August 17, 2017

Major Sell-Off. How Did Our Strategies React?

Now the market stands $.19 above the opening price of the third trading day in May, when the “Sell in May” theory begins. Even with the sharp decline today our Iron Condor position is still roughly 40 points above the short put strike, so we still have a little wiggle room. If the market bounces, which I expect to see over the next couple of days given the extremely oversold nature of the market, I might use it as an opportunity to widen  the range (lowering our short put strike) which will decrease the risk a bit. We shall see when the time comes.  

Our ETF Extremes did not make out as well today. As we state on the site we discuss winners and losers, reagrdless. Losing trades is where you learn the most so it is imperative to dissect a trade once it is closed, particularly if it is a loser.

We established a position yesterday for all of the reasons I have stated over the past few days i.e., very oversold, positive seasonality, etc. Well, the late bounce yesterday looked good for the trade and gave us hope that we could take a profit again today especially given the sharp advance in the futures after the closing bell. Even late last night the futures were still significantly higher.

However, the situation changed dramatically overnight as the futures gapped lower to the tune of $1.48 in IWM. When you are long a position this is never a good situation to wake up to, but as a trader you have to roll with the punches. Losses happen and they will contniue to happen throughout your investing and trading lifetime. This is one thing that I can guarantee!

The bounce at the open gave us the opportunity to get out for a reasonable loss given our long only position and the huge gap lower. Per our stop-loss and capital preservation guidelines we knew it was appropriate to take the loss and move on to the next trade. Never allow your emotions and your personal opinions get involved. Had we waited we could have potentially lost 38.9%. Constantly seeking to reduce risk and protect capital must always come before making money.

Remember, as we always say, this is a marathon and not a sprint.

We are obviously disappointed with the end result, especially because the trade looked so promising after the close when the futures shot up after the AAPL earnings were released. But, we are realists. We know there is no fool proof method of trading. No holy grail where the win ratio is 100%.

This is our second loss since our first trade in early ’06 and it brings our win ratio down to 86.7%. Our cumulative return stands at 113.3%.

Losses happen; it is how you manage them that counts. Again, trading guidelines that include stop-loss limits, capital preservation techniques and position sizing are an integral part to investing/trading. Your most valuable commodity in investing/trading is your capital. Preserve it! We will continue to teach these valuable concepts and how they relate to our strategies in our newsletter and the daily commentary.

Overbought/Oversold levels for July 26, 2007

  • SPY – 16.8 (very oversold)
  • IWM – 8.3 (very oversold)
  • DIA – 22.6 (oversold)
  • QQQQ – 27.5 (oversold)
  • GLD –  Quote vendor stats are not correct
  • OIH – 47.7 (neutral)

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