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Rookie Corner: Preparedness

June 25, 2020

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Hey, Y’all! This week I want to talk about the current market situation and some observations I have had recently with my peers and how I believe this relates to all traders from rookies right on down to the legends. Check out this chart below and notice the markings I put on it.

This is a 6-month daily chart of the SPY with the last candle being the 18th of June. Now I underlined three candles in grey and then I put a green line above three candles at the top. I did this for a very specific reason. During this market action, I had been working closely with my trading peers, the great folks at Tackle amongst others. Looking at this chart I was of the mindset that the candles with the green line represented a lower high and that we might have some more downside to come and yet many others that I conferred with, thought that perhaps this was just a bull pullback and that there could be some beauty opportunities just waiting to be had from the bull side. The thing about this chart setup is that either scenario is very likely to play in the interest of time. We could have had a pop higher that would have made the bull retracement look attractive or the markets could start to slide as I thought they might do. If you have been trading for any length of time you will probably realize that we as traders spend the vast majority of our time fighting between these two different views. It has been my experience that seldom does everything set up so perfectly that you are super clear on which was to go. So, what are you to do if you find yourself in this conundrum? This is the focus of the blog this week.

The title of the blog this week is preparedness if that’s actually a word, not really sure it is but it is the one I wanted to use because it becomes so utterly important in trading. One of the most asked questions I get from rookie traders is “what happens if the market goes the other way?” That’s a great question and I am betting many of you reading this blog have asked this as well. The thing is, if you haven’t asked this question then you are doing yourself a great disservice. I say this because I had a mentor that really helped me with a breakthrough in my trading success and he always said the same thing when I asked the question above. He said, “you must be happy with whatever comes next and if you are not happy with what comes next then you have not done enough planning.” This mentor was teaching me to be prepared for whatever happens and if I am truly prepared to accept whether the market decides to go up, down, or even sideways, yeah we hadn’t discussed that one yet then I have done enough work to make a trade.

You see the picture I painted above with the chart of the SPY is a classic example of why we need to prepare for anything because we really have no one of knowing for sure what will happen. I didn’t really know that those candles under the green line would be the lower high before the market moved down and I didn’t really know whether that was just consolidating before the next leg higher on the bull retracement.

So, how do we make ourselves happy with whatever comes next? Well, first we decide that whatever we do will not put us in terminal peril. By terminal peril I mean it won’t take us out of the game of trading permanently. This is where we ensure that even if we are wrong on the direction of the market that we can still be around to change our minds. This involves very conservative position sizing. Make sure your bets are small so that if you are wrong you can live to bet another day or do my favorite thing and that is jump sides. I had a trade on recently that I took a strong stand on the direction and I used a long call option, thinking that I was absolutely right in the fact that this equity was going to rise. Well, let me tell ya…I was dead wrong on direction! The trade almost immediately went the other way and did so quite aggressively. However, I was prepared for this possibility and so I jumped ship right over to the other side of the trade, as a matter of fact, I not only switched on delta but I went from theta negative to theta positive because originally I was on the wrong side of that as well. I was able to do this because I made a small wager on the original direction and I had lots of ammo (risk capital) available to change.

The above is just one example of how we can be happy no matter what the market does. In the coming weeks, we will discuss other ways to be happy if the market decides to go against our will!!

In closing, I want to say that being prepared is paramount to good trading and that if you prepare to meet your opportunities as they present themselves you may find a lot of luck on your side when it comes to the markets.

Happy Trading!

Coach Holmes.

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