Editor’s Note: Today, we’re sharing a walkthrough of one of our winning trades from the past year. We hope you enjoy – and from Larry and the team, have a very happy holiday weekend!
With today’s volatile markets, it’s hard deciding what you should do.
If you sit on the sidelines, you could miss out on some good opportunities. But if you jump into the wrong trade, you could easily tear a big hole in your account.
The key is to focus on each potential trade in isolation… and avoid getting caught up in your emotions.
That means we only enter trades with strong technical setups.
And just as importantly, we take our profits when we see them. Because what might start out as a profitable trade can quickly turn into a loser.
So today, I’m going to show how I used this approach with my options advisory, The Opportunistic Trader, in the first half of 2022.
We generated an average return of 83% on Roblox (RBLX) in just a few days…
Spotting a Pattern
To begin, let’s look at RBLX’s chart…
Roblox (RBLX)
Source: eSignal
As we can see, RBLX was moving in a downtrend.
The 50-day moving average (MA – blue line) was sinking heavily. Plus, the 10-day MA (red line) was tracking below it (a bearish signal).
The Relative Strength Index (RSI) also showed bearish sentiment… It was tracking in the lower half of its range (below the green line).
This is a common pattern when a stock or index is trending lower.
However, the chart also showed several countertrends against the overall downtrend. These kinds of countermoves often provide a strong setup for a long trade.
Specifically, RBLX’s share price bounced each time the RSI formed a ‘V’ (red circles) out of oversold territory (lower grey dashed line).
Take another look…
Roblox (RBLX)
Source: eSignal
So when a similar pattern emerged in May, we readied ourselves for a trade…
83% Gain in a Couple of Days
As the RSI formed a ‘V’ and began rallying higher from oversold territory, we entered a long RBLX trade on May 11 by buying a call option (which typically increases when a stock price rises).
After RBLX rallied strongly the next day, we sold out half of our position (Exit 1) for a near 52% gain.
Then, when RBLX rallied even higher on May 13, we sold out the remaining half of our position (Exit 2) for a 114% profit.
That made for a blended gain of 83% within just a couple of days.
As always, I want to be clear that we supercharged this return using options. If we had bought the stock instead, our returns would have been lower.
However, this scenario highlights the importance of using a strong trade setup and of taking our profits when we see them – to make money in these volatile markets.
We need to remember we’re not hunting down huge counter-swing trades. Nor are we trying to work out where a stock is going to be weeks or months from now.
Instead, we aim to find stocks that have run too far in one direction and profit whenever they revert to their mean.
If these kind of returns interest you, you can learn more about my profit-generating strategy right here.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict