How to Make Money on a Trade — Even if it Bombs…

This post How to Make Money on a Trade — Even if it Bombs… appeared first on Daily Reckoning.

Bad calculations, wrong assumptions, and poor choices aren’t the hallmarks of a great investor, right?

But what if I told you it was possible to make money even when you get a trade all wrong? Would you believe me?

It’s true…

I understand if you’re skeptical. But it is possible to make money—even when you’re dead wrong about a trade or investment. How?

Well, today I’m going to show you…

Sometimes the stock market gives you a big, fat middle finger. It’s unavoidable. All your hard work and analysis fails. And a trade just blows up in your face. But as you’re about to see, you should love it when then market proves you wrong.

If you can learn to set your precious little ego aside and embrace the unpredictable markets, I promise you’ll make more money that you ever thought was possible—all while being dead wrong. That’s because losing trades can sometimes turn into big winners—if you know what to do…

So, what’s the secret to turn losing trades into winners?

Failed breakouts…

Failed breakouts occur when a stock breaks out for a move to new highs, but quickly stalls out. The bastard then tanks, which triggers a bunch of stop-losses. Everyone heads for the exits.

Anatomy of a Failed Breakdown

It’s tricky business. Most traders get demolished by the false breakout. They refuse to believe a perfect setup moved against them, so they end up clinging to the trade and losing more than they bargained for…

But if you know how to handle failed breakouts, you can actually turn these failures into pure profit. But you have to act fast once the breakout fails, or else you’ll be left holding the bag.

So here’s what you do if you’re caught on the long side of a false breakout…

1. Cut and run.

When the trade triggers your trailing stop, hit the eject button. Never let your emotions get in the way.

Failed breakouts can cause powerful moves in the other direction as traders close out positions. That ignites a chain reaction that leads to a price implosion. First the day traders get out. Then swing traders make a run for it. And after the stock retreats back into its trading range, many longer-term traders might also scramble for the exits. That usually leads to a swift move lower. In the above chart, you can see how fast the stock plummets.

Only the stubborn longs are left holding the hot potato— the poor souls who couldn’t admit they got the trade wrong. Don’t be one of them.

That’s why you must obey your stop loss if you’re trading a failed breakout on the long side. No matter what your gut says. If you don’t, you might as well stop reading right now and go make yourself a late breakfast.

2.Wait for the breakdown. Then do the opposite.

If the stock fails at support (like in our example above) you now have the option to hop on the other side of the trade and sell it short. You’re betting it’ll fall further – the opposite of your original plan. And that’s the key to making money in this trade – you make it on the way down. It’s that simple. But again, that means abandoning your original trade and flipping the script.

This strategy works in the opposite direction, too. I’m talking about what happens if you short a stock that starts heading higher. Just reverse your thinking. Get out of your short position and go long. In this case you make your money on the way up. Check out what it looks like in this simplified chart:

TheFailed Breakdown

Swing traders love setups like these because they can lead to fast, predictable gains. It’s the perfect way to play a changing trend where most people are caught on the wrong side of the trade.

So the next time you see a disappointing breakout (or breakdown, for that matter) remember that you have a shot at booking big gains if you simply turn the trade on it’s head and do exactly the opposite of what every other panicked trader out there is doing.

But the key to remember is that you’ve got to act fast. That means changing your stance when the market proves you wrong.

That’s how you turn a losing trade into a winning one. And it could put a lot of cash in your pocket if you use it in this choppy market.


Greg Guenthner
for The Daily Reckoning

P.S.  If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.

The post How to Make Money on a Trade — Even if it Bombs… appeared first on Daily Reckoning.