Stocks are taking a lick for the second straight session. We can blame tariffs as the catalyst, as they are set to increase to 25% on $200B of Chinese goods starting Friday, according to U.S. Trade Rep Lighthizer.
However, discussions are still ongoing, and there is always a chance something changes before Friday. Stock futures have been selling off since Sunday after President Trump tweeted that the Chinese-U.S. trade deal is dead. Dow futures were down as much as 500 points but managed to recover nearly all of its losses.
That said, today we’re relatively weak again, and the VIX (the market’s fear index) is above 20, a level we haven’t seen since January of this year.
Here’s my advice to traders: Stay Calm.
And most importantly, stick to your trading plan. It’s easy to let your emotions run when you see your positions bleeding money, however, if you trade without a plan, the likelihood of making things worse is tenfold.
For example, instead of trading levels or catalysts…
…you might trade your profit and loss (PnL), act on revenge or desperation.
Experience has taught me to be calm, and that the first initial reaction isn’t always the correct one.
(stocks go up and down…my trading system works in all market conditions… click here for my real-time trade alerts, and more.)
That said, while some traders and analysts have been talking about a stock market sell-off… I was actually putting money to work to profit off from a stock crash.
(some people like to say “I told you so”… I let the PnL do the talking for me… if you need alerts like this in your inbox or on your phone, click here to get started.)
I didn’t roll the dice when I bought calls in TLT nor when I bought puts in FIVE…
That said, there are several factors to consider when putting your overall trading plan together, such as thesis, risk-reward, entry and exit rules, and position size.
U.S – China trade talks have turned for the worse after the President of the U.S. (POTUS) announced that higher China tariffs are coming on Friday. Now, this sparked a sell off, and it’s overshadowing some stock-specific news like Lyft (LYFT) earnings after the close… and Uber’s long-awaited initial public offering (IPO) on Friday.
Now, with the market selling off… it’s got a lot of traders scared.
However, when stocks are crashing… there’s one thing that’s extremely important: having a plan.
For example, the market gapped down big yesterday. If you didn’t have a plan, you probably panicked and took a loss right around the open.
You see, we all knew the markets were headed for a big drop just by looking at the S&P 500 futures. However, it’s how you plan for days when stocks are selling off that could save your portfolio… and potentially make you money.
Now, I had no idea the market was going to tank… in fact, I thought the market would be higher yesterday because the markets ended last week on a high note. However, if you don’t know my trading style… I plan for days when the market crashes by having a balanced portfolio. Basically, I keep a portfolio of options that I think will benefit if markets sell off… and options that should go up with the market.
By planning and keeping a balanced portfolio, it allows me to achieve smoother and more consistent returns.
You might be wondering, “Well Jeff, why is having a trading plan so important, and what is considered a ‘good’ trading plan?”
The Importance of a Trading Plan
Now, there are a few keys to developing a winning trading plan. All “good” trading plans include the following:
- Thesis. What’s the reasoning behind your trade? Are you long based on a specific chart setup or catalyst?
- Position size. Ask yourself, “How large will my position size will be for this trade?” For the most part, I like to keep my position size to a maximum of 5%. In other words, I won’t allocate more than 5% of my account to any one position.
- Risk-reward. Having a good risk-reward ratio will help you better plan your trades. For example, I like to have a risk-reward ratio of 1:2. That means for every dollar of risk, I’m looking to make at least $2. Now, I like to keep things in percentage terms, so I’m looking to make at least 100% on my trades, so I’m willing to risk around 50%.
- Entry and exit rules. Before getting into any trade, you should know where you would stop out, and take profits. For the most part, I like to use charts and my money pattern to let me know when to get in and out of a trade (I’ll show you how I use my charts shortly). Basically, you want to know your prices or signals of where you want to buy and sell shares or options.
For example, here’s a look at my current plan for the market.
Right now, I’m watching two levels in the SPDR S&P 500 ETF (SPY) – which traders use as a market barometer. The markets are right around the lower blue horizontal line ($289) and it’s below the green line – the 200-period simple moving average on the hourly chart.
Unless the market closes below the 200-hourly, which would be a bearish move… I’ll be on the sidelines until we see a clear direction. If the market does close below the green line, I’ll begin to start looking short.
Earlier, I sent out to Weekly Money Multiplier clients, “I really think today is a day to tread lightly and not get too involved. There is a lot of uncertainty in the markets right now (isn’t there always though?) and I am waiting on better setups before I get aggressive on trading again.”
Now, just because I’m not looking for new trades… that doesn’t mean I’m not generating 100% returns.
Case Study: TLT Trade Plan
For example, just under two weeks ago, I let Weekly Money Multiplier clients know about my moves in the iShares 20+ Treasury Bond ETF (TLT).
Now, my plan for this TLT trade was pretty simple. I went to my charts and was stalking TLT for about a week at the time. However, I noticed the ETF was bouncing off the lower-end of the Fibonacci retracement, as shown below.
If you don’t already know, TLT doesn’t move a whole lot… so it doesn’t take a whole lot to generate 100%+ winners in the name. Well, at the time, there was also a positive catalyst for TLT. The Federal Open Market Committee (FOMC) was meeting and commenting on rates and monetary policy.
So my thesis was TLT would bounce off the Fibonacci retracement level, and would run higher because the Fed was probably going to leave rates unchanged. In fact, the market was pricing in a potential rate cut (2.5% chance the FOMC would cut rates, 97.5% chance they would leave them unchanged). Well, if rates are left unchanged, chances are TLT catches a pop.
I’m going to stop out of my call options if TLT breaks below $122. My target will be at $124. I’m looking for 100%+ winners and a move to $124 will get me that percentage gain. I’m going to allocate no more than 5% of my account to the trade.
I also noticed the money pattern (blue line crossing above the red line)… Indicating TLT could start to run. Now, here’s a look at the hourly chart on TLT.
Pretty simple trading plan right?
Now, with the help of the market sell-off, TLT broke above my target at $124. You see, when stocks are crashing, the smart money rotates to bonds because they’re considered safe-haven assets.
(If you want to learn to trade volatile market, check out my webinar – in it I go over one pattern to profit from crashing stocks.)
“Fail to plan, you plan to fail.”
Trading plans are one thing you should always write up before you enter a trade. If you don’t plan all your trades, you end up trading on emotions… and one little sign of volatility could cause you to panic and get out of all your positions, even if there was no clear reason to.