This Labor Day trading lesson is about how to make the most of market holidays. But there’s also a little about patience, volatility, and a short-squeeze from hell. Read on…
I’m so grateful for the opportunities that have opened to me by learning to trade over two decades ago. I set myself free. Without trading, I wouldn’t be able to travel the world like I do. Also, I wouldn’t be able to give so much to charity.
Table of Contents
- 1 Markets Closed for Labor Day
- 2 Trading Lesson for Labor Day
- 3 Trading Tales from the Dark Side
- 4 Questions from Students
- 5 Millionaire Mentor Market Wrap
Markets Closed for Labor Day
Labor Day is a stock market holiday and also a day off for most U.S. workers. How will you spend it? Some people mark the end of summer with a picnic or barbecue. Others prep their kids to head back to school.
For me, Labor Day brings back memories of watching the U.S. Open tennis tournament. Back in the day, I had aspirations of going pro. In a way, I owe my early success as a trader to tennis. That’s because I got serious about the stock market while recovering from surgery due to a tennis injury.
Whatever you do, remember what it’s all about. When Labor Day became a federal holiday in the 1890s, it was a way to honor the contributions of the ‘laboring class.’ Know what? The fact that you live in a world full of opportunity has a lot to do with the efforts of hard-working men and women of past generations.
If you really want to show your gratitude, don’t waste today.
Heed this Labor Day trading lesson: Treat every stock market holiday as a gift. You don’t have to watch the markets today, which means you have spare time to study. So, after you read this post, set aside some time to prepare for tomorrow. If you’re not sure what to study, read this recent post for ideas.
Travels, Travels, But Little Trading
In the last Millionaire Mentor Update, I told you I’d been in LA for a day. I was there to throw out the first pitch at the Dodgers game on August 21. I was repping my charity Karmagawa for that. It was fun. Hopefully, I’ll be able to share some pics or videos with you soon. For now, I have to hold off for legal reasons. (Lawyers: I love you. Most of the time. Grrrrrr…)
After Vancouver, I was off to North Carolina. Karmagawa is working with a new factory on updated, more environmentally friendly merch. It’ll be out later this year.
After North Carolina, I headed back to Italy — also working on some new Karmagawa projects. Next, I’m off to South Korea to meet some K-pop stars and eat some amazing food. OK, I eat amazing food nearly everywhere … but I’m really looking forward to some amazing Korean food.
Trading Lesson for Labor Day
I think one of the most important lessons to learn right now is patience. September and October are statistically the two most dangerous months of the year. Remember that as we head into fall.
A lot of people who are new to the markets — or just beginning as traders — aren’t used to such volatility. And lately, we’ve seen a lot of volatility. When the Dow drops 500+ points in a day, it’s scary.
So be careful right now and for the next few weeks. Especially with the U.S.-China trade war. And the fact that one tweet can influence an entire market.
Trading Tales from the Dark Side
If you’ve been reading for any length of time or you’re a Trading Challenge student, you know I’m not a fan of short selling right now. Especially for newbies and anyone trading with a small account. It’s just too easy to blow up your account.
To take advantage of volatility — which is what we do as penny stock traders — there has to be someone on the other side of every trade. That’s how markets work. There’s a buyer and a seller. It’s the basic law of supply vs. demand.
With that in mind, I want to give you a little insight into the only stock I traded last week. I traded it twice, but I won’t review the trades just yet. Instead, I want you to see the potential for big price action when longs and shorts go to war.
Appliance Recycling Centers of America Inc (NASDAQ: ARCI)
First, take a good look at the ARCI chart, then I’ll explain what it’s all about:
Then, on August 27, the stock had a massive short squeeze. Find the gap down at the market open on August 27. (Hint: if you click on the chart it’ll open full-size in another browser tab.)
Got it? OK, now check this out…
ARCI opened at $5.40 on August 27. By 10:17 a.m., the stock spiked to $9.24 as shorts got crushed. That’s only 47 minutes. Then, by 11:17 a.m. — only another hour — the stock tanked to the $3.80s.
What does this show? It shows how you could potentially make money both long and short on a move like this. It shows the shorts were right — in the long run. But anyone who shorted at the open either endured a lot of pain or lost big.
But again, I don’t like short selling right now for small accounts. The problem — as shown on the chart — is that you can’t predict how high the stock can go. It’s too easy to lose 25%, 50%, or even 75% of your entire account because it’s tough to get out when it’s squeezing.
How to Avoid Big Losses As a New Trader
If you have a small account and not a lot of experience, you can’t risk big losses.
But newbie shorts are stubborn. Maybe it’s because it’s difficult to find shares to short. So they get giddy when they find them. Once they reserve shares they feel like they have to use them.
I hope you take this on board…
Big Account Strategies vs. Small Account Strategies
It’s very dangerous to use a strategy that works well for big accounts when you’re trading with a small account.
I don’t wish big losses on my worst enemy. But it sucks getting daily emails from people who say “Tim, I should have stuck with you. I should have stayed in your chat room.” Or, “I wish I’d listened to you…”
Sometimes my students go over to the dark side. It pains me to see them learn this lesson the hard way.
This isn’t about being right — it’s about doing what’s best for a small account.
I hope the ARCI chart scares the crap out of you. Take heed. Learn the basics first. Learn to go long. Learn to build your account. Then you can learn short selling. For now, if you’re a newbie or your account is small … I’d advise against it. If you decide not to listen, all I can say is thank you for helping make the market. My chat room loves you.
To be clear, I don’t like playing short squeezes long, either. It’s too scary for me. Unless you time it just right, you end up chasing. And for the same reason — the inability to predict when the tank will happen — I tend to stay away. It’s better to stay on the sidelines and watch.
Now for some…
Questions from Students
“Are there times when the indicators you use are weighted differently from the Sykes Sliding Scale?”
(The Sykes Sliding Scale is a system I developed to determine if a trade is worth the risk. It uses seven indicators and returns a score between 7 and 100. The higher the score, the more likely I am to take a trade. Like I always say, it’s not an exact science. But I’ve found the sliding scale useful. So, I teach it to my students. You can learn it by watching my Trader Checklist guide.)
Now for my answer…
Yeah, exactly. I was talking about this during a recent webinar for Trading Challenge students. Sometimes one of the indicators is more important than it would normally be. Right now, the market environment is more important.
Why? Because the trade war with China and the president’s tweets can influence the entire market. I’d be very careful taking overnight trades right now. I’d be careful taking weekend trades. It’s just too unpredictable — so be safe right now.
“In your experience with penny stocks, is market inefficiency exaggerated more the lower the stock’s price is?”
Stock price is just one thing. One part of the equation. A lot of people think, “Oh, the stock is trading at $1 a share … it’s a penny stock.”
But if the company has 10 billion shares outstanding then they’re still a $10 billion company. So you have to look at the market cap, too. Not just the stock price. A lower market cap — say $100 million, $200 million, even up to $500 million — will be more volatile than a multi-billion dollar company.
Why? Because the value of the company can go up or down easier. If a $40 million company announces a $20 million deal … that’s 50% of its value in one deal. But if a $10 billion company announces a $20 million deal, it’s not as important. It’s nice… but it’s not gonna really change the company’s value.
So don’t just look at the stock price. Newbies make that mistake…
A Final Labor Day Trading Lesson: Entertainment vs. Education
I believe most people spend too much time on entertainment and not enough on education. That said, I’ve watched every movie on the IMDb Top 250 list. Also, I like to watch movies about the stock market.
There’s a movie I’d like to recommend. It’s not directly about the stock market — but it relates to the question. It’s called “Radio Wars.” It might be hard to find, but if you can get your hands on it, watch it.
There’s this whole thing about Sirius Satellite Radio and how it was trading as a penny stock. People thought it was a conspiracy by short sellers because it was a popular product. They thought it should be everywhere.
But it was just a low-priced stock. The company had billions of dollars in debt and more than a billion shares in the float. So even though it was a low-priced stock, it was still a billion-dollar company. Note: the company now trades as Sirius XM Holdings Inc. (NASDAQ: SIRI).
In other words, you have to look at the stock price AND market cap AND shares outstanding. You want to trade lower-priced stocks, but you also want to trade lower market cap. I’m talking companies with a market cap of $100 million, $500 million, even $700 million … basically anything under $1 billion, because the value of the company can move more based on a news catalyst.
Millionaire Mentor Market Wrap
Thanks for reading. I hope you get inspired and build your knowledge account with every one of these updates.
Be safe in the coming weeks. Be aware of what’s going on in the broader market and understand that big moves can happen. As I write, the Dow is up over 300 points on positive U.S.-China trade war news. Again, things are very unpredictable right now.
The best thing you can do is be prepared — so study, study, study.
Are you a trader? How do you prepare for market volatility? New to trading? Comment below with “I will be safe in the coming weeks.” I love to hear from all my readers!