≈ How far can the S&P500 go? ≈
The market is again pressing to all-time highs and it is showing little signs of abating. So, does this mean we should be going all-in on directional trades or is there another way to play inside this kind of trending market that keeps the stakes reasonably in check?
There are a couple of things that every trader needs to ask themselves when looking at any type of market but especially when we have a trending market.
How long do I think it can last and what happens when it changes? And,
How do I take advantage of the situation whilst still making sure the market doesn’t crush me if it turns on a dime?
This is the ultimate balancing act between fear and greed and it is a place where many traders get themselves into trouble. The greed part is easy to understand, the markets just keep rising and there are no signs of slowing momentum as the technical patterns just scream bullish and therefore traders are trying to keep that portfolio delta number as high as possible and this can work as long as one does not get overleveraged which is essentially the greed factor kicking in. If your portfolio delta number is too high, meaning you have too many bullish trades on, the first steep decline can wipe out a lot of profits and as one of my mentors used to say all the time, the markets never announce themselves. This damage can be seen from the last pullback we had two weeks ago. The S&P500 was just sliding higher nicely until it wasn’t. The last green candle on the futures had a range of 41 points. The very next day the index dropped 147 points from peak to trough. If a trader had a very bullish delta on that day it would have wiped out almost 4 times the previous candles advancement.
The fear part comes in from our first question, how long do I think it can last and what happens if it changes? No one really knows when the markets will turn but often there are clues and that is why we need to have a solid technical read of the market and look for likely reversal type patterns and loss of momentum to give us a clue of short-term change. As for what happens when it changes? We need to plan in advance what needs to be done. Do we close positions or adjust them or do we hedge? This is what we need to know before the change comes.
Lastly, how do we take advantage of these trending markets without getting crushed when it turns? That’s easy, have a plan for every trade and come to the realization that there is no need to press your luck when it comes to the markets. Just let the trades come to you and make sure to stay within your pre-set trading limits of loss and you will most definitely take advantage of all the market has to offer!
Chart of the Day
SPY Daily Chart
SPY put in another all-time high yesterday and is showing that it may yet want to run on as the momentum is not yet waning as the last two candles after the recent breakout are approximately the same size.
Video of the Day
What is Position Sizing?
Coach Gino teaches the basics of position sizing.
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