I’m sure you saw the headlines all weekend. ASX down! Billions wiped!
Hey, not so fast.
Let me tell you how things looked a little closer to the front line…
Not ALL stocks got whacked on Friday. I can tell you some went up! Some held steady. Others, obviously, fell.
The mainstream media always makes out volatility, like we saw on Friday, to be this horrible thing that should be avoided at all costs.
I must upbraid them for their lack of imagination.
Volatility can be put to very good use.
Let me show you a couple of ways…
Two ways to turn a down day to an advantage
I’ve mentioned this before but it bears repeating. How your stocks hold up under intense pressure is a very good test of their strength in general.
None of the stocks I’m currently in gave me any cause for concern on Friday.
I’ve made a point to avoid the ‘hot’ sectors lately like the buy now, pay later names for this reason.
These have a lot of momentum traders and retail investor participation.
When the big waves hit, there’s bound to be some sharp drops.
But also of high interest on days like Friday is which stocks rise.
Take that morning for example: I had my latest buy alert ready to fire for my subscribers.
The selling pressure in the morning was giving us a better price! Beauty!
If there’s a stock you really like, then don’t fear volatility, it might give you a better entry price.
There are more ways to take advantage of big ‘down’ days like Friday.
Let me tell you about another one…
I used to work with a man renowned for his knowledge of WD Gann. He’d made a living as a trader for many years.
Often, we would spend an hour or more reviewing potential trades.
He never really cared for the stock or the outlook, but he often latched on to the same thing.
It was this: ‘That trade gives us a very good place to put a stop-loss.’
You see…for him it was all about risk management. It was worrying about being ‘right’ on the trade but knowing when we might be wrong.
How does this relate to Friday’s action?
A lot of stocks fell down hard on the day, but closed higher.
I’ll give you an example…
Source: Callum Newman
You can see quite clearly that this stock attracted strong buying on Friday even though the wider market was selling down.
We can’t know the future. But my old mentor would say you could enter this stock with your stop-loss below this last bar.
If the stock keeps rising, you go with it.
And if the stock breaks below Friday’s low, then perhaps the stock isn’t as strong as we first surmised. You can cut off the trade with a small loss.
Obviously I’m talking about a very short-term approach to what’s going on here.
But it’s just another example of how volatility and ‘down’ days can be put to use.
Conversely, if you have a stock and it doesn’t receive strong bidding, then you have to wonder if it’s a stock worth having.
Again, if you’re Warren Buffett and you’ve owned Coca-Cola for 30 years, then a day like Friday is meaningless.
It all gets back to whether you’re ‘trading’ or ‘investing’. That distinction can be murky at times.
The approach I take in my service Catalyst Trader is short term. So I do need to be attentive to signals like this.
And your strategy for each stock is important too. That buy alert I sent on Friday is for an explorer/developer in the mining space.
The ‘economy’ or the ‘market’ is less important than what is in the ground in the leases they hold.
Best to focus on that aspect.
So…don’t fear volatility…put it to use!
Editor, Profit Watch
PS: Profit Watch is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.