This market reminds me of a few years ago leading up to March 2003, where every bounce was an invitation to short sell [1] (up until the final low was made). That market provided me with one of my better stretches of consistent profits, ironically with somewhat small position sizes.
Back then, the back-and-forth market action was producing sharp pullbacks and bounces much like what we’re seeing now, and I was trading a very effective method which was low-stress yet highly profitable. Call it the ‘Pick and Grin’ approach.
What I would do was establish small pilot positions (pick) in stocks on reaction bounces anticipating a move back down once the bounce was sold. This method of initiating smaller positions, booking some quick gains, and adding exposure when the stock returned to previous levels was very good to me. If my entry timing was poor, it didn’t matter a lot because I was only in a partial position. Depending on the stock, I’d either add the remaining shares up to my intended size (average down [2] the good way), or cut the trade entirely and look for a better spot to re-enter.
Once the stock began to weaken, I’d place bids to cover at least half of my position, booking profits as the trade developed in my favor. If the move was sharp, I’d take most of it. If the move was slow and steady, I’d scale out on the way down. Then I’d patiently wait for the relief bounce or oversold bounce to arrive so that I could remount the shares that I had covered.
This went on for a few months, and I was amazed to see what my consistent gains were adding up to by the end of the month. Minor gains in a handful of stocks were booked with regularity, and the end result was a fatter trading account [3].
Right now, this market is making it very difficult to hold positions for very long. The sharp spikes upward we’re seeing are being followed by dizzying spirals right back down, making it much harder to not only locate good swing trading [4] candidates, but also harder to hold them.
Consider the Pick and Grin approach until things smooth out. With the sharp market moves likely to continue for at least a little while, it won’t hurt to trade a little smaller. Plus, the add-and-subtract style of the Pick and Grin approach will let this back-and-forth market play to your advantage.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com [4]
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