This week as SPX has pulled back about 5%, I've talked with several traders who are bordering on frantic following an impressive bull run this year. As we often emphasize at Good Kids Trading (GKT), allowing fear and emotions to drive your trading decisions can set you up for losses. "Should I just sell everything?" or "I heard people saying we have a huge crash coming." These are real questions I've been asked. No one really knows what's going to happen, but I do know trading with fear and emotions is not the way to handle pullbacks like we're seeing this week. So lets talk through the GKT way of trading what the market gives us.
Stocks don't go straight up. When they soar unchecked, its a signal to consider selling. GKT frequently advocates for a contrarian viewpoint. When most are selling out of fear, we see this as a buying opportunity, expecting the market to rebound. When everyone is overly optimistic we consider selling or even shorting stocks. This approach, when combined with our strategy of trading small, often, and mechanically, significantly reduces the influence of emotions and fear on your decisions.
While most people love a discount while shopping at a store, they don't share the same enthusiasm when the stock market offers a "sale" during pullbacks. If you change this mindset from fear to appreciation it makes a difference. Trading out of fear or panic usually leads to bad results.
Over the years, I've made significant amounts of money by purchasing when the general sentiment was fear-driven, and many are selling everything to remain in cash. Do I always pinpoint the perfect moment to jump in? Absolutely not – and to be frank only a few people are lucky enough to buy the exact bottom or sell the exact top. It's essential to recognize that market dips can go deeper than we expect. That's why we all need robust trading plan in place, complete with exit strategies such as stop losses, or an intention to hold quality stocks for extended periods and just sell premium like covered calls or strangles to reduce the cost basis of your shares.
It's important to have good risk mitigation, don't oversize your positions. If you are making trades that are too big this is why you feel so much pressure. At GKT we add bullish trades and we add bearish trades! You do not have to catch every single market move, but don't let fear paralyze you. Monitor your account's delta, make sure your account matches your sentiment.
Please realize that if you wait for "the bottom" to buy you will only realize the bottom happened after its too late. So many traders try to time things perfectly and end up selling at the bottom and buying at the top!
Pullbacks shouldn't induce fear; instead, they should spark excitement. Embracing this attitude is the essence of the GKT trading philosophy. Trading, at its core, is as much a psychological as it is strategic. That's why crafting a diversified trading plan and adhering to it is crucial. Being part of a trading community offers support during tumultuous times. If you haven't already, consider joining our Discord and connect with a community of traders who trade everyday. Here's to making informed choices and flourishing in the market. Happy trading, good kids!