This market remains a volatile beast, gapping higher or lower practically every session. We are also almost through another round of quarterly earnings, which always seem to create potential for large gaps. I think many of us can agree that the first 30 minutes of the market can be very volatile because of a volatility event or from an earnings report. If you have been watching the market over the past couple of months, you might say the entire sessions have been volatile. But by being patient, and many times sitting out early market action, you can improve your chances for success later in the session.

There is an old technical analysis saying that says gaps tend to fill. Of course, that is true sometimes but not true other times. That said, the market and stocks tend to be more volatile at the open than later in the session. Although technical analysis like support and resistance levels still tend to work, erratic movements are present more so than later in the session. I like to tell traders to let the market settle and simmer and then look for an edge.

So, remember: Be patient and wait to see how early trading develops. Give some previous support and resistance levels a chance to respond to try and get a better feel of which way (if any) the market will move after the initial open. Then if you get a 2-bar close, for example, on whatever time frame you are using below support or above resistance or a reversal off those levels, you have put the odds are your side. And that is a very good thing!

As market volatility continues, here is a quick reminder to be cognizant about removing risk. If you know me, you have probably heard me say (at least a thousand times) to think of yourself as a risk manager first. But many times we take that for granted, especially when it comes to options. Let me explain.

What’s the Use?

The way the market has been behaving lately, there are many positions that can move quickly in our favor and of course those that can move quickly against us. The latter are what I am talking about here. Removing risk from your portfolio is not just about taking profits. It is also about reducing risk and protecting the position from further losses. Often, we are frustrated when a position goes against us, and we just give up. Trust me, we all have felt this way, especially early in our option trading careers. But you need to refocus and manage the trade as initially intended despite your frustration. Protecting the position from additional losses is the key to getting ahead and not letting big losses take you down.

Expiring Worthless

Another option position that is often taken for granted is credit positions. Selling covered calls, cash-secured puts and vertical credit spreads. Many option traders will not close out the position and let the position expire worthless. Let’s be honest: More times than not they do, especially if 80% or more of the premium is gone. But why not remove risk totally? Although the odds are small, the additional gains when at 80% or more of the max profit pale in comparison to the risk that remains. In this market anything can happen, so be smart and get rid of the risk.

Be the Risk Manager

Once again this has been a friendly reminder to be proactive and manage your positions actively. This can make all the difference in the world and give you a fighting chance to keep extracting money from the market for a long, long time.

I can read minds. OK. Not really. But, hey, wouldn’t some of that sixth sense stuff be great as a trader?

I actually traded with a guy on the CBOE trading floor who said he could bend spoons with his mind. True story. I never saw him do it, and let’s just say I had my doubts. But he swore he could.

Anyway, I feel like I can almost read minds in one regard: reconstructing the rationale for why someone may have made a trade.

Wing Spreads

You’re probably already familiar with our Credit Spread Genius and Time Spread Genius trade trigger systems. Well, those work so well that I’m expanding the family with Wing Spread Genius (soon).

I’ve got the prototype ready and have been testing it by looking at the trades the model sends out.

Just like the credit spread and time spread versions of the Genius namesake, it’s built to scour the market for the best candidates of a very specific type of trade—direction-neutral income trades. And it spit out those trades but also some other types I did not expect.

It was French physiologist Claude Bernard who said, “It is what we know already that often prevents us from learning.”

I know butterflies, iron butterflies, condors and iron condors like I know my birthday. I’ve traded them for years. But I underappreciated the directional prowess these trade setups have.

Johnnycat from Group Coaching is a pro with directional butterflies. But it wasn’t until I saw some of these hit the scanner that I really started to appreciate them for all they are worth—and learned that a LOT of professional traders use them all the time.

NVDA Directional Butterfly

On Thursday, midday, this trade hit the Wing Spread Genius test account:

This market has been a volatile beast with almost every day filled with decent to large moves. Let’s be honest: It is hard for a swing trader to get an advantage with those moves. Obviously, when the market closes, there is never a guarantee it will open higher or lower the next session. If we knew that, trading would be a whole lot easier and we probably wouldn’t be having this chat. But there is a method I use on a constant basis that I have found helps me tremendously. It is to monitor how the stock closes on the day.

Bullish Close

This is even more essential if I am looking for a bullish or bearish directional trade. For example, I like to enter a bullish trade closer to the end of the session if the stock looks like it will close toward the high of the day. Naturally, I want the stock to close in positive territory. But if there is some resistance or if the stock is extended, odds tell us there is a better chance the stock will pull back. If there is a strong bullish close at or above resistance or if the stock does not retreat much, that shows buyers have not moved on. This gives us better odds the stock will move higher, at least at the open. Many times, you will see the stock continue to move higher, particularly if it is breaking resistance or triggering a bullish reversal.

Bearish Close

For a bearish potential trade, look for a bearish close with the stock closing near the low or at or below a support level. If it does, I look for a bearish entry toward the close again.

Many times, the stock will continue to move lower, especially if support has been broken or that bearish close has triggered a bearish reversal.

No Guarantees

Of course, there is no guarantee whether a stock closes bullish or bearish that it will continue in that direction the next session. Market risk can move stocks too, like a gap that is the opposite of your expected move. But being patient and waiting to enter a position when there are more odds on your side can improve your results tremendously, and that is a guarantee.