How To Trade A Red Day

“All of your long term retirements stocks, your stop losses were triggered and you are down and feel terrible. How could this day get any worse?” Is the thought that goes through a lot of traders heads on a day that the market is down. Well, today we will dive into the reversal plays and momentum trades for a down day.

The Partial Buy In

As far as long stocks go, you only lose when you sell… or the company reverse splits or goes bankrupt. If you truly believe in a company I am a firm believer in taking the leap to invest. These investments are called prospective investments. However, if these stocks are the entirity of your retirement investments it’s bad. At most I suggest a strategy of 10% prospective investments and then the rest heavily invested into ETF’s that track the market and other aggresive but not dangerous investments for investors.

On aggresively red days though, I highly suggest taking another 1-5% of your assets in steps to invest in individual stocks that you think have promise. What does that mean? Lets say that you lose 5% on the stock that you truly believe in. You take another 1% of your portfolio and invest it back into the stock for every 5% it goes down until it gets to 25%. Why? Because this is essentially buying a stock at a discount.

Now, you must do your research and not just gamble your money away. If this is a company that is iffy at best don’t even think about it and why are you investing in the company in the first place? Buttt lets see how this would pan out for the hype surrounding Tesla in 2018. I’m doing Tesla because I was there for the hype. All my friends were talking about it back in 2018 and I didn’t like the companies financials (stupid me I know).

Anyways, lets assume someone who has a 20,000$ portfolio would have done this. That means they would have invested 2,000$ for the stock Tesla, to invest but an additional 1,000$ to invest on that day. The day is July 2nd, you have 27 shares at 72$/piece. The stock loses 10% in one day, you’re upset but you implement the stratgy and buy 6 more shares at 67$/piece. You now have 33 shares.

Tesla stock on July 2nd

July 3rd comes around and the stock goes down another 10%. You’re very upset and you think about selling but you remember how well the company’s business plan looks and you envision the future with them. You stick to your strategy and buy 6 more shares at 62$/piece. You now have 39 shares.

Tesla stock on July 3rd

Fast forward to today and now your main shares(the 10% or 2,000$ or 27 shares) are now worth 21,438$ and the shares you bought that day are worth 9,528$ for a total of 26,202$. In other words you now have 30,966$ just in stocks. Yeah it is a 3 year return but most investors would take that any day over the 10% return on the broad market.

The point is that this strategy can pay off in the long run or rather quickly but it pays to enforce it.

Swing trade

Given the same situation you are a trader and your assets are 100,000$ and 10% is allocated to individual positions. On a very red day I would suggest taking on up to 30% of your trades to a single asset. Warning: Only do this for trades that you feel confident in the company and the upside.

Your stop losses for this swing trade would be extremely low but you will still do this in steps. 3,000$ would be invested every 1% drop. So after July 3rd you have 454 shares at an average of 66$. Skip forward 1 month and now you sell all your shares for 74$/share. This means you made 8$/share at 454 shares or 3,636$ in profit. That’s a good trade for a swing trader.

Shorting Into Abyss

Now lets say you are a swing trader and you also want to profit off the downside by shorting it. You have 100,000 in assets and allocate 10% for each position. Do not take more than the alotted 10% for swing trades on shorts. This part is tricky because the question remains how do we know a stock is in a downtrend? We don’t. But we do know the last 10 days trading ranges and average them together to get the range and stop loss we should set it to. Also analyzing the chart will help us determine the trend.

After analyzing the stock we get an average range of 2$/day which will be our trailing stop. We also realize a engulfing candle (where a red candle engulfs a green candle or vice versa on the chart).

Tesla stock on July 2nd. The yellow marker indetifies the engulfing candles

We use 10% so 10,000$ for our position of 144 shares and we short at 69$ on July 2nd where we let it sit. We watch the money go up as the stock price goes down and eventually we get stopped out at 61$ on July 5th. We made 8$/share at 144 shares making us 1,152$ in profit in 3 trading days (4th of July is a holiday). Really good return.


Although these strategies for trading on a red day are not all inclusive it gives you a base for trading on a down day. The truth about the market is you have to be brave, not risky, brave. If a setup looks good, its not that everyone else isn’t using it, its that everyone else is too scared. Fear is a hard thing to control but once you conquer it you can gain masses of money. Remember, the market is subject to manipulation and unseen events and only you can control and shape the outcome of your own investments or trades. Have a goodnight everyone and I hope to see you next time!


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