There is a maxim heard from many successful long-term contrarian investors; I’m buying when there is blood in the streets. It’s actually a statement worth paying attention too. There are two items that come with it. First, being able to recognize when these moments occur and second, knowing how to trade it.
Notice in the first sentence I said “long-term” contrarian investors. We need to pay mind to this because there is a big difference between slowly building a large position when you see a fundamental change happen opposed to simply trying to take advantage of a short term trading opportunity. As traders, we are generally seeking to do the latter.
Let’s use the current market environment as an example. Oil and just about any oil related name has gotten beaten down recently. Now, we don’t need to get into the fundamental reasons why and what you or I may think OPEC will do in the future. As traders, it’s not our job to forecast out that far into the future, we’ll leave that for the long-term contrarian investor.
What we can do with a “blood in the streets” moment (many of the oil names qualify of late) is find profitable trading opportunities. Using oil and the oil names as an example, we see that crude oil has aggressively fallen over the past three months, thus pressuring stocks of everything from oil drillers to the equipment suppliers.
Then last week OPEC decided it wasn’t going to cut production, which was essentially gasoline on the fire to the existing burn down. These stocks are going down “because” of the decline in oil prices and “because” OPEC didn’t cut production. I quoted because, being theses are just merely the current catalysts for a move in the oil sector. As traders the reason really doesn’t matter. Understanding how stocks react and how we can trade them does.
So after an aggressive move lower and then a hard sell off based on the OPEC decision, what are we looking for as traders? Guesses? It’s a real simple answer – I’m not trying to trick you.
We are looking for reversal opportunities! (well, atleast I am) The preferred pattern is a U-turn reversal. This should be familiar to you if you have completed any of the education from tradingeducationblogs.
The jist of it is finding quality names that have had a string of down days and have produced the required reversal candle to trigger a long entry. These setups, especially the real good ones, show up more often following some volatility. The recent decline in oil and pressure on the oil names gave that to us.
To learn all the details and requirements of the U-turn trading pattern along with how to setup a complete trading plan check out – Active Trading Blueprint. Use the following link: http://tradingeducationblogs.com/active-trading-blueprint-course/
Always remember, “Victory Loves Preparation”