Yesterday, I talked about how the market is entering the “danger zone…”
In other words, a perfect storm of technical and fundamental indicators is leading me to believe that the market is headed lower soon.
But attempting to predict the direction of the markets is useless if you don’t know exactly how to approach it…
When stocks start getting bearish, there are specific steps I take to weaponize the new price action.
These steps come from experience. After trading through so many different market environments, I try to be prepared for every possible outcome.
If you don’t consider taking these steps in your own trading, you could miss a massive opportunity. Or worse, you could be forced to eat an avoidable loss.
But by simply these suggestions to heart, you can set yourself up to trade the “danger zone” like a pro.
Keep reading and I’ll show you how…
Step #1: Keep a Big-Picture View
Even when you’re trying to find sector-specific setups, you must keep tabs on what’s going on with the major indexes.
In a raging bull market, you don’t have to worry about this as much.
But in a near-term downtrend — like the one we’re in the middle of — you’ve gotta keep a pulse on the overall markets.
Having a big-picture view doesn’t need to be complicated. But what exactly do I mean by the big picture?
Generally, I’m talking about the broader price action in the overall markets.
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If you pay attention, I always start our weekly webinars by looking at the S&P 500 ETF Trust (NYSEARCA: SPY).
I do this for a very specific reason … looking at the SPY is one of the best ways to gauge the sentiment of the overall markets.
If the SPY — which tracks the 500 biggest companies in the U.S. — is leaning a certain way, there’s a much better chance the one individual stock you’re looking at will begin leaning that way as well.
Additionally, it’s important to pay attention to how the Federal Reserve is moving interest rates in this current market, as few factors have had a greater effect on stocks over the past year.
Step #2: Watch for Predictable Trading Patterns
A huge part of my trading comes down to identifying key price levels and pulling the trigger when stocks break them in either direction.
And to find key price levels, you’ve gotta look at daily and weekly charts. This is where long-term support and resistance are clearly visible.
With a bit of experience, it’s impossible not to see these levels. They stick out like a sore thumb. (Example: $400 on SPY!)
Aside from identifying key levels, I’ve been focusing on finding first green day and first red day setups…
The market has provided a lot of up-and-down price action recently, which naturally leads to first red (and green) days.
These Tim Sykes patterns are some of my favorites to trade because of how predictable they are.
If I see a stock putting in its first green day, I know there’s a high probability that the momentum will continue…
This is exactly how I nailed my Microsoft Corp. (NASDAQ: MSFT) calls trade last week!
And the opposite goes for stocks putting in their first red day, which often leads to further downside in the near term.
That said, finding juicy setups will be meaningless if you don’t manage your trades correctly…
Step #3: Book Profits Quickly
If you’re lucky and disciplined enough to find yourself in a trade like my BITO play, where your contracts are surging, it’s time to immediately identify another price target — the level where you’ll book profits.
You’ve heard me say that you should always cut losses quickly. This is always true.
But the concept works on the other side of the coin as well — when booking profits quickly.
If a trade’s going well, greed is your worst enemy. You’ve gotta fight the urge to hold out for unrealistic price targets.
Pick a nearby round number. When the share price nears this level, sell your contracts no matter what.
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When traders come to options from the world of common shares, the volatility can be overwhelming.
Setting a hard profit-taking target can help this. And if you play it right, you can potentially make some killer trades.
Again, look at my MSFT trade from last week…
I bought contracts expiring the following day because I knew I wanted to get out of the trade quickly.
Had I held an extra day, I would’ve not only lost all of my profits … but also taken a stinging loss.
By selling the same day I bought my contracts, I locked up a solid win and avoided a trading disaster.
So, take it from me. In this market, book your profits quickly!
Final Thoughts
Winning in a losing market is what separates sharply-skilled traders from the 90% of traders who lose money.
There are diamonds in the rough out there, five-star setups just waiting to be discovered…
It’s not easy. But by following the steps above and applying them to my trading in a focused way, you’ll be giving yourself every opportunity to succeed.
