In my previous blog post, I shared a slew of tips centered on price action. In this blog post, I cast a wider net and share more options trading tips on a variety of subjects. (And by the way, this is all evergreen advice, so bookmark these posts!).
Read the news but trust the charts and technicals
Turn on one of the financial news channels, and what do you hear? Lots of opinions, with objective facts sprinkled in here and there.
If you pay more attention to what the talking heads are saying than what is actually happening in the charts and technicals, you will either miss out on trade opportunities or make a trade when you shouldn’t.
In March 2020, the stock market and global economy were in tatters, and investors and traders bailed on the markets.
As spring progressed, things began to change. If you studied the charts, you could see evidence of a bullish trend; you just needed to be patient and wait for confirmation. Once the Fed announced drastic measures to support markets and the economy, indicators began flashing buy signals and money flow returned in a hurry. The headlines were still dour, and if you had listened to them, you would have missed some big winners.
Now, let’s talk about this past summer when the media were in a bull-trend feeding frenzy. The markets did turn up, but it was a bull trend in a bear market. Those tend to be sharp and spectacular, but they are not long-lived. If you had whipped out your bull market playbook, you would have been crushed.
And this brings me to my next tip:
Jumping the gun on analysis is a big mistake
Traders who are new to technical analysis often try to interpret a chart before a pattern is fully formed. They then enter a position prematurely – a major error.
I see this a lot with the bullish morning star pattern. A morning star signals a reversal in a down trend; it appears as three candlesticks (the first is tall, the second is smaller and the third is tall).
New technicians often jump the gun when they see the second candlestick form. This is when the bears give way to the bulls, but the new upward trend is not confirmed until the third candlestick is fully formed. If you jumped the gun, you risk loss. Patience will serve you well as a technician.
In a bear market, play both sides
If you’re up for it, you can play the market in both directions during a bear market. This can dampen portfolio volatility and increase your chances of banking wins.
Most of us are conditioned to only play the bull side. Throw out that playbook. I come to the table each day looking for opportunities on both sides of the trade, regardless of where the trend is. Stocks do not rise every single day, even in a bull market. Stay agnostic and look for opportunities with an open mind. You’ll be more likely to find ideas on both sides.
Learn how to manage rising volatility
I have three words for you: Buy index puts.
Adding index puts will protect your portfolio from rising volatility. My favorite put instruments include SPY, DIA, QQQ and IWM. These are all liquid and will offer you great protection in times of need.
The goal is not to cash in and make loads of money (though that can certainly happen very quickly). Rather, you want to blunt the market volatility as much as possible.
That’s it for 2022! I have no idea what the next year holds – will have a recession, won’t we? – but I will share whatever advice is right for the moment as the year the progresses. I’m sure by the end of 2023, I’ll have even more options trading tips to bundle up and pass along.
