12 Trading Lessons From The Volatile Month Of October

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The month of October was very volatile month that caught many or at least the people that I talk to by surprise. The SP500 closed the month up 2.3% after being down 7% by October 15, the COMPQ closed up 3.04%, it was down at one point 6.18%, the Russell 2000 went from being down 5.5% to closing up 6.5% for the month. Here are a few takeaways from October that we can use going forward.

1. Don’t short oversold markets, the market has a history of bailing out the bulls not the bears.

2. Every now and then you might get lucky shorting an oversold market that becomes more oversold and stays oversold, but the distance between of every now and then is huge, don’t do it.  The odds are against you, especially after 2009.

3. Don’t bet on crashes, seriously don’t.  Take a look at history, they rarely happen.  The average intra-year decline since 1980 is something like 14% (less after 2009), 25 out 33 years the SP500 has had an annual positive return despite intra-year drops of 14%.

4. It has payed to hold your nose and put some capital to work when the market looks horrible, a lot easier said than done.

5. Oversold markets are different than overbought markets.  I would fade oversold markets probably 9 out 10 times but only fade overbought markets maybe 4 out 10 times, different dynamics.

6. Different strategies work in oversold markets, I prefer mean reversion strategies over breakout trades.  Ignore the twitter gurus who bash mean reversion trading just because they don’t do it.

7. It is best to trade index etf’s when you are trying to catch/play an oversold market, my favorite vehicle to do that with is XIV.

8. When the market is in a correction or deeply oversold, emotions are high, it is best to tune out the noise, just go back to October 15 on your stream and you’ll know exactly what I mean.

9. I have never been a fan of shorting the classic technical breakdowns, I rather wait for the break then the natural retracement bounce to initiate a short.  Years ago (pre 2009) my rule was that if the market was in a correction and sold off hard I would only consider shorting the market after it  bounced  for 3-5 days, in today’s market you have to wait a minimum of 7-10 days to consider shorting due to the V bottoms.  How To Properly Short.

10. The most reliable pattern of the last few years has been the V-bottom.  Many years ago V-bottoms were failure prone, now it has become the best pattern to buy.  Here is the scan; the vehicle has to be an ETF (no commodities), look for one that is oversold, down multiple days in a row, buy some, when it accelerates to the downside buy some more, hope the V-bottom pattern continues to work, sell over the next 7 days.

11. FIFO (FIRST IN FIRST OUT) still works, the Russell 2000 was the first to get hit out all the major averages and it was the first one to come out of the correction/pullback.  It had the biggest return with the least amount of draw-down this month.

12. Make whatever ideas you get from the stream your own, you have no idea if the tweeter giving out the idea is actually in the trade, you have no idea what his size is relative to his portfolio (his tweet might talk a big game, but in reality it might have a small bite), you don’t know why he is actually taking the trade, and chances are high that he will let you know when he is out of the trade if it works out and leave you with a “what a great experience this has been for me, glad I’m young” when the trade has gone against him.

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Frank Zorrilla is the founder of Zor Capital LLC a New York based investment management firm.  Our goal is superior performance, with preservation of capital as our number one priority. Zor Capital manages separate accounts (both taxable and retirement) for accredited investors and institutions. This structure gives clients access to a hedge fund like strategy while maintaining 100% control of their accounts.  Managed Assets

Photo; Giancarlo Rado

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.


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