In this article:

• Understand risks for losses and wins
• Learning from selloffs and panic
• Brewing battle between central banks

An obvious statement of fact, but the stock market has been challenging to trade this year.

Traders have losses, and they have wins.

Those who follow the Simpler Trading style of developing a trading plan – and then following that plan – know that one of the important aspects is to review the wins… and losses.

Learning from past mistakes and successes helps manage future risk while adjusting the trading plan to what the market gives.

(Check out the free video, above, for insight into trading this changing market.)

Traders take losses, produce gains

Last month was a strong example of the trading environment in the current stock market.

All traders know there are risks involved, but the goal is always to have more wins than losses at the end of the day, week, month, and year. Sometimes traders will suffer a string of losses before gaining a string of wins that offset the losses over a time period.

Simpler’s traders faced continued challenges in May when working to target risk vs. reward opportunities.

There was a sharp drop in the overall market in May with the S&P 500 (SPX) hitting a new low of 3,810. This was in contrast to the start of the year when the SPX rose to 4,818 (The SPX closed at 3,759.84 on Wednesday).

Sharp intraday swings across the market made predicting potential trades difficult. Traders adapted with fewer trades in play, limiting risk per trade, and using shorter time frames (as short as the five-minute chart). 

Traders suffered losses in May in an erratic market. Any losing trade is tough, so the focus is on what can be learned from a loss.

Limiting risk – less capital exposed – was identified as important to handle volatility. Risking $150 to $500, as an example, and targeting a higher reward vs. risk was common. Failed trades in this range equated to limited losses in the trading account.

Traders also had trades at higher exposure if their account allowed for this risk level.

Here is a trade example for a loss: Entry – May 4: BOT +1 VERTICAL TSLA 100 (Weeklys) 6 MAY 22 950/1000 CALL @13.07; Exit – May 5

The plan was for a modest retracement to exit Tesla (TSLA), but it didn’t happen. Ten-year interest rates exploded and reached new highs as the Volatility Index (VIX) pushed above 30.

Market action had turned “crashworthy” and the trade was exited for a loss: SOLD -1 VERTICAL TSLA 100 (Weeklys) 6 MAY 22 950/1000 CALL @1.49

Each trade can deliver insight into how to work the market going forward despite a tough market that didn’t reveal clear patterns or levels that really worked well.

To get wins, traders maintained the risk levels – $150 to $500 on average – and targeted profit of $1,000 to $1,500. Some traders took profits before the maximum level was met, while others held through the setup to maximize potential.

A trade example for a daily win was buying American Electric Power Co., Inc. (AEP) for a $100 call at $3.00 and then selling two hours later at $3.80. This produced a winning trade with limited risk on a shorter time frame.

These are just a sample of the losses and wins from Simpler’s traders.

The key to trading well in May or current conditions is the timing of the trade, ticker levels, and monitoring technical signals. These fundamental elements of any trade continue to help keep Simpler’s traders overall in the green by using sound trading ideas.

Learn ‘how traders trade’ this wild market

This market can leave traders questioning whether they want to start trading or even continue trading.

Sometimes you need a little insight into trading without a long-term commitment.

If you are curious to see “how traders trade,” then come join us for FREE. Simpler Trading has opened the Simpler Free Trading Room, where traders can take a peek behind the veil to better understand what it’s like to trade with professional traders.

Sign up today and get access to our live online chat room, recorded live sessions, and free classes that might just open new doors along this trading journey.

Traders learn from selloffs and panic

What are Simpler’s traders focused on in the near term?

They are learning from recent selloffs and market participant panic.

Last week the market gapped down heavily and quickly for the worst week since the start of the pandemic in 2020. The S&P 500 pushed further into bear market territory, losing 5.8%. The Nasdaq also lost last week down 4.8%, as did the Dow, losing 4.8%.

The fast move down was one of the biggest percentage drops in stock market history. This is not a “normal” drop in the market. This was panic from retail traders to large institutional funds reducing market exposure very quickly with thoughts of market capitulation on the horizon.

The flip side to this mad dash to get out of the market is that it heralds a correction that is expected to happen before the market sets off on a sustained uptrend. The process could take months or more, so the market has entered a new phase.

The market has changed, and the “new normal” is a trading market – buy support and sell resistance.

Battle of the banks is brewing

Tightening financial conditions are here for a while, and stocks are not expected to retake highs in the continued fiscal tightening environment in the U.S. stock market.

Traders are watching this dynamic and the contrast in fiscal conditions across the world where the economic and financial environment is very different. As an example, Japan is moving opposite the U.S. market by easing its fiscal tightening.

Central banks in the U.S. and Japan – the dollar vs. the yen – are on opposite fiscal tracks.

While the U.S. (and Europe) raises interest rates and tightens monetary policy, the Japanese central bank appears to be turning on the spigot and printing even more currency (quantitative easing). This can create almost a battle of central banks that tends to break down U.S. trading portfolio models built over the last 12 years of zero interest rate policy in the U.S. 

For traders not engaged in foreign exchange (Forex) trading, this contrast in monetary policy is worth watching as an indicator of how U.S. markets will move. In Forex trading, as dollar/yen Forex rises it tends to align with U.S. stocks moving higher.

This contrast in banks is not an “exact” signal of market movement, but it can be another helpful stock chart indicator in a market that is not clearly revealing direction.

Why trade alone against market volatility?

Trading requires learning skills and diligent research, and at Simpler Trading we understand the time commitment to trade well.

We started the Simpler Options online trading chat room years ago to help traders find out more about who we are in the world of trading.

Try this online training and trading community today and get access to pro-level traders with decades of real-time market experience.

Prepare for market volatility, more lows ahead

This market could arguably “quiet down” somewhat in the near term with the caveat that it could also gap down further at any moment.

The market is not likely to fire straight up or down and hold that move for an extended time. The heavy sell off last week was followed by a rally higher to start this week. This recovery response – whether up or down – is typical in market history.

Key market signals to watch going forward include the VIX, rising interest rates, and market internals.

Traders who want to trade this volatility should have a plan in place and be prepared to stay nimble.