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If you want to learn how to be a successful trader, you’re going to have to learn how to do three things:

  1. Leave your emotions at the door
  2. Effectively manage risk
  3. Learn to embrace volatility

Trust me when I tell you that, more than the market, it’s a trader’s inability to handle these three items that can ultimately end his or her career.

When the market gets ugly and investment accounts are bleeding red, traders who practice proper risk management and position sizing are the ones in control and ready to take advantage of discount prices when other retail investors are panic selling. 

As US equity trading was just getting started this past week, many investors were still shell-shocked from the heavy selling that took place late last week.

But for Total Alpha members, access comes with live video sessions that offer me the opportunity to walk them through what I’m seeing in the market in real-time.

One of the more recent examples of how this timely insight helped put traders on the right side of the market comes from the Master’s Club session this past Monday, where I pointed out how a key sentiment gauge had combined with a popular price pattern to signal that the market was ready to bounce.

Today, I am going to break this setup down for you.

Knowing when it’s time to buy after a sell-off takes practice

With equities rallying this week, it appears that the markets are trying to shrug off the inflationary fears and lockdown potential from the new variant that hit the news wires last week and this week.

And I’m happy to see that technically we are starting to make improvements to the overall markets.

Is this the market telling us that the Fed may be hesitant to take away the “punch bowl” in light of the recent virus-related fears?

It’s certainly possible, but I am more inclined to think that it’s primarily due to the fact that so many traders bought puts last week, betting on a market collapse, and that caused things to become so one-sided that these new bears are now being forced to cover those shorts.

On Wall Street, some of the most successful traders are known as “contrarians.” 

In other words, these are the traders that wait patiently for sentiment to become so stretched in one direction that there’s simply no one left to chase price, causing the air to come out of the trade, which results in a trend reversal.

So how did I know that put buying had become so extreme last week?

Well, by using a very popular timing tool known as the CBOE Options Equity Put/Call ratio.

In Figure 1 below, I’ve placed this indicator on the bottom panel of the chart, with the S&P 500 in the top panel.

You’ll find that I am using the popular charting service Stockcharts.com to create this chart, which is what I use in my daily updates and in my Master’s Club videos. The ticker for this indicator when using Stockcharts.com is $CPCE.

Figure 1

Now, it’s common to apply a short-term moving average like the 5 or 10-day moving average to the put/call ratio to help smooth out its noisy swings.

In this example, I am using the 5-day moving average (see blue line in the bottom panel). 

Essentially, when this ratio is high there are more people buying puts than there are buying calls, which means there is a bearish bias in the market.

But when the moving average reaches extremes, it’s an indication that there has been a recent trend of sentiment growing to a bearish extreme.

More often than not, this alerts traders to the fact that market conditions have probably become too negative for the selling to continue without some degree of a bounce occurring to alleviate this negativity.

Just like any indicator, however, the put/call ratio is not a perfect timing tool, and it is best used in conjunction with areas of price support and noteworthy price patterns to find the most reliable signals.

In the case of the most recent bottom, Figure 2 highlights that the extreme put vs. call buying that occurred last week was accompanied by an inside (harami) price candle while the S&P 500 was testing the late-October breakout area (former resistance turned support) and the 50% Fibonacci Retracement of the entire October through November rally.

On their own, these “harami” candle patterns are an indication that sentiment may be shifting from bearish to bullish. 

But it’s the added support of the extreme put/call reading that increases the odds that the shifting sentiment will result in a price reversal, at least for the short term.

Figure 2

Conclusion

Traders love volatility because it produces opportunity in both directions. But knowing when to switch market sides takes a lot of practice and knowledge of key market indicators.

Facing scary conditions like we witnessed last week on your own, especially when you are still learning how to practice all the things needed to become a successful trader, can be daunting.

After many years of trading and educating traders, I’ve learned to embrace these conditions, and I love nothing more than being in the heat of battle with members helping them choose the right weapons and strategies to use to survive. 

To YOUR Success!

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Last week I got out of most of my positions. I’m doing what I’ve got to do to protect myself. In times like these, I’m not worried about the upside, I’m worried about protecting the downside.

Right now, I’m focused on managing position sizing, navigating the markets, and getting ready for some chop! You can read more about why it’s important to Protect your Ass…ets! Here

Despite my cautious attitude towards my portfolio in this highly volatile environment, I am still looking for trading opportunities when they are set up. On Friday, despite significant market weakness, we got a great long setup in CFVI. Here is some of my commentary from my live trading room:

Dec 3, 2:09 PM

Jeff Bishop (Moderator): starter on CFVI @ $11. I’ll build and probably hold over the weekend with Trump media rumors

Dec 3, 2:29 PM

Jeff Bishop (Moderator): still adding CFVI…

Dec 3, 3:19 PM

Jeff Bishop (Moderator): CFVI & DNUT. Only safe havens are Trump scams and delicious donuts. Love this market

Dec 3, 3:20 PM

Jeff Bishop (Moderator): I’m gonna keep buying the Trump scam though. Nothing wrong with that. I plan to hold into Monday too

Dec 3, 3:26 PM

Jeff Bishop (Moderator): The ONLY reason I would see the markets bouncing from here is the fact everyone is so bearish right now. The biggest rallies come in bear markets

Dec 3, 3:29 PM

Jeff Bishop (Moderator): just no way the social media clowns aren’t talking up CFVI all weekend. Then I want to sell them my shares on Monday much higher from here

Dec 3, 3:35 PM

Jeff Bishop (Moderator): I now have an irresponsible amount of CFVI into the weekend

Dec 6, 8:11 AM

Jeff Bishop: I’m scaling out of CFVI in the pre-market, trying to leave some for the market open 

Dec 6, 9:36 AM

Jeff Bishop: all out of CFVI now from Fri….

 

As you can see, despite my focus on risk in my overall portfolio, I was still able to load up on a great long setup on CFVI

You see, not all stocks follow the market, when certain stocks have a news catalyst they can have independent order flow. Moreover, despite my focus on protecting my Ass…ets I understood that the market could have a nice bounce on Monday, which it did, but I don’t trade with FOMO. For me, until the market shows me it has settled down, I am not focusing on the upside, I’m worried about the downside.

 

Here was my reasoning for the CFVI trade:

CFVI is a SPAC. On Thursday, it was announced that the company would be acquiring Rumble Inc., the neutral video platform. Rumble is attempting to be a neutral competitor to Youtube, if not a more conservative platform. Talk of a link to Donald Trump sent the stock over $14 on Thursday, as Donald Trump Jr. tweeted “Amazing” in response to the deal. However, by the end of the day, it sold off below $11 to close the day at $10.58.

On Friday, the stock stayed weak until it found some buyers in the afternoon coming into 2 pm. Then it was announced over the new wire that Cantor’s Howard Lutnick, In an Earlier Bloomberg Interview, Said He Can Confirm Digital World (DWAC) SPAC Partner Truth Media Will Use CF Acquisition VI (CFVI) SPAC Partner Rumble For Distribution. That was very important news.

DWAC, a Donald Trump SPAC to set up a new media company, traded from $10 to over $170 in 2 days. I knew that this news that CFVI would provide DWAC with distribution could send the stock soaring. 

To me, I knew that anything under $12 was probably cheap as Twitter Guru’s and Social media forums would be all over this and circulate the news over the weekend, likely leading to big demand on Monday morning. Thus despite the market weakness, I was loading up, playing for a gap up on Monday morning! Here’s what happened:

CFVI ran in the after-hours on Friday and gapped up even higher in the pre-market on Monday morning. As per the plan, I started selling shortly after 8 am on Monday and got out of the rest after the opening bell. Once again, thank you, Donald Pump!!

Bottom Line

Even during severe market weakness, there may be opportunities to get long stocks with independent order flow. This is usually the case with stocks that have breaking news that may be relatively undervalued.

CFVI was a perfect example. Despite the fact that I had been trimming my portfolio due to market volatility, I was confident getting long this setup for a swing trade over the weekend with size! It worked out, and I was able to exit higher on Monday in the pre-market. 

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

It’s been wild out there. 

Last week was a vicious week for a lot of traders and portfolio managers, especially for those who weren’t prepared. I’m seeing some nasty internals in the market, not the kind of stuff you want to see in a bull market. 

When we get back-to-back selloffs on Friday, I don’t think we’re done when it comes to market pain. 

If you think things are bad now, you should prepare for what could come because it could turn into something much worse. I’m making sure I’m cashed up and have exited a lot of my positions. I’m doing what I’ve got to do to protect myself. In times like these, I’m not worried about the upside, I’m worried about protecting the downside. Right now, I’m focused on managing position sizing, navigating the markets, and getting ready for some chop! 

Today I’d like to discuss why it’s important to protect your Ass…ets by cutting trades that are not working quickly and adjusting your position sizing in times of increased market volatility. Below is an example:

Hope Is Not A Trading Strategy

There are numerous reasons why trades that are not working need to be cut. First of all, hope is not a trading strategy. Legendary trader Paul Tudor Jones once said you never want to wish or hope. You always want to be trading, in control. Cutting trades is all about opportunity costs.

Last week I took a stop out on FUBO. It was a nice idea, the trade set up, I had good risk/reward. I followed my plan and got the F out.

My Trade Plan:

  • Stop under $19.80 – just under the recent low made last week
  • Target near $25, which is around the recent support level before the breakdown to $20.

My Trade:

  • FUBO Dec 10 2021 $20 call near $1.80

Here’s how I traded it.

As we broke below 19.80, I hit out of most of my position. Over the rest of the week, FUBO traded below $17 with the market weakness. I didn’t fight the stock, I didn’t double down, I reduced my risk as planned and cut the trade to a manageable outcome. This is also why I love structuring my trades with options, as the risk can be pre-defined if something unexpected happens.

FUBO didn’t work out, but the risk-reward was there! I respected my stop losses. Adding to losers is how traders blow up! Let’s have a look at a couple of more charts to see why it’s important to stay in control in a volatile market. 

 

DOCU

The chart above is Docusign (DOCU). This is the kind of stuff I saw during the .com bubble. The stock had a huge run-up, but for me, it wasn’t worth 5 times what it was pre covid. Last week it lost its bid, then in one day down 40%. 

This is not a penny stock, it was a $50 billion company!

Imagine leveraging up and not stopping out of this trade. That is potentially disastrous and how traders blow up accounts. Leverage up big out of the money calls and you’re a swinger, then the stock drops another 40%, which could wipe out your portfolio and you’re eating Ramen.

 

ASAN

ASAN INC (ASAN)– another one! The same setup failed, then down 30% in one day!

If you don’t have stop losses, you will walk into stuff like this that can decimate you!. Think about position sizing and allocations that make sense!

These moves seem unlikely, but as you can see, it happens over and over. And the whole market could do a similar move. It might not seem possible, but it could happen! And would catch a lot of people off guard, really, really quick!  

 

Position Sizing

If you’re day trading in and out of a liquid stock, you can use leverage with good risk management, only if you’re disciplined and stop out of your trades. 

If you’re swing trading, you could take some big heavy hits without the appropriate sizing! 

These things can get out of hand sometimes, keep that in mind! Maybe you’re used to sizing 10%, consider reducing to 5 or 2% based on market volatility. Think about how you will sleep at night and how it will affect you! When market volatility increases I reduce the size I am trading, to protect myself. I don’t want to be a hero in this type of market. I preserve my capital for the next time the market sets up well. Right now, I am trading very small!

Respecting stops is what separates great traders from gamblers. In trading, you always want to be in control, seeking the following great trading setup. Trades need to be cut to protect your psychological, emotional, and intellectual capital, so you are always ready to perform to the best of your ability.

Where to next in the market? I don’t know I don’t want to be long much now. All the stops at the lows are being taken out after pops. I think the market is due for a bounce, but right now I prefer to stay on the sidelines. 

 

Bottom Line

I’m a big boy, I take my losses, I own it. I don’t let my losses snowball into something I can’t handle and something I can’t stomach! I made the trade, I took the trade, I’ve got to have my plan and stick to it! That’s how I’ve been around for so many years, I know I’ve got to have stop losses!

Shit happens and is a part of the game. How we react to these situations separates the best traders from people who are forced out of the game. It is crucial to cut trades that are not working quickly. Getting out of trades frees up your mind to pursue new trading setups.

Legendary trader Jessie Livermore once said “A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss- that is what does damage to the pocketbook and to the soul.” Moving on to the next trade as quickly as possible can helps maintain your emotional well-being. A vital part of not only trading but your life.

You don’t want to be a hero in these market conditions. Preserve your capital for the next time the market sets up well.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.