Today I want to share with you the “secret” to my trading success.
It’s not some mysterious algorithm or a weird indicator you’ve never heard of…
No… The thing that made me a successful trader is actually quite simple. And it’s something I have no doubt you’ve heard many times before…
What goes up, must come down…
Reverting to the Mean
In the trading world, we have a more technical term for that phrase: mean reversion. It’s when an asset gets so overextended, either up or down, that it quickly returns to a more neutral place.
In conditions like these, people lose their sense. They feel the FOMO (fear of missing out). And they throw all principles out the window.
You don’t need me to tell you that that’s a huge mistake. But it’s amazing how quickly people forget this when there’s a golden carrot dangling in front of their face.
But they’ll never catch that carrot. Unfortunately, in most cases, it leads them off a cliff.
What You Should Do Differently
When stocks get bid up to unreasonable levels, the right thing to do is to take the opposite side of the trade.
Now, taking the other side of a popular trade isn’t easy. And you might go through a few painful days or weeks before you start to see any positive results. But once you do, it
can be well worth the time it takes for your trade to play out.
Let’s look at an example from one of my previous winning trades on the Volatility Index (VIX) back in April 2019…
If you’re not aware, the VIX is a measure of expected volatility in the markets over the next 30 days. It’s often referred to as the investor’s “fear gauge.”
And the way I made the trade was by buying UVXY – a 3x leveraged fund for the Volatility Index (VIX). (That means that as volatility rises, UVXY rises three times as much, and
In mid-April 2019, the stock market was chugging along. Investors didn’t have a care in the world. It seemed that all the ugliness of the previous December selloff was behind us, and we were on our way to new highs.
But the market hardly ever makes it that easy. Where most investors were complacent, I was concerned. I knew that the April rally was far too much to be real, and a surge in volatility was around the corner.
So, about halfway through April, I made a bet that UVXY would rise as volatility returned to the markets.
As you can imagine, the next couple weeks were painful for that trade… When you go against the crowd, it’s not uncommon to be a bit early.
But what happened after speaks for itself… Volatility spiked as the market fell all throughout May, and shares of UVXY rose three times as much.
Here’s my point…
The most dangerous thing a trader can do is simply follow the herd. You should always look to take the other side of an overly popular trade.
Look for bets on an overextended condition reverting to its mean, and get ready to profit while everyone else panics.
Editor, Trading With Larry Benedict
P.S. Taking the popular trade usually isn’t the best route to success…
Fortunately, a little-known market phenomenon is fast approaching – where over $1 trillion is at stake. Most investors have no idea what it is, let alone how to trade it… but it’s typically extremely profitable with the right strategy.
So next Wednesday, September 8 at 8 p.m., I’ll be hosting a free special briefing letting you know just what the event is, and I’ll even give away the best ticker you need to trade it. It’s entirely free, all you need to do is reserve your spot right here.