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Jesus replied: “ ‘Love the Lord your God with all your heart and with all your soul and with all your mind.’ This is the first and greatest commandment. And the second is like it: ‘Love your neighbor as yourself.’ All the Law and the Prophets hang on these two commandments.” Matthew 22:37-40

3 Feb 2016


Hi Friends,   7 Ways to adapt your trading in Volatile Markets.

Stay disciplined and stick to your trading plan:     Emotions have no place in trading.  Decisions regarding which stocks to own should be based on fundamental analysis or other research that examines the financial condition of the underlying companies.  When markets get choppy, knowing what to own becomes even more important.  Once you have a target list of stocks, employing technical analysis—the study of stock prices and trends—can help you select your entry and exit prices.  Then, monitor your positions carefully.  Set realistic profit and loss thresholds and follow them when the stock price moves outside of these bounds.  Don’t expect to outperform the broader market each year, even professionals rarely do that.  Also remember that you don’t have to trade your entire portfolio actively—in fact, you shouldn’t.  Instead, consider your personal risk tolerance when deciding how much of your portfolio will be used for trading—perhaps something  like 20-30%---and then keep the rest of your portfolio as core holdings.  With these longer-term investments, be sure to stay diversified and stick to your target asset allocation.

Maintain your risk tolerance and trade smaller positions:      Most traders think they have a high tolerance for risk—that is, until they encounter a bear market.  Before that happens, make sure you understand your capacity to withstand losses.  Don’t assume overly large positions to maximize gains if you aren’t comfortable with the risks involved.  When trading, consider scaling in and out of positions by buying the stock in increments as its price fluctuates, or selling in increments when you think it may be getting close to a top.  When properly managed, scaling in and out can reduce your overall cost basis and prevent you from owning too much of a position that is moving against you.

Use limit orders:         Market orders can be appropriate for trading highly liquid securities during market hours because they let you buy or sell a stock at the best possible price available when the order is received.  But market orders leave you vulnerable to market conditions, particularly if you enter them while the market is closed.  Plus, you may not obtain your desired price.  Limit orders are more prudent in volatile markets.  They allow you to specify the maximum price you’re willing to pay when buying a stock.  Conversely, they let you set the minimum price you are willing to accept when selling a stock.  Be aware that while a limit order allows you to specify a price, there is no guarantee of an execution, even if the market moves and reaches your limit price.

Use proper risk management techniques:        To help protect unrealized gains or limit your potential losses during market hours, consider using stop, stop/limit, trailing stop and bracket orders.  When you place any of these orders, you have to decide how many points or what percentage below the stock price to place the order.  Many traders have a standard policy based on their personal risk tolerance—such as 5% or 10%.  For traders who determine the size of each trade based on the dollar amount invested, rather than the share quantity, a point value (for example, $1.00 or $1.50) may be more effective than a percentage.

Trade the trend:        Trying to pick the top and/or bottom of the market seldom works to your advantage—it’s usually much easier to follow the direction and momentum of the market than to fight it.  If you’re going in one direction while everyone else is going in the other direction, you’ll likely get trampled.  In technical analysis, an uptrend is defined as a series of higher highs and higher lows.  Similarly, a downtrend is a series of lower highs and lower lows.  The number of occurrences it takes to establish a pattern will vary depending upon your time horizon.  Long-term traders may look for trends in weekly or monthly charts, while shorter-term traders may use daily charts.

Take some profits off the table:          If you own positions that have increased substantially in value, selling some of your shares is a good way to protect some of your gains.  Plus, you still have the potential for further upside on your remaining position.  During times of higher-than-average volatility, a slightly higher cash allocation is often prudent.  By taking partial profits on some of your appreciated positions and leaving those proceeds in cash, you can help protect those profits and lower your overall risk.

When in doubt, wait it out:      Just as markets can’t go up forever, they also can’t go down forever.  Periods of heightened volatility come and go, and, more often than not, are short-lived.  If you don’t have a good feeling for where the markets might be heading, sometimes just sitting it out isn’t such a bad idea.
Good Luck.                                                                     See You Later.

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