The enormous shop had rows and rows of shoes, all of which were decorated with bling.
When faced with that many choices of glittery pumps all calling your name, it becomes daunting to select.
In those situations, it may be best to either
- Buy several pairs.
- Buy nothing and do some reconnaissance work with the intention of coming back another time.
Such feels like the case with the market right now.
With so many stocks climbing from their bases or extending their momentous gains thereby looking delightfully blingy, how does a trader make a sound choice?
Is it best to just buy several instruments and hope for the best?
Should (assuming traders already own several instruments) do nothing other than recon and come back to buy another time?
When we enter a trade, we like to use at least a 2:1 ratio of risk to reward.
That implies that we have a good reason to enter the trade to begin with.
It means that we think the instrument has enough momentum to move higher (or lower if going short).
We risk about 1-2 times an instrument’s average daily range, because we think the instrument can go up at least 2-4 times its average daily range.
In the current market, picking instruments that have that level of potential is not nearly as easy as picking out fun shoes.
However, the analogy is that when the market offers this much bling, one must have a methodology if trading for a longer timeframe than just for the day or overnight.
Using the small caps (Russell 2000 IWM) as an example, let’s say you decided to buy on the opening gap up higher.
Theoretically, you paid about 159. The average daily range of IWM is 1.72.
If you risked about $3.00 or 2 times the range, you are stopped out under 156.
You are banking on IWM making at least $6.00-$9.00 on the trade or a move to 164-168.
That’s possible for sure.
The bigger point is, this is exactly the dialogue a trader needs before making a decision.
I can buy 5 pairs of shoes and return them.
With trading though, returns can be costly.
Please consider the aforementioned advice as a guideline and not necessarily a warning that buying up here is a mistake.
With that said, in spite of new all-time highs in the Semiconductors SMH, the rest of the Modern Family still has a long way to go.
S&P 500 (SPY) 306 support. All-time high 308.
Russell 2000 (IWM) 155-156 Key support 158 pivotal 160 resistance.
Dow (DIA) Made a new all-time high at 275.05
Nasdaq (QQQ) All-time highs at 200.53. 198.20 support.
KRE (Regional Banks) 55.74 July high now pivotal support 56.75 next resistance
SMH (Semiconductors) 133.08 new all-time high and done with a breakaway gap. Must hold 130
IYT (Transportation) 195 finally cleared, now must hold. 199.23 was the September high, which I still find sobering in comparison to the SMH, SPY or QQQs.
IBB (Biotechnology) 110.93 the July high which this could not get to. with 107 nearest support
XRT (Retail) 44 now the pivotal support.