Stocks, Strategies, and Common Sense

With the uncertainty in the markets, and the threat of double dip recession which may or may not be averted by governmental action, it can be difficult to know how to handle your stock portfolio. For instance, if the double dip happens stock prices will plummet to test the previous lows, from which they have now recovered a major percentage of the previous value. Can you bear to face such large losses again?

On the other hand, if the situation is handled well by the powers that be, and the major financial houses continue to support investment, you don’t particularly want to be out of the market while gains are continuing. In fact, viewed in this light some of the major companies on the stock market are severely undervalued, and at the current time there is a marvellous opportunity to “stock up” on first-class stocks.

What many investors and traders choose to do is listen to the financial news and cross their fingers. You can usually find a pundit who will concur with what your feelings are, and be reassured – to some extent – in your course of action, whether it is to get out of stocks, hold firm, or to increase your portfolio.

But in the end, what has changed? When was it that someone said you should forget all you know about trading, fundamental and technical analysis are of no value, and you’re on your own? Volatility comes and goes, but common sense dictates that markets are still moved by human actions and emotions, just as they have been for decades, including really good times and really bad times.

In whatever financial field you dabble, there are basic common sense practices which you should be maintaining. One is to set and keep to a stop loss position. In the short-term trading field this may be measured as two or three times the current volatility, or the previous high or low, depending whether you have a short or a long position. If you hold stocks for investment rather than trading, and intend to hang on to them for years, then your trailing stop loss position may be 15% or 25% away.

Many investors saw their stop losses trigger in the recent swing, and hopefully honoured it and got out of the market before losing too much. That is just what the stoploss is supposed to do. That is one of the reasons you have an investing or a trading strategy, to protect you from disasters. But other market participants may have felt that the rules have changed and dithered about applying what should be second nature, to their detriment.

Another way to deal with stocks going down is to hedge the move, using spread betting or other techniques. In this way you can remain fully invested, and still be protected from a large downswing. In effect, you have locked in your profits to date when you hedge, and also frozen them. You are insulated from the markets machinations, up or down, until such time as you take the hedge off.