Don’t panic, stick to your Trading Strategies

 

Don’t panic, stick to your Trading Strategies. The problem with the modern world of investing and trading is that the internet provides everyone with access to see live market prices from computers, iPads, and Smart Phones. What this does, is make them question their trading strategies as they react to short-term price fluctuations. The key is to stick to not panic and react to short-term movements.

As a broker, I only hear from my clients when 2 situations occur:

1) When they have made a loss, and

2) When there is a market spike that makes them panic.

I rarely hear from clients when they are profitable, or when I have closed out of a profitable position. Without blowing my own horn, it’s needless to say that communication with my clients is quite minimal and mostly during times of uncertainty in the markets.

We’ve just seen one of those periods, with the S&P500 index in the US falling 47 points, or 3% from the high of 1,531 on the 20^th February to the low of 1,484 on the 26^th February. This minor ‘glitch’ in the current trend spooked investors due to uncertainty from the Italian elections, and the fear that the US Federal Reserve would end their quantitative easing measures sooner rather than later. Both points appear to be a quick negative reaction (at this stage).

None of us know with certainty what the markets will do in the future. As a professional analyst, I will make my decisions on what I know has occurred in the markets, weighing up the probabilities of success for that position and entering trades where the Risk is measurable and profit potential suitable. The bottom line is that it is the trading strategies that we adopt that define success or failure in the markets.

Two weeks prior to this recent market glitch, our analysis suggested that the markets were slowing in buyer momentum, and that there was a little bit of uncertainty creeping into the markets. This decision had been made based on Technical Analysis techniques that we use to evaluate price movements of the leading indices. Looking ahead, we had identified that there were two key fundamental events that had a reasonable probability of causing uncertainty amongst investors: 1) the Italian elections, and 2) the deadline for the US government to agree on the Budget increase and Debt ceiling.

Trading strategies are then evaluated and chosen to suit the outlook.

We deduced that there was lower probability for the markets to trend upwards on the short-term, however, we were not convinced that there had been any recent selling pressure to warrant panic in the markets. The trading strategies that would best suit this outlook included neutral or sideways strategies, or Time decay strategies which include, Covered Calls, Credit Spreads or Calendar Spreads.

We adopted a Credit Spread on the SPY (S&P500 index ETF) which we are still currently holding. And although we have seen a return of buyers in the last two sessions, we are happy to hold this position to hedge against a potential continuation of the recent uncertainty in the markets.

The Decision-making process, with regards to what trading strategies to adopt, can make or break your success in the markets. It’s no different to you making a decision on whether it will rain today or not. You evaluate the information you have at hand, and weigh up the probabilities of it raining. If you choose to believe it won’t rain, head outdoors, but then get caught in a storm, then clearly your decision was incorrect.

But when we are dealing with money, as we do in the stock market, investors tend to panic when they see signs of a ‘storm cloud’ brewing, and forget that they can grab an umbrella (adopt protection strategies, or hedge their portfolio), or simply run indoors out of the rain! This is why I believe it is imperative that you consign the skills of a professional you trust to assist you in the decision-making process.

What many investors are unaware of are the trading strategies that are available to them, and how to manage their decision-making process. I believe these are skills that anybody can learn and implement, but you need to dedicate the time and effort to learn, practice and understand just how to professionally manage your investment capital.

At the time of writing this article, we had the US S&P500 index rebound 31 points in the last two trading sessions, and showing the potential to continue the previous upwards trend that has dominated the markets since mid-November. Does this mean we will see further upwards activity, or is this the last hoorah from buyers before the next downwards leg?

Reality is that we don’t know. But the trading strategies we have implemented over the last two weeks mean that if the markets fall, we will have hedged our investment portfolio and if the markets continue rising, then we will exit our hedge positions and benefit from a continued rise. If the markets did nothing at all, wavering along sideways, then we have positions in play that will also profit from Time Decay. This is the power of knowing what trading strategies you have available to you, and when to implement the appropriate trading strategies to suit the market conditions.