Swing Trading a Choppy Market. How We Do It
The Nasdaq has now fallen over 10% from high to low over the past couple weeks in a choppy consolidation so we now have seen a correction for both the Russell 2000 and Nasdaq.
In this weeks blog post, we will go over how we trade a choppy market dealing with a lot of uncertainty and how to avoid large drawdowns that most traders face when trading a market trending sideways to lower.
This is probably the most valuable blog post we have published in a while. So grab your favorite beverage and learn from a successful trader with 20 years trading experience.
Here are the key things to keep in mind.
Stick with What is Working Which is Often a Narrow Area of the Market
Its good to know what is driving the volatility in the current market. Currently, its a growth scare, uncertainty over possible austerity and uncertainty over trade policies for the US and worldwide.
So it makes sense that one of the strongest areas of the market right now is insurance stocks which are less affected by trade.
As we trade daily, we have noticed the good price action in insurance stocks over the past few weeks. And one of the best earnings breakouts this quarter was PLMR.
PLMR is an insurance stock breaking out of a multi-year consolidation into new all-time highs on the back of a big earnings beat with very strong growth. We featured the stock near a good entry point and it quickly reached that entry point and moved higher from there. We have already taken some profits and raised our stop to ensure a profit on the trade using the tactics taught in our free swing trading primer.
But its important to know what areas of the market are doing well despite a choppy market or market pulling back. The highest relative strength stocks often (not always) lead the market higher in the next market rebound.
Wait for Your Pitch. On Second Thought, Wait for a Gopher Ball
The PLMR opportunity was ideal in a lot of ways. The price action after the breakout was about as good as we have seen this quarter. The earnings breakout trade easily hit the first profit target taught in the rapid account growth course while holding a very tight stop below the technical entry point which is a good sign.
So wait for an ideal trade in an area of the market holding up well currently. We focus on the top earnings breakouts and high tight flag breakouts. In general, we only trade the top 20% of high tight flag breakouts. The ones that pass all of our rules pre-market the day of the breakout.
Sticking with just these ideal high tight flag breakouts, also taught in the rapid account growth course and new trading boot camp, overcomes the worst problem in choppy markets. Overtrading.
Its also important to keep in mind that sometimes the best trade is cash.
Trade Less, Make More
Overtrading and revenge trading are the worst things you can do in a wild, choppy market with sudden swings in either direction. Having a clear checklist of exactly what you are looking for with a series of quantitative checks that need to pass before considering a trade is important right now.
You should already know what strategies tend to work at least OK in a choppy market. We have already discovered that for ourselves through a lot of extensive research and experience. Trade everything right now and its easy to get hit with a big drawdown.
Only about 1 ideal high tight flag breakout and earnings breakout comes up per week on average. Probably less than that right now.
By having a careful set of rules of what is an ideal trade that only comes up once per week on average, you crush one of the biggest obstacles holding many traders back. Overtrading and revenge trading at the worst times.
So you may want to take your strategy, increase the qualifications of an acceptable trading opportunity, and trade just those. You want opportunities that come up rarely enough to prevent overtrading.
Nearly all long strategies will have a lower win rate in this environment. Using a position size calculator, plug in the lower win rate and you will see that the position size should go down.
Let Trades Play Out with Very Few Exceptions
Once you prevent overtrading using the methods above, another mistake is to not let your trades play out. We would avoid late Friday morning entries right now because a lot of news can come out over the weekend, but we should let the trade go all day at least.
If the catalyst is a monster earnings beat, we would just let the trade play out with the stop and limit order for the target sell price even if it breaks out on a Friday. Its easy to ruin profitability by taking trades off early.
The stock is going to be more volatile in a choppy market and we should only take the trade off if there is some seriously bad news that is hitting the market. Tariff updates are generally not enough to take the trade off.
We use a 2.5% to 4% stop-loss with the rapid account growth strategies taught in the course (short-term swing trading strategies) so we can just put in the stop-loss right away and go find something else to do. The stock often holds while the market suddenly drops 2% to 3% because we trade with a big bullish catalyst going on for the stock.
But its more effective to just let the trade play out with your stop in place rather than watching it minute by minute when using the tight stop-loss.
We also take more off at the first profit target in a choppy market consolidation or pullback with higher volatility. Stocks just are not going to take that next leg higher right now in most cases with the volley of news raining down on the market.
So we take more off at the first profit target and raise our stop on the remainder.
Focus on the Very Best Strategies. Forget Everything Else
Its a good time to avoid lower win rate trades. Newer issues, stocks below $25, commodity stocks where the commodity is not in a strong uptrend on all timeframes. These are just a few of the lower win rate areas of the market. Also, more disasters like surprise capital raises tend to occur on lower priced stocks in this type of market.
Instead, we just sit back, check our watch lists each day, and wait for something that checks all the boxes. Then we consider the trade which often goes surprisingly well.
2nd tier, or 3rd tier opportunities or if we break our trade qualification rules? Not so much.
Again, reaching for other trades that are not ideal is a a sure way to risk a large drawdown. Penny stocks or buying options instead of the underlying stocks? No way in this market.
Using a ranking strategy or just buy and hold? You can expect large drawdowns and you want to have a plan ahead of time for when the large drawdowns occur. One plan it to just ride it out if using a buy and hold strategy. But the last thing you want to do is turn a trade into an investment. Investments require a lot more research and legwork before entering a stock.
However, if you are using technical strategies on top stocks (such as the ones taught on this site), you should be able to achieve a much smaller drawdown using the tactics discussed here.
Keep Tight Stops. You Have to Manage Your Risk Tightly in a Market Like This
One of the problems with trading options in this market is that the market can switch on a dime. Suddenly, the excess option premium vanishes and the lower liquidity of options and wide bid/ask spread could mean you are stuck.
Again, we want to be able to manage risk tightly in a choppy market environment. We focus more on our short-term technical strategies that use a very tight stop stop with appropriate position sizing given the expected lower win rate.
We also usually avoid the first 5 to 10 minutes of the trading day when entering a trade in a choppy market. The increased overall market volatility and high volatility early in the market day can be a bad combination. Especially on lower priced stocks and stocks with lower volume on average.
But what if you miss an ideal entry by waiting?
So what. There will always be other ideal trades that come up in better market conditions. Not when we want them to, but when they come up when market signals are flashing green.
This is why we have to have a good daily routine including checking our watch lists each day. Patience is key right now. Becoming a successful trader includes learning discipline and patiently waiting for just ideal trading opportunities while doing the work consistently along the way.
Look for Signs That the Market is Entering the Next Uptrend
Eventually, the market will show signs that it wants to go into the next market uptrend. The bullish market signal we look for occurred in early April of 2020, early 2023 and May of last year.
Once you get into a trending market that is above all the key moving averages, it could be a bonanza. For instance, the ideal high tight flag breakouts that we trade went on a huge run last summer until early August as the market went through a trending phase.
This is where the big money is made trading and its important to pick your markets where you want to get aggressive. Not when you feel like it but when your strategy is working well.
Get a Great Coach Now Before the Next Market Uptrend and Huge Trading Opportunities Set Up
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This is a great time to learn so you will be prepared for the next trending phase in the market where the big money is made. Sign up for the 2 week boot camp below. You want to get ready now ahead of the next market uptrend. Not when its almost over.
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