Top Four Ways To Lose Money In An Unexpected Stock Market Rally When It's Clear As Day

The S&P 500 Index SPDR S&P 500 ETF Trust SPY has rallied 298 points off the lows of October 27th, in a virtually unexpected rally very much mirroring stock market lows back in October 2022. In any trend, traders should be able to adapt to the conditions and should make a ton of money, right? Well, why is it that most don't?

Here are top four ways to lose money in a rally based on personal experience and surveying many full-time traders over the years:

Unbelief - In any market rally either for a few days or few weeks, traders commonly think to themselves that this isn't really happening, or the movement is a "bull trap". At some point, they may be right when the reversal comes, but in the mean time traders sit on the sidelines not wanting to chase the price. Reasons for unbelief could be macro conditions, bearish ideologies of conditions of world events, reading too many "doom and gloom" talking heads on TV, and others. Whatever reasons for unbelief traders have need to be silenced during navigating price action. Follow the price, not individual biases.

Cherry Top Picking - There have been some short term reversals in this rally but they were all just that, very short. I often find traders say "I'm accumulating puts", or "buying hedges here", only to be stopped out a day later. Below is a 30 minute time frame of $SPY since October 27th. We can see every pop in price to resistance was met with some form of "basing" price action before the next leg up. One can almost certainly be bearish after the Powell speech on Thursday but price rallied again on Friday. In my opinion at this time, only if we break 433, does this trend come to a correction stage thus becomes confirmation of going short. Traders who call tops rarely make money.

Playing Short Term Options - One of the best ways to make money during an impulse rally as we've witnessed over last 9 trading days, is buying a minimum of 7 days out Calls for intraday scalping yet also acquiring some (based on your risk appetite) monthly expirations. For example during the morning on Friday, placed orders BTO-Calls, for 11/17 and at same time BTO-Calls for 12/01 and 12/08. I'm taking advantage of the higher thetas during an intraday trend while also maximizing gains using monthly calls, as long as the intraday trend persists and overall 30min / 1 hour trend stays in tact. Based on the above chart, the trend has not showing any significant reversals.

I bought the when $SPY was around 436 Friday morning and watched the trend to 440 for 75%, 40% and 30% returns. Of course you want to secure profits on shorter term calls, or trim down contracts. But I retain my December calls. In a strong trend day, this is one of my best ways to exercise patience. On the other hand, many traders open same day options or 1-2 days out. Personally, this is a very easy way to get stopped out on temporary minute to minute reversals.

Lastly, if you're up 20%+ on an option swing/scalp, DO NOT average up. It's a mistake to do so. This is why on a trend day I prefer to have multiple option positions with multiple expirations.

The Laws of Attraction on Moving Averages - My intraday minute charts contains multiple EMA's vs. on my daily charts I use just a few Simple Moving Averages: 20D, 50D, 100D, 200D. This is the chart I try to spot trends. Other form of my daily charts I have trendlines, and shorter moving averages such as 5D, 9/15D etc. These are great to watch for rejections on shorter time frames. Our target for this week on $SPY was 439 based on the 100D, since we closed above the 50D last Friday's gap up. And we see that that target was acquired on Friday. When prices move above a short term average, such as 50D, you're watching to see if market participants are respecting that Moving Average. First thing on Monday morning, prices pulled back to the 50D and continued upwards throughout the week and even on the dip on Thursday respected the 50D. On Friday, that's when we broke the 100D.

Let me be clear, I'm not saying prices do not come back down to test and or break moving averages, on a reversal, it most likely will but that's outside the scope of this article. My point is if you know your moving averages and price attraction to them, on larger time frame charts, you can methodically make money in any stock market rally!

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