Today, I’m going to show you what might be my most profitable trading strategy.
If you’re a longtime reader of Market Minute, you’ve seen me use this strategy plenty of times before. If not, you might be a little skeptical at first.
But I can assure you… By using it, you’ll be able to double your money over and over. Even in a market downturn, while most other investors are ripping their hair out.
I’m talking about technical analysis.
Now, if you’re new to trading, technical analysis might seem a bit “scientific”… even intimidating.
But really, technical analysis is much more of an art than a science… That is, if you try to force it to conform to strict rules and formulas, it’s likely to be wrong almost every time.
Try thinking of it the way I do… A chart of a stock (or index) is simply an emotional picture of the stock at a specific moment in time.
Stock charts tell me how traders/investors are responding emotionally at any given point in time. Human emotions are remarkably consistent. We tend to respond the same way, over and over again, to the same circumstances.
So, if I look at a chart, find a time where the conditions were similar to where they are today, and note how the chart behaved afterwards… it can provide strong clues for what to expect in the future.
But technical analysis is emotional. It evolves over time. So, conditions that used to provide a catalyst for a big move may need to get more extreme to cause a similar movement the next time.
Think about it this way…
When I first got married, I’d often come home from work, take off my socks, and drop them on the floor next to the couch in the living room. My wife would come home, see my socks on the floor, and get all ticked off about it. In other words, she’d have an emotional reaction to her husband leaving his socks in the middle of the living room floor. This happened over and over again.
Now, think of how this reaction would look on a typical stock chart…
It’d start with a line trending sideways – my wife’s emotions before she knew all about my sock habit. You’d see the line climb as my wife got more and more frustrated…
Eventually, though, my wife got a little better about dealing with her slob of a husband, and I got a little better about not leaving my socks next to the couch. Leaving my socks on the floor no longer elicited the same reaction from my wife.
She still had the same emotions. But she had adapted. She had evolved. She suppressed her emotions and would need a bigger catalyst before getting upset with me again…
Over on the chart, things have calmed down. The line on the chart is headed sideways, with little action in either direction. There’s less volatility.
But in the background, energy is building. Those dirty socks had to be going somewhere… and it wasn’t the hamper.
Remember, human emotions don’t change. They’re remarkably consistent. But, emotions do evolve and sometimes it takes a bigger catalyst to elicit the same response.
That catalyst was provided when my wife was vacuuming one day and moved the sofa in order to vacuum the carpet beneath it. She found about a dozen pairs of my dirty socks tucked beneath the couch.
Boom!
You can guess what happened next on the chart…
Here’s my point…
A stock chart is simply the emotional representation of traders’/investors’ reactions to the stock. If we can spot previous patterns on the chart that look similar to how that chart looks today, then we can see how those previous patterns played out and then trade the stock in anticipation of a similar reaction.
A lot of my trading strategy revolves around finding emotionally overbought/oversold conditions that are ready to reverse. Technical analysis helps me identify conditions where investors’ emotions have gotten extreme, and where I can see how stocks have reacted to similar conditions in the past.
This is exactly what traders should be doing in 2019. In the volatile market we’re seeing today, any extreme condition is likely to reverse. Likewise, any overly calm condition is likely to explode with energy in due time.
And here’s why: Periods of low volatility are always followed by periods of high volatility – and vice versa.
Consider this… In 2017, stocks just kept marching higher. Overbought conditions just got more overbought. There was nothing for traders to do. No volatility.
At the beginning of 2018, the stock market had just come off the least volatile period of the entire bull market. So, investors who figured stocks would go up forever were greeted with massive drops in February, October, and December.
2019 hasn’t been quite as volatile so far. After all, the market’s recovered around 20% since the start of the year. That’s a remarkable gain.
But as I showed today… that can only last for so long. I think we’re in for a crazy second half.
Most long-term investors won’t know what to do. They should probably take their gains so far this year and take a nice vacation.
But this is exactly the environment where traders can thrive… and earn much more than 20%.
Especially those that pay attention to technical analysis. For them, there are opportunities to profit every single trading day… no matter what the market does.
Best regards and good trading,
Jeff Clark
P.S. This strategy often comes into play in my new advisory, Jeff Clark Trader.
But, the big thing most new option traders get hung up on is picking a stock to trade out of the countless ones available on the market.
In Jeff Clark Trader, I’ve done the hard work for you… We trade only three stocks, over and over again, with the goal of helping you fund a comfortable retirement.
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