What Goes Up, Must Come Down Welcome to Trading With Larry Benedict If this is your first time reading Trading With Larry Benedict, thanks for joining us. You can catch up on all previous issues right here. If you have any questions for Larry, or feedback, shoot us a note anytime at feedback@opportunistictrader.com. | Daina’s note: Before we get to today’s interview, I want to wish you a happy Thanksgiving and a relaxing weekend ahead. Today, Larry details a strategy that has helped take him from a novice pit runner in the early ‘80s… to the multimillionaire trader he is today. He shows that while today’s market environment is difficult to trade, Larry has maneuvered and tweaked this strategy to fit the times. And he’s made it so the strategy can work no matter which way the market moves…
Daina Schnese: Recently you told readers that your favorite thing to trade is the S&P 500 because it’s “pure,” and that makes it simpler to trade. Is there a certain strategy you use when trading the S&P 500? Larry Benedict: The core of my trading strategy is that everything eventually reverts back to the mean. Now, that’s a little bit harder to see in today’s market. Especially in individual stocks, which can act as outliers to the broad market… That’s why I like trading the S&P 500. It’s just easier to tell whether the S&P will rise or fall throughout the day, and when a move up or down gets overextended. Whether the market goes up or down, you can make money. There’s little to no guesswork involved. With individual stocks, you have to deal with a lot more noise. That can work to your benefit with research and a deep understanding of the stock, of course. But if you don’t have that deep knowledge, you might just assume a single stock will go up along with the market. But a rising tide doesn’t necessarily lift all boats. Any number of factors can explain why… It could be because of bad news out of the company, a big seller, or a bevy of other things. But the point is, you can’t depend on individual stocks to follow the trend like the indices do. Daina: Can you give a little more on your mean reversion strategy? Larry: It’s simple. What goes up, must come down… Or at least, that’s the likely outcome. The primary thing I look for is a two- or three-day mean reversion. That means if the market has two or three days up, I’d guess it was heading back down, or to the mean, soon. So, I’d look to short it in anticipation of a pullback. And it works the opposite way, too. The market tends to have a bias to the buy side, but my thought is that everything comes back to the mean eventually. And the longer things stray outside the mean, and get more and more overextended one way or another, the stronger the move back to the center. Of course, it’s not 100% accurate… Because the market isn’t logical. Just because something is overextended doesn’t necessarily mean it’s going to revert. You have to be able to spot signs that the reversion will take place. To me, that comes from watching things like the technical indicators, particularly the Relative Strength Index… as well as watching the intermarket relationships between the Chinese and European stock markets, currency markets, and bonds. Then, when the pullback does happen, you need to be ready to act. It could be as little as a half of a percent, or even as high as 2%. But depending on how you trade it, you can make much more than that. By doing that over and over again, and accumulating profits, big or small, on those moves, you’re putting a P [profit] on the page. And as I’ve said countless times before, that should be the #1 objective of every single trader out there. Daina: Do you use this strategy with individual stocks, too? Larry: With stocks, I have to extend my timeframe for a mean reversion. It’s closer to five days if I’m looking at just one stock, because the computer algorithms have really messed with the natural trade flow of the markets. But I’ve maneuvered and adjusted the strategy to utilize it better, in light of the algos. But, like I said, it doesn’t always work. And you have to put safeguards in place when it doesn’t… I use stop outs and set percentage loss targets on the downside. If I hit my stop on any trade, I’m out. No second guessing. As soon as you let your emotions guide your trading decisions, you’re finished. Daina: That’s a great piece of advice. Thanks for your time today, Larry. Larry: Thanks, no problem.
Daina’s note: If you haven’t yet signed up for Larry’s Trade-a-Thon on December 11 at 8 p.m. ET, there are plenty of good reasons why you should… - Win or lose, you’ll get to see the full results of Larry’s challenge to generate $70,000 or more in just three hours out of the trading day...
- You’ll learn why he chose to undertake the challenge…
- Just for attending, you’ll get a free copy of his Foolproof 50 – a list of stocks he considers essential for traders of any experience level.
Secure your spot here, and keep an eye on your inbox for a special video series starting next week... About Larry Benedict... Larry is a former hedge fund manager with over 30 years of investing experience. He’s also known as one of the world’s best traders… and for good reason. From 1990 to 2010 – when he was actively running hedge funds – Larry never had a single losing year. Larry’s market commentary is frequently featured in Bloomberg, Barron's, and The Wall Street Journal, among other major news outlets. That’s why we’re publishing this limited-edition interview series over the next couple months. When we saw what Larry could offer to everyday investors, we knew we had to share everything we could with you. If you have any comments, questions, or suggestions about this free e-letter, please drop us a line at feedback@opportunistictrader.com. And if this interview series isn’t for you, simply click this link to opt out now. | |
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