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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
“What’s the most money you’ve ever made on a trade?”
If someone gave me a dollar for every time someone asked me that, I would probably have enough money to never trade again!
But truth is, that kind of “big-hitter” mindset is the absolute opposite of how I approach trading. I found out early (the hard way) that swinging for the fences is a low probability way to trade.
That’s why you’ll often hear me talk about putting another ‘P’ (profit) on the page. And it doesn’t matter if the profit is small – if you have it, you take it.
I wrote about this method and the only reliable way to hit your trading goals earlier this month. I truly believe that making lots of little profits is the most sustainable way to make a living from trading.
Today, I’ll go a step further. I’ll show you an example of how you can trade a single stock to collect a succession of tiny profits.
Let’s look at a chart of SPDR Gold Shares (GLD) – an ETF that tracks the gold price – to use as our example…
The chart shows around the past eight months of GLD price action, and at first glance it may not look very interesting…
First off, there’s no obvious trend. And, for half a year, GLD has traded in a tight $20 range. That equates to a little over 10% swing from top to bottom.
What’s exciting about that?
Well, I’ll tell you – it’s exactly the market that can be a rainmaker if you know how to trade it. And that’s why I just love looking for chart patterns like this.
You only need to look at the Relative Strength Indicator (RSI) below the price chart – and the corresponding price action – to see how many trading opportunities there are.
On the RSI, from ‘A’ to ‘B’, GLD gained $6 (on the price chart). Then from ‘C’ to ‘D’, GLD rallied to $21.
Then, from ‘D’ to ‘E’, GLD fell $13. Add on the move from ‘E’ to ‘F’, and then from ‘G’ to ‘H’, there’s another $12 price move between them.
Between all those moves, there is a total of $52 of price action (in both directions) to try to capture.
To be clear, we’re not just adding up all the price swings over that period. If we did, the total price action available would be a lot higher.
Instead, we look for a simple trigger – it’s when the RSI is showing GLD as overbought or oversold.
That’s why there is no trade from ‘B’ to ‘C’, nor from ‘F’ to ‘G’, because the RSI didn’t trigger a trade entry.
I’m not saying that you’ll capture each or all of these moves. From my 30-plus years in the markets, I know that simply isn’t possible.
But I do know that you only need to capture some of these moves to start generating regular profits as a trader.
Add up all those tiny profits and you’ll be surprised at just how quickly your trading account will grow.
My bet is that when most traders look at a chart like GLD, they quickly dismiss it and move onto another. They think it’s just not worth their time or effort.
But, as I’ve shown you, those traders are giving up countless opportunities.
Trading is about applying a proven methodology to generate regular profits. And by doing that repeatedly, you’ll put yourself well ahead of the game and avoid going all-in on one high-risk idea that could blow up your account.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
I’d like to thank the readers who’ve written in about my e-letter, here are some of the latest responses I’ve received…
I’m new to trading and look forward to your insights on the markets. Thank you.
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