The best advice I ever received – find yourself an expert to learn from. Someone who’s in the trenches and can help you both from a technical perspective… as well as… the mental aspect of trading.
However, when I first started trading I tried the DIY approach…
After eight years of trying (and having no profits to show for it) I decided to seek help. And since then, I’ve been able to turn a small $34K account into a cool $2Ms.
Despite my success I don’t trade relatively big. If you take a look at my portfolio below you probably would have never guessed I’m up seven-figures in trading profits year-to-date.
I trade options on large-cap stocks that appear to be setting up for a breakout. In fact, it’s pretty much all I do these days.
I put together a Case Study highlighting a 100% winner in PagSeguro (PAGS). It’s not my biggest winner of the month but it might offer the most teachable moments and I’d like to share them with you.
Back on October 7th, I sent a notice to Weekly Money Multiplier members:
Let’s break down the components of the trade.
First, the chart drew a head and shoulders pattern. This pattern signals a reversal for any equity.
Each pattern contains three components: the left shoulder, head, and then right shoulder. The drawing illustrates the pattern.
The pattern activates when price crosses below the orange line known as the ‘neckline.’ Ideally, price will extend below that by a function of a Fibonacci extension or the length of the head to the neckline.
Each pattern may look slightly different. Chart pattern identification requires some finesse and art.
I marked in the chart below the important points I saw with the trade.
PAGS daily chart
You’ll notice I had two price targets: $38.89 and $34.94. These come from drawing Fibonacci extensions between the swing high and low. I prefer to use a 27.2% and 61.8% extension.
I know that many people draw extensions differently. My method works for the trading I do. However, I recommend you practice on your own.
Before I even enter this trade, I know my entry and exits. I want to enter the trade at $46.50. My stop will be a daily close above $49 (the right shoulder).
Note: Daily closes allow for intraday volatility without whipping me out of a good trade.
Now, my trading strategy uses options. I buy calls or puts in-the-money. This reduces the amount of extrinsic value in the option price.
As a reminder, an option price is made up of intrinsic and extrinsic value. The intrinsic value is the difference between the current stock price and the strike price. Extrinsic value is anything remaining. At expiration, your extrinsic value goes to $0.
So, my initial trade started with 10 contracts of $47.50 puts for November 1st. I picked these up for $4.30.
With the stock trading at $46.50, that meant I had $47.50-$46.50 = $1.00 in intrinsic value. The remaining value – $4.30 – $1.00 = $3.30 – was extrinsic value.
Lastly, I look for a squeeze. For me, this means the Bollinger Bands trade inside the Keltner Channel. Don’t worry if you don’t know what that is. I’m just looking for price to tighten its range. You can see it with the red dots at the bottom of the previous chart.
Now that I have all the elements of the trade, let’s look at the management and results.
The chart below shows how things played out on the daily time frame.
PAGS daily chart
It took 11 trading days before the stock gapped down. The squeeze pressure released downward, slamming the stock into the first target.
At that point, I made the decision to take the entire trade off. Yes, I could have let a portion continue to run.
However, I locked in 100% profit on my trade.
Ultimately, the stock did take another leg lower. However, time decay began to speed up the longer I held.
Even after trading for years, I’m not immune to mistakes. That’s why I log all my trades in my journal. I still want to know what I can do to improve.
This trade didn’t have much I would change. While I could have let the stock run farther, I had three big reasons I didn’t.
First, I hit 100% on a medium-sized trade. This wasn’t a small lotto I wanted to let run. I had enough at play that this felt like the right move in a choppy market.
Second, the volume on the gap down was massive. We’re talking well over 10x normal volume. That tends to create severe snapbacks.
Third, the stock made a tail candle. While it wasn’t a great reversal candle, it looked mean.
When you add these pieces up, I made the right decisions. I don’t focus on the outcome. Stick to making the right calls, and profits will come your way.
If you’re ready to take the next step, join me at Weekly Money Multiplier. I’d love to have you on board!
If you want to learn a little more about my trading system, watch this short clip below:
How do you bounce back after a big loss on the market?
Nathan Bear has some insight:
🚶 Step back from the market for a little while
🙏 Forgive yourself
🐎 Get back on the horse pic.twitter.com/m8SrkrGn18
— Raging Bull (@RagingBull) October 21, 2019