You Need to Read This to Avoid Big Losses

man with piggy bankOctober has always been a month of volatility and, so far, this October has been no different. Following four straight up months, stocks are showing some fragility in October, with selling across the board from small-cap stocks to blue chips.

The focus of the selling pressure has been on technology and small-caps, with the NASDAQ and Russell 2000 down 3.6% and 1.9%, respectively, as of October 19. The NASDAQ and Russell 2000 have also been negative since the end of the first quarter. Moreover, the DOW, NASDAQ, and Russell 2000 have fallen back below their respective 50-day moving averages (MAs), based on my technical analysis.

Driving the move to the exits have been weak quarterly results from the bellwether technology companies along with numerous S&P 500 companies.

In all, this is not a time to get too comfortable in the equities market.

The reality is that, based on what we have seen so far in the earnings season and the estimate, the revenue growth is muted as America tries to get its consumers to spend.

The key is not to try to time the market, as this is difficult; but a prudent investment strategy is to make sure you have some trading strategies in place.

You always should be thinking of the risk and your situation and should always have a good investment strategy in place.

Having a good investment strategy, which includes risk management, is the key to stock market success. The most important tenet in trading is preserving your investable capital via the use of risk management. The last thing you want to have happen to you is to make a sloppy trade and lose your tradable capital. You can avoid this by following a simple investment strategy.

When the price of a stock trends higher, you should think about a potential exit strategy. This investment strategy does not mean liquidating profitable trades, but rather protecting your profits.

An investment strategy is to take some profits after a surge in the stock. Chances are the price will retrench.

Another key investment strategy is the use of mental or physical stop-loss limits. The reality is that no one is perfect in trading. I have made mistakes and so have many of you.

Some of you may be wondering if the stop-loss should be a mental or physical stop. I prefer physical stops, as they effectively eliminate the potential influence that emotion can play when you trade. Emotion often can destroy good trades and cause you to keep your losers, which is not a good investment strategy.

Keeping losers is counterproductive and will make you a viewer from the sidelines.

For those familiar with options, you can use a put hedge to help minimize your downside loss. (Read “Stock Market—Fragile Conditions Means You’d Better Have Protection.”) If you own mutual funds, you can buy the appropriate index put by determining the type of fund it is (i.e. small-cap, blue chip, S&P 500, technology, etc.).

If you are already adhering to risk management within an investment strategy plan, good for you; if you are not, learn the strategies you can use and you will become a better and more successful trader.