 Welcome back to the Trade Hacker Mindset. In this episode, I want to talk to you about trading in an irrational market. Trading the markets can be difficult to master and seemingly just out of reach. Professional traders have a secret. Trading requires total mental and emotional control. It requires the Trade Hacker Mindset. All right, so let's jump into our discussion of trading in an irrational market. At the time of this recording, it is Friday, November 5th. And I guess you could say we're a little bit in the middle of an irrational market. As an example, and if you're listening to this episode via podcast, you're not gonna be able to see this, but if you want to watch the actual video that's on YouTube, you can check that out as well. And so I've got a chart up of none other than Tesla. Now what has happened with Tesla over the last few weeks? Well, just back on October 20th, so three weeks ago, call it three weeks ago, Tesla was trading in the 8.50 handle, $850 a share. Today, just three weeks later on November 5th, Tesla hit an all-time high of $1,243.49. This is a stock that just moved up nearly 50% in a matter of a few weeks. Now, we're all familiar with the meme stocks and the Reddit crew and the irrational exuberance that we've seen in stocks over the last 12 to 18 months. And these were fueled by really retail traders kinda getting behind a company and all holding on using diamond hands and all that fun stuff that we read about on the news and in the Reddit forums. But just to give you some perspective on how irrational we're seeing in the marketplace today, let me just pull up GameStop and I'm gonna go to the fundamentals of GameStop. I'm in the Thinkorswim platform. And if I scroll down here, we can see that GameStop has a valuation of $16 billion, okay? All right, so based on this rise in the stock price of GameStop, 16 billion bucks, right? Not bad. And you can see on my chart here, if you're viewing this, is back in January of this year, 2021, where GameStop went from about $20 a share and hit a high of $483 per share, okay? So that's crazy, right? I mean, and we thought that was crazy. But let's take this into a little bit of perspective into what's going on right now. I showed you Tesla and how Tesla went up nearly 50%, but here's the difference, okay? Tesla is not just being driven by a few traders on Reddit, a few retail traders on Reddit. Tesla is a trillion-dollar company, okay? Tesla is one of the most valuable companies in the entire world. If we look at the market cap of Tesla currently, the market cap of Tesla is $1.2 trillion, okay? $1.2 trillion. $1.2 trillion stocks are not supposed to be able to move 50% in three weeks. And while sure, there's a lot of retail support around Tesla and the dynamics around the CEO, Elon Musk, this is institutionally driven. I mean, this is institutionally driven. This kind of move in that kind of a market cap stock is institutionally driven, not just driven by a bunch of retail traders on Reddit. Now, what is fueling this irrational exuberance? Well, the media would have you know that the reason that Tesla is going up, the headlines that they use is that Hertz rental car purchased 100,000 Teslas to be part of their fleet. Okay, fine, you know? Great, is that positive for Tesla? Yeah, is it worth a 50% move in the matter of three weeks? No, absolutely not. The other headline that we've recently seen about Tesla is that they're now gonna start allowing their superchargers around the world to be used for other electric vehicles. Okay, now that's a little bit bigger of a deal. That's a bigger macro thing that can really move the price of the stock. But we're still talking about a 50% increase in the price of the stock in three weeks on a 1.2 trillion dollar company. Okay, those numbers just don't add up from a fundamental perspective. And so that's why this would be considered a very irrational market. Let me give you another example that we are recently seeing. What about Nvidia? Okay, well, what do we know about Nvidia? Nvidia is a chip maker primarily making chips for gaming. And they do chips for all different types of things, but here's what Nvidia has done recently. Okay, as of about the middle of October, 1012, Nvidia was trading at about $206 per share. And just today it hit an all-time high of $314. Again, just an astronomical parabolic move in the matter of just a few weeks. So what's the size of Nvidia? Well, let's go to our fundamentals tab in Thinkorswim and check out what the market cap is of Nvidia. It's a $748 billion company, okay? $748 billion company. And in the matter of just a few weeks, Nvidia has managed to gain 30%, it has managed to go 30% higher. Now we know all the headlines around this. Semiconductors, there's a shortage in semiconductors. Nvidia is a semiconductor company. They make chips and all that stuff. But the irrationality of a move like that in a stock that size, again, this is institutionally driven. This is not just a bunch of retail traders getting behind the stock and pushing it up with all their might. And then of course we've got our cryptocurrencies. I mean, there's a ton of debate about the actual value of a cryptocurrency, but the value is what someone is willing to pay for it. And just to take a look at Bitcoin, the biggest market cap cryptocurrency, just a few weeks ago, actually at the beginning of October, Bitcoin was trading around 42,000 and it pushed up just in a few weeks and hit an all-time high of over $67,000 per Bitcoin. So from a macro perspective, what is fueling all this in the wake of what would be called the worst pandemic of our lifetime in one of the worst unemployment situations that we've seen in our lifetimes? Well, one of the primary drivers of all this irrational exuberance is the Fed printing money, flushing our system with so much money that people are trying to find and institutions are trying to find places to put that money to work to get a return on their investment. Now the first quantitative easing that we saw the Fed do was back in 2008 during the financial crisis. You know, when the banks had all those issues and they flushed the cash with banks so that the banks would continue to loan and that was supposed to be a one-time thing. That was supposed to be a one-time thing to get our economy back on track, to make sure our economy and banking system didn't collapse and then that was supposed to be done. But what happens whenever the government comes in and decides that they want to do something like that as a stimulus or a benefit for American people? Here's what happens. It creates a situation where it's almost like a heroin addict, okay? America is the drug user, the Fed is the drug dealer and the Fed pumped in some heroin into the economy and what happens to a heroin addict whenever they get their heroin taken away? They start going into convulsions. They start shaking and they need that heroin to be functional, right? Unless they go through rehab and they sweat it out and all the stuff that goes into that, okay? I've never done heroin so I'm not sure exactly what that's like but from viewing documentaries on it, that's what I gather. Now, what happens is the Fed started giving this and then anytime there was any little issue in the economy, what had to happen? The Fed had to print more money. They had to give you a little bit more heroin and a little bit more and a little bit more until the point now our economy is a full-blown heroin addict, right? And what happens when the Fed decides that they're going to start pulling that money away when they're gonna start tapering? They've already announced that they're gonna taper all these bond buybacks but they did it in such a minimal way that the market viewed that as even better and so the market, even after the Fed announcement this week, the market is going even higher because it was the equivalent of the Fed still giving the heroin but just maybe one little drop less. Okay, because if the Fed actually decides to really ramp back on that tapering of those buybacks and they actually consider to start raising rates the economy is gonna freak out because it's like they're pulling that heroin away from a heroin addict. Okay, fine, so this is all well and good. Okay, that's what's going on, let's say. But the question is and the title of this episode is how do we trade in an irrational market? Well, one thing that you, let's start with what you do not do. First of all, let's go back to our chart of Tesla and Tesla's trading at all-time highs up over $1,200 per share. Do we go into that and say, okay, Tesla just can't go any higher. It's had this huge move. It's gotta be overextended. Let's start shorting Tesla. Now to me, the answer is no, okay? There are other people who are very, they consider themselves contrarian traders and there's a very popular personality, on an options trading network, that would say, yeah, that's exactly what you do. But if you don't have unlimited funds, if you don't have multi-million dollar accounts where you can start doing that and incrementally continue to do that, trying to pick the tops and trying to get involved in the market to go the opposite direction in a market that is completely and utterly irrational, I think you're playing with a lot of fire if you try to do that. You know, one of Warren Buffett's most famous quotes is that the markets can stay irrational longer than you can stay solvent. The markets can stay irrational longer than you can stay solvent. So if you started shorting Tesla here and Tesla continued to move higher and it's currently at $1,200 a share and then it gets to $1,300 a share and then it climbs to 14 and 15 and next thing you know, Tesla's at 3,000. Would that be irrational? Would that be crazy? Can you even fathom that Tesla could go and double in price from the point it is now in the matter of the next six or 12 months? You know, I really can't fathom that that is going to happen, but there have been much crazier things happen and if you decide this is the one time that you think this is the top and you're just gonna continue to average in and continue to short Tesla as it goes up, eventually if you do that, you are going to get caught and you are gonna lose substantial amounts of money. And hey, I know this from experience, okay? I decided I was gonna do that in oil one year and this was about, I don't know, 10 years ago where oil was around, I think it was around $80 a barrel, not too far off from where it is here. Everything in the media was talking about oil was going, it had already been at $100, it dropped down to 80, everything in the media and all the fundamentals and all the technicians, everybody in all the headlines said everybody knew that oil is a foregone conclusion, oil was gonna go back to $100 a barrel. And that's exactly what I thought as well. So what was I doing? Well, I started buying oil futures, started getting long oil and then oil went down to 75. Well, I liked it at 80, now I love it at 75, so I bought some more. And then what happened, it went down to 70 and then it went down to 60 and I continued to average in and buy all the way down because I knew, I just knew that eventually oil was gonna go up and it was gonna go back up to around that 100 level. Well, by the time it was all said and done, I was down six figures in my account by the time that I finally pulled the plug, called uncle and that was the situation where I ended up stopping, I ended up quitting trading for about six months. And so A, I don't ever wanna see that happen to anyone else because A, that was before I had any real structure in my trading, I was very inconsistent at best. And that was a gut-wrenching situation. I almost did not continue trading after that situation because of the position that I put myself in. And so, regardless of how irrational you think something is, regardless if you think that Tesla should only be valued at $600 a share and you just know at some point it's gonna go back down to that more rational level, you cannot trade against irrationality because the markets can stay irrational longer than you can stay solvent. Now, the other way to look at this and the other way to potentially trade it is, you know, we recently came out with a new strategy we call navigation trend trading and if you're looking at our charts, you can see the indications of what we're using to do that. We've got, you know, this that shows an uptrend, if it's in a downtrend, it shows a downtrend, and then we use very specific customized, what we call trend candles, to keep us on the right side of the market. Now, if you were trading Tesla, you know, before this move happened, would we have been long or would we be short? Well, we're in an uptrend, so when we are in an uptrend, we don't take short positions for that strategy. You know, so the only thing that we would have done has been long Tesla throughout this entire move. Now, did I catch this entire move? No, I did not. Did I catch the beginning of it? Yes, I did, leading up to earnings. Now, obviously you can see the move, the majority of this move had it after earnings and I did catch a couple other little dips in here but I certainly didn't catch the entire move but here's what I did not do. I did not short Tesla through any of this massive move here. Okay, same thing with Nvidia. Let's go back to the chart of Nvidia that we looked at, same thing. I mean, as of 1022, you know, we were in an uptrend in Nvidia. There's nothing here that would tell me that I need to short Nvidia and if you think that you can pick tops and pick bottoms, you're just wrong. What we want to do is we want to get involved and only be long a stock or a market that's in an uptrend and only be short a market that's in a downtrend and that will keep you on the right side of the market. Going back to another example, going back to GameStop and let's go back to when it had that massive move up in the market when all the excitement was going on. Well, before that happened, GameStop, as you can see, it was already in an uptrend. So there's no way we would have been short this market. The only thing we would have been doing is potentially getting long. In fact, there are some very precise signals that would have had you long before this thing really spiked up. Now, part of the art of trading is how long can you hold something while it's making massive moves in your favor? And that's, you know, that's a different story, but if you can be on the right side of the marketing, if you can have the tools like we've created with the navigation trend tools to be on the right side of the market, it is going to, A, keep you out of trouble and help your mind work against you trying to work against irrational markets and potentially get on the same side as the irrational move, which is gonna create profits for you. And it's not gonna allow you to, you know, have this mindset about, oh, this thing is just so high. It can't go any higher. I'm gonna try to fade this market and go against it. Now, I usually don't get this technical from a strategy perspective on this podcast because this podcast is all about the mental side of trading, but this ties into it. Sometimes you have to use tools to help trick your mind into ways that are keeping you in check. And there's never a more important time than when markets are irrational like they are right now. So there are a lot of irrationalities in the market right now, but even when you find yourself, you know, looking at an individual stock or maybe the rest of the market is just kind of acting more normal, but you find a, you know, a random stock that's acting irrational, make sure you take what I've said to heart about trying to get involved in a stock that's irrational. You know, we've had a couple of members talk about, you know, why not create a course or why not start a thread in our community about getting involved in what on Reddit they call YOLO trades, right? You only live once, putting a bunch of money into something and kind of hoping it, it's exploding or jumping on, you know, a GameStop or something like that. And the reason we don't do that is because we wanna teach people how to actually trade and be consistently profitable over time, okay? We don't wanna send the message to our members that trying to jump on one of those meme stocks is a consistent way to make money, okay? If you read Reddit, you're gonna see all these posts about, all these thousands of dollars people have made, what they don't post is all the trades that they've lost thousands of dollars on. When you trade like that, it is simply another form of gambling. Now, if you wanna take a little shot every now and then and take a little tiny piece of capital and take a shot on a potential big move, cool, go ahead, no problem. I do that every once in a while as well. But what I'm saying is trying to use a strategy like that and starting and trying to consider that as a valid strategy as a way to actually make money over time, it's not gonna happen. That is an absolute losing game. So to wrap up, use statistics and probabilities in your trading. Use tools that are going to keep you on the right side of the market so you don't have a mental lapse in judgment and try to fade an irrational market. Remember the quote by Warren Buffett that markets can stay irrational longer than you can stay solvent. And don't get caught up in the media headlines and the fear of missing out that you've missed something and now you get in and try to take advantage of it and it all goes against you. Don't do those things. Remember how to trade, keep your sanity even when the markets are irrational. Hope this was helpful. If you wanna be part of our community, just go to community.navigationtrading.com. That's community.navigationtrading.com. It's free to join. We have hundreds of traders and they're interacting on a daily basis. Not only about the mindset stuff but sharing trade ideas with the sole purpose of helping each other become better traders. Look forward to seeing you on the inside or we'll see you in the next episode.