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Cutting Risk With SQ

Hey 5-Star Trader,

“Tuesday Trade” Journal: One of the most important concepts in trading is to review your work, and learn from the good and the bad. Identifying what is working is critical — to do more of it. So, to lead by example, each Tuesday, you’ll get a trade from my trading journal, in which I explain my thought process from start to finish. Trading is all about finding something that works, and applying it over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

For this week’s “Tuesday Trade,” I want to outline my trade in Square (SQ).

When people hear the word “square,” a financial service is probably not the first thing that comes to mind. But, if you’ve ever been to a farmers market, roadside stand, or the like, chances are you’ve used Square’s service before. Founded in 2010, Square has been the sales vehicle for many small businesses and a ticker that I like to trade when I see a setup.

Near the end of last month, I saw that SQ was within range of a new high and had multi-time frame squeezes. This piqued my interest, so I took a closer look. I then saw that there was a Volume Zone Oscillator (VZO) buy signal, and that sealed the deal — SELL -2 VERTICAL SQ 100 17 SEP 21 270/265 PUT @2.12 limit order (LMT).

This put credit spread was bullish in nature with about a 1.5% risk of my overall account. 

One week into my trade and everything was looking great. SQ was still in a squeeze and there was nothing to report. However, nine days after my initial entry, the market’s behavior was beginning to shift.

I saw that the market was moving toward a downward trend. The S&P 500 was down 25 points, or .56%, and the 195-minute squeeze was firing to the downside. In a broad sense, this down day wasn’t horrible, but I kept in mind if there was a break in key psychological values, we could quickly cascade much lower in the days to follow. Not knowing which way the market was going to sway, I kept my SQ trade and proceeded with caution.

The very next day I had seen enough and decided to let go of SQ for a loss — BUY +2 VERTICAL SQ 100 17 SEP 21 270/265 PUT @4.08 LMT. 

There was an area of support at $250 where I could have possibly held on, but that would have been too low for my put credit spread to work. Typically, I don’t exit positions on down days, but I felt as though sentiment was going to continue downward so I opted with cutting my maximum risk.

Trades like these are always a little disappointing, but you never know which way the market will turn. I’ve learned that cutting losses early helps prevent wiping out the account and I’m always better off freeing up capital for the next one!

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