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How to Avoid This Rookie Mistake

By Larry Benedict, editor, Trading With Larry Benedict

Since the latest hostilities broke out in the Middle East, speculation has been in overdrive. Will we see a regime change in Iran? Will other countries join the fray?

Despite the uncertainty, markets barely took notice of the escalation.

After initially dropping, the Nasdaq and S&P 500 closed out Monday around their highs. Gold, which ordinarily would have spiked, yawned.

Oil did surge higher… But on Monday, it reversed sharply off its highs. In just one day, it erased over a week-and-a-half of gains.

Moves like these are making this a tricky time to trade. And in a headline-driven market like this, it’s easy to get sucked into a bad trade.

So avoiding costly rookie mistakes is crucial to making it through…

Dud Trades

The spike in oil is a classic example of how you can get sucked into a bad trade…

The bombing of Iranian nuclear sites over the weekend had traders piling into long positions on Monday in anticipation of a fresh breakout higher. Sunday’s headlines called for oil to hit $100.

But oil was soon swamped by a wave of selling.

Iran’s retaliatory attack on a U.S. base in Qatar was symbolic – it gave plenty of notice about the “surprise” attack, allowing ample time for its missiles to be shot down.

The market saw the events as a positive sign for the Middle East, with much of Iran’s military capabilities destroyed. The sharp reversal was a classic case of “selling the news.”

That’s also why gold failed to break higher. Gold continued to slide, as traders saw no need to jump back into safe-haven assets.

Anyone who piled into short positions in anticipation of a big sell-off on Monday is feeling the heat.

And all this shows how headlines can be an unreliable narrator, so to speak…

Ignore the Headlines

Overcoming the urge to trade off headlines was something I learned the hard way when I started out in the trading pits of the Chicago Board Options Exchange (CBOE) more than 40 years ago.

I was keen to jump on every move for fear of missing out. I blew up my account multiple times before I learned to restrain that impulse and control my emotions.

Of course, you need to be aware of what’s going on in the world… But you need to focus your trades solely on finding strong setups. A headline alone isn’t a strong setup. This is critical if you want to survive long-term.

As a mean reversion trader, I had to be patient and wait for something to overshoot. (That’s a common occurrence in a headline-driven market.) Then I’d aim to profit when momentum swung back the other way.

I’ve used that strategy successfully for decades.

In fact, it’s a great strategy in the current circumstances, as it typically involves holding a position for just a few days. That means you’re not sitting in the market, exposed to another surprise move.

The other crucial factor is that I use options. That enables me to profit if my anticipated move comes off, all while knowing my maximum risk.

You can be sure that there are going to be plenty more headlines over the coming days. The trick is not to let them suck you into a false move.

Instead, ignore all the noise and be patient. Only enter a trade when the right setup comes your way.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict