Market Environment and Thoughts on Making Money

Good morning. Just a general note about market conditions.

I tend to start any assessment of market conditions with a simple question: “From where things are here, how much potential upside is there?” Now, there is no way to quantify the upside with specificity. It’s a guess. But the way I see it, there’s not a lot of upside from current levels. I won’t hazard a guess on the downside. That’s taken care of by simply deciding where you’ll exit any and all trades if the trade goes against you. So the potential downside is not that important to me. Now, if you don’t believe in stops, then the potential downside is a HUGE factor to consider. I need stops because I don’t try to predict market movements. I can only react to them. And that reaction focuses on protecting my trading capital. I’ll let the stock take care of compounding my money — I can only control the risk.

I don’t see a lot of follow through on breakouts, and that’s important. Yesterday’s breakout in $FUTU has failed today and the stock is down more than 16%. $CVNA was trying to move higher, but it’s looking more like a short now. $VSTO took a stab at a breakout, but it’s down almost 5%. $ETSY had been looking good a couple of weeks ago, but it’s under distribution now. $NKE has broken down completely and is now looking more like an upside-down swoosh — All the woke in the world won’t overcome determined selling. $FIVE and $DECK are also pretty weak, though they haven’t had the treads come off like $NKE has.

$AAPL is extended, though it’s not showing signs of any pullback — it’s really just a matter of the potential upside. I understand that they’ve got some announcement today, but I never hang my hat on such things. They are by their very nature unpredictable. The way I see it is that any big move to the upside would only be as a result of a well-received announcement. But that’s a binary event — the move could be downward, too. So that’s just gambling. For whether weird reason, I had more than half of my trading account invested in $AAPL last week while I was on vacation. The position was protected with staggered stops, but it was a pretty big position to hold while I was spending the week trading dollars for margaritas.

To be honest, I really can’t justify holding such a big position while I was away from the market. The stock was already extended, though it did have pretty good momentum and I just figured that there was more upside. But I approached the position the same way I always do: Define the risk first. So I knew exactly how much I was risking, and I can assure you that it wasn’t much. I was not stopped out, so I came into the day with a lot of apples in the cart. The stock ran above $135 today and I ditched it all as soon as it fell back below $135. Basically, I paid for the vacation, including many shots of mezcal that burned my throat and made me sneeze. ( The Mexican people are much better drinkers than me, and I don’t feel compelled to compete with them. I’ll let them have the win).

I traded $TSLA this morning and actually was really heavy in the stock. At one point, I had 70% of my account in the stock. No options. Just stock. And I watched it very closely. I also watched the clock per my 59 Minute Trading approach. I had more stops than city bus on a crowded route. I was hoping that the stock would follow through, but it did not. My big position paid me off nicely, but it was only possible because I had a very tight control on risk. I was able to take what the stock gave me. It was only modestly generous, though I was in a position to do very very well if the stock sprinted higher. I’m out of that now.

So the bottom line for me is that breakout buying does not pay off these days. So I’m not trading breakouts. The tactic that works the best are very precise entries with tight stops. The position can be built quickly without increasing the risk because of stop placement. I don’t think about the % of the account in the trade. Rather, I think about the % of the account that would be lost if my stops are hit.

What’s the moral of the story? When you focus on risk first, you set yourself up for reward.

My trading account is now 100% cash. (Remember that cash is a position.) I have the capacity to lose money with each minute that the market trades, but I’ve got the rest of my life to make money. When you are patient, you make better decisions.


Market Update

Leave a Comment