My Go To Trading Strategy for a Volatile Market
After over a year of low volatility and not even one 3.5% pullback, volatility exploded and the market indices dropped nearly 12% within a couple weeks. The VIX volatility index reached highs not seen since 2015.
In the last blog post I talked about having a written trading plan for your strategy ahead of that. In this post I want to share one of my favorite trading setups in a choppy market: I call it the explosive bottoming pattern.
This strategy is great for volatile markets and is very successful even while using a tight 3.5% stop-loss.
Its much easier to nail the ideal entry point versus trading strategies on lesser quality stocks yet outperforms them in my experience for most traders.
Several stocks formed explosive bottoming patterns last week before big moves higher including OSTK, LGIH, PATK and others.
Each has already hit their first target within 24 hours. While most long traders on lower priced stocks were struggling, these setups on top stocks were cleaning up.
A large pullback in the overall market is a great time to add to an existing long-term position position. A big down day in the market followed by a large gap lower is often a great time to dollar cost average for that month when you are adding a set dollar amount to a position each month anyway. When investing on long time-frames, its a good strategy for a volatile market.
During periods of high market volatility, the explosive bottoming strategy really takes over as our best performing swing trading strategy.
Even well before the market bottom, this strategy often does well. For instance, we mentioned 2 explosive bottoming setups in the closing comments in the Daily Alert in very early February – one was MU and the other was LITE.
LITE reached the entry point in the strategy while MU did not. LITE soared more than 10% while MU pulled back shortly afterwards.
In the last blog post I talked about how important it is to know the ideal technical entry point when trading using your strategy. Through extensive experience and back-testing, we know precisely what that point is for this setup.
The stock also has to reach the entry point within a certain window of time to trigger an entry.
Many stocks failed to bounce much last week but nearly all the setups that met the criteria in the explosive bottoming course surged much higher.
Recent setups in this pattern mentioned in the alerts over the past year included RH, HTHT and ALGN which all surged 20% to 80% within a few weeks after reaching the entry point in this unique and powerful technical pattern.
Now most stocks will not make this kind of run but some will. The large majority run 4% to 10% within about 3 days on average which is terrific during a volatile market while keeping a tight 3.5% stop.
That is the big difference I have found with the explosive bottoming strategy. Most bottoming patterns require a 7% to 10% (or more) stop-loss to achieve the same level of success.
If the technical pattern sets up as explained in the instructional videos, you can get the same level of success with a stop-loss point less than half of that.
They do not come up as often during a low volatility market but they do come up every month on the right stocks even during less volatile periods. Patient traders looking for these setups are often well rewarded when they do.