ivayloIvaylo Ivanov has been successfully trading equities and options for twelve years.

He is a founder of MarketWisdom.com, where we provide swing trade ideas, momentum investing model portfolio, market education, and mentoring. There’s a 7-day free trial.

Mr. Ivanov is the Author of: Top 10 Trading Setups – How to find them, When to Trade them, How to Make Money with them (2016), The Next Apple – How To Own The Best Performing Stocks In Any Given Year (2015),   The 5 Secrets To Highly Profitable Swing Trading (2014), Crash – How to Protect and Grow Your Capital during Corrections (2015), “The StockTwits Edge – 40 Actionable Setups from Real Market Pros” (Wiley, 2011).

Ivanov’s work has been featured in WSJ, Bloomberg, Yahoo Finance, Reuters, CNN Money, UT San Diego, Traders Magazine, Business Insider, Abnormal Returns, Real Clear Markets.

He earned his MBA and MS Finance from Webster University in Saint Louis, Missouri.

Follow me on StockTwits: @ivanhoff and on Twitter @ivanhoff2

How I think about the stock market

There are two major cornerstones to my market approach – simple is good and “the glass is half full” attitude.

The stock market is an opportunity machine. Times change, gas prices change, fashion changes, regulations change, but there are always companies that find a way to monetize on an undergoing social and business trend and make their investors rich. The only things that change on Wall Street are the names of the winning and losing stocks.

There is always a silver lining. One company’s rising costs are another company’s rising revenues and the market usually, does a pretty good job in identifying the winners and the losers. Money never sleeps.

Albert Einstein liked to say that “Any fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction”. No truer words have ever been said when it comes to investing. You could make your investing life as complicated as you want it to be, but the degree of complexity is not positively correlated with market returns.

The stock market is a discounting mechanism that looks 3 to 6 months ahead into the future. This is why prices will often change before fundamentals change. By no means, I try to convey the message that the market is always flawless. It is not and there are short periods of time when it acts like a bipolar schizophrenic but for the most part it is a leading indicator and I want to put the odds in my favor by paying attention to price action and staying on the side of trends.

Prices don’t change when fundamentals change. Prices change when expectations and perceptions change and they could change for various reasons. From a trend follower’s perspective, the main indicator that signals change in expectations is price.

Anybody could buy a stock and identify a new trend. Most people’s investing problems come from not being able to sit on their hands when they are right. Very few hold their winners long enough to make a difference in their returns.

If you don’t know why you bought a stock, you won’t know when to exit. If price action was the main reason you bought a stock, price action should be the reason to sell it. It is good to have conviction in your picks, but discipline should always prevail. Sooner or later, all trends end and when they do, it is not pretty. I have accepted that I won’t be right every time and I have learned to live with it. Being wrong is not a choice. Staying wrong is.

There should be a very clear distinction between trading and investing. Long-term investing is essentially a bet on how other people’s perceptions will change over time. It is about answering the question What are the catalysts that will change market’s expectations? Trading is about understanding the constant cycle of range contraction and range expansion, it is about risk/reward, it is about constantly adapting to changing markets.

How I Think About Trading

There are two major ways to consistently make money in the market:

1) Hunt for several huge winners in a year. Build large positions in them and ride them for monstrous gains.

2) Hunt for hundreds of 5% to 30% short-term winners, where the goal is to compound capital quickly by actively moving in and out of them.

There is not right or wrong approach here. Both have a place in the arsenal of each active market participant.

Everything comes at a price. If you want to catch a 200% to 300% long-term winner, you have to be willing to sit through multiple consolidations and several bigger than 30% pullbacks. Not everyone has the stomach to ride big stock market gainers, but maybe you don’t have to.

If you sell all your winners, when they are up 20%, you will never catch a double or a triple. Fact.

What is also true is that in any given year, there are a lot more 20% moves than 100% moves. If you learn how to catch hundreds of quick 10% to 30% moves, your capital could appreciate very quickly while you keep the drawdown in your account to a minimum. Plus, you can catch those moves on the short side as well.

Swing trading is among the fastest ways to grow capital if you learn how to properly apply its principles. Swing trading is all about velocity and an opportunity cost of capital. The goal is to stay in stocks that are moving quickly in our favor and avoid “dead money” periods.

Stocks often move in 10% to 30% momentum bursts that last between 2 and 10 days, before they mean-revert or go into sideways consolidation. The goal of every swing trader is to capture a portion of a short-term momentum burst while avoiding consolidation periods. Then to repeat the same process hundreds of times in the year by risking between 0.5% and 1% of capital per idea.

The beauty of swing trading is that it provides many signals. You don’t need to risk a lot per signal, which means that you won’t second-guess yourself whether to take a signal or not. One trade is not going to make your year or your month, but it also won’t ruin it.

How I think about Market Timing

They say that the definition of insanity is doing the same thing over and over again and expecting different results. If you do the same thing in the market, you are guaranteed to get very different results because the market constantly changes.

Different setups work in different markets. Everyone makes money in a bull market. Not everyone keeps it when the market changes. There are four different types of markets and each of them requires a different approach.

In rising markets, I buy breakouts and in anticipation of a breakout in stocks with hot price and industry momentum and recent IPOs.

During range-bound, choppy markets, I trade less and with smaller size, focusing on the industries that are showing clear relative strength or weakness. If there are no such industries, I stay in cash.

During corrections, I like to keep a large cash position (over 50%). If I trade, I focus on volatility and leveraged inverse ETFs. Correlations go to 1.00 during downtrends, therefore stock picking almost doesn’t matter and sticking to a few liquid ETFs makes sense.

When I see signs of bottoming (momentum divergences), then I look for mean-reversion trades, especially in severely beaten stocks with huge short interest – those could quickly go up 30% to 200% during market recoveries.