Playing for Keeps: 5 Simple Strategies That Put You in the Drivers Seat

Andrew Nyquist

bullish, bearish, stock market, investing, recessionEver had a stock or index fund in your portfolio head south and thought “I’ll give it a little more room” or “I’ve got years to hold it?”  Maybe said a prayer or two?  Or, conversely, have you ever debated when to buy or sell a high performing stock and decided to buy or sell it because it’s up pretty good?  No doubt, these are tough decisions.  But, it’s ok… you are not alone.  Repeat after me:  Investing isn’t easy.  Even skilled investors/traders have to refresh and regroup at times.  And, whether it is trading or life, we (collectively) are always learning something new.

So, why so difficult you ask?  Well, for starters, investing is emotional.  It’s our hard earned money and we want to be “in” when the getting is good and “out” when the kitchen is on fire.  When we aren’t involved in a strong market, it’s only natural to want in.  And, on the contrary, when a market or stock isn’t performing well, it’s only natural to want out… unfortunately, history shows that emotions and a”herding” mentality tend to surface at precisely the wrong times.  No matter how easy it may look or feel at times, investing is tough.  To become a good investor, one needs to have control over their emotions, understand and employ solid risk managment, and always have a plan.

Over the past several weeks, I have analyzed many stocks, commodities, and currencies through my weekly “See It, Market” annotated chart column.   Within each annotated chart, I attempt to touch on the tenants of risk management by outlining pricing parameters for buying, selling, and/or understanding the resulting economic impact of price movement.  We need tools and experience to make investment decisions with high confidence.    Although I can not provide you with the experience component,  I can offer up some strategic tools to assist you with your current and future investment choices.  With that in mind, here are 5 simple strategies that will put you in the drivers seat:

1)  Draw trend lines.  Pull out the ruler and crayola and start drawing lines.  Trend lines assist long term investors and short term traders alike.  They provide the foundation for making decisions based on pricing parameters.  See PowerShares QQQ Trust (QQQ) (quasi Nasdaq100) chart below for more color.

2)  Use stops and limits.   When purchasing or selling a stock or index fund (ie. ETF), it is imperative that you employ proper risk management.  Sell Stops protect your investment capital, while Buy Limits get the security you want at the price you are willing to pay, and not a penny more.

3)  Buy and sell in “legs,” or portions.  Buying in 2 or 3 legs can assist in lowering your dollar cost average.  And on the flip side, selling in legs can assure that you don’t have your whole position taken out in a “shakeout,” or fast downturn that goes just below trend lines (i.e. support) and quickly reverses upward.

4)  Avoid Events.  Unless you are an experienced trader, or on a long term plan, try to avoid buying or trading into earnings reports, market/stock events, and other activities that may cause increased volatility.  Whether we like it or not, emotions get in the way and impair our ability to think clearly.  A quick 5% or 10% move against you hurts the wallet as much as the psyche.  Know what you are getting yourself into, and if you don’t have the stomach or moxy for it, steer clear.

5)  Have a plan.  Know why and what you like about a stock or fund before you buy it.  Firm up your entry and exit points and adjust accordingly along the way.   Stay involved.  And check your emotions at the door.  Note that a more detailed outline of a trading or investing plan will follow in the coming weeks.

One final note:  Risk management leads to smarter investing.  Smarter investing equates to greater confidence.  And confidence breeds more confidence.  A virtuous cycle.  Have a good day and happy investing.

 

Previously published as a blog by Minyanville.

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Your comments and emails are welcome.  Readers can contact me directly at andrew@seeitmarket.com or follow me on Twitter on @andrewnyquist. Thank you.

No positions in any of the securities mentioned at time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.