Swing Trading Corrections and Recoveries
Near record volatility has hit the market over the past few weeks as governments have been forced to shut down significant portions of local economies to save lives.
Progress is quickly being made to advance different therapies to treat those most affected. We can all pray that these therapies will continue to show promise and that a cure or vaccine will soon be available.
Whatever the cause of the extreme volatility, though, swing traders need to be prepared to best deal with it like other traders.
This article we will discuss some tips for handling swift market sell-offs when trading.
Risk Management in a Volatile Market
Risk management is critical during a large market correction. With technical swing trading, its important to realize that win rates will be lower.
Sure, you can widen your stop, but even then win rates will suffer with extreme volatility.
Great breakouts on top stocks will suddenly turn over fairly quickly and tend to pull back a lot more. A couple months ago it could have been a great technical breakout but usually not when the VIX volatility index is this high.
You can short or buy put options but snap-back rallies can be sudden and fierce and stop you out in a heartbeat.
The best way we have found to approach it is to reduce position size and become a lot more picky about which trades we take. And look more to taking most if not all off at the first profit target when going long especially.
We also look for price direction confirmation which will be discussed more in a moment.
If going long, we want to see a market rebound developing (most will be short-lived until we see a bullish confirmation signal), ensure we have price direction confirmation, shorten our time horizon and in some cases tighten our stop even more.
We also want to make sure we are swing trading less, trade the stocks that have solutions for the problem driving the market lower, and consider trading the overall market indices on a shorter time-frame.
Cash is King
Back in February we went bearish on the overall market and told customers that sometimes the best place to be is in cash with your swing trading capital. Its important to talk to your financial adviser about your long-term holdings and plans but we put a lot of our swing trading capital in cash at that point.
Again, very high volatility and the sharp move off the highs is a warning sign to us when swing trading.
The sign is saying win rates are likely to drop, you need to lower your swing trading position sizes, tighten stops on current positions and be a lot more careful. Also, its telling us to start looking for good short or put option setups as well.
For instance, we found an ideal short swing trade on oil soon after for customers in the Daily Alert. It was a terrific head-and-shoulders pattern where the neck-line was sloping lower, with a strong move through the technical entry point, and then a weak rebound to test the technical entry point.
Fortunately, the price reached the technical entry point given to customers and hit the profit target within three trading days. It was a 30% profit for those using our target entry and exits. Those who played put options must have made a fortune in 3 trading days.
Now, contrast this with the long on bitcoin which reached our target entry point and the stop-loss the next day for an 18% loss. Even gold went down. Still it was a good few days for those using our targets overall with a 30% win and an 18% loss.
Not bad but for less experienced swing traders, its not likely to go this well.
But that is what you can expect with volatility this high. A lower win rate, wild swings and real overnight risk to the upside or downside.
Again, sometimes cash is a great place to be in our swing trading accounts as we have stressing over the past several weeks to subscribers.
Price Direction Confirmation and Swing Trading
Nearly all the long trading opportunities featured to clients in our alert service over the past month have not reached our technical entry point listed with each stock. This kept us mostly in cash when using the daily alert service.
One of the confusing parts about trading for newcomers is that jumping in on a trade before it reaches a good technical entry point is often not a good idea. Again, when we are holding a trade for just a few days to a few weeks, we need to see the price moving strongly in our direction with a fresh catalyst without moving too far already.
This means we need to get in very near a good technical entry point as traders and investors are starting to flood into the market to buy the stock.
If the price cannot even break a key resistance such as a prior days high (which we sometimes use depending on the type of trade) the next day, how much momentum does the stock really have?
The trading opportunity must not be that exciting or well received by the big money if it does not surge higher, consolidate strongly, and then show strong signs that is starting another leg higher by breaking a key resistance level.
An Example of Price Direction Confirmation
When volatility is very high like this, its even more important when swing trading to see price direction confirmation.
For example we had a few explosive bottoming patterns set up and were discussed in the Daily Alert. However, none of them reached the target entry point listed and taught in the explosive bottoming course which, again, kept us safely in cash.
Now if the outbreak in Italy would have quickly died out, the rest of Europe had few cases like some other countries, and shutdowns were not required in the US, the trade would more likely have triggered an entry by reaching the technical entry point.
No one knows for sure what the news will be the next day and how the market will react. But if the news is bad the next day the price is less likely to reach the technical entry point which is a good thing when swing trading a long because we do not jump in unless it reaches the technical entry point.
Its important to realize that the stock market is a vetting process. Some stocks will go higher over the long-term but most are destined to go sideways to lower. So a stock may never reach the technical entry point.
This is one reason why there is an S&P 500 index. If the company does not perform as well and the value trends lower, it will eventually be taken out of the index and replaced by a large cap stock on the rise.
Timing Our Swing Trading Entries
For us, often when the price reaches the technical entry is also important.
With the explosive bottoming pattern, not only does the price have to reach the technical entry point, it has to reach it the by a certain deadline as we pointed out to customers ahead of time. It has to reach the entry point by that deadline and no later.
Again, price direction confirmation is an important consideration with most technical swing trading strategies. Especially when swing trading in a volatile market environment.
What to do Next
Swing trading a highly volatility environment like this can be very difficult unless you are a very good, experienced swing trader. Its a great time to learn on a simulator or at least reduce exposure significantly in your swing trading account.
This is one of the few times we will trade the overall market through the SPY, Qs, IWM or other market index ETFs. Futures will give you a lot more leverage when trading the market indices but, with this extreme volatility and wild swings, that can be dangerous too.
A proven cure announcement, the exchanges being halted or shut down, or some other major event could trap you in a trade with a lot of leverage. Who knows where the price will be once the exchange re-opens? What happens to your futures contract if the exchange is temporarily shut down?
Its a risk worth at least considering with near record volatility and plenty of negative headlines coming out all the time and very positive headlines possible also.
In our next blog post, we will discuss what we are doing now to profit each week with this near record volatility. Ideal put option opportunities, shorter-term long and short trades and other tips will be covered.
Shorter-term strategies we have been developing and testing over the past several corrections and are now proven enough and worth sharing with our audience.
When Will the Market Bottom?
Now some of the biggest trades are the high tight flag breakouts, large consolidation breakouts on top stocks and other longer-term swing trading strategies. These become the most attractive trading opportunities during a confirmed market uptrend after the market bottoms.
Currently, the market indices are near or beyond record oversold levels. However, as a wise trader once said, technical analysis works… until it doesn’t.
Will this be one of those times? Personally, I think we are getting closer to at least an intermediate-term bottom. Soon, authorities will have to balance the harm from opening businesses with the harm of keeping them shut down for the longer-term.
Once we know more about how bad things will get, they will have to come up with the best long-term plan for managing the risk of a larger outbreak with the risk of high unemployment and poverty.
High unemployment and a long recession could also lead to problems just as bad as the affects of the virus. At some point, you have to go back to living life and taking appropriate precautions.
Once that moment arrives and government authorities begin to signal the long-term plan, the market is likely to rebound. Perhaps in a very big way.
One of the technical signals we will be looking for is a higher swing low followed by a higher swing high on the major indices.
The same signal we saw at the very beginning of 2019 before a big rally that went on for over a year until we hit the pandemic brick wall. Lets hope the answers will come soon especially for the most vulnerable among us.
One of the first top growth stocks to reach the entry point in an explosive bottoming pattern last time around was TTD which was featured at the end of 2018.
TTD reached the technical entry point given to customers soon after and it then soared over 100% higher very quickly.
So this is a great time to learn our favorite bottoming pattern before the next market uptrend is confirmed. The next market rally could start very quickly so you want to prepare ahead of time with a great strategy for your trading capital.
We are offering a big discount right now on the explosive bottoming course.