Handling Pressure

Stock market "experts" are a-dime-a-dozen, and a good many of them don't even trade and barely invest. Chances are, you know exactly the type.

Hindsight Millionaires is what I like to call them, and the world is full of them. They're way too eager to share what they would have done, or what you SHOULD have done in order to make a killing in the market.

"You could have made a fortune today if you had just gone short on the open and walked away until the close," some nudnik once told me. Ya think? Thanks pal, so how did you do going short on the open and walking away? Crickets.

But there is something to be said for being able to examine stock charts and recognize the formations that could have tipped you off to why the market made the moves that it did. While hindsight won't make you a millionaire, it can add clarity to the markets, which will help you in planning trading strategies that lead to future profits.

No trader is infallible and we're each a bit weaker in certain aspects of trading than others. For example, I'm not as adept at selling rallies once a top has been established, as I am at buying dips after a bottom is in place. For me, it's like trying to throw left-handed. Sure, I can do it, but it just doesn't come naturally and I'm not as effective at it. Or maybe it's just my eternal optimism that has conditioned me to gravitate to the long side rather than the short! But what it comes down to is that I simply don't read charts as well on the way down as I do on the way up, which is a deficiency that's important to overcome in order to maximize performance from each side of the market. Compounding this shortcoming (no pun intended) is that I become too set on buying dips on the way down, mainly for the lack of being short. This can be incredibly dangerous when downward momentum causes the market to crater through support, and I'm left to wonder as I sift through my losses, not only why did I try to get long?, but also why didn't I try to get short? 

In all cases, a quick chart study after the fact will reveal the reasons why the market behaved in the ways that it did as well as provide valuable perspective to grow on.

The 5-Minute intraday chart for the S&P 500 ETF SPY shows us a chart with clear topping action as well as the various rallies that could have been sold before it finally broke to the downside.


The top at $462.07 in SPY at the end of the session on March 29th, 2022 is clear to see, and it even strung along there in the aftermarket/premarket session before cracking to the down side the very next day. The aggressive move down without any real rally to speak of, save for a brief morning pop, tipped off the idea that the trend in the market may have turned from bullish to bearish. There was an opportunity to get short after the morning flurry, which was only confirmed the day after that.

SPY rallied twice modestly during the day on March 31st, indicated by Resistance A and Resistance B in the chart above. Each time, you would have had a winner selling the rally. SPY then formed up for a while at $456 and then attempted a rally back up to Resistance B before tanking down to $452 on the close. I find it difficult sometimes to pick up the downward momentum when the rallies won't hold and as a result I'll try and buy dips. However, when the market direction is decidedly going one way or the other, you need to find a way to get on the right side of the market or else you risk getting swallowed up going against the trend as the move gains momentum. In that case, if you went to buy $456 the second time down, rather than sell Resistance B at around $457.30 the second time up, you would have been calamitously disappointed.

Knowing when it makes more sense to sell the rally or buy the dip is literally the difference between winning trades and losing trades. The key to understanding this difference is knowing how to effectively trade from either side of the market. If you're predisposed to better read charts from one way over the other, you can inverse the chart in your head so that the chart looks like a mirror image of the actual chart.


Above is a flipped over version of the SPY chart in which top is the bottom and the rallies are dips. If you're a more willing buyer than you are a seller, you can train yourself to visualize the chart in a way such as this in order to trade more confidently. You may also look into an inverse ETF, which is also called a Bear or Short ETF that trades opposite the regular ETF.


The 5-minute intraday chart above is for the SDS, which is an inverse S&P ETF that trades pretty much exactly the opposite of the SPY; and at less than 1/10 the price! Buying an inverse ETF for an index or sector tracking ETF can replace the short trade that you may be less adept at making, even if only until you get more comfortable trading from both sides of the market. Keep in mind that inverses for regular equities are not available. However, you can find an inverse ETF that tracks the sector that a stock you're trading is a part of; for example an inverse financial ETF such as FAZ if you'd normally trade one of the big investment banks.

The purpose here was not to suggest that trading from the short side is inherently more difficult than trading from the long side, or that all traders face the same challenges in the same ways. The point is that we each excel and struggle in ways that are personal and unique and that we must develop methods to compensate for our weaknesses and eventually turn them into strengths. Hopefully sharing some insight into something that I struggle with as a trader and the ways in which I respond to that struggle will help you to identify your own struggles and come up with your own methods of managing them. The goal will then be to get to the point where you can recognize the correct trades in real time, regardless of market conditions, instead of studying charts the following morning only to decry what might have been.

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