Every week, the coaches at Prosper Trading Academy offer their insight on some of the most challenging questions covering recent stock market developments, trading tips, and relevant news stories. This week, Scott Bauer, Charlie Moon, and Mike Shorr cover this week’s CPI report and other future events that could impact the market, along with ways traders who suffered massive losses in the last 12-18 months can start potentially rebounding.

This week’s CPI report devastated the market. With next week’s Fed meeting a nationwide railway strike potentially thwarted, how can traders prepare for the impacts these events can have on the market?

Charlie: Cash is a position. We are in a “high Risk, High Reward” environment and as such, we must adhere to discipline. We have seen how out of control stocks can get if we slide or rally, and this means we need to define risk and stick to our guns if we take on trades. Otherwise wait for the dust to settle and then pick a side. Hedging can only do so much if you are too weighted to one side, so be fluid and and remain staunch in your discipline.

Mike: The CPI data was not horrible, but the market was certainly looking for softer numbers. That takes us to the Fed. Will the Fed have to become more aggressive with their monetary policy of raising rates? Before the CPI, there was about a 20% chance of a 50 bps rate hike and 80% chance of 75 bps. That has changed to a zero chance of 50 bps, 70% chance of 75 bps and 30% chance of a full percentage point hike. If the probability of the 100 bps hike goes up considerably higher, look for more downside in the market. Also, watch your October VIX contract. If we break through and hold the 27.00 mark, that is quite bearish for the equity market.

Scott: Traders should always be prepared for possible scenarios. However, we can NEVER know exactly what is going to happen, which is why we must use technical analysis and past trends to help in our decision making. The most important piece of this is to NEVER EVER overtrade. Make sure that whatever risk you’re taking is measurable and not one that will end your trading career.

Over the last 12-18 months, scores of traders have seen their accounts plummet up to 90% (maybe more), and are anxious to make up those losses. What’s the most important piece of advice you’d give to traders looking to rebound off these massive losses?

Charlie: Easier said than done, but use the past as a POSITIVE LEARNING MOMENT. Physiologically it can be extremely difficult to get past the losses, but to succeed in the markets you have to get beyond it. Losses are a part of the game. We teach to define risk prior to any trade and to get out when we are wrong. Ride the winners when the going is good. You can easily trade at a sub-50% W/L ratio and be very profitable by learning to keep losses small. That is the key. Know when you are wrong and move onto the next opportunity. Think of a bad trade like a toxic relationship. If you want to be happy, ditch the bag and find you a winner.

Mike: One thing to keep in mind is those losses are over and done with. Your goal should be to build your account back up certainly, but not by getting it all back in one chunk. If you do that, you’ll be making your risk decisions based on chasing lost dollars and not the trade at hand. If you’re holding onto positions, have an honest conversation with yourself (and possibly an advisor) about what’s worth holding, and which positions should be cut. Then build from there with a manageable position that you’re comfortable with and NOT a pile of junk that you hope will turn to gold in the future.

Scott: This is an easy one. So many traders I know will let positions “run” or hold them longer than they should just to make up for past losses. They change their outlook or trading style from potentially “hitting a single” to “swinging for the fences.” This is a recipe for disaster.

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