Investor Education: How I Trade a Choppy Market (And Walk Away Alive)
Investor Education for my Community: Trading a Dangerous Choppy Market
Note: This is an Investor Education note that I had intended to share only with Private Members, but I have decided to publish to my entire Community here. This note is designed to be educational and evergreen in nature.
Given market volatility, I wanted share some real execution examples as educational case studies. However, it is extremely important to note that inside my Investment Community, I exclusively only provide Strategy & Directional Opinion.
Make sure to share this letter with like-minded Investors & Traders looking to navigate this market.
Folks,
I wanted to provide a brief evergreen educational note on how to invest and trade in a choppy market.
I will include real examples of how I’ve been targeting Downside in this generally upward trending market.
In Investing, there is no point in trying to “time the market” and there is no point in trying to target Downside. We simply do good fundamental analysis and perform valuation work in order to buy assets that are intrinsically undervalued. We buy and hold for the long term and we do not let intermittent fluctuations cloud our judgement.
As Investors, some of the best tools include the following (not an exhaustive list):
Discounted Cash Flow Models
Historical Valuation Ranges
And understanding growth rates relative to growth expectations
In Trading, we aren’t necessarily trying to “time the market” per se, but we are deliberately planning out specific parameters from which we wish to enter and exit a name. To do so, we have entries and targets (exit price).
Traders have the opportunity to bet on both Upside and Downside if they have a desire to play both sides.
As Traders, some of the best tools include the following (not an exhaustive list):
OrderFlow (for Institutional Investors)
Candlestick Analysis
Technical Analysis
Sentiment Analysis
For me personally, I think it would be wise to separate an investing portfolio from a trading portfolio. They serve different purposes, require different timeframes, and therefore should be approached differently. They also require completely different mindsets when transacting.
I want to demonstrate an example in which I recently traded MSFT, META, QQQ, and RSP using on the short side (looking for downside).
Generally speaking, this market in 2023 (as of May 1st 2023) has been overwhelmingly favorable for positions that benefit from Upside rather than positions that benefit from Downside.
At least, for now.
However, I’m going to show some examples of where targeting Downside is in fact possible. It’s far more challenging, requires more patience, but can be done.
See here.
Case Study 1: On MSFT
Commentary: Before its recent Earnings Report (which you can see the gap up), MSFT had failed to break the 290 key resistance level over a 10-day trading period.
I personally saw this as faltering momentum, and decided to short MSFT using Call Options with an intention to close out upon any weakness.
In this trade, I sold short the Call Option at around $7 and bought-to-cover at around $5 for a total profit of around ~$200.
Had I stayed in this transaction one day too late for MSFT earnings (in an attempt to press downside), this would have been unprofitable. In fact, it would have worked greatly against me.
The Yellow Shade above is the duration during which I entered and exited the transaction.
Case Study 2: On QQQ ETF (Nasdaq 100 ETF)
Commentary: Before the recent Earnings Report for FAAMG, QQQ was tightly capped at the 320 level for Resistance.
Given that breadth was weak, I saw that equal weighted QQQE ETF indicated broader weakness. I personally saw this as faltering momentum in QQQ, and decided to short QQQ using Call Options with an intention to close out upon any weakness.
In this trade, I sold short the Call Option at around $8.5 and bought-to-cover at around $6 for a total profit of around ~$200.
Again, had I stayed in this transaction one day too late for FAAMG earnings (in an attempt to press downside), this would have been greatly unprofitable.
The Yellow Shade above is the duration during which I entered and exited the transaction.
Case Study 3: On RSP Equal Weighted S&P 500
Commentary: Members inside my Investment Community know that I’m not at all excited about the prospects of RSP ETF (equal weighted S&P 500).
I saw the 145-146 level as an opportunity to short RSP calls in an attempt to hedge my long book.
In this trade, I sold short the Call Option at around $7.5 and bought-to-cover at around $5.5 for a total profit of around ~$200.
Again, had I stayed in this transaction one day too late for FAAMG earnings (in an attempt to press downside), this would have been greatly unprofitable.
The Yellow Shade above is the duration during which I entered and exited the transaction.
I demonstrate this to let you know that in this choppy market, it is better to take your Wins early and that prioritizing certainty is better than sticking around for the “Big One.”
In a strong upward trending market, you can let winners run. After all, macro is behind you, and all you need to do is sit tight.
But in a mean-reverting (choppy) market, every 2-3 days of advances can be followed by a day of larger sized declines. The net result of a choppy market, unless one takes profits, is that there is little to be made in simply holding.
I rate this market now as extremely dangerous and it is quite important to preserve capital.
You can be a bull, and money in a bear market. You can also be a bear, and make money in a bull market.
However - in this volatile market, from a trading standpoint, overstaying by just one day too late is the difference between being profitable and unprofitable.
As we enter an environment that is becoming more troubling from a macro standpoint, I will share more thoughtful guidance in my Community to help the folks navigate this environment.
Stay safe in this market - whether you’re targeting Upside or Downside.
Inside our Community, I will share any observations, insights, and Strategy to best serve our Members and protect their capital from this extreme period of uncertainty.
Best,
Larry
Disclaimer: My investment community is not investment, financial, or trading advice, but for educational informational purposes only. I am happy to share my personal opinions which I provide as my personal journal. Trading of any kind of securities involves a lot of risk. No guarantee of any profit whatsoever is made. Investors may lose everything they have. Practice extreme caution. No profit is guaranteed whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this publication are NOT registered as securities broker-dealers or investment advisors either with the U.S. SEC, CFTC or with any other securities/regulatory authority. Make sure to consult with a registered investment advisor, broker-dealer, and/or financial advisor.