Trade The Journey

Trade The Journey

Trade Review: Week of November 5th

Trade Asset: SPY (S&P 500 ETF)

Trade Strategy: Vertical Call

Trade Leg 1: Buy $412 call

Trade Leg 2: Sell $416 call

Premium Paid: $3.00

Profit/Loss: $1.70

Hypothesis: Markets are oversold evidenced by the RSI

Hypothesis Explained:

Nearly of the major indices fell in unison as earnings reports from the Magnificent Seven disappointed, geopolitical risks rose, and treasury yields rose to multi-year highs. The indices had a tumultuous October and the market looked oversold. The RSI for nearly all the indices hovered near the oversold levels if the indices didn’t already break through the level. It was a somewhat easy call to make, it was just a matter of when the markets would show some recovery.

The market had enough catalyst this past week to push the market up or force it deeper into oversold territory. Volatility started to recede, and I thought it might be a good time to place a bullish bet on the S&P 500. Volatility started to decline from its more recent trip above twenty and yields also began to pull back from its most recent high.

Trade Management

Luckily, the markets weren’t moving too fast as they were awaiting the Fed rate decision and preceding press conference. Fortunately, I was out of the market before the rate decision was announced as I thought the uncertainty involved in managing the trade through the decision wasn’t needed to make a profit. This trade faced some challenges at the onset but began to show profit rather quickly.

The trade was opened as SPY bounced around the $412 level after hitting a flash low of $408 earlier in the day. The good news seemed to be that SPY formed a level of support and didn’t venture below this level. There wasn’t much action during the day, but SPY rallied into the close reaching a level of $416. The next day SPY declined to $415, and I closed close to this level.

It turns out that the SPY didn’t finish rallying as it reached the $436 level by the end of the week. I missed out on a significant profit but most of the reaction by market participants was due to the somewhat dovish press conference given by Fed Chairman Powell. Even if Powell didn’t intend to cause a rally, his language during the press conference provided more evidence that the Fed may be done raising rates.

Trade Review

This trade went well and I earned a 50% return on this trade. I could look back and say I should have remained in the trade or widened the spread but the return I earned was decent. There’s a fine line between greed and healthy return, and I’ve crossed the line many times. After you close the trade, sometimes the true trend of the market emerges because you aren’t emotionally involved in the asset’s performance. The trick is to remain emotionally uninvolved while you’re in the trade, which is what Mark Douglas spoke of in his book, Trading in the Zone.

Trading with a carefree state of mind according to Mark Douglas is the mind state the top traders have. My initial goal is to master the art of cutting my losses and after mastering this aspect of trading, I plan on focusing on honing the skill of letting your profits run. Trading is a series of stages that few have the discipline of mastering as the years change.

I can say with confidence that I am approaching the mindset of an experienced trader and slowly working my way to the stage of master trader. The great thing about this site is that you can see the stages I’ve traveled through.

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