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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