Posted May 10, 2021
By Alan Knuckman
Pave Your Way to Your Next BIG Winner!
There is an underrated tool for trading success. Its not some new gadget or a big secret. The one tool that can withstand any market environment is to simply create a plan.
Remember that volatile market conditions can still be some of the best times to take advantage of unprecedented opportunities. A disciplined trader has the tools and skills to maximize the situations that may leave most speculators unprepared and emotionally vulnerable to news and events.
Lets get started. The first step in any investment decision is to quantify your risk on each position with stops or protective options. Decide what dollar amount or percentage you are comfortable to put at risk per investment. The challenge is to balance the risk with reward.
All investment decisions should use the same methodology and discipline (your time horizons and strategy will change depending on conditions).
Investment decisions consists of going through a four-step process:
1) Identify High Probability Candidates
2) Execute with Proper Risk Control
3) Manage Position
4) Maximize Trend
At the very minimum, you should analyze protective stop loss placement prior to entry on any investment. The best time to create a plan is before the emotion of the markets movement clouds your judgment. Being stopped out can be frustrating, but it can be a necessary part of risk control and solid money management.
A covered call strategy can also be an effective method to benefit from the increased market volatility by lowering your stock basis cost. Without the discipline of trading with stops as an exit strategy or options for protection, investment success can be increasingly difficult.
As opposed to conventional stops, insurance is available for your portfolio or individual stocks that you may be interested in at certain price levels. While volatile conditions might damage your portfolio, it is always possible to prevent further deterioration with options. Like any insurance, the greater the protection, the higher the costs. Option premiums are no different and affected by the amount of time purchased and deductible cost.
Usually, it does not make sense to risk a large percentage of a portfolio on any one investment choice. Another concern is the time horizon and risk tolerance for different account types. An IRA may have separate investment objectives than an option account designed to speculate.
Emotion often clouds good judgment and is detrimental to a disciplined investment plan. Be prepared to invest in any direction and conditions that fit your risk tolerance.
Shorting stocks to profit from downward moves can be as simple as buy low and sell high in the reverse order. Some stocks and sectors still rise in bear markets. Keep in mind that money may move to other investments like gold, currencies, municipal bonds or treasuries in times of instability as safe havens.
Times of extreme market volatility may increase the opportunities in the marketplace. It may be necessary to lower expectations and rebuild confidence in the investment tools and decision-making process that you employ. One major problem for investors is their emotional reactions to what is happening in the financial markets around them. As a result, not implementing that disciplined plan for success in any environment.
Remember, there is no such thing as good or bad markets, only ups and downs. If you have a solid plan, one that is fueled by logic and risk aversion, then keep at it and dont let emotions get in your way.
Keep it In the Money,
Alan KnuckmanEditor, In-The-Money