The question you ask yourself is: "How much can I risk with a 40% stop out and still fall under/at $100 loss on the day?"
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Trading Rules
“Never permit speculative ventures to run into investments”
It goes without saying, even the least savvy market watcher can easily assert the correlation that oil and the markets as a whole have been trading in tandem. So when oil shot out of a cannon starting Thursday when it bottomed around 26.6 and moved all the way to 32/barrel it came as no surprise that it took the markets with it.
Whether it's up or down, it is human nature for market speculators to continue to try to find a bottom or a top in the current environment that were in. Speculation, in its most natural state, is done in such a way to avoid being the sucker. No one wants to be left holding the bag on the way up, and no one wants to miss the bounce on the way down. This peculiar, yet rather unfortunate state, is why we often see irrational buying when markets implode, and incessant top calling when markets sky. No man wants to be the "fool" in any/either circumstance.
Since the bounce in oil was all but telegraphed it puts the markets in an interesting position. It has been commonplace for oil and gas speculators to buy oil/gas when the weather gets cold and to cut it when weather gets warm again. So with the first blizzard of the year, and biggest one in years, combined with oversold conditions, risk in oil to the upside, and an overall market technical bounce, the bounce in oil futures was pretty much a "slam dunk."
Personally, I am of the mindset and the belief it is always best to avoid getting in the way of a train in motion (in this case oil moving lower). If you as a speculator believe that you can stomach whatever downside risk exists in oil, by all means have fun. From experience, I have learned that markets are significantly irrational and that they more than often overshoot beyond anyone's "rational" expectations.
With all that said, my bias on the overall markets currently is still bearish. That doesn't mean I am advocating blindly shorting, or suggesting that we are imminently going lower. I am simply looking at multiyear charts on multiple time frames in the SPY/SPX and CL_F and they still all look dismal.
DEEP SEA FISHIN'
This move lower in the markets in general was telegraphed by the transports in November of 2014 when the IYT topped out and began its imminent decline. (Not) Coincidentally, the WTI broke multiyear support that same month and has never looked back.
If we expand the charts to the start of the bull run in 2009 we notice that both these issues had stellar performances starting in 2009. The IYT advancing almost 400% (rough estimate) and WTI advancing nearly 335% (rough estimate again). The parallels here are fascinating with the most interesting caveat being that even with their sharp declines there is still room to run. Only recently did oil break its 2009 base bottom and the downtrend in the oil markets only calls for further downtrend in the IYT as shipping costs via trucking decrease in price with the falling price of gas.
TAKEAWAY
The main point I am making here is that trends don't happen overnight. Just like the IYT and WTI broke almost 1.5 years ago and we're only now reeling from their problems, a two day rally that was telegraphed doesn't reverse course. It is important to take things as they are, and to remain steadfast with the overall (larger) picture. My bias will remain negative on both oil and the markets so long as the larger picture for both these issues remains to the downside.
Start at Stop: Form a Plan
“The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don’t waste time. When a stock moves below a mental-stop, sell it immediately.”
You're probably here because you want to make money in the stock market. You might be someone who is new to trading, someone who's been trading for a while and wants to get better, someone who thinks the market is rigged, someone who is bored and doesn't want to trade on their own, someone who is at their wits end with the market etc etc. Whatever the reason is that brought you here today, if there is one thing that you take away from this site please let it be this -- Form a plan and stick to it.
Let's run an experiment. Close your eyes and think of the last person you spoke to about the stock market that isn't an active trader/investor. What was the first thing they asked when you told that person about the market or a trade you took? Almost all of you probably thought "How much can I make?" That comment is so unbelievably common it almost always makes me chuckle. That comment is why I wanted to start here, at the very beginning.
Most people who fail when it comes to investing/trading do so because they lack focus and conviction in their plan. Whether it's not knowing your setup, not trusting your setup, or just plain old greed, lacking a plan or not sticking to one will almost always ruin you as a trader/investor. Having a plan is so important that I felt it must be addressed at the very top. Having a plan is the fundamental backbone to investing/trading. It is something that anyone can do, even if they have no stock market experience.
You might be asking yourself "How do I form a plan if I don't know anything about the stock market?" Ah, that's simple, by using a stop loss.
- Stop Loss: In simple terms, a stop loss is your emergency exit strategy. It's the absolute maximum you are willing to lose on a trade/investment that you place.
The most common mistake I see from new and seasoned investors alike is not respecting their stops, or worse, not having one. Even more troubling, and like the experiment we ran at the top, many who are new to investing (or worse some who have been doing it for years) think in terms of what their profit will be prior to entering a trade, rather than what they could possibly lose. This is a fool's mindset. The key to investment/trading is capital preservation. You simply cannot preserve your capital if you do not know what you can possibly lose.
So if you take nothing away from this post, or any other post in the future, please take the following away; Always know what you are willing to lose before you enter a trade. Always know your breaking point.
That simple rebalance of your thought process will set you apart from most investors/traders and put you on the path to success.