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Traders,
Today we return to our series highlighting five tips from the bear market playbook. Recall that tip one was “if in doubt, stay out,” and tip two was to reduce your position size.
The third tip is to scale-in.
One of the key characteristics of a bear market is high volatility. Overnight gaps multiply. Up days are frequently followed by down days and vice versa. Choppy prices aggravate directional traders, and the Average True Range (ATR) expands. In markets like this, it’s crucial to find a way to use the volatility to your advantage.
Scaling in does this. It consists of splitting your trade into multiple smaller trades. For instance, say you want to buy 100 shares of a stock. Instead of buying all at once, you might buy 50 shares twice or 33 shares three times. That gives you the flexibility of adding more shares at a better price.
And the high volatility usually means prices do go against you at some point. But rather than sucking on that lemon, why not take it and make some lemonade?
Adding size at a better price is sometimes called dollar-cost averaging. It lowers your cost basis, thus improving your probability of profit. We use this technique nearly every day in my Team Phoenix trading lab. Of course, it works in bull markets too, but it’s during the excessive volatility of bear markets that the tactic really shines.
Chart of the Day: Dow Jones Industrial Average Historical Returns
The year is over and the stats are in. The Dow Jones Industrial Average delivered over a 20% gain with dividends reinvested. Here’s a great chart from Albert Bridge Capital categorizing the Index’s performance throughout history. Note the summarized numbers on the bottom left. Impressive, most impressive.
Video of the day: Gino’s Gems: How to add and interpret custom technical indicators arrows on Thinkorswim charts
In today’s Gino’s Gems, Coach Gino Poore teaches how to add and interpret custom technical indicators arrows on Thinkorswim charts (TOS).
Today’s line up
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
The Coaches Show Replay
If you missed last night’s episode where Coaches Tyler Craig and Gino Poore talked about Rolling Covered Calls or would like to watch it again, check it out in the video below.
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day, and fun in a way that only Matt and Tim can deliver.
Trade Masters 7:00 PM EST
Every Wednesday at 7 PM EST join us on the Trade Masters where two Coaches go head-to-head to see who can find the best trading setup.
Financial freedom is a journey
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