I am going to hope that if you are reading this you are well aware that you can’t predict the market’s direction with certainty. What you can do is look at what you know about the market and determine the probability of what it will do. Over the last couple weeks we have watched the market hold on to its current level with a white knuckle grip. It has been essentially flat for months and has recently shown weakness. While we don’t know for sure that it will drop, the probability that it will decline is pretty high.
Looking at how markets have behaved in these conditions in the past gives us an idea of what to expect, how to prepare, and most important how to exploit these moves.
- Review your risk strategy. Take a look at all of your current positions and double check your exit plan. If you are using stops, look at how recent moves have impacted those stops. Is it time to tighten them up? If you are able to watch the market closely, consider removing stops. With the elevated volatility wild swings can trigger a stop on a quick drop and take you out at the worst time. If you can watch the market closely, keep the stops in place.
2. Long-term vs Short-term. If you have diversified your investments, you most likely have positions you are holding on a more long term basis in addition to your short term more frequent trades. The market has historically trended upward in the long-term in spite of drops and crashes. Look at your long-term positions and consider adjusting your position size to ease the impact of a drop. Smaller positions during a drop mean less losses.
3. Trade the Drop For Gains. Options are a perfect way to make this market work to grow your account. While it looks like we are headed for a drop, options allow you to generate income no matter which way the market moves. This is even more true when volatility is higher as it is right now.
Don Fishback has put together an excellent guide to using options in this current market. He starts at the begging and takes you step-by-step through trading including which strategies work in specific trading conditions. You can grab a free copy here.
Keep learning and trade wisely,
Market Wealth Daily