A Daytrader's Guide To Outplaying The Market

Last week I touched on finding trading setups that are uncomplicated and familiar to you as a way of avoiding impulsive and destructive trading habits. However, while those approaches will ultimately make you a more consistent trader, I also want to put in a word for the unexpected.

Let me put it this way, thinking and formulating trades inside a certain framework will make you better with certain stocks or assets in a certain kind of market. However, that poses a problem when the conditions are off. Those conditions for a quality trade should be guideposts for your trading, not a barrier. Thinking outside your framework and habits every once in a while will not only help you grow as a trader, but might also be the best path to outsmarting the rest of the market.

Case in point, not too long ago I undertook a short position in Arcadia Biosciences Inc RKDA, which went on a huge tear after the company made a huge product announcement that sent the stock skyward to the tune of 300 percent. While I had held a long position in the company a couple days prior to the run, I had already sold out and was in the position of reacting to the massive jump after the fact.

It was a rough feeling to lose out on potentially tens of thousands of dollars, and it was tempting to jump in to capture some of the action. But the trade never felt right. The spread was already massive by the time I had my trade ready to go and I didn’t like my chances.

So, rather than act on FOMO, greed, disappointment, or blind luck, I waited. I waited for the first signs of a draw down in activity, then I entered a short trade and caught my upside on the pullback. I should say that that was my first short position in months, and it felt strange to set my levels for a draw down. However, it was a simple, straightforward position that got the job done while posing relatively little risk in a stock that was clearly being overbought.

Of course, that’s just one example. More clever traders might know where to find a sympathy position to capture a return, or turn to the options market to exploit sentiment among other traders. The point is to think differently when everyone else is rushing to the same conclusion.