The Problem With “HODL” — And A Better Way To Trade

In recent weeks, the difference between old traders and young traders has grown stark.

When I talk to young traders, I hear about dogecoin, Elon Musk, and the importance of the HODL strategy.

For those of you scratching your heads, HODL means “hold on for dear life.”

The Problem With HODL

Old traders talk about the probability of inflation, the Federal Reserve, and the importance of remembering the trend is your friend until it ends.

A few days ago, I mentioned that I came up studying under (and being mentored by) some of the pioneers in the trading community. Some of them are more well-known than others, and I still keep in touch with many of them. My access to old traders gives me a sense of history. They tell me HODL is an internet-friendly way of saying “buy the dip,” which was a popular strategy in the 1980s and 1990s.

Two bear markets in the first decade of the 21st century made “buy the dip” obsolete. Investors learned dips could be more than 50%. Investors in the popular names of the late 1990s suffered dips of more than 80%. Dips like that prompted selling rather than buying.

The next bear market will show that HODL is a bull market strategy. When gains turn to losses, brave talk turns to selling.

The chart below shows that we are at important support levels. A break below $400 on the SPDR S&P 500 ETF Trust (NYSE: SPY) could trigger a significant selloff.

Old traders are watching trendlines like this. They will become defensive as trendlines are broken.

And here’s the thing… Those old traders using strategies they learned over the past 40 years? Together they manage billions of dollars. When their strategies say it’s time to sell, that’s what they’re going to do, and their selling will fuel further declines.

There’s A Better Way To Trade

And at that moment, I believe young “HODL” traders will likely join the selling because they will see the value of preserving capital.

This is a simple analysis, but it’s an important analysis. We all know that when the trend reverses, we need to adapt. Those who haven’t learned this lesson will learn it.

As for me, I’m watching it all, knowing a reversal is likely at this point. But I’m prepared to revise my outlook if the S&P 500 pushes to new highs.

For example, I recently recommended a trade in Bank of America (NYSE: BAC), a company positioned to do well whether the broad market rises or falls.

Banks should do well for the next few quarters because defaults and late payments have not been as big a problem as expected. When the economy shut down in 2020, banks prepared for the worst. They set aside large reserves for possible losses, and they are now reversing those reserves, adding to their income.

The recovery that is boosting earnings by not generating those expected losses is also generating income by creating demand for loans. Borrowers are returning to the market as they seek home mortgages, car loans and business loans. BAC will benefit from this trend.

BAC offers value for traders right now. Shares have a price-to-book value about 25% below the long-term average.

Source: CapitalIQ

Action To Take

Another thing about these younger traders… They could benefit from learning new strategies, like the one we’re using for the BAC trade over at Maximum Income.

We’ve had a great deal of success trading BAC in the past. In fact, we closed another 16% winner on the stock in March — and I believe this trade will produce a similar result.

That’s because we’re using a strategy that allows us to earn income upfront from the stock – while still allowing us to participate in the stock’s upside. This makes it a safer strategy than “HODL” or whatever you want to call it… because we’re locking in gains right away rather than having to wait.

This is why I like to think of it as an “insurance” strategy – and it’s one that’s been used by seasoned market pros for decades, allowing them to profit in any kind of market.

Go here if you’d like to know more about how this works now.