Daniel Bustamante | Wealth Management Instructor
This week was nothing short of eventful with some of the largest moves we've seen a long while. I wanted to take some time to write a little bit about the week in review in hopes that it helps clear up some questions that those of you may had. (By the way for members, a full review in the members blog on some of the trades I took this week will be/is posted with more in depth review).
When the markets are volatile like this it creates a lot of opportunity, but it moves fast so you, more than even, have to have your price zones developed ahead of time. What we did today on the indices was re-test support at monthly areas of interest and as some of you that have taken Core Foundations of Trading know, those monthly areas deserve your attention. Markets are not random and the phrase "anything can happen" is nonsense. Moves happen for a reason and it's your job as a trader/investor to know what that reason is (hint: price chart).
So let me try to use a chart of the Dow Jones futures to better explain. When we sold off we tested $23,300 and we rallied very hard. Then, we failed and re-tested that area and again, rallied, shocker I know. So why is this important to you?
It's important because you want to establish 'cheap' long positions - think of this as an after-Thanksgiving sale but instead of people imitating Stone Cold Steve Austin to get a TV it's people (funds/banks etc) piling in long positions. They're re-deploying cash. But the thing here is, when we understand why this monthly area matters (think like Wall Street and trade like them - aka they all use many of the same things) we can use this idea knowing that there will be massive buying in force. So, for you and I it creates a chance to get back into stocks or as I chose, options on select stocks.
Next when things like this happen, tune out the news, it's pointless. Also, consider focusing on maybe a few ETF's like SPY or IWM and maybe 1-3 individual stocks. Narrow your view and speciality instead of getting caught up in what seems to be 'chaos' it's what the market depends on you doing; losing control and acting irrationally.
My final point. When you have market corrections build a shopping list of stocks you want to buy, but don't just buy them for the hell of it, make sure you have a technical entry point that reduces downsize risk. Then when you have that list ready use the Dow Jones and S&P500 to help you gauge the strength.
There is really really good money to be made in sell-offs and the subsequent rallies that occur, I cannot stress that enough. It takes some work before hand and clean execution during but if you do it right it allows you to re-balance a portfolio and potentially make 2-3 trades a year that really could do better than keeping your capital in a mutual fund or ETF through all the ups and downs.
I hope this article helps. If you would like to discuss other topics please leave a comment below.
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Instructor, Wealth Management
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