One of my favorite contributors to Real Money is Alan Farley.
What makes his work worthwhile to me is this ability to read the overall environment and derive specific, easy rules to help adapt and survive the turmoil, whatever it might be at the moment.
This week, he offers some common sense advice to traders who may be hacking themselves up in the whip-saw, choppy markets of late:
• Pick lower-volatility stocks.
Why pick lower-volatility stocks? Slower movers let you to react in slow motion and not get hurt by intraday swings. You won’t make money as fast with these trading tortoises, but you won’t lose it as fast, either.
• Trade smaller size
By reducing position size, you let a stock travel over a greater distance without damaging your equity. Present conditions aren’t a good time to place big bets on market direction. Remember, size equals risk.
• Use limit orders
Avoid market orders entirely. Place a limit order at your carefully chosen price, regardless of where the stock is trading at the time. If you don’t get filled, just move on to the next opportunity.
• Place physical stops
Place a physical stop as soon as the position gets filled, to protect you from major losses and preserve profits when the market moves in your favor.
• Lower your commissions
You need a resourceful broker who provides low-cost execution, fast reporting and many ways to access information.
• Hold positions longer
Don’t act like a daytrader unless you are one. Most of us should avoid the intraday markets because the volatility forces bad decisions. Instead, save your analysis for an end-of-day review.
That’s all good, straightforward advice for traders and investors alike.
Adjust Your Second-Quarter Strategy
RealMoney.com, 3/30/2006 12:38 PM EST