A Moneymaking Strategy for Bad Times
Heading into the second half of this year, which has been volatile and marked by a negative bias, stock markets continue to trade on major news. It has been a market in which it is largely difficult to trade; but having said that, there are good opportunities to buy on market dips and profit from a subsequent bounce. In technical terms, when stocks sell off for a period of time, they hit what we call an oversold condition. When a period of selling happens or if a stock plummets after news, as a trader, you want to watch for the selling overhand to dissipate and then buy on weakness.
This strategy on buying on major declines does not always pan out, but, as long as you ride out the winners and sell the losers, you should have good success. This is a strategy that I use. Each morning, I scan the market data searching for stocks that have been sold off. I evaluate the stock and, as long as I do not see a major shift or deterioration in fundamentals, I place the stock on my radar and decide on whether to place a buy order at a limit price that I want. Be extra careful on thinly traded stocks where the bid-ask spread could be large.
The key to trading, especially in the type of market we are in, is to minimize losses and capitalize on the winners. If you do this, the key to success is to monitor your positions closely and make sure you are always on top of the situation. Take the emotion out of trading by using a mechanical selling system in which you set a sell order on the downside at a predetermined price. This will help protect against major downside losses, albeit it sometimes fails. When stocks move higher, you should adjust your stop higher. When you record major gains, take some profits off the table. Remember, the key is capital preservation, so you can always have funds to trade.