Money & Risk Management
April 9th, 2019
September 11th, 2018
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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 a 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.
October 26th, 2017
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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.
March 2nd, 2017
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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.
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?
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:
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.
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.
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:
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:
And this goes back to our question here initially is:
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.
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.
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.
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.
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.
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.
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.
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.
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.
February 2nd, 2017
January 5th, 2017
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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.
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.
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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
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.
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.
December 8th, 2016
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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?
- Can it continue to go for those six months?
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.
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.
December 1st, 2016
November 17th, 2016
November 3rd, 2016