the puts. When they want puts, you're giving them the puts.

On the flip side when the market is heading higher, you're buying time premium — something like calendars or diagonals. You're buying time premium because volatility is cheap which means prices of options are affordable. You can afford to purchase a time premium.

That's what it means to be a contrarian whether you're trading stocks regularly trading you know positions and shares or even in options. It comes down to the personal preference of what you're doing. It doesn't matter whether that's shares or whether that's options.

Keep in mind you're always looking to hedge your position. Be careful if things go against you. If things don't work out in your favor what are you going to do?

That's the big question you always want to keep in mind.

This is the way that you do things in the market place to capitalize from being a contrarian and also to make things work out in your favor. Even if you have the upside and you went on and put on some calendar positions eventually, you get a higher VIX pop - a pullback. And your calendar decayed a bit, and you get out. If you had two calendars, you get out one calendar, and you can hold on to another one. And if it gets outside your range, you're out of that position. You could create it the next.

Conclusion

I hope it was helpful and gave you some insights to looking at the market in a contrarian way. And how you would ultimately go in on a contrarian basis. Those are some of the things that I've gone in and discussed.

It doesn't mean that you can't follow the trend. It means you don't follow the actions of the group. If it's an up day, it doesn't mean you buy right away.

A lot of the issues, the emotional problems are difficult in the marketplace. Sometimes it's weeks where you're feeling these things. But then eventually it all works out because you know the bigger picture.

Ep 117: Building a Portfolio Through Accumulation w/ $20,000 Account

January 5th, 2017

Listen to the Podcast

Subscribe to the podcast

iTunes Stitcher

We're going to talk about building a portfolio through accumulation with a $20,000 account. That's what we'll cover here in this post.

Disclaimer

Before we get started, I think most of you know this, but all investment theories concepts that we cover here in this module is for theoretical and illustrative purposes only.

It's not investment-specific advice simply because you might be reading this post later. Also, your investment risk tolerance might be different. Contact your financial adviser before placing any trade. There could be a lot of risks involved in trading and investing.

News That You Might Find Helpful

Be sure to check out the Traders Fly website and check everything that is there for newsletter subscribers.

When you get there, go to the live classes right at the top, and you'll see there's a tentative calendar. If you're on the newsletter list, you can get access to some of the free live classes that we do.

The other thing is that we've done a discount on video classes for previous members. You can head on over to the member's membership plan section and then scroll down.

Getting Started With Building a Portfolio

I chose a $20,000 account simply because it's an excellent average account that I think most people are starting with. They're getting into trading, or they're looking to invest. And it's one of those that also is difficult to build up.

It's a lot more challenging to build up a smaller account than it is to take a more significant account and make $20,000 from $1,000,000.

Look at some of the things that we can control in the market. The first thing is the time. Just for illustrative purposes, I'm going to use left to right because it's easier.

Your investment timeline or time horizon is going to be finite. It's going to have a starting point and an ending point.

This ending point can be determined based on:

  • the price movement
  • the success of your trade
  • the life of you doing investments

Once you hit a certain age, you might stop at some point. In either case, there is a stopping point.

This initial point is your starting point from when you're researching to get into the trade. But ultimately from when you put on that first trade. When we go into investments, some risks are attached to it.

Number one is pretty heavy price risk. We look into time initially when we put on that first trade we have very minimal price risk.

The moment you put on the trade that trade is barely moving. But as we continue moving through this time frame that's when the risk starts to happen. You have to start looking at things through time. If you've had trouble with this looking at a finite example then maybe this will help.

As you start looking at this, you have to break this apart. One of the ways to do this is through accumulation. When you look at the time and you look at accumulation you can reduce your risk. That's possible because, in the end, it comes down to the risk that you have. You can reduce that risk through accumulation over time.

As you continue moving through time, your second trade might be over here, and then your third trade might be over here.

After you get into three full trades, then you have your full position. But this is only about half or a third of your total full trade.

We might only get into 30% of completion when we finalize the trade. The next part of that trade could be profit taking. It could be profit taking or managing. And then the remaining part is exit - exiting section.

This is where we get through a full trade, and most people don't think about it that way. If you start breaking things down in segments, the beginning part is to get into the trade.

The next part is managing, or you take your profits. It could also be adjustments depending on what you're doing. Then the final part is exiting. You could also exit through doing it in stages a stair step pattern.

The most important segments are:

  • getting into trade/accumulation
  • managing/taking profits
  • exiting

Our primary focus right now is going to be talking about this first part which is getting into the trade and accumulation.

If you do this part well and if you get into the trade at the right time and you do it with lowering that risk it saves you a little bit even if you're not as good at managing or exit section.

I think managing and adjusting your positions is also one important part. And then if you exit even too soon you should be okay.

If you get these two parts down, then you should be reasonably good within your trades. I'm going to show you how this can work out for you.

How you can break apart the time at getting in to reduce your risk?

Showing that to you is my goal. We're going to look at different time frames so that you can get into the trades by reducing that risk. And you are then managing it. I'm going to give you some tips on that as well.

Let's take a look at some charts and again we're looking at a 20,000 dollar account to start with. It's a nice number, and if we take a look at Facebook right here, you can see I'm looking at a daily graph.

You can tell it's a daily graph because of the icon indicator up right there. I'm looking at it from about June timeframe to December and January. You can see the stock has gone up and then pulled back a little. There's little sideways action.

That's overall our movement. Now if I take this out on to a longer time frame (a weekly), you can see we have some pullbacks down, and the stock has been heading higher most of the time.

And then we get a little pullback right now. Looking at your timeframe of investment depends on when you're entering this stock chart and the length of your investment. If you were a person who is looking to hold for a few days and you got into the stock at the beginning when it first opened up you most likely would have lost money.

That's the case because your time horizon was a few days and that stock was heading lower. Now there is another scenario where you look at things on a longer-term perspective. You might get in at the beginning of this stock wherever in the earlier parts this stock continued to head higher.

The problem is always the risk that goes along with it. If you still had a long term perspective, but you got in it at the beginning down there sometimes it's challenging to keep your cool.

It's challenging to keep that mentality or psychology in check. If you had done the accumulation part, you would have purchased a few shares let's say right here.

Then again a few shares over here and a few shares maybe over here in this area. You're putting on a few shares from 2012, 2013 and 2014. It's a three-year span across let's say 6-7 year time horizon you would have been fine.

Your average would be somewhere let's say around this area (yellow arrows). That would put the stock price around $45. That's your average right around $45-$50 of accumulating those shares. And now you're at the $120.

A little pullback would not have hurt you that much. However, we don't always trade that way. We don't always know the length of time that we're going to be in a trade. When you do accumulation, it can often help you reduce that risk.

Analyzing Daily Chart

Let's look at some of the more difficult situations and let's look at Facebook.

If we look at the daily chart and if my time horizon is a year I might look at this chart of one or two-year timeframe. Now I come to the question of well how long do I want to accumulate these shares for?

We take a look at the time to buy, and we're looking at about one year. This whole timeframe is a year or in other words twelve months. That is what we're looking to do a full investment on, but our starting point is at the beginning.

If we start here what is our accumulation phase going to be? We could probably afford anywhere between a zero to four months to accumulate our position.

You don't have to get in it all in one day or all in two days or all in three days. I know it's exciting, but if you're looking to invest for about twelve months, probably four months is good enough.

You could do it in two months or one month. That's up to you depending on how you're looking at the chart. Four or five months is also fine because you'll see here as we start playing with numbers how this all plays out.

I'm sharing with you precisely the way I think about things as I'm looking to make a trade.

We're taking a look at Facebook here, and we want to build upon our position through accumulation, and we do it based on time. You can do this in a few different ways.

If you're looking at a year position, you could accumulate everything, but some problems could go along with that. I'll share with you here shortly.

The other approach you could do is stagger it a bit. Do one per month or do one every three months. You could do something like this. Or you could do something even further out. But then if you're holding patterns one year, you have some problems.

Important note: We need to decide how many shares we can buy and how many stages of accumulation do we want. If we do it in thirds, we're saving ourselves about 30% to 60% on a pullback. That way you're not getting in all at once.

The whole point is that if you get in a large chunk or 30% of your position and the stock's pullback you still can afford to buy a few more shares at the lower price level. That's ultimately the goal. Whereas if you bought all the position all at once and you have a pullback you're going to have some problems.

That's the case because you have spent all your money and you're down for the count. That's why you want to do accumulation and building out a portfolio in this way through accumulation. And you can do this with many stocks.

If you're doing it with multiple stocks, take your portfolio and reduce it in half to do two stocks. Or reduce it in thirds if you're doing three stocks. And even if you want to be even safer, this is what you can do.

Let's say you had a $20,000 portfolio. You could trade with $10,000. And if you want to trade two stocks, you can trade $5,000 with one stock and $5,000 with another stock. That will give me my $10,000 even though you have a $20,000 portfolio.

That means you have $10,000 remaining in cushion because you've used $10,000. You have $10,000 in a cushion for adjustments and so on. It depends on how you structure the risk.

How You Can Do It Properly?

Here're a few different variations in situations that we have right here. As we take a look here and get into our position right over and I start building up my account, this puts me at about the $85 range.

On a $20,000 account, we have 235 shares. If I want to do this in thirds, we get about 78 shares. But if I want to be a little more conservative call it 50 stocks to make matters simple. So here 85 times 50 shares, that gives me $4250 on this accumulation part.

The stock then pulls back a little bit and then continues moving. Let's say I wait another month or two and I do a second accumulation over here (yellow arrow).

My next accumulation here is right around $90. We do 50 shares because we're still in the same price range and level. I want to give you perspective since we budgeted conservatively. You get $4,500.

Now we're up to about $8,750 in our spending capital. What happens now is impressive. You can see we're fairly profitable, but then the stock pulls back a bit. And this creates an excellent opportunity for you to buy some more shares. Remember your holding time is about a year maybe two years a year and a half. You're able to get the stock at $82 and again would do 50 shares to make calculations simple.

You can budget accordingly and play with the numbers. But I'm keeping it 50 to make the math simple. Fifty shares times $82 and now I get $4,100.

In total, if I add these numbers up, I have $12,850. That's the total that we've spent, and it's nowhere near our $20,000 range. But now you've averaged your prices. That is fantastic because now you have 50 shares at $90, 50 shares at $85 and 50 shares at $82.

Your price average for these shares is $85.66. That's what I got as far as the math goes. Of course, you can do your calculations. We're right around the $85 range here for our average.

We have a time horizon that we're looking at from this September timeframe for September of next year. Now we're allowing things to ride. And not everything is going to work out perfectly. As you can see sometimes, we come back, and this gives me right around the $95 price range.

Then they come back around here about $108 price range. But overall my prediction was correct, and this worked out well on the accumulation part. It allowed me to gain those shares at a lower price averaged out my position and buy things at lower prices.

I did in thirds. You can do it in quarters you can do it in half. If you have less money, sometimes you do it twice. If you have more money, you could do it in 5-10 times. That's how prominent money managers do it. They continue to accumulate day in or week on one end. And they continue to build out that account.

This works out well because I can see the future here on this chart. But what happens if we do it differently?

What To Do If You Make a Mistake?

Let's take a look at if you did this completely bad because accumulation is there to save us a little bit from a bad mistake. And I want to share with you where the risk or reducing your risk through accumulation can help save you.

Even if you put on a horrible trade initially, you can do something to correct things. Let's say you got into the trade somewhere around this level.

We can say 133 since it's all almost at the highs. If I go 50 shares multiply that times 133 we're going to get $6,650.

That's going to be our total that we've spent right there on that position. We still haven't spent our full $20,000, but now you see things rolling over. As you see things rolling over you probably want to wait if you can get it at lower prices.

And if you see things here coming in and bouncing even if you caught it at the highs. This is your next step of accumulation. Things are going higher - let me accumulate. Now you're accumulating at about 122.

Do the math: 50 shares times 122 gives me $6100.

Now I have a few shares at 133. I have a few shares at 122. The stock again rejects those prices, comes back lower and I say this is tearing me apart.

Then it pops higher, and it comes back lower. By now you can see it's bouncing off of this price level. The first one you probably wouldn't be able to see. The second one you might have been able to see it. And the third one you should be able to see it, and you say you're going to buy it at the 115 price level.

If you went ahead and bought a little bit more (again 50) at about 115 that gives you $5750 on that position, all in all, if you take the average, we get a price point of 123.33.

That puts us now somewhere right around this price level. You can see the difference of where we're at. It's not very different from being up at the top at 133. Because if I put in all my money at $133 it would pin me to having that stock have to go up to 133. I've average down, and that is not always the best approach.

If you do it in stages through accumulation and you've planned for this in advance, you understand that you're reducing your risk over the period.

I usually say do not average down on your positions. The reason is that what people typically do is they put in 100% of their position at the beginning.

They put in everything. They put in the full $20,000 or whatever it is that they have initiated at the beginning. When they do that, and things sell off now, they try to double down. They get more money, they need more money, and they try to add on to this position as things are having higher.

That does help, but you don't have a plan in mind. Here when you look at it, you can see the plan that I have in mind. I plan to do it in thirds as I mentioned earlier.

There is what I need to stock to get into to break-even. Now I could set my stop, and my stop could be a that big point where - that 115.

If it gets below that, I'm out. I take my losses, but it's not as bad as being up at the 133 level.

Looking at Price Point

The other advantage to this is that if I'm looking into this price point, you have to remember that I'm accumulating 50 shares at 115.

If I have 50 shares at 115, we have $5750 invested. That's what we have invested. Now keep in mind these 50 shares I could go ahead and peel them off to take some profits to reduce my risk.

I'm thinking about what's my risk. I have these 50 shares that I can use to make money on to be able to make up the difference for these shares at the 133. Separating those things is crucial. Separate those things from your mentality.

Maybe this is the case. This went up about $4. That amount times 50 shares and you get $200 in profit. That right there helps you make up the difference.

You're reducing your risk because now you only have the 50 shares remaining from this part and the 50 shares remaining from this part (in yellow). If it rolls back over and goes lower, you can buy back the original 50 shares from the 115 price level.

I know it may sound confusing, but you're using the 50 shares from that 115 price point to roll them constantly. To continually make money from them as that stock heads lower, and bounces have lower and bounce up until you can either make up the difference for these other shares. Or up until you get out from a stop if that is your stop.

All these things come with making a plan in mind. You can see how the accumulation stage helps you reduce that risk based on your time horizon. That's the case especially if you're looking at a year plan. The difference is we're going from October to January, so we still have about six-seven months to make up those differences.

If it heads into month four and five and I'm still struggling probably, it's the best to get out of the position.

Maybe you don't see things turning around. Then it's better to put your money elsewhere. In general, I can stair-step on the way up, and that's my accumulation and then allow me to make money from the steady uptrend that's going to happen.

The more significant thing to learn from this is that if things continue to head lower, I can average into my position. That way things do reverse. Not every time but if you're picking the right stocks, looking for a longer term and if they're paying out dividends it helps you make up those differences.

That way even if you get stuck in the last one or two positions you can use them to make up the difference with those bounces. You're averaging into them. But obviously, the critical point is that you don't put 100% of your position all in that one spot.

If you put it all in on that one spot 100% and you do it from the beginning that's where people get in trouble. That's why you don't double down on a losing position. The reason is that because you already put 100% of your money in here. And now you're trying to double down to make up the losses from earlier.

That's why having a plan is the smartest idea. If you're going to accumulate in stages, it allows you to reduce that risk because of splitting things into time. You have to know your investment horizon for that.

Great Strategy That You Can Apply

You can do this across multiple stocks. It's hard to overlay this with charts and draw at the same time, but let's say you had another stock chart.

In one stock you bought in May and July and September. The other stock you bought in June August and October. Now you start looking at the fact that you've done accumulation three times in every stock.

You've also staggered the months and the different position. You have two stocks each one accumulating three times and alternating months. You could do things that way as well. Keep in mind now you start getting into multi-level diversification and accumulation.

That's where you can take things further. My goal here was to share with you the accumulation process and why you're accumulating over time.

If I see a stock breaking out, I know it's bouncing because right here is a classic pattern of support. Even if I see it bouncing if you're looking at a shorter timeframe it's sporadic I'm going to get in 100% of my position on the first day.

Why would I put in 20,000 shares on the first day? When I could put in 5,000 shares at the multiple points. That's perfectly fine because I'm letting the stock prove to me and then I take the 5000 from this first position, and I take those profits off down the road.

And then as it continues to move higher, I may take off profits when it is the right time.

Then this third position I could let it sit and let it build upon. And I can add back from the first or second trade again back when it bounces again.

It's a rotation, and it's dynamic. Trading is dynamic, and I hope you see that. It's a little confusing drawing it on screen, but I hope it's giving you a bigger picture.

You're rotating things through. Even if you're doing swing trading, you can see how this works out because you go in one day, two day or third-day fourth day. But now you're taking the profits down the road.

And then again you start reaccumulating. Then you might take profits. Or you might continue the accumulation process. And then as you start seeing it weaken off, you take the profits then.

Conclusion

Your goal is to accumulate - to reduce your risk. Don't put in 100% of your shares or 100% of your position right away. The main reason is that you don't know if that second day, the third day, the fourth day it's going to be a down day.

You don't know if the trend is going to change up. That's why you stagger those things because it allows you to reduce the risk based on time.

Trading is dynamic, and you have to think about breaking apart your positions that you put on position number one, position two and position three and start trading off of those to psychologically reduce the risk for yourself.

Ep 113: Your Positions in Bullish Market Conditions

December 8th, 2016

Listen to the Podcast

Subscribe to the podcast

iTunes Stitcher

Hey, this is Sasha Evdakov.

This is a post about your positions in bullish market conditions. It's December 8th, 2016 and right now the S&P is up about 7 points and 2250 is the level we're getting into.

I want to talk more about your positions in which you're probably going through as you're looking at the market as it continues to trend higher.

And I'll cover some things you want to consider depending on your situation.

A couple of Quick News

I posted a few critical charts around the indexes. Next thing is new webinars posted for course owners. We did an intensive webinar, and if you go to the Rise 2 Learn website, you'll find it.

This is where we hold all the courses and anything with options. There're the options course and two webinars.

The last thing is that I did refilm and added content to the Accelerate Your Stock Trading Education Course.

Take a Look at The Market

If we take a look at the SP-500, we can see that the run and the expansion that we had especially since these lows right there since the election has been extreme.

You could say that we broke out right here pass this resistance line. That's one thing, and we came back to retest this support line. And then again we consolidated slightly, and we powered higher.

As I look at this, we continue to keep pushing higher. You're probably in a few different variations of this trade depending on how you looked at it.

I want to look at it in a couple of ways. Number one would be your timing with overall being in the market. If you're brand new to the market and this is the first time you're experiencing this I have some words of caution.

That's the case because if you've been trading one or two months at most and you're experiencing this move, this is not a typical move. I've talked to a lot of traders in the past. I've done a lot of coaching in the past with people who've traded in the past. This overall right now is a bull market time.

It means you could basically close your eyes throw a dart and stocks are going up. And everybody is a genius during the bull market. If you think you're ahead of the game be humble about it because this is not a healthy condition.

These things can last for:

  • a month
  • three months
  • six months
  • a year
  • five years

It depends, but the more you stretch it to one side the more massive the drop. My first thing is when we're looking at your various position as you're looking at your time frame. If you've only been trading for one or two months, this may seem reasonable.

For others of you that have been trading for 2-3 years or maybe more, you realize that this is a unique scenario. Be mindful of your emotions especially as you're looking into these kinds of situations.

Number one reason is if you've been trading for one to two months you're probably making great money, and you feel good. There's euphoria out there, and you're buying because you can't go wrong. Now if you've been trading for 1-2 years, you probably have some balanced edge, and you might feel like you're missing the move.

There're two different feelings here that are going on. And if you were shorting the market, you're probably not feeling terrific. So let's break these things down on the chart perspective.

If you've been trading this last month and a half you probably just saw a slight pullback. And then you now have this run expansion which you haven't seen a lot of.

Are You Taking Profits Into Strength?

You have to realize that market go up for much longer than they do to the downside. But the downside moves are much more violent. The more stretch that you get, the stronger the pullback usually becomes. And if these things have a significant pullback are you taking profits into strength.

That's the key. If you're new to the market and you've been trading for one to two months are you taking profits into strength. We haven't had a lot of red days except just a few.

  • If you take 1,000 shares, are you taking 200 off the table?
  • Or are you taking another 200 as it goes higher?

This helps reduce your risk. If you're not doing that you're going to pay the consequences eventually. This business is about making money.

You might be saying:

  • Why don't I continue to move my stop and continue to raise my stop and then if it hits my stop I get out?

Well, because sometimes those stops can be blown past especially on down days. And that's why you do it. That's because there could be one day or two days drop that could wipe you out.

Be mindful and if you think you know better by all means you can trade it the way you want to trade. Just be aware of taking profits into strength when things are good. When you're making in the last 20 years and when you don't have a run such as this one, then you want to take profits in the strengths.

If you've been trading the last 2-3 years or you're even a short a bear, then you're probably in a position like this. You're either missed the move, and you're not making enough, or you weren't long.

  • What do you do?

Maybe you're losing money because you were short. Or you saw this was building some consolidation levels.

  • And in that case what do you do?

Well, you're probably losing some money or not making money. If you're not making money, don't stress about it. If you're losing some money, but you're sticking to your game plan you're okay.

Don't be too stressed about it. These are not realistic conditions. Keep in mind we are trading based on potential policies and potential euphoria. There's a lot of rotations going on when you start looking at stocks like a Bank of America or a Goldman Sachs. These are not normal conditions.

US Steel is a good example as well. For a steel company to go up this high - these are not normal conditions.

  • Can they continue to go higher?

They can to some degree go higher, but you're starting to get into stretched valuations. And eventually, that comes back.

  • Can it continue to go up for another month?

Yes.

  • Can it continue to go for those six months?

Yes.

However, when the pullback comes, it's always much stronger. Keep that in mind that this can be building for something larger - for a pullback. You have to stick to the game plan. It's apparent that you have risks on both sides regardless of whether you've just been new to trading or if you've been trading for a while.

Bank of America Stock

You have risks on both sides. If you get in it right now, your risk is that it could pull back right here and still nothing be wrong with the stock.

And that's a pretty good pullback in Bank of America. You're also could be missing out on further potential gains. The other side is if you short it right now you could have an excellent potential to come back to a particular situation like over here (yellow lines).

The stock could continue to run a little higher. And then you'd be losing out on your short. You have these two unusual high-risk situations that you're in right now.

Things to Remember

Over 300 companies are making 52-week highs. That's not normal.

And you have to be mindful and realistic of your situation and game plan of the potential:

  • the possibility of it continuing going higher
  • the potential of it to break lower

I've pared down some of the short positions because I was a little more balanced. I've pared down a lot of my short positions, so I'm slightly short. But I have wide spreads out in options for selling outputs as well to counteract some of this momentum.

I am not trading anything around this range. That's because I know that the potential for these stocks to come back to 2,200. They can do it, and nothing be wrong with it. And that is because we have additional risks coming up.

After the new year, you have things that are coming up. It's a new cyclical year, and people may take profit. They're looking to maybe hold on to those gains until the new year.

Otherwise, you pay short-term capital gains tax. The other thing is you have the FOMC meeting coming up next week to make the federal interest rate announcement. Now we're melting up with a lot of shorts being squeezed and a lot of euphorias. There are a lot of retail traders as well.

The volume's there, but it's diminishing in some regards. We did have a nice little pop and spike right there which fueled some stocks a little bit higher. That was pretty good and significant volume.

This is, in reality, a bull market. You could close your eyes, and you could throw a dart, and everybody's a genius. That's the case because most stocks are making higher moves.

If you've been trading 1 to 2 months and this is what you're getting it, you probably think you're a genius. Keep in mind these are not realistic scenarios and situations. You want to be peeling things off into strengths.

Maybe you've been trading for a little while, and there are scenarios like this:

  • you're either missing the move
  • you're short, and you're losing out

Be aware of the fact that these are not real day-to-day, week-to-week, month-to-month. It's not statistically normal for stock markets to do this without having some pullbacks.

You will probably see some pullbacks. If we look at this, you will probably see some pullbacks within February time. And I say February because that's after the inauguration and those kinds of things.

You'll probably see those things start to come forefront - if not maybe sooner.

At least getting into more normalized levels meaning you'll have:

  • a few days sideways
  • a few days up
  • a few days down

That's more normal and realistic. As I look at things, every day is an up day. And out of the last few days in last month in the market, we went up 13 points. If you look at the SP-500, we went up 7%-8% which is your yearly gains on a good bull market you made in one month 163 points. And you only had seven red days.

That is extreme. Be mindful as your positions and how you're positioning things and what you're looking at.

Popular Stocks - Facebook, US Steel, Goldman Sachs, Netflix, Apple

Let's take a quick look at some popular stocks. Looking at Facebook your line in the sand is that 114 level. It's bouncing, but we're struggling at that level.

These are some favorite stocks. They're pushing a little bit higher, but it's not on significant volume. The stocks that are moving well are things like US Steel.

Here's what's happening with Amazon go. They offer free to check out or check out without having cashiers in line. They're innovating things.

Things are changing, and the environment is changing. The industry itself is changing. If you look at things like US Steel you have to move with where the big boys are moving, but looking at industries like the steel companies I find it to be challenging in the long run. In the short term (maybe in the first year or two) it's possible.

However, in the long run, just the way that things are moving it's just tricky. The jobs are becoming a lot different. It's not to say that you can't bring jobs back and have more growth in the job market. I want to say that the jobs are different.

That has been happening to garbage trucks with the guys doing the lift. Now that the truck has a lift and an arm and there's now one guy instead of three or four. All those things are changing in our world environment and world economics.

Right now where we're built on euphoria, but no policies have taken place. And if you look at this run, they saved a thousand jobs from moving to Mexico. The Union guy comes out, and he says it was only about 500. All these things remember to get embellished in politics.

You might start looking at things like even Goldman Sachs. I mean for it to come up so high so fast like biotech it's beautiful, but eventually, these things do pullback. They don't go up forever.

What's interesting to me about some of these things is we're coming into 2008 highs. In 2008 was a major sell-off. If we can break that level in Goldman Sachs, I'd say that's fine. But beyond that, I'm a little cautious.

Also, Netflix - these are leading companies. They've been leading the markets for years. Except for this last month - they're not leading now. That has me concerned.

It's the same story with Apple. They say that there's a rotation going on. Rotation is excellent, but the earnings need to come in. That's where you get to see it - we have earnings month in January here coming up as well.

You got to see how things play out. If you're trading these stocks and you feel like you're not making a fortune, don't stress about it too much.

Pro tip: These are not normal market conditions. You don't want to be chasing things. That's the one main thing and the main point I want to make for you.

Once they're high and powering higher - don't chase. When I used to pursue things like this I was greedy, and I wouldn't take profits in the strength.

I get in right here, and eventually, these things start coming back. And they continue to go lower. It would go beyond where I entered.

If you've been trading for 1-2 years and you feel like you're not making a lot - go into things slower. Things will change, and a pullback will happen. It will happen, and it's just a question of when.

The other strategy is to trade lighter. If you usually trade 1000 shares, now you can go in with maybe 100 or 200 shares.

Get less exposure. Maybe you'll make less on the upside, or you'll make less money on your profits. But you're reducing your risk that if and when that pullback comes you're not as higher exposed.

Important Note: We're not moving in a big way on the big companies.

On Amazon, we're doing a slight little pullback which could be an excellent potential entry point. Seven hundred would be ideal. We had some swing lows, and in theory, you could, this is a trendline.

But you also have some gaps and overhead resistance which is creating some problems for the stocks. Keep that in mind that you have the clusters that are significantly bearish for this stock.

The ones that are powering higher where the money is moving are things like US Steel. There are things like Bank of America. You can see the influx of volume, and it's typically just the money moving from the big boy companies and the leaders into these companies.

I don't see new money stepping in. I see more along the lines of the rotate is what's going on. And you do have the volume that's there. But the critical question is can it last and how far stretched.

Take your profits. You have to take some profits into strength especially if you're new. If you're experienced and you were able to catch this run you should be taking your profits.

If you don't take your profits and you've been trading for a while, and this comes back - you deserve it. Because in simple terms you're making a boatload of money, the run is extended, and if you're reading this post, this is a wake-up call.

Pro Tip: When things get a little stretch you know they're going to pull back. Just be careful where you're at the position.

Take a Look at Bollinger Bands

If you look at overall Bollinger Bands whether it's the SP - you can see we're way beyond it on on the percentage level.

Statistically on the probability level we're very stretched. I'm cautious. All my positions are all along with a slight tiny bit of shorting potentials and possibilities. But in general, you want to be careful in these kinds of market.

It depends on your experience of how you are positioned. Be agile and mindful.

Things to Be Aware of

I didn't post as many charts this week simply because any stock that you pick would be going higher.

A lot of them were powering higher, and you could have made some good money. However, keep in mind that these things will pull back eventually.

You want to take your profits. You can see like here these stocks powering higher way beyond. If you look at it here's the normal level.

You could see the normal levels. And sometimes there are pretty substantial pullbacks. Those are the abnormal areas. You can take any other stock - it's the same thing.

Final Word

When you get too many people on one side, then everybody's going to be on the other side eventually. The reason is that there will be no sellers.

Keep that in mind especially if you get these stretched moves. The more stretched it gets, the larger the pullbacks.

Ep 112: Trading Stocks by the Numbers (Statistical Probabilities + Options)

December 1st, 2016

Listen to the Podcast

Subscribe to the podcast

iTunes Stitcher

In this week lesson, we're going through trading stocks by the numbers and looking at statistical probabilities.

Disclaimer

I do want to remind you that all the examples that we use in this video or any other videos are strictly just there for informational and educational purposes. None of it is recommendations to buy or sell any stock securities or options. That's because you might be reading this that some future date and time or your risk profile or risk levels might be different.

A Few Words about Live Classes

Visit traders fly website and check live classes towards the top. My ideal goal is that we take this live class concept and apply it to live market conditions and do trading.

You'll see there's a calendar of events. You can even mention some stocks, and we can look at them and dissect them and evaluate the charts.

Log into your account. The registration is free; it's just to get the notification email of where to go to watch the class. Choose what suit you the most and enjoy learning new things.

We're going to get into very detailed concepts if everything lines up and if you like the live classes. I'm looking to take 1, 3, or 4 months depending on the trade selection and go through the trade with you on a week-to-week basis.

I'm going to show you:

  • what I do
  • how to trade select

And you can watch the class, or you could follow along. It's going to be up to you, but it would be in the live market conditions. That way, you can see how to do retirement trading or build for your retirement and a simple vertical strategy.

Most of these are going to be free. As we get into detailed classes, some of them will be more premium based and more paid based.

Some of the topics might be something like this:

  • beginners for trading stocks
  • detailed trading for retirement with options
  • long-term investing strategies

In either case, take a look at those things if you're interested. Make sure you register your seat.

Focusing on Our Charts

Take a look at our charts right now and get into statistical probabilities and the chances of things working out. I'm going to do this in two different ways. The main reason for doing this is everybody's trading a little bit differently.

You see that the market right now is starting to roll over.

You see this topping action, and when you have an expansion that's this far, it's pretty dramatic.

More than likely a slight pullback should happen even if we come back to retest this price level. One of the things that I typically like to watch is I look at things like the Amazon. I watch how they're performing.

Also, I take a look at Apple, Netflix, and Facebook. When I see these significant companies rolling over to me, this is a little bit of a caution sign.

It is when the leaders don't lead, there's something underneath, that's changing. This could be good, or it could be for a bad thing. When I look at Facebook right here for a $3.50 move about in a day - that's pretty significant.

That means volatility, and the stock is picking up. Now granted some of this was due to the earnings problems that they had. They talked about it, but if that stock that level breaks down then more than likely we will see lower prices.

As you could see here, the volume is also picking up. Take note of that and be very careful, especially as you see these big companies pushing lower.

When it comes to Amazon, you can see the ABCD pattern. As you look at this, you can see that we're hitting this 61.8% level. And we couldn't fill the gap.

  • What are stocks going to do?

If they can't push it higher, they'll bring it back lower. We're looking in evaluating any stock chart. You're looking at the chance of something happening.

And in the day-to-day world, the chance of something happening is not that difficult to understand. As you get deeper into statistical probabilities, it does start to play a more significant role.

In this case, I'm going to look at two different types of statistical probabilities.

Statistical Probabilities

The first one is we're going to look at some statistical probabilities. As I look at things on this page, for example, it's elementary to look at statistical probabilities.

Here I have a few different index cards in yellowish tone - 5 of them. Then I have a pink one on the right.

I started to mix these up. Now, if I took somebody that was blindfolded, what the chance or which card color has a higher chance of being picked is.

To remind you there are five orange ones and you have one that is pink. It's a pretty simple answer. These yellow cards would be more likely to be chosen. At least one of the yellow ones is more likely to be selected.

As I take one away, the chance starts to diminish a bit. And as I start adding pink ones, we can have three pink cards at this moment. Then your chance begins to become a little more balanced.

If I add a fourth one now, you have a 50%-50% chance for those things to be chosen. In the stock market, things are a little bit more complicated.

Think about the rubber band effect. If stock market prices go up a little too high eventually they'll snap back down. The same thing if they go down a little bit too much eventually they'll snap back down.

That's why if you have a significant sell-off that's big eventually have significant snapback that's also more strong to the upside. And the same thing if you have a considerable pop to the upside finally you have a major pullback as well.

Sometimes those things can work out a little bit differently, especially if you have a significant pop to the upside. If you get some sideways consolidation or sideways action, this can help ease the pain as well. If it moves sideways, that builds momentum for it to snap more to the upside or the downside.

The same thing works in reverse. Let's say stock market it's moving to the downside and then if you get some sideways action it's building or even a little retracement to the upside - that snapback down can be even more violent.

Some critical support levels get broken. If they get too far stretched, that band will snap. It will continue selling off. Remember, the more stretch, and the more coiled this thing is either down or up, the bigger the snapback.

With that in mind, as we look at probabilities, this is what you're looking at. You're looking at stock prices.

Closer Look at Amazon

As we look at Amazon, you can see when the stock gets sold off in a big way you probably get that snapback.

That's why you have the ABCD pattern. You got a snapback, but the snapback isn't as big. That's because the coil is set up for downside movement.

After that snapback, you're getting that next leg to the downside. When you get too far extended to one direction, it'll snap back in the other direction. That's why in general are 90% of traders wrong.

That happens because when they see this sell-off happening they say that's the market or this stock is going down.

They estimate the stock is going down. Then probably what they do is go short at this price level and then all of a sudden it reverses. You get that reversal and the wrong. They get out - they lose a lot of money. That's what happens.

If you're looking at the upside, it's the same thing. After a while, it's starting to go up. And people think that is great. It's going up, and then they wait another day or two. They are waiting for the right moment to get in it at this price point. And then eventually we recoil back and snap back because we're too far extended to the upside at this level.

You look down here, and you'll see that we're too far extended to the downside. It depends on the time frame view. You could have a shorter time frame view (daily or 30 minutes), but you usually want to look at daily, weekly, and monthly.

The concept is there no matter what frame view you apply. As you get too far extended probably should get a pullback. On the other hand, if you get a pullback that lasts 1-2 months, you probably will get some higher prices.

As you think about it more deeply, you start to put those things together. This helps increase your statistical probabilities as you start looking at things. More things are in your favor.

Look at this ABCD pattern. If you're in the trade or getting in the trade, you wouldn't know that this trade is setting up for an ABCD pattern.

You wouldn't know until this bounce over at this price level. But you could start seeing things. You have this expansion, and when you're at this point (B), you notice that it's a little extended.

Now you see the price expansions a little high, so you would want to wait for a pullback. While everybody else is selling you know that here your C point you have a pullback. A standard pullback can go 50% and have nothing wrong with the stock.

Pro tip: You can have a pullback 50% (even 61.8%), and nothing be wrong with that stock.

Right now, we have this pullback. Everybody's selling, and most people are wrong. Instead, you would probably want to be buying on a big candle like this. Now you want to be very cautious and going slowly maybe do it over multiple days.

But typically this is the concept. You're doing things opposite of what you usually think. It's something like when you're driving or eating. For many people, they do the intuitive thing.

You want to do the counterintuitive thing. Things that usually are not natural to you, and this is why this works out.

Many people are selling, and you should be the buyer. As you're doing the buying right here in this bar (C), you'll slowly see that bounce come in. That's where you get that full expansion.

There're a couple of things in your favor. As I look at this, you see that you have the A to B pattern and the stock was overextended. Now, you want to wait, and you're getting the pullback there, and you see the B to C pattern. That's two things in your favor.

Then you're looking for:

  • the volume
  • the contraction of volume
  • how the stock is moving
  • the shift other factors

If we're on the weekly, we can see it's 50 a week. You see how does that come into that. It broke it a little bit, but it's holding it.

The volume here is not in as big of our favor for the upside. But we did get the pullback. You have to balance those things out.

As you start seeing more and more things you're putting that statistical probability in your favor. That's what you want to do as you look at prices.

Evaluation of Probabilities

When we look at this on a piece of paper, you can start evaluating these probabilities.

There're a few questions:

  1. is the stock overextended?
  2. what patterns do you have?
  3. does volume confirms the move?
  4. the health of the market?
  5. what about fundamental analysis?

1 - Is the stock overextended?

It doesn't matter if the stock is overextended to the downside or the upside. If it's overextended, then it's not in your favor to go into that extension. That means if we're too far to the downside and you want to go short, that's not the right approach. It's not because you're overextended. If it's overextended to the upside and you want to be the guy that goes long typically, that's again not in your favor.

2 - What patterns do you have?

The second thing is what patterns do you have. I'm making a simplistic approach here. When you're looking for the upside, do you have an A to B pattern? Now we're overextended here and are you getting a slight pullback? Are you in the B to C leg or are you creating maybe a triangle pattern? Maybe there's a consolidation. Did you have a consolidating base or some contraction? Where are you relative to the previous up move? Is this in your favor as far as the pattern goes?

3 - Does volume confirms the move?

Number three is volume. When you look at this pattern, does volume confirm the move? Do you have more volume here to the upside and less volume on the retracement? Check where you have more volume. Let them take some profits so that way you can have that next leg higher.

If you have way more volume on the downside then on the upside, then more than likely this pattern will break. More than likely, this support at this level will break and continue lower. You check in the volume. If it's a little more even that could happen depending on market conditions. But you're looking for volume dying out.

That means as we go up, you want nice significant volume. You want multiple bars that are nice and big. And as you pull back before you take the next leg higher, you want lighter volume. Now, this is again a simple example that I'm showing you. It's a 50% reduction in volume. Most of the time you'll see it won't be that easy to spot.

Pro tip: You have to compare the bars and look at them individually. You're looking for a reduction of volume so that way as you start breaking out you'd want more volume. That's ultimately the traditional way or classic approach.

Now you have three things that you're looking for in your favor. That's all getting things to set up. If you only have two of these, then you have less stuff in your favor. But if you have three of these things, then you have more things in your favor.

4 - Health of the market?

Then you start looking at other factors - the health of the market. If you look at the health of the market, this could be another thing. If your stock is heading higher, but the market is heading lower, that's not great. If you don't have both things in alignment, then one less thing is in your favor.

My way of doing things:

This is what I do. I probably have a checklist of ten different things that I'm looking at as I continue running through this. There're a lot of other little minuscule things. On this list are main things that you're starting to look for and you'll start building upon that.

5 - What about fundamental analysis?

You'll also look at fundamentals. If you're trading the SPX, SPY and so on you, don't have to worry really about fundamental analysis or even earnings. The reason is that because there's no fundamental analysis. It's a group of stocks, so it makes it a little bit easier.

In that case, makes your life easier you don't have to worry about. But in general, that's what you're doing. You're starting to add more things together.

Benefits of Options

Now even if you're trading regular stocks, you can use the benefit of options also to give you a chance or probability of success. And you are looking at those probabilities.

Here with Amazon as I start looking at it - you can backtrack it on the monthly, and you start viewing things. Again you can do a long-term pattern. And you can do shorter term patterns.

There is ABCD pattern within the ABCD pattern. You're starting to look at those things. As you backtrack it into the weekly, you start looking at those other things as well. You got the big-picture view, and as you get into the big picture, you begin dwindling into the smaller items.

You start looking at the volume and expansion. You're looking at how are things looking overall on the SPX.

  • Is the SPX or the SPY or the Dow Jones also a little toppy?
  • How's the volume?

As we go to the upside, the volume was pretty good. But look at the volume then later. As you start looking at this and we look at this volume on the red bars, they're starting to pick up. It's beginning to roll over.

  • Can we move here and move sideways and then power higher?

That's possible. But this means one less thing in my favor.

Closer Look at Facebook

I'm taking Facebook as an example. The Facebook stock itself is stretched, and there hasn't been a pullback in a while.

I'm looking at:

  • a pattern
  • support lines
  • the volume

As you start putting all those things together, you start realizing what is in your best interest.

Maybe it's not in your best interest to go long. But it's starting to get there because now you can see the market is beginning to pull back. So if the market pulls back and it's a little overextended that'll probably start getting into a good value. But in either case, let's say this is a fair value.

Let's say 50% on this stock from the breakout would put this stock somewhere around 77. You won't always get a perfect entry on these stocks. Sometimes if it comes down to this price level now, these price levels become even more in your favor.

That's the case becomes now you have a pullback. And overall, the trend is upward. If you have a slight pullback, then there's no reason why the odds aren't more in your favor because you're buying it at more of a value.

That's what you're looking for. The more things you have lined up, the better it is for.

How Do You Use Options?

You are wondering how to use options to give you some price indication or probabilities of things working out. Well, if you look at Facebook, we're at basically 114.83. We're not going into detail of how options are priced.

But take a look at think or swim platform or any platform that gives you statistical probabilities. I pull up Facebook, and you can see that you have the calls and the puts.

Let's say we're looking for the 130 price level. You can see I have the probability of in the money. And you can change these values. I have a probability of in the money set for this column, and it's set on the put side as well.

That's my probability of in the money. This is at expiration, not touching, but at expiration, if that option premium is worth any money.

The chance of this expiring in 50 days above 120 is around 31.17%. That's above 120. As I look at this price above 120, you got about 31% of it expiring in-the-money. That is giving you 30-70 odds. Not the best odds, but it takes time for those things to come back and reverse.

You have to take that into account. As you switch and getting into the money, you got a 65% chance even though this is at 110 and the stock is at 114. This is already worth something, but the time has not expired yet.

This gives you a rough indication, but it's not about touching it. I believe they also have of touching. As you go into touching, you can see the probabilities jump. That's because it's touching it.

If you're looking for price movement and selling it out there, you could use the probability of touching. You can see at the 120 you got a 63% chance, and at 115 you got a 99.9% chance.

And at 114 you have 98%. You can see those probabilities already shifting and changing and hopping and jumping. If you go to the downside, you can do the same thing. It's possible for you to see the probability of touching. You have 17.72% at 97.5.

If you're shorting a stock and you're expecting it to get to 85 within 50 days you technically only have about a 5% chance.

  • Can it happen?

Absolutely, but you only have about a 5% chance of it getting to 85.

Let's say you shorted the stock. This right here we have a 5% chance. As we short the stock right here and it starts heading lower, your chance starts to increase. That 5% may get to 12%.

However, you have to remember where you start it. You started up here at the 115 level. So your chance slowly started diminishing because you're going to get it bounced sometime in the future. You need to be taking profits somewhere over at this price level.

It's smart to start getting out of that because you were at higher prices. The chance is starting to go against you now. The reason is that you're going to get that counter-trend rubber band to bounce effect.

That's how options help you look at those chances of success and probabilities. The same thing is to the upside. If you're buying 50-100 shares and you're looking at this your chance of getting to 125 in the next 50 days and touching it you got about a 35% chance.

It gives you a rough indication. Now if you get into the 120, you got about a 63% chance. If you're looking to get $5 out of Facebook, you have a higher probability of success.

Maybe you're trying to be a little more greedy. And you're trying to get 130-135 on the price level in 50 days, and your chance of success goes down.

You can play the chance of success versus profitability. If you have a higher chance of success, you make less money - but you have a higher chance of success.

If you are more greedy or if you want to make more money, you have a lower chance of success, but you can make more money.

It's a trade-off and a balancing effect that you have to do as you start looking at these things personally. You can use options to help you out with that. But in general, you're combining multiple things.

You can use Bollinger Bands to help you with the over-expansion. You can see you at the upper range or are you towards the lower range.

These contract and expand as you get into more volatile or larger price bars. You could use that as a guide. You can draw them with a moving average.

That's what you're looking at when it comes to statistical probabilities. The green line is that expiration. The white line is the current profit and loss picture.

We're at 114.96. If we're above 100, we make $28. We're risking $472 to make $28 which is not a lot. But your chance of success is higher.

I could pull this into 110 and 105, and now I'm making 109 on a $391 investment or risk. I'm making much more on the absolute dollar value, but my chance of success is a lot smaller.

Final Word

Take that into account as you start balancing and looking at your positions and trades. You have to take into account the probability or chance of success along with your risk tolerance.

You can make much more if you take the higher risk. I hope you enjoy this lesson on statistical probability and that you have an idea when it comes to trading stocks by the numbers.

Ep 111: Your Trading Profile and Match for YOUR Trading Style & Risk Profile

November 17th, 2016

Listen to the Podcast

Subscribe to the podcast

iTunes Stitcher

Hey, this is Sasha Evdakov.

Today we're going to look more about your trading profile. Taking a look at yourself and finding a match is vital.

When you look at any profile anything that you do in the market, it all comes down to finding your match. It's essential to find something that is working for you.

You're a Unique Individual - Find Your Match

You are not the same as everybody else as much as you want to believe it. If you're looking at day trading, you're probably a different day trader. Maybe you're looking at penny stocks. Well, you're probably a different type of penny stock trader.

If you're a swing trader or long term investor, you're probably a long-term investor that's different from another person.

You need to know that in life it's important:

  • to find your match
  • to choose a vehicle
  • choose a relationship

Everybody's different. Your preference is different than another person. And it's, in the end, your goal is to find that perfect match and to figure it out in what's going to work for you.

You need to find what works for your trading style, risk management, education level. Focus on things you're attracted to and create a system and strategy that works for you.

We'll Go Through This Together

That's what we'll be talking about in this lesson. We will do an example of cars. We'll take a look at doing an instance of your risk tolerance.

I'll also give you some breakdowns about trading profiles that you could use to create your trading profile.

It's not going to be specific to any one individual because obviously, you are different than somebody else. But it's going to give you some things to think about creating the trading profile that works for you.

We'll take into account your:

  • risk tolerance
  • education level
  • style

And we'll combine those things along with managing your risk and making it together and creating a profile that's yours.

Honesty is the Vital Part For Successful Trader

To be successful in figuring out your trading profile, you need to look in the mirror. You need to be honest with yourself.

I always typically mention this case. If you're the type of person that's still late, but you believe to be on time - you got to be honest with yourself. You have to tell the truth.

Also, if you're the type of person that loves to race through traffic and cars in and out if you're blasting through red lights, then you need to be honest with yourself about those things.

You're doing some crazy and dangerous things, and you have to look at the mirror and be honest with yourself.

That's important, especially in trading. It's going to reflect in your trading account. You're going to see the losses. If you're not honest with yourself when it comes to trading, you're going to see the result that you won't like.

You're going to see it right in your account as you're making trades. It's going to be a reflection of how honest you are with yourself. That's what we're going to do in this week's lesson. We'll focus on your trading profile because your profile is going to be different than anyone else's.

Real-life examples - Easy to Relate With

Before we take a look at this on trading and how it relates to trading, let's take a look at something more realistic. I think most people can relate to or apply these concepts.

There're three different types of vehicles. We have a hybrid car, a convertible and we have a truck.

If you were to choose one of these vehicles which one would you choose?

Some people would probably choose the hybrid. Other people might prefer the convertible. And some people would choose the truck.

The hybrid is good on gas mileage. That means if you're taking a trip, and want to save money on the gas, the hybrid would be the way to go.

If you want more fun and adventure, you might decide to go with the convertible. And some people would choose a truck because it might be better for hauling wood and picking up things.

The thing to remember: Everybody is different when they're looking at purchasing a vehicle.

Narrowing Things Down

As you get into this and let's say we're now taking a look at things of just the trucks.

Now when you look at this spread of trucks, if you're interested in trucks, you have:

  • a Nissan truck
  • a Dodge truck
  • a Ford truck
  • a Chevy truck
  • a Toyota truck

There're all kinds of trucks that you could choose from. You're starting to narrow things down. We started from a base concept. Now, as you continue to narrow things down, you have this choice that you could choose from.

You're starting to narrow things down.

  • But which one do you choose even if you're interested in a truck?

There's still a lot of choices out there. Looking at this, you have five different options. And even from there you have modifications that you could go with. There are modifications such as leather, sunroof, or something like that.

You continue to narrow these things down. For everybody, it's going to be much different on what they choose. That's because of their preference and goals.

It's all about their situation and desires. Everyone is different. For you, it's essential to find your match. Find out what's working for you.

Take Into Account Age Group

You might have a very young person, a middle-aged person, and an older person. When you're young, you're not even worried or concerned about investing. Or if you are, then your risk tolerance could be much higher.

As you get to be a little bit more middle-aged, then now you're a bit more conservative. You're not as conservative as somebody a lot older, but you're a bit more traditional.

You have your solid foundation, lifestyle, and so forth.

When you become older things change. Let's say you're in your retirement age. Then you might be extremely conservative or risk-averse as you become a grandparent. Or as you in your retirement stage. That is the time when you don't have the years or the time to make up any losses or for growth in income. You're looking for more stability.

If you're looking at your age bracket, things are going to change. Things are going to vary depending on your risk tolerance. Now I can't categorize that everybody young is going to be aggressive. It doesn't work that way.

It doesn't work that everybody who's old is also conservative. In theory, the majority it does work out that way.

Top Tip: But in general you're looking in the mirror to see what type of risk tolerance can you handle. Someone who's even young or middle-aged might be trading or investing or might be extremely conservative because they don't like the risk. That is their natural character and their real personality.

What about Risk & Style?

It's imperative for you to analyze your risk. Understanding your risk and risk tolerance is the key.

Answer these short questions:

  • are you a low-risk person?
  • are you medium or average risk person?
  • are you a person who likes to take the high risk?

Be honest with yourself and answer which one are you. You're trying to find something that's a match for you.

That's the end key. You're trying to figure out where you are in terms of your risk level. And then what you're trying to do is also match up your trading style.

As you start to look at things a little bit further, you're also going to look at your style. You're going to look at the type of thing that works for you.

That means that you are maybe:

  • a day trader
  • a swing trader
  • a long-term investor
  • an options trader
  • forex trader

This is the style or the type of investments that you're going to do. Now is the time to find your combination. Maybe you are a person with low risk that wants long-term investing. Or you are low risk but like the fact of day trading.

Maybe you are more of a high-risk who wants to day trade or trade options. There is a tremendous amount of combination. You're trying to find your match. That's the goal.

Even within these levels, you have little sub levels. You can't define it to specific. However, insurance companies attempt to do this assessment and ensure you. They try to assign you a number or risk value.

In general, for trading purposes, you're going to be at different list risk levels. This will change within your life.

Take a spectrum and see where is it that you fall into place from low to high risk. And the same thing as you get into the style.

As you get into day trading, swing trading or long term investing, there's going to be different levels. And there's the same thing with options. You'll have different levels within those stages.

Example - Day Trader

Take a look at the case if you're a day trader.

As you're a day trader depending on your risk level are you a person who's into trading:

  • penny stocks
  • blue chip companies
  • new or IPO based companies

You have different styles within a significant style. It's about narrowing things down and finding a match that works for you. The issue that happens with many people is they're in the wrong vehicle. They're doing the wrong thing.

Choosing Vehicles & Trading Style

We can look into this in terms of the vehicles. Take each car as the stock or the style or the type of trading that you should be doing.

Many people should be in a hybrid, but maybe a hybrid is not cool enough. Perhaps the social factor behind it stinks, or you're not interested in a hybrid. It's not cool amongst your friends or your peers or the people you associate with. In that case, you want a convertible.

The same thing could be with an SUV or van. Let's say you're a parent. There's no way you're going to catch me inside a van even though the van is the right vehicle for you as a parent.

Whatever your story, it doesn't matter. That's social triggering that's playing an effect on you. And it's not the right match for you.

  • Ask yourself what makes the most sense for you?

That's what you need to do. Look in the mirror and look at trading as a business and tell what's right for you.

In the end, if you're driving the wrong vehicle, there are some caveats to that. Let's say you're choosing between a hybrid and a truck. For you, a hybrid is not cool enough. You want to go with a truck.

This is what happens in that scenario:

  • it's more expensive
  • it's more expensive to fuel up
  • it's more costly to fix potentially
  • it's more difficult to park
  • it's more difficult to drive it

The same thing goes with a van versus an SUV. If you're looking at being a parent, you want to seat more people. A van can seat more people. But an SUV seems cooler, and it appears cooler. You know that the engine might be the same people opted to go with the SUV.

Even though the performance might be slightly different, the cost of the SUV might be that much more. You're paying for that prestige. You're getting in the wrong vehicle based on the requirements that you need.

You're doing it based on social factors. And this is how people trade as they look into getting into trades.

Making The Right Choice

I have seen people get into trading penny stocks only because of an email. They've heard of something that comes into the email, and they think this is the stock they should get into.

I've seen people trade different blue-chip stocks because they've seen things on TV. Not because that's what they should be training, but because this is what people on TV are talking about.

This is what happens. People get into these things even though they shouldn't be trading these. If you're the person that should be trading blue-chip stocks and blue-chip companies, then that's what you need to focus on. That's to your core.

Maybe you're not a day trader. Perhaps you're more of a swing trader, and you have a calmer personality where you have a slower investment tolerance. Then you might want to stick to swing trading the blue-chip stocks. You need to find that match of what works for you.

Take a Look at Creating Trading Profile

Here's how to create a trading profile for yourself.

I'm just using a few different things:

  • risk level
  • style
  • comfort area
  • education
  • managing trades

If you look at this, you'll slowly start coming up with your trading profile. It's crucial for you to be honest with yourself when you're looking at this.

Maybe you're the type of person that's always late to dinner and you're telling yourself you're still on time. You're not going to get a proper trading profile.

You won't be honest with yourself as well. It's crucial that you're able to see yourself in a real way.  The first key question is knowing your risk level. Look at it on a spectrum.

  • Where do you fall into play?

As I mentioned earlier if you're a little bit older, you'll probably fall into the no risk or minimal risk area. If you're a little bit younger, you might fall into a high-risk area.

The younger you are, the higher the risk you'll be able to take on. You have time to make up that difference.  Here comes down to personal preference - style.

  • What is it that you typically want to trade like?

You might have a day trader, swing trader, long-term investor. It could be an options-related style. Within these, it breaks things apart right. You could go deeper within your style. You could say I'm a day trader only for penny stocks. I'm a day trader only for a big cap. I'm a swing trader for the top five leading companies - like Apple, Google, and Netflix.

If that's your style by all means, then you can define it. But you go deeper within your method.

Next would be, comfort area:

  • Is it a low dollar amount?
  • Is it more the tech companies?
  • Is it more the bio companies?
  • Is it more the healthcare companies?
  • Is it the high dollar companies?
  • Are companies with good fundamentals?

Determine what your comfort area is. This typically relates to your education. The more knowledge that you have in a particular area or, the more that you've spent time within that area you will gravitate more to that area.

If you watched more videos of people or followed people that are more of day traders or swing traders that trade penny stocks that are typically your education, that's where it's going to be your comfort area.

Deciding where is it that you want to spend more education is vital. The critical thing is, where do you want to progress.

If you're still in the learning and growth stage, you need to define this and then eliminate those areas. Because now all of a sudden, you need to make your profile based on those areas.

A Real-life Example of Making Profile

Let's say you want to trade high dollar stocks because that's where big money is. That means you want to focus based on technicals, and you want to be a swing trader to a longer-term investor. Or potentially even do options on these high dollar stocks.

Then obviously you need to focus more insights, energy, and education into options trading by the technicals in the high dollar stocks.

That's what you need to focus on rather than wasting your time on something else. Something like day trading the penny stocks or hanging out and following the people that are trading the penny stocks.

Penny Stocks Scenario:

If you're looking to trade the penny stocks if that's where you want to get to then, you need to spend more time focusing on the low dollar stocks.

You need to focus on the cheaper stocks for day trading. Penny stocks move for a shorter period. And in that case, that should be your focus in education.

How to Manage your Trades?

Everybody has a different management perspective or the way that they like to manage their account. It's the same concept when you're managing a bank account differently than other people.

Some people will spend their money on cameras. Other people will spend money on their computers. You might spend money on your car. Whatever your priority is that's where people put their money.

If you're more interested in camera gear and computer gear, you don't care about cars. For me, that's typically the way things work out. I don't care about my car that much because I don't drive that much.

However, I'll spend more money on my computer and camera gear. I value those things a lot more and use them day to day.

In either case, where is it that you spend more money, more energy and more resources, that's what you're looking at — the same thing here in managing your trades.

The management is going to be different based on:

  • your style
  • your comfort area
  • your education

This is what I tell people who are trading shares or contracts to contracts of options or a hundred shares if they have a stock that goes up a couple of bucks you want to take about half of your position off.

As you get more proficient, you could do a third or a quarter off in the strength. And then let the rest ride. If you're doing option contracts the same thing, you could take one deal off into strength and then let the remaining option contract ride. This all depends on you, but your management style might be different.

You might be the person that on pullbacks you buy the stock. Other people might be the person that buys on breakouts. You could be a combination of both. You could be much more flexible and do a mix on those things.

But it comes down to your style of managing the trades. You might manage trades differently than somebody else. Building a profile around some of these things is your goal and key. Figuring out what's your risk level.

Figuring out what's your style and figuring out your comfort area. What do you like to trade? What about your education? Are you more focused on penny stocks, or do you want to get into more options?

Then that's where you need to focus on — and then managing. How do you manage your portfolio? Do you manage it by buying on the dips? Do you manage based on looking for extreme events, drops, or volatility?

Are you managing it based on the money the finances that you have on the table - selling half a third a quarter?

All those things come into play that creates a unique personal profile for you as a trader.

Choices That You Need to Make

It's like choosing a woman a mate or someone to spend the rest of your life with. You have choices. You have options, and you're looking for your match.

There are so many different types of people out there, and all you need to do is find one. You need to find one that works with you.

And in trading is the same thing. You only need to find one style, one strategy, one main thing, the way that you trade that works with you.

You are unique, and that's why you have to find something that matches with you, rather than trying one thing or another thing. I mean you're going to do that just like in dating. You'll probably date one or two or multiple people through time and history.

Figure out what is it that you're looking for. See how you match with one person or another. But in general, you're looking for someone that can match and relate to you.

With trading, that's what you're doing. You're trying to find a match that you can relate with. That is something you can do time and time again that. You can take advantage of the market opportunities that are given.

That means you put on that trade every single month. Or you put on a trade that you see every single week that matches your criteria. And that's what you're doing. You're finding your specialty. You're finding the specialty that works for you.

When it comes to trading, a lot of it is internal. You have to look inward to figure out what works for you. You have to be honest with yourself. That's one of the problems that many people have.

They're not honest with themselves about:

  • what style they are
  • how much risk tolerance they have
  • their education

We always want to think we're smarter than we are. When in fact we when we have very little education, that's where we need to be a bit more careful.

Instead, take things slower, and when you find your match, then that's the breakthrough. That's where you can create trade and make that trade. And look at that trade and make it work consistently.

Take a moment to look in the mirror and evaluate yourself. To figure out your risk profile and it's something that may take a little bit of time through experimentation. It's not easy to figure out what it is that you like and what you don't like.

Some of these things you can guide them into a certain way depending on where you focus your energy your education. And if you focus on improving.

Look at your risk tolerance, the things that you're attracted, and the style of trading. Take a look at the education that you currently have and the education that you also need to get to where it is that you want to get to.

Evaluating all these things, along with how you prefer to manage money is going to help you determine your trading profile. Then look at how you can modify your trading profile.

Final Word

You're looking to evolve and improve continually. If you're looking to do that, you need to know and understand the types of risks that you want to put on the table. You have to be aware of the types of trades that you like as well.

If you can do that, then you can consistently trade on a week to week, month to month, or a year to year basis, producing those same results. All that is possible only because you know and understand what works for you.

Ep 109 : Preparing for Uncertainty & the Market Risks

November 3rd, 2016

Listen to the Podcast

Subscribe to the podcast

iTunes Stitcher

Today I'm going to share with you some political risks. Also, we'll take a look at some uncertainty in the market conditions.

We'll talk about some stock charts such as like:

  • Starbucks
  • Apple
  • Amazon
  • Netflix
  • Facebook

I'll share with you a few quick charts as well as some news and announcements. And we'll take a look at what you can do when there's uncertainty on the table in the market. You'll also see what the market is currently doing.

Disclaimer

Before we get going and taking a look at some of the charts, remember that trading involves a lot of financial risks. It's risky, especially if you don't know what you're doing. All the examples, the topics, and the strategies that we discuss it's strictly for informational and educational purposes.

It's there to give you some insight. That is also because you might be reading this post at some time in the future. Also, prices may have changed. It's crucial for you to contact your local personal financial advisor before investing or trading in anything that I discuss.

I think most of you understand that by now. But I wanted to make sure and be clear about that up front.

Some Quick Announcements

The options course preview is available, and you can take a look at that, and I will share with you some sample lessons from that course.

Go to Rise 2 Learn website and then scroll down there's the options mastery business of options and training verticals. If you go there, you'll see that the video is long about an hour and 12 minutes. It's going to share with you sample video lessons directly from the course.

Options Mastery #2: Business of Options & Vertical Spreads

The other thing that I'm looking to do is the critical charts and videos were also posted. Go to Traders Fly website, and you can see that I've done a couple of videos.

What we will probably do is create more of a live-based seminar or webinar series for these videos as well. That way, as I do the charts, you can also ask me questions. It might only be once a month for getting started to see how people are interested in it.

Take a look there, and you'll find your point of interest. The longer that you've been a member, the bigger the discount I will probably do on the upgraded membership there.

Those are the main things that have been in progress lately.

Going Through Charts

I'm going to go through some charts quickly first. And then I'll give you some insights into the market. It's about preparing for the uncertainty we have the election coming up. Wherever you stand is, it doesn't matter to me. It comes down to what's possible and how the market is behaving.

And we have to see why it's behaving the way that it's acting. First I'm going to go through a few quick charts some of the more prominent companies. Then we'll talk about the political risks and what's going on.

I'm going to get into it as far as a retail trader is concerned. Or what you should be watching out for as you're trading on this market or what you could potentially expect.

There're two outcomes. The market can go down, or the market can go up or go sideways. But it's going to either go down or up depending on who wins and depending on the political risk.

Facebook Situation

Let's go through some charts. I have facebook here that had some earnings. If you look at this, we have a significant sell-off.

Overall the market is acting weak, and this one has a nice sell-off from those high. That's simply due to earnings - the words that they used. And this happens. For me, it wouldn't be a surprise for this stock to come back down.

If you take this stock and the run that it's had, I wouldn't be surprised if it came down to 88 or even 75. I wouldn't because look at that run and expansion.

  • What could happen?

Well, if you did an A to B and B to C pattern, we could have a B to C and then a C to D into higher legs. A pullback could happen. I don't know.

We're going to see. This is the first day after earnings, but you can see it's having a problem within the stock. And of course, overall market conditions could continue to accelerate that stock even further.

You want to pay close attention to how a lot of things are moving. Not just one thing. You're not looking at one specific thing. You are looking at how overall everything is moving. That will give you a bigger picture of the market.

What About Amazon Situation?

If you take a look at Amazon, you can see the same concept with earnings. These things have to be nearly perfect earnings. And you can see we had this forty point sell-off and then we had a little pop. We would get the popup to this price level and then roll over to fill the gap.

But we didn't get there. We got up, and now we continue to roll over due to market conditions. If you look at this stock, where would I say is a good value - may be 675, somewhere around that price level.

You can see that because of some of the swing points. That's why I say even coming into this 50-day moving average you can see that moving average.

Coming back to there would be a pretty good value buy. I wouldn't chase it right now and try to catch it on the dip or anything like that. You don't know how far it's going to pull back.

Here's What Tesla Is All About

This one is set up for lower prices, especially if we break. You could see some serious lower prices. There are your support points right there, break here could take it 150 price level at least.

And then we'll see where it goes from there. But that's pushing to the downward end. It kept trying to break it. And so far it hasn't, but if it does, you'll probably see it accelerate lower.

Apple Situation

This one it's acting a little weak. It's getting into that 1/20 price level, and it can't get above it. If you take these resistance lines over you can see that range right there it's rejecting prices right at that price level.

Excellent value for that stock would be somewhere around this price level. If it breaks that price level, it wouldn't surprise me.

I mean, it's Apple. People love it, but I don't use their products. It's not my favorite company that I deal with business. But the stock is loved. A lot of other people love the products. And I mean you can't deny the revenue growth that it's had.

However, at this price point and this juncture that 120 is the problem. If you can get above that 120 to level that's a reasonable price. Or if you get into this 92 price level and it bounces that could be an excellent value to get into the stock as well. That's if you're looking for a longer-term play.

This Is How Starbucks Stands

I mentioned this one multiple time for months. We've talked about this in the critical charts. When you look at it, this was our support breaking right there. Volume picking up, market acting weak right now.

For me, I would expect further lower prices. If you look at the daily, you can see the way that it's playing. Broke at first, they tried to get back above it and then it couldn't do it - follow-through day a heavy wide price spread for a stock like this.

In general, it's not that much. For this type of stock, dollar weight is pretty big. There is fear and selling action. There's worry triangle pattern, overextension - it's the way things move.

Netflix Situation

Stock is overextended. How fast can you go?

  • Are you going to be a rocket to the moon?

Probably not. This one is exploding like a rocket ship after earnings.

  • Do you think it's going to break through?

No, probably not. It's not real, and it's not realistic. You can see right there pulling back a bit.

  • Could it pull back right here and then breakthrough?

Yeah, it could. It takes time, and it's not going to do it all in one day. That's why I said a little too far too fast and too quick.

That's the thing you want to be mindful of these explosive run-ups.

Take a Look at Disney

It's similar to Starbucks. If you look at it, you'll see it set up for lower prices. That's not a good sign because if this one breaks that could send the market also going lower. The main reason is that it's tied into Dow Jones, S&P and so forth. It's tied in a pretty big way.

Take a Peak at Nike & GMC

It's the same thing here with Nike. You can see this one breaking these levels. It's breaking these key stocks which are fueling this market.

And then, CMG. I've mentioned in the critical charts this one. It's horrible. This the stock is toast. I would expect this stock into the 200 price level.

We'll see what happens. You might get some value buyer stuff in 280, 285, 240, but somewhere in the 200 is where it's going to go.

I'd step aside. There's too much heavy volume picking up into that stock. It's way too much.

Preparing for The Uncertainty & Risk

I've talked about the political side of things in my critical lessons in the past. I've also mentioned it about trading politics (episode 104), and a lot of people were not happy with this episode.

Their political views for me it's irrelevant. It doesn't matter what your political views are because I'm looking at the market the way it behaves and reacts. And I'm looking at statistical probabilities. I'm looking at numbers specifically.

The question is what's going to happen and what's happening. There is no room for the issues. You can vote whatever way you want.

If you review that video (looking at trading politics), you'll know that I've spent a great deal of energy looking at the statistical chance or the probabilities of the market.

Democrats typically do better in economic situations. That's the numbers and figures. You can go out and do your statistics and research on the economic Bureau of Statistics. Go ahead and break apart some of the charts in this season so forth.

But in general, the market doesn't like volatility. That's the simple point behind it. When things are more volatile, unexpected, and unsure of what's going to happen, the market is going to sell off.

When you look at the SP-500 at what's been going on, I've mentioned that regardless of the candidate, I expect that a slight sell-off. I would expect a more massive sell-off if Trump gets elected.

Looking at this I've mentioned that we're already at top levels. We're at all-time highs if you look at this. You can see this rounding action right there.

  • What happened here, and what was going on?

There was, of course, a few different actions:

  • there was the Federal Reserve
  • there was that oil pipeline that burst

There are a few things that have been happening, but in general, Trump took the lead in some of the polls. Things have been getting a little more even on the political front. So when this happened, the market started to see this and started to sell off.

As a snowball effect that continues to accelerate things. When this starts to accelerate things, it continues to move. And as you break critical levels, that continues to accelerate it even further.

People step in not getting out of positions, but now they think that they should short the stocks. That continues to create further selling action. You can see the volume picking up.

We're going to have this political headwind until the election. Now, there're economists that project that we'll probably get a 5%-10% correction if Trump gets elected.

The next day the market will sell off. Anybody who has 401K, 403B - all those retirement packages that you have with your employer pretend that you're going to get a pay cut if Trump gets elected.

That's what the economists say. If you look at it a 5% from here if we draw it down would put us down about 105 points.

That's from here. If we continue to go lower and 5% from there - could put us right at the 1980 price level. We were at 2000 during Brexit. And that wasn't even our country.

We can get into this 1865 level. And why is that? Well, I mention that it's due to uncertainty with a character and behavior that's a little more volatile with unpredictability. The market doesn't like predictability or unpredictability.

It's just like when you have the Fed reserve, and they'll probably raise interest and continue telling that. They're telegraphing things.

What Could Happen on The Market?

But with Trump, you can't telegraph. You can't see what's going on and that's why people are worried. The market itself feels that with a Hillary Clinton there's a more even pace to what's going to happen. There's more calmness to it.

Of course, there're scandals all over the place. But as far as the character, the personality, the policies the market overall is more worried if Trump gets elected. With that in mind, if we look at the market, we were already at a top level or higher prices.

If he gets elected, I would expect the 5%-10% pullback like some people say. It wouldn't surprise me. For me, I'm a little more cautious about my positions. I'm lighter on my positions.

But what you also need to be mindful is that if you get some unexpected result and Hillary Clinton wins you could get a massive pop as well.

That way, it could change your risk profile picture, which means if you're positioned for the short side and all of a sudden Hillary Clinton wins you need to be very quick to change your positions.

That's because if the market skyrockets all of a sudden, your positions could be in deep trouble. Especially on the short side. In this scenario, you have to be prepared for a double direction move. You don't know whether Trump is going to move the market to the upside. Or Trump's going to move it to the downside.

Maybe Hillary's going to move it to the upside. Whether it's to the downside. Regardless we have more volatility because there's uncertainty.

What do you do in this situation?

Well, you can do one of two things. The first thing that you can do is pretty much lighten up on your positions. You can go to cash.

The second thing that you can do is you can be lighter on your short side. If you have a lot of positions to the upside, you could neutralize some of those positions.

For example, if you bought the SP-500 and you purchased it somewhere over here or even over here.

It doesn't matter where you bought it. But you're positioned long let's say 500 shares.

You could take a look at something like the SDS which works well when stocks go down. You can see this has been climbing to the upside. And you can buy it for a hedge for a couple of days during the election after the election results. That's what you could do.

The Small Cap 3X Bear

There are other vehicles like a TZA. This is another vehicle that you could do. But you could see this is the small-cap 3x bear ETF. These you do not hold for a long time. These are hedging vehicles. They get recalibrated.

If you look at it, it's been heading lower. The market has been heading higher - they get recalibrated. You can also see the stock splits that take effect.

In general, these are not things you trade for an extended period. There's fear coming in the market, you get into it, hold it for a week or two, and then you get out.

That's all they're all about. You get into it, fear is coming in, and then you're out. That's what you do with these types of vehicles.

There're TZA, VIIX, and SDS. In either case, these are the vehicles that you're looking for. However, these are a hedge for a small period. These are not for long term holdings. When you look at the SPX, we're probably going to get into this price level right there.

That price level will be right around 2040 - give or take a few points. If Trump gets elected, you'll probably see it come down to test this if it breaks through probably come to test 2000.

If it breaks this now, you start looking into some other previous points. With Hillary, I still would expect a slight sell-off. It's probably going to be less. And that is in part still due to the overwhelming top levels that we've had in the market.

I'd still expect maybe one or two-day pullback, but you might see a rally to the upside after a few days. That's what I'm looking at as far as the political risk.

Pro tip: You need to look at the hedging possibilities of what if this goes against you. Rather than looking at how much money you can make or the political outcome.

If you're looking at it from an economic standpoint, you're looking at it in terms of what if this goes against me and what is the uncertainty.

That's what people are looking at, and that's what are the risks. You're looking at the dangers on the table, and that's what investors talk about.

Pay Close Attention to The Risks

The risks on the table right now are these more or less political risks. And as you continue to get closer to the election, the market continues to go down. If we start coming into this level and there's some nervousness in the marketplace that happens all of a sudden 5% to 10% from this level becomes a much larger and a bigger deal.

10% would bring us back into 1860. That's where you'll probably get some support.

  • Can it happen?

There's no question about it.

Take a look at some of these bars. Probably won't happen in a day, but it can happen. It could happen like we had a massive 40 point down day. Now we've had massive multiple days a sell-off only due to the uncertainty and risk.

That's what's on the table. You're always watching what if it goes against me.

Right now that's what you have. You have uncertainty and risk, and you need to hedge for it. Or you don't trade and wait until after the election. Things will stabilize, and now you have a more stable environment.

Those are some of the significant big risks. The reason for that is when you start looking at a VIX above 20 that's some severe nervousness in the market. A VIX is above 20. We haven't had too many extremely high VIX levels, but now we're starting to get there.

We could get into the 30s if more nervousness panic selling starts kicking in. And other retail traders who have the 401K for 3B. They could take a pay cut on their retirement. But that's what I'm looking at in the economic sense.

  • What am I doing?

I'm setting up, selling some calls on the upper side at this price level. That way Theta decay also works against me because there are 14 days in the November option. You could sell some premium around this level. More than likely that's going to expire. It allows me to hedge for some of the upside positions that I have - rather than taking them off.

Of course I'm pairing some positions, but in general, I'm hedging in case there's a significant down risk that comes down either to this 1850 level or even 1750.

The time will tell, but you do have a few support levels before they're like 2042. And 1900 or 1860.

Watching those levels, that's what you're looking at in these stocks. If you view all of these other stocks and if you start seeing Disney, Starbucks, Nike breaking down, you have an event where many things are working together to go against the market.

That's where get some heavy selling, and it creates a lot of buying opportunities as well. As you look at the IWM and you start seeing the overall market picture we're also got into the highs. Then we're rolling over.

In part, the market was overbought. It was a little too high and to toppy. But that also means any little uncertainty and anything a bit volatile it's going to move this market in a manic way.

That's what you're seeing right now when it comes to this market and why we've had so many of these days. Fifty-five points within the last 9 to 10 days.

Getting out and being careful. That's what's happening. If there's nervousness or major panic that comes in you'll probably see one big massive bar. I don't want to scare you because it may not happen.

But that's what people are preparing for. If Trump gets elected, that's what they worry about. There could be massive catastrophic problems within the economy. That's what may happen.

You're watching the market and risks. Taking a look at some of these stocks that we covered they're going to create great buying opportunities - like Facebook. That's the case, especially if it comes down to 75, 60, 85 would be high buying points. It's on the first day.

It's the same thing with Amazon. If it gets into let's say 680, it's going to be an excellent buying opportunity. Allow those setups to set up. For you being an active trader, you're going to have nice setups if those things come back and pull back. But if not, then, by all means, you'll still get that bounce probably. And then things will keep moving.

We'll see how things play out. Nobody knows on the election. The polls aren't always accurate. You never know, but as far as economics go when the market is more nervous, then the market sells off.

There are that uncertainty and the risk, and you need to hedge it by reducing your position or hedging it in some way.

Ways like getting either the SDS the TZA or some bear fund or the VIX. Or sell some upside options to hedge for a potential down move. The same thing goes in reverse. If we went down 200-300 points in the last week, you'd do the same thing on in the opposite way for a long position.

If the market keeps selling, it's probably going to bounce soon or with time.

Final Word

You can't have a super emotional mindset when it comes to preparing for uncertainty and market risks. You need to be clear minded, and you need to think out things logically.

And look at it on a what's possible, what's your risks and what can happen. Also, look at what's the distance or spread of that movement in a situation.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

Join over 31,258 regular people who are bettering themselves in the stock market.

Click Here to Sign Up!

This is a community that is motivated to learn & improve their skills.
Join us and get free training lessons, freebies, and exclusive promotions.

want some helpful advice?

pay per minute coaching

I am scheduling helpful coaching sessions for people who are interested in real-world advice & guidance where you only pay per session. No long term commitment required.

Learn more
This website and content is for information purposes only as Rise2Learn, TradersFly, and Sasha Evdakov are NOT registered as a securities broker-dealer nor an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Rise2Learn, TradersFly, and Sasha Evdakov cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Rise2Learn, TradersFly, and Sasha Evdakov in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Rise2Learn, TradersFly, and Sasha Evdakov accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.