Editor’s note: Today, we’re keeping the spotlight on our colleague Market Wizard Larry Benedict.
Larry shares how pocketing regular, smaller wins is the key to building a foundation of success in your trading.
Because when you’re too focused on chasing the biggest returns, you’re missing out on a major part of the action.
Read on for more from Larry…
When folks read about trading stories, what they really want to hear about are eye-popping gains…
About entering a trade and exiting it a short time later, picking up double- or triple-digit returns along the way.
Those kinds of profits do come around. For example, in The Opportunistic Trader, we’ve bagged returns including 58.2%, 73.8%, and 113.3% in just the last month.
But the truth is, these types of gains can be rare…
That’s because you can only make the profits the market lets you. Sometimes those anticipated big moves simply flare out.
That’s why instead of focusing on chasing big returns, I scour the market for regular, small gains. Doing so has been a cornerstone of my trading career.
Now, I know for some that might sound counterintuitive. Especially for someone like me who has successfully run a big hedge fund.
But by regularly banking all those small profits, they snowballed into something much bigger. That’s why Barron’s ranked my fund in the top 1% in 2008, 2009, and 2010.
And as I’ll explain, the premise behind these small trades is simple…
Profiting From Ordinary Moves
See, for every move that produces an outsized gain, there are countless more that are just… ordinary.
These are the sort of moves that when most folks look at a price chart, they’d barely notice them at all. But even these small moves can still provide plenty of profit opportunity…
Just like a trade we did recently (through The Opportunistic Trader) on crypto exchange Coinbase Global (COIN). All up, it generated an 18% return in just a single day.
Having rallied around 300% from its October 2023 low, COIN topped out on March 25. That’s “A” on the chart below.
Despite an earnings beat, it then retreated right through to May…
Coinbase Global (COIN)
Source: eSignal
Throughout this period, however, it tested and held a key support level (horizontal orange line)…
These levels are something I watch closely. That’s because when a price tests and holds that level (as it did here), that can set up a potential bounce. And a potential trade…
COIN later retraced from a lower high at “B” in June and was closing in on that $200 level. And there was a good chance that buyers would come in and support it around that level.
That’s what put COIN on my radar.
But I was also watching something else… Bitcoin.
Given that it’s a crypto exchange, COIN tracks the Bitcoin price closely. For example, when Bitcoin is rallying, that will pull more buyers into the market. And that drives COIN’s revenues (and stock price) higher.
Bitcoin’s sell-off in June became overstretched. So a rebound in Bitcoin would likely offer a boost to COIN’s stock price.
Then we saw momentum reverse higher (black arrow), as shown by the Relative Strength Index (RSI) in the bottom half of the chart. So we bought a call option on June 24 to capture any potential bounce.
A call option increases in value when the underlying stock (in this case COIN) rallies.
And as the chart shows, we got our timing exactly right…
With COIN rebounding higher, we decided to bank our profits. And we exited our position just one day later for an 18% gain.
Compare that to the S&P 500, which has averaged around a 12.1% annual return since 1926.
We generated more than that with our COIN trade in 24 hours.
Know and Understand Your Risks
As always, we need to be clear that options amplify both gains and losses…
And because options have an expiry date, time decay is constantly eating away at the option’s value.
Meaning that if the trade doesn’t go your way, the option can expire worthless. Though you can always close the trade out before expiration.
But that’s the risk you take. Also, remember that when you buy an option, the most you risk is the premium you pay for that option.
As this trade shows, though, options can leverage an even mild one-day reversal to generate a very handy return.
If you only concentrate on looking for big moves, then you’re missing out on a big part of the action.
The key to banking regular profits is to search out for price reversals (whatever size), like in our COIN trade. And look to bank those profits quickly.
Happy trading,
Larry Benedict
Editor, Trading With Larry Benedict