The Perfect Setups
2021-01-25 | Allison Ostrander
The year 2020 was crazy for the market. We saw the most dramatic monthly range that the S&P 500 (SPX) has ever seen. We saw choppiness as the market was unsure which way it would continue during the pandemic. Then we saw a strong recovery bringing us back to new all time highs. Moves that used to take 5-10 years for the movement and range to occur happened in record time.
For many traders, it was a year to test their accounts and their sanity for that matter. But many traders also wondered how they would know when to jump back into the market. And then, of course, they also wondered what they should buy and on what time frame. When these questions came up, as a technical trader, I looked at the charts for that guidance to find the perfect trade setups
What Makes a Perfect Setup? The TSLA Example
In 2020, there were definitely technical indicators that signaled when to buy back in, and if you followed those indicators and saw those signals, you had some well timed trades. I know some people who did buy, and held, and they found 2020 to be a great year. One of the symbols that gave excellent buy back indicators signals was Tesla (TSLA), and it fit the profile of what I call a “perfect setup.” Let’s take a look at this TSLA trade. You can see in the chart, TSLA had this perfect setup on the Weekly Time Frame. If you were an Options Gold Room member at the time, then you heard me talk about this entry like a broken record.
When you have all the technicals in line screaming “BUY” or “SELL” like they were on this chart, it’s time to start putting your capital to use.
Weighing Strong Trade Setups vs. Your Risk Tolerance
If you know me you know that I didn’t bet my whole account on TSLA in 2020…. even with a setup this strong. I was still very mindful of my risk as a trader. However, I did start with my full risk tolerance.
I always advocate staying true to your risk boundaries. It’s an approach that will carry you through to the long term as a trader – which is what it’s all about. So how can you take advantage of strong setups?
In general, if you have a larger account and you’re looking at signals like these, you could consider jumping into shares or leap calls. These strategies can leave you with that unlimited profit potential and the time to hold for the continuation of the move. However, not all of us trade large accounts. So how do you take advantage of this move in a smaller account?
When I’m trading smaller accounts, I look at trades that are low risk vs high reward. Where going in with my full risk tolerance at the start of the trade can lead to gains with over 100% return on risk. What I tend to do is look at Blue Chip Stocks with low volatility and high potential, and then I apply the method that was used in the TSLA trade.
Instead of buying and holding for the move, which itself would have created huge profits, I pivoted to smaller trades – multiple of them throughout the bullish trend. This allowed me to stay within my risk tolerance, and trade within my smaller capital accounts, while still allowing myself to take part in some of the big wins.
Executing My Trade Setups with Butterfly Strategies
So how did I pull this off? I did this by using butterfly strategies and compounding on them; as a result, I was able to stay with low risk, high reward trades. And oftentimes, I was in and out of a trade in a day.
The standard butterfly is a low risk trade that is a combination of the vertical debit spread and vertical credit spread. They share the same spread width, short strike, and expiration. The standard butterfly is a great strategy to learn because you can win on both sides of the trade. It allows you to hold a very small capital risk, but a very strong profit potential.
Once you understand the standard butterfly strategy, you can then build from that knowledge to learn about more non-traditional butterfly strategies. For instance, like the unbalanced butterfly or the broken wing butterfly.
Having tools like these in your trading toolbox can be a great way to control your risk, grow smaller accounts, and still allow for profit potentials above 100% return. They can also be very forgiving trades, and with the market that we had back in 2020, we all needed a little grace.
Going forward in your trading career, keep your eye out for these perfect setups in your account. If you have a large account that can hold shares on long far out calls, look to buy and hold. If you have a smaller account, however, consider taking a look at adding butterflies to your toolbox. Regardless if we are in a pandemic, a recession, or a depression these strategies can improve your profit potential while staying low risk.
If you’re interested in watching me trade with these set ups – during live trading sessions – check out my Profit Recycling Mastery!