Page 42 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

see items ranked 3 and 10, when the DJIA actually rose by 12 percent and 9 percent,
respectively, around the same time period as the crash.
The market was extremely volatile during the 1929 crash, and it had huge swings to the
downside blended in with huge swings to the upside. As always, the market never
moves in a perfectly straight line. It has corrections along the way until it finds its
direction.

If you were trading in 1929 and could read the market correctly, you would have been
able to make an enormous amount of money because of the volatility. Huge swings in
price activity to the downside and then to the upside and then to the downside again
offer talented traders a unique opportunity to profit.
Unlike buy-and-hold investors, traders benefit from volatility in the market.

Buy-and-hold investors, in contrast, tend to buy during the euphoria phase at the top of
the market and sell during the panic phase at the bottom of a market cycle. This is
precisely the wrong thing to do. When you enter and exit the market based on group
psychology, there is a high probability that you will be entering the market when it is at
the top and exiting the market when it is at the bottom.
Table 6.5 shows the top 10 list of largest intraday point swings in the DJIA. You can see
that nine of the top 10 ranking intraday swings took place in 2008. So, if you knew how
to read the markets correctly, this highly volatile period would be an ideal opportunity to
trade and generate profit.
One more note for you to think about regarding gaps.
There will be times when a gap up or a gap down will blast right through your carefully
set stop-loss exit. This type of event will be out of your control and you will lose more
than your planned risk amount. This is something to be cognizant of so that you can be
quick on your feet and not have your trading psychology thrown off. Keep a cool head in
the event of a gap that goes against you.

And, in the reverse situation, when you have a gap that goes in your favor, my favorite
approach is to scale out a portion of my position when there is a hyperbolic move in the
direction of my trade. That locks in profit and reduces anxiety while in the trade.

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