With today’s volatile markets, it’s hard deciding what you should do.
If you sit on the sidelines, you could miss out on some good opportunities. But if you jump into the wrong trade, you could easily tear a big hole in your account.
However, the key is to focus on each potential trade in isolation… and avoid getting caught up in your emotions.
That means we only enter trades with strong technical setups.
And just as importantly, we take our profits when we see them. Because what might start out as a profitable trade can quickly turn into a loser.
Today, I’m going to show how I used this approach with my options advisory, The Opportunistic Trader, to generate an average return of 83% on Roblox (RBLX) in just a few days.
To begin, let’s look at RBLX’s chart…
You can see RBLX is in a downtrend.
The 50-day moving average (MA – blue line) trended down all year. Plus, the 10-day MA (red line) has been tracking below it (a bearish signal).
The Relative Strength Index (RSI) has also shown bearish sentiment…
Right from late 2021 until recently, the RSI was tracking in the lower half of its range (below the green line). This is a common pattern when a stock or index is trending lower.
However, the chart also shows several countertrends against the overall downtrend. And it’s these countermoves that often provide a strong setup for a long trade.
Throughout this year, RBLX’s share price bounced each time the RSI formed a ‘V’ (red circles) out of oversold territory (lower grey dashed line).
Take another look…
So when a similar pattern emerged in May, we readied ourselves for a trade.
As the RSI formed a ‘V’ and began rallying higher from oversold territory, we entered a long RBLX trade on May 11 by buying a call option (which typically increases when a stock price rises.)
After RBLX rallied strongly the next day, we sold out half of our position (Exit 1) for a near 52% gain.
Then, when RBLX rallied even higher on May 13, we sold out the remaining half of our position (Exit 2) for a 114% profit.
That made for a blended gain of 83% within just a couple of days.
As always, I want to be clear that we generated this return using options. If we had bought the stock instead, our returns would have been far lower.
However, this scenario highlights the importance of using a strong trade setup and of taking our profits when we see them – to make money out of these volatile markets.
As I wrote in our Apple (AAPL) trade analysis, we need to remember that we’re not hunting down huge counter-swing trades. Nor are we trying to work out where a stock is going to be weeks or months from now.
Instead, we aim to find stocks that have run too far in one direction and profit whenever they revert to their mean.
Editor, Trading With Larry Benedict
How will you apply these two concepts to your future trades?
Let us know at [email protected].