Mike’s note: There’s another simple market concept that’s brought Larry a wealth of big trading opportunities over his 35-year career.

It’s something you might know of, but that you probably don’t know how to apply to everyday trading…

This concept will no doubt come into play during Larry’s Trade-a-Thon on December 11 (which you can sign up for with just one click right here). And in today’s issue, Larry will show you how to use it yourself…


One Market Behavior You Can Always Count On

By Larry Benedict, editor, The Opportunistic Trader

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…

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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.

There were several times this past year where we can see this dynamic – the most obvious being in April.

Stocks got overextended to the upside all throughout April. The index rose from 2870 to 2940 – almost a 2.5% gain for the month.

Investors chased this move all through the month. Stocks seemed to be going up with no end in sight. How could they let that opportunity go?

In conditions like this, 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.

And that’s just what happened at the end of April. The S&P 500 plunged almost 200 points, or about 6.5%, in just the next month. It wiped out all the gains from April, and then some.

And anyone chasing stocks throughout April got crushed…

What You Should Do Differently

I’ve been trading for a long time. So when I see situations like what I just described, I know the exact way to play it.

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 look at an example…

One of the winning trades I made in April was on the Volatility Index (VIX).

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
vice versa.)

In mid-April, the stock market was chugging along. Investors didn’t have a care in the world. It seemed that all the ugliness of the 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.

Regards,

Larry Benedict

P.S. I’ve been trading using this strategy, on all sorts of different markets, for over 35 years…

And now I want to share everything I’ve learned with you.

That’s why I recently filmed a 7-part documentary-style series that explores what I’ve done as a trader through my whole career… and what I’m doing now to turn that experience into something that can benefit you – and my community.

The second part released just this morning. Check it out – and sign up for my free Trade-a-Thon on December 11 – with one click right here.

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