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Legendary boxer Mike Tyson once said, “everyone has a plan until they get punched in the mouth.” Amid this rapid decline, investors have never seen anything quite like the coronavirus stock market selloff. It has dealt a swift blow across the board – hurting the economy, the stock market and the public psyche all at once. 

In a day and age where we have instantaneous information, investors and algorithms are reacting faster than ever. As a result, we’ve had one of the most aggressive bear markets ever seen. It took just 19 trading sessions for the Dow to collapse into a bear market, defined as a decline of 20% or more.

The important thing is though, investors must keep their focus on the long term. If they are regular contributors to stock funds, they should consider staying the course.

The Coronavirus Stock Market Selloff

In January, COVID-19 began to spread, eventually triggering a massive coronavirus stock market selloff. I was confused by a number of things, the main one being the strength in equities. Stocks continued to hit new all-time highs, even as COVID-19 continued its aggressive spread throughout China. 

Companies like Apple and industries like the airlines were warning about coming financial hits as a result. Yet markets kept rising. So too were bonds and gold — a warning sign that safe-haven assets were on the move. There was a lot of conflicting signals in January and February. But the end result has been clear as day. 

In a month, we’ve seen the S&P 500 fall 32.8% from peak to trough. In the span of four trading weeks, three of them resulted in the S&P falling by more than 9%. The one “not down 9% week” came when the index “rose” 0.41%. Ouch. 

The worst week thus far came when the S&P 500 closed lower by almost 15%. It’s a bloodbath out there, as many individual stocks are down much more than the index. However, with panic comes opportunity, and that’s exactly what the coronavirus stock market selloff is giving us. 

I don’t know when the market will bottom. I don’t know if it’s next week down another 5% or next quarter down another 25%. However, I am confident that long-term investors should be just fine. Here’s why.

Long-Term Investors Are Winners

Using TradingView, I was able to go back through the decades and get a sense of just how the S&P 500 has done over the years. Have a look at the S&P 500 since 1950:

The span above covers the last seven decades of investing. Dating back to 1950, the S&P 500 has generated a compound annual growth rate (CAGR) of 7.82%. With the market down about four times that figure in four weeks, investors are likely shaking their head and saying, “so what, big deal.” 

But in actuality, it is a big deal. That 7.82% CAGR over 70 years is what helped drive the S&P 500 from 16.6 to more than 3,200 by the end of 2019. That boom has helped fuel an incredible economic run and has fulfilled millions of retirement plans over the years.

Have a closer look at the chart above. In doing so, you’ll notice something else: A lot more green vs. red. 

Knowing how to read a candlestick chart is both simple and helpful. However, you don’t need to be a certified technical analyst to know that green is up and red is down. Over the last 70 full years, the S&P 500 has enjoyed 56 up years vs. just 19 down years. That’s an incredible 78.5% win rate! 

One of those “down years” even includes a completely flat year (2011), and if we include dividends, the overall win/loss improves to 58 vs. 17 — a win-rate of 82.8%. 

Let’s take the conservative route and not include dividends. That seems absolutely incorrect, because dividends are either money in investors’ pocket or reinvested back in the market. But just for humor, let’s not include it. Ready? 

The “up” years for the S&P 500 in the original study — 56 wins, 19 losses — returned an incredible 17.04%. The 19 down years averaged out to a loss of “just” 11.93%. 

One last observation? Only once has the S&P 500 fallen for three straight years in the last seven decades. That came during the dot-com bust, as the index fell 50.5% from peak to trough. The index has had 10 runs with three or more consecutive years of gains. The longest stretch was for eight straight years, spanning 1982 to 1988. 

• Here’s one way I deal with corrections in the stock market.

A Recap and a Reminder

Guys and girls, ladies and gentlemen — Listen Up.

This investment machine has given us some marvelous insights. We are looking at an investment that has delivered a 78.5% win rate since 1950, and an 82.8% win rate when including dividends. In the up years, it has generated a 17% return, and in the down years, it’s only lost about 12%. Just once has it doled out three straight losing years, but 10 times it has doled out three or more consecutive years of gains. 

If you walked into a casino that had a similar setup, where would you place your bets? A casino would never have this game, unless investors could only bet on “down,” because the house would always bet on “up.”

So could we continue to fall from here? Yes. 

Could we decline for 2, 3 or 5 years? Yes. 

Could we see a 50% peak-to-trough decline, or worse? Yes. 

While we could still have more downside left in this coronavirus stock market selloff, betting that the stock market will never hit a new high again has been a disastrous mistake.

We surely still have more selling pressure to get through, but this too shall pass, just as every downturn has eventually given way to a massive bull market. 

Need some tips for how to invest or trade when market volatility rips higher? Try this.

We’ve seen an unprecedented move in equities, as stock market volatility skyrockets in the first quarter of 2020. The coronavirus-induced increase in volatility has led to one of the most aggressive bear markets we’ve ever seen in the S&P 500.

Put another way, the Dow Jones went from an all-time high to a bear market in just 19 trading sessions. The previous fastest took 36 trading sessions, followed by 37, 38 and 39 sessions for the Great Depression, Great Recession and Black Monday. That helps put this move into perspective. 

Amid that move, we’ve seen the VIX soar, topping $85 so far at its high (as shown below). 

Granted, this spike in stock market volatility has been intense, but it won’t be the last time we see it. Knowing how to trade when volatility rises is key to survival — both as an investor and a trader. If the move caught you flat-footed and off-guard, this is a learning lesson for the next time. 

Here are some tips. 

Reduce Your Position Size

This one is a biggie, and it doesn’t matter if you’re an investor or a trader at this point. When volatility ramps up, reasoning goes down. Stocks can jump or dive significantly on no news and without reason. 

If you’re trying to trade normal size on this now extra-wide trading range, you’ll get chopped right up. That’s why we need to reduce our trading size to allow for these outsized moves. Because remember, this is all about managing our risk. 

For example, say our risk is $100 per trade in a normal-volatility market and we trade a 100-share position. In essence, we are risking $1 a share. However, when stock market volatility is running rampant, we may instead opt for 50 shares, 33 shares or 25 shares, allowing that loss-per-share to climb up to the $2 to $4 range, without risking more than $100. 

This allows us to still make our trades without subjecting ourselves to outsized risks. Failure to cut down your trading size and you’ll learn very quickly how painful a high-volatility environment can be.

Investing? Same Thing

Just as traders should cut down their size, so too should investors. I have a plan for market sell-offs that makes dealing with them easier on the mind. When setting downside targets or looking for your buy price, consider a small size if considerable downside risk still looms. 

Obviously it depends if the S&P 500 is down 10% or 40% at that point. But for those that set downside limit orders, you must consider the possibility that the stock goes through that price and heads even lower. 

As a result, consider smaller size, so you can again nibble on the stock should it continue lower. It’s one thing if a bottom has been established in the market. When there’s not, buying too much, too early can be a painful experience. 

Zoom in or Zoom Out

This one is important, and knowing which to do depends on your timeframe. If you are a longer-term investor, focusing on the hourly or daily moves is not likely to help your emotional state. 

Instead, zoom out and focus on the bigger picture. Instead of a daily chart, look at a weekly. The monthly chart often goes unused by many, but can be very helpful in seeing the really big picture. It’s one thing I love about TradingView, as I can use any timeframe that I please. 

The opposite of zooming out is zooming in. For those that are used to using the daily charts, consider using shorter timeframes. That may be a 60- or 65-minute chart, or possibly a 10- or 15-minute chart. It might be a 2-minute chart.

When volatility ramps up, typical swing trading becomes almost impossible because the market is gapping up or down by 3%, 4%, 5% or more. If you’re on the right side of it, it can be a windfall of short-term profit. Land on the wrong side though and you’ll be taking a painful body blow. 

We’re trying to avoid the body blows and knockout punches. By zooming in and reducing our position size, we can practice our 5 D’s of Dodgeball, ducking and dipping in a day trading environment. You can trade the same patterns you trade on the daily on the 10-minute charts — be it breakouts, ranges and trends. Of course, for smaller profit. 

But…

Cash Is King (and a Position!)

Remember, cash is king. A lot of people will talk a big game when stock market volatility is very high. How they banked 1,000% on put options and how they’re killing it on the trading front. 

It’s true that higher volatility can make for some great intraday day-trading environments. But if you lack experience in high-volatility environments or do not have the discipline to cut losses when the trade parameters change, you may not be ready for the situation. 

There’s no shame in that, either. Talk to anyone who’s been in the game a while and they will tell you just how difficult these environments are. Anyone who tells you differently isn’t worth taking seriously. 

“Cash is king” is a saying for a reason. And doing nothing is absolutely okay. When in doubt, stay out. You can be long or short this market, but you can also sit on your hands and wait for a better trading environment. 

You do not have to: 

1. Day trade if volatility is too high
2. Trade for several days or weeks 
3. Feel like you are missing out

The market will always be here. It took me a while to really grasp that fact. It’s here when I get back from vacation and it’s here when I am ready to trade. Being in cash keeps your emotional and mental capital healthy too, helping put you in the right mindset. 

Patience can be a tough, but often a rewarding endeavor. 

Bottom Line on Rising Stock Market Volatility

So remember, when stock market volatility is ramping higher, reduce your trading size and zoom in or zoom out depending on your timeframe. Also remember that cash (being neutral) is a position and eventually, a trend will begin to form once again, either higher or lower. 

Don’t be afraid to sit in that batter’s box and watch pitch after pitch go by. Screw the crazy curveballs and wild pitches. We want a nice fat one down the middle, and we’re going to wait for it, no matter how long it takes.

The coronavirus has finally taken its toll. Honestly, it’s not really a surprise, given the economic complications caused by the rapid spread. However, what is surprising is the speed of the pullback in the stock market. 

In just 10 days, the S&P 500 went from a 52-week high to a 52-week low. That’s never happened before. It sent the VIX to roughly $50, as investors ran for cover.

It’s not the first selloff we’ve had to experience and it won’t be the last.

Veteran investors have learned to endure these types of declines — even ones as rare as this. In order to take advantage of the long-term compounding we experience in the stock market, we have to take our punches too. There’s a reason those returns are so good over a long period of time, and it’s because of volatility like this. 

But what can we do to feel better when these types of declines come our way? 

How I Handle a Pullback in the Stock Market

The simplest way to invest in the market is scheduled contributions into a fund or ETF. There’s little to no thinking, it’s hands-off, and over time, it returns plenty of money (we’ll get to the stats in a minute). But a pullback in the stock market can still be a gut-wrenching event, especially for investors that own individual stocks.

First things first: learn to keep some cash handy. Whether it’s 7% to 10%, 15% or maybe more, always have some dry powder ready to deploy. That way if the market sinks 10% in a few days, just like now, we can grab some fire sales.

My second point ties in with the first one, which is to raise cash on the way up.

Some investors don’t like to sell; that’s fine. Others like to do so selectively and conservatively, as they’re long-term holders; that’s fine too. Some holdings I trade around constantly. Others I hold and only adjust every few years. 

Note: be careful not to cut your winners after every rally in hopes of buying it back later for cheaper. That doesn’t always work out and over-managing can cost you big down the road!

Case in point, I didn’t sell Apple on every 10% move higher in 2019. But when it went from sub-$150 in January 2019 to $330 in January 2020 (+120%), paring some down north of $300 was a good idea, (although it was tough to stomach at first, as Apple kept rising).

But when the third — and very simple — part of my pullback strategy panned out, I felt great. That third part?…

Fingers Crossed for Lower

A pullback in the stock market sucks. There’s no other way to put it. But we can put a positive spin on it. I do so by setting low price orders on my favorite holdings. Say, buy back some of that Apple for $275 after we sold three-quarters of it at $300-plus. Buy back some more at $260. 

Hey, give me some Roku at $110. Shopify at $450. Trade Desk and Nvidia at $250. I want some Alphabet at $1,300 too. Gimme some QQQ at $200. Citigroup at $62.50.

Your picks, your call. But it’s really that simple guys.

I still don’t love pullbacks. But rather than panic during them, I’ve found a way to embrace them that works for me. You can do this too, by setting limit orders on a good-til-cancelled (GTC) basis. 

Buy 25 Trade Desk at limit $200 GTC

Buy 25 Trade Desk at limit $150 GTC

Maybe you don’t get the $150 fill. Maybe you do. But when you’ve kept some cash on the sidelines and trimmed some positions on the way up, you’ll find this strategy can pay off nicely. 

Once you start doing this during pullbacks you’ll find yourself actually hoping for a bit larger of a decline to get more of your lower orders filled. Although I must note, this works much better when you have a longer time horizon and you actually want to own the stocks. In other words, this is for investors, not for traders.

They say the stock market is the one business where people panic when the items go on sale. Well, this is a way to reverse that mentality and take advantage of the dips. So long as the companies are of sound financial shape, here’s why you’ll want to consider it:

Statistically Speaking

Statistically speaking, the stock market is built to be a winner. Well, maybe it’s not “built” to be, but that’s what it is.

Not only does the market win more often than it loses (up 82.8% of the time going back to 1950 when including dividends), but the up-years outperform the down-years, ~17% vs. -12%, respectively.

Imagine there’s a table at the casino where you place your chips on green or red. Green has an ~80% chance of winning, while red has a 20% chance of occurring. If it’s green, you win 19% of your bet. If it’s red, you lose 12% of your bet.

What color are you putting your chips on on a consistent basis? I would guess green.

So next time it feels like the end of the world, realize that it’s likely not. And if it is, money’s not going to make a difference anyway. So invest with a level head by knowing the stats, knowing the numbers and keeping your emotions in check.

The Bottom Line

If you have some cash on the sidelines, it’s not too late to take advantage of latest pullback in the stock market. But even if it is too late, have no fear — there will be plenty more down the road.

Just remember this: Keep some cash on the sidelines. If you are comfortable doing so, take some profits on the way up when it’s prudent. When the market starts to look extended and toppy, set your GTC buy prices and wait. If they get hit, great, we got a better price for a great business. In the event they are not filled, that’s fine too, because we’re still long and can enjoy more gains. Plus it will leave that extra cash ready for a new opportunity.

If you found this article helpful, try this one next: Four Tips for Improving Your Trading & Investing Results

On paper, trading is easy. It’s when our emotions and ego are on the line where things tends to get messy. Most investors who take on trading will likely fail because they’re searching for a holy grail instead of improving their mental game. That why reading or re-reading trading tips from time to time can serve as a helpful reminder.

Think of a surfer. Their goal is to catch one wave on the entire ocean for just a moment of time. They’re not fighting the tides or the currents, looking to take on the world. They just want capture one little sliver of the ocean’s coattails. That’s what successful traders do with the market, too.

So let’s look at a few trading tips to help clean up that bottom line. The first? Actually having a strategy. 

Trading Tips: Stick to a Trading Strategy

We can’t do anything without a strategy. Before dealing with any other factor, we need to have a trading strategy we plan on using. If you’re completely new to trading, paper trading for a while is a reasonable way to help figure out the style you prefer and the timeframe you like. 

Even if you are an experienced trader, working with a new strategy in a paper trading account first can be helpful. Not just for entries and exits, but to help keep our emotions out of the strategy. 

Some people will like swing trading over multiple days or weeks. Others will prefer scalping or day trading. You may enjoy trading breakouts or breakdowns, while some investors prefer the long side or the short side. Options, futures, equities… the list goes on and on.

My best advice? Find a strategy that fits your personality the best. Learn how to perfect it, then consider adding other strategies to your arsenal. Taking a Jack-of-All-Trades approach is a perfect way to become overwhelmed and eventually fail. Find what works for you, then perfect it. 

Personally, I have found that red-to-green trading works well for me. The stop-loss and entry rules are well-defined, and there’s very little way for me to screw it up. 

Risk, Risk, Risk

What came first, the chicken or the egg? It doesn’t really matter now, because you need both to survive. Without an edge in the market (a strategy that actually works), traders will fail in the market. Likewise, even those with a successful strategy will fail if they don’t manage their risk. 

Anyone who has read the Market Wizards series by Jack Schwager will understand the importance of finding an edge and establishing a risk-management system. (For those that haven’t read the series, I highly recommend it and find his Little Book of Market Wizards to be the perfect intro). 

When it comes to surviving in the most competitive environment on earth, we need to protect our backside. There’s plenty of helpful people in the trading community, but at the end of the day, we’re all trying to eat from the same pie. As soon as I established where I would I cut my losses before entering the trade — and actually stuck to the plan! — my results improved dramatically. 

Not necessarily because I was winning more, but because a big loser wouldn’t wipe out a bunch of my profitable trades. When we get stopped out, we preserve a bulk of our capital and live to fight another day. 

It’s different for everyone, but for me, rarely do I get stopped out and see the stock reverse higher in the direction I was hoping for. Nine times out of ten, that stop-loss prevents me from losing even more money than I was at that point. I became grateful for the stop-loss because it was actually saving me money, not locking in a painful losses.

Too tight of stops can be detrimental too. You have to find the point in the trade that says “I’m wrong,” but not having a stop so tight that you get punched out on the slightest move. That’s different for every strategy. 

Start a Trade Log

This was such an important development for me. Perhaps not as important as implementing hard risk management rules or finding a strategy that worked just for me. But it has played a big role in finding specific nuances in my results. 

For instance, in my quick trades I have a better winning percentage and bigger wins on the short side than the long side. That’s even as I prefer buying vs. selling short. I also notice that my best trades tend to be quick and work right away vs. taking their time and still working in my favor. 

The hard data only goes so far, though. 

Just because I have a loser on a trade that I entered at 9:45, doesn’t mean I shouldn’t enter at 9:45 necessarily. But the data is there. I can say whether I entered based on my max risk rather than based on a profit target. And more importantly, whether I stuck to my risk measures. 

The “notes” section is particularly important. Any “lesson” that can be extracted from the trade is recorded here. Every week, I re-read the prior week. At the end of the month, I re-read the whole month’s worth of notes. That’s the thing about this market, we will always continue to learn. 

I love knowing the date, time, entry, size and risk of each trade too. It let’s me replay the trade to see what went right or wrong. Literally. I subscribe to TradingView — well worth the price of admission given the commission-free world we now live in — and one of the key benefits here is trade replay. (Seriously, take a Pro Trial for 30 days free and try it.)

I can replay the trade on various timeframes to see what I could have done differently. I usually only do this for losers, or winners that I punched out of too early. Still, it’s been a very helpful way for me to improve. 

Last Trading Tip – Position Size

Talk to some experienced traders or read a few interviews and you’ll be sure to hear about trade size. Trading with too much size will end one of two ways, and neither is good. Either the trade will move severely against the trader, potentially wiping them out, or it will cause them immense stress while carrying the position. 

I have been in that situation before, too. The trade can deal a painful if not lethal blow to one’s trading account. That alone should be enough of a catalyst to reduce the trade size. Conveniently, that should ease the burden of outcome No. 2, as there’s much less to worry about. 

For every trader, the rule of thumb will be different. Some will risk just a few basis points of their account value on a single trade. Others will land somewhere between 2% and 5%, while some will swing with 10% or more of their account equity on a single trade. I can’t tell you what’s right for you. Only that calculating your risk is an immensely important part of the process. 

No one single trade should alter your life. Too much size and eventually things will end badly. Smaller size allows a trader to make mistake after mistake and still live to fight another day. It also allows them to think more clearly and reduces the risk of reacting in panic.

Good luck out there! Hopefully these trading tips improve your bottom line.

Maybe you’re on Twitter or you’re watching CNBC, and you hear someone harping on about relative strength. But you don’t know what it is, so you just chalk it up to some financial jargon to look up later and move on with your day. 

Well, relative strength is a very simple and powerful concept.

In essence, it’s a stock that is showing strength relative to the market. Say the S&P 500 is down 1% on the day, yet Apple (AAPL) is up 1%. That’s a stock showing relative strength. On a one-day measure, relative strength isn’t all that convincing. But say the market is going through a really choppy period or is under a lot of selling pressure for a prolonged stretch. When a stock is standing tall during that period of time, then it’s really worth a closer look.

I like to post about relative strength plays on Twitter. Some will ask me why it matters; what good does this knowledge do? 

Not only are relative strength plays a good place to “hang out” during market turbulence, but they usually outperform when the market comes back to life as well. When I say “hang out” I don’t necessarily mean buy and hold. Sometimes that strategy plays out well. But other times, the relative strength plays get taken out to the woodshed too.

However, they are generally good stocks to invest in or trade with while the market is going through its crazy spell. Further, they tend to be traders go-to names when the market finally comes back to life.

Examples of Relative Strength 

Roku has been a total stud so far in 2019. It’s one of the market’s strongest participants. Ignoring the fact that shares more than doubled from January through March, look how well it did in May and August. In both months, the S&P 500 (shown below) struggled, while volatility increased significantly. 

It’s almost as if Roku gets more juice as volatility and selling creep into the indices. We’ve seen it twice now and while I think Roku is overbought, it’s been very impressive. 

Starbucks held up pretty well in May, losing less than 2%, and gained steam in August while the indices struggled. It wasn’t quite Roku-strong in those months, but impressive given its 81% one-year gains vs. a flat S&P 500. 

But here’s where SBUX really shined — against Roku and the S&P 500. 

Look at it during the fourth quarter. In Q4 we saw the S&P 500 lose 15%, while the Nasdaq shed almost 20%. Volatility was rampant and things were getting ugly. That is, unless you owned SBUX. Shares rose in October, logged big gains in November and while they stumbled in December, still ended the quarter +14%. 

That’s damn impressive in the face of a market-wide meltdown. 

• How to Trade the Red-to-Green Setup

Final Thoughts on Trading RS

When the market is going through its turbulent period, it’s best to already be long these relative strength plays. Unfortunately, timing the market is no easy gig and knowing which high-flyers will stand tall only complicates things. 

But the more quickly you can identify relative strength plays, the better. They are usually the ones that hold up the best amid the storm and they also tend to outperform when the tides turn back in the market’s favor.

Admittedly, it’s a bit perplexing when they don’t lead the way on a market rebound, but nevertheless, quick identification often pays off for stock observers. 

Consider that if you had noticed how well Roku had done in May, perhaps you would have been long it coming into summer and through the August volatility. Same perhaps with Starbucks coming into 2019 or any one of the other dozen-plus names throughout the year.

Hope this helps, happy trading!

Day trading is a very difficult profession. No, scratch that. Any kind of trading is a very difficult profession. It’s not that traders have to be geniuses, wealthy or tech gurus. In fact, the biggest battle is in our head. Knowing when to stop out for a loss, book gains and maneuver the markets is so much harder than we initially realize when starting out. But there’s one way to help: the red-to-green setup.

The longer we stretch out our trading horizon, the easier the game is. But the longer we survive the game, inevitably, the shorter the timeframe many of us start to use. 

Day-trading has a negative connotation with it. Investors tend to think of day-traders as algos and prop firms, while non-investors think of it as swindlers ripping around on penny stocks. That’s not really the case, as you’ll see.

The red-to-green setup is actually quite simple, because the rules are so well defined. Much of trading is actually simple too, we just make it complicated by failing to stick to our plans. We let losers run wild, double-down on low-quality setups, trade with too much size and have poor entries. 

Because of the simplicity of the red-to-green setup though, traders can map out of a firm plan and actually stick to it. Here’s how it’s done. 

The Red-to-Green Setup

The first step? Finding candidates. It’s key to find stocks that performed well in the prior session.

Twitter’s @TraderStewie does a great job talking about his “Power Earnings Gap” trades. In fact, he even keeps a public list available, for free. These are stocks that move well on earnings.

For trading red-to-green setups, this type of price action is ideal. However, it doesn’t have to be an earnings rally. It can come off an important announcement, investor meeting, ruling or another key development. Although, M&A doesn’t tend to work as well.

The point is, we’re looking for something that moves well and closes strong on the day. That’s step one. 

*Tip: I prefer to look for stocks that have a market cap in excess of $2 billion and average more than 1 million shares in volume per day. Feel free to alter it to your preferences, but I find it works well for me.

After we find a viable candidate, it’s time for Step Two. That is, looking for a slightly weaker open in the next session. I generally like an opening loss of less than 1% to 1.5%. The total loss is important, but we’ll get to that in a minute. 

Here is the strategy: If we have a stock that closes strong in the prior session, but opens slightly weaker in the current session, we have our candidate for a red-to-green setup. We’re looking for the stock to go from a lower open and reverse to positive territory. Once the stock goes from red to green, that is our entry. In other words, our entry is near the prior day’s close after a lower open.

When a stock opens lower on the day and quickly turn positive, it shows that buyers are willing to snap this name up yet again, even after the prior session’s big gain.

Here’s why the total loss is important: the stock’s session low becomes the stop-loss for the trade. That’s how we measure the risk and determine if it’s a worthwhile trade. It’s simple, black-and-white risk management. There’s no “gut” feeling or head-calculations to worry about.

We want a decent (but not huge) opening decline so it gives us a level to measure against. If the decline is too shallow, it makes for an easy position to be shaken out of. 

An Example of This Day Trading Strategy

I loved the way Dollar Tree (DLTR) stock traded when it reported earnings in March 2019. We had a gap-up start to the day, where DLTR actually pulled back to the 50-day moving average. (You can tell its action by reading the candlesticks).

That 50-day moving average held like a champ, as Dollar Tree stock reversed and closed well on the day. It also closed over $100, which was a very key level we were watching (as highlighted on Twitter). 

You can see on the chart we had our “big move” on earnings, but shares opened lower on Day Two. On the second day, the stock opened near $99.50, dropped to ~$99 and reversed higher. Once it went green on the day — so around $100.40 — that is our entry on the long side. Our stop becomes the session lows, or ~$99 in this case. 

This trade was a textbook red-to-green setup.

Final Thoughts on the R2G Trade

You’ll need to use your judgement or set your own rules for an upside target. 

But the most important part is that we have a limited-risk, defined entry system in the trade. From there, we can manage the trade to be a swing trade or a day trade. If we get a decent gain — say +1% — we can raise our stop to break-even to ensure we don’t lose money. Different approaches will work for different traders, but at least we have a system in place.

I personally do not like to let a stock drop more than 2% on the day. The reason being, I don’t want to risk more than a 2% loss on a day trade, which the red-to-green setup typically is for me.

In the event where a red-to-green setup looks quite attractive to me, but the losses exceed the 2% threshold, I will consider an entry but with a smaller trade allocation to account for the potentially larger drawdown. 

In any regard, this is just an idea to help form one strategy for you guys! Hope you like it and feel free to alter it to your preferences. It’s just educational after all. Happy trading. 

Candlestick charts are commonplace in trading. It doesn’t matter if it’s stocks, forex, commodities, futures or crypto. Some traders prefer open-high-low-close charts (OHLC), while others like dot charts. Some prefer the simple line charts, but there’s nothing like the story that candlesticks tell. 

Looking at a multi-month stock chart full of candlesticks can be intimidating. It can also be confusing for those that aren’t familiar with them. Look at candlestick pattern.

Trading Candlestick Charts

Above is a weekly candlestick of Roku, clearly showing the footprint of the stock’s price action. The stock opened the week near $102.50, hit a low just over $100, a high near $113.50 and closed the week at $106.85. All of these levels are illustrated above.

A clear-colored candlestick shows that the stock advanced during the session (daily or weekly). Many platforms won’t use a “clear” candle, but a green one for positive days. Down days will be shown in red. That looks something like this.

It’s interesting that both sessions have a high of $10.15, but that’s not the point of showing the chart. The blue arrow shows the closing price of the prior session. In the most recent session, shares opened higher on the day but ended up closing lower. How do we know that?

Well, the candle is red, which is a pretty clear tell. But by knowing the color, we are able to decipher where the open and the close occurred.

Once you learn how to read these candlestick stocks, it will become like second nature to view them. Looking at a chart will show the history and “price action map,” and it will be as easy for you to read it as you would a written article. 

Learning to read charts is a building block to trading. Hopefully this helps!

Should You Trade While You’re on Vacation?

We’re supposed to suppress our emotions when we’re trading stocks. The wins and the losses are supposed to be inconsequential and we’re supposed to go about our day the way we normally would whether we’re in the green or in the red. Like most money-related topics though, that’s easier said than done. And undoubtedly when we’re trading, the question of whether to trade stocks on vacation comes up.

Even though we’re supposed to be as unemotional as possible, we’re all human. We enjoy the wins, but do our best to remain humble. We get pissed off, frustrated and exasperated when we’re on a losing streak. That’s just part of being a trader and a human. So it’s not surprising when we want to trade stocks on vacation. Trust me, nothing feels better than sipping an espresso in Venice or a rum-and-something in Maui when we bang out of a stock for a big gain.

On vacation and hitting winning trades? Can’t get much better than that. But…

Trade Stocks on Vacation?

Here’s why I don’t like to trade stocks on vacation, which is not necessarily in order:

1. It sucks to lose. Instead of losing in the office or at home, losing on vacation sucks even more. There’s no other way to frame it, really: It sucks to be on vacation and have a few losers in a row. The trip already costs enough.
2. Time with family or friends is more important. The most import thing in life — believe it or not — is not trading. Our time with friends and family or even self-reflection is more important in this case. Put the computer/iPad/Interactive Brokers app down and enjoy the rum-and-something or hit the ski run one more time.
3. We should be relaxing and exploring, not staring at a screen in some beautiful foreign land. Go for an extra hike, sleep in a little later, turn off the GPS (depending on where you are!) and get lost in a delightful part of town. Traders need downtime to “reset” too and doing it on vacation is a great place to start.