by: Al Thomas
For the past few weeks the market has had a very nice advance breaking out of an eight month sideways pattern. Then the brick wall. Several days of slamming down taking back some of the nice profits that have been accumulating.
Now what? We know which way is up, but we don’t know how high is up? Don’t think you are confused. So am I and I am considered a professional trader.
The market is giving mixed signals. Some technicians claim their signals are bullish and others say their signals are bearish. The fundamentalist (those folks including many economists) are also on both sides of the fence. Is there anything folks can do to protect their investments?
Wall Street says buy and hold. We have seen what happened with that scenario in 2000. Many investors lost their shirt, pants and underwear. Less than 1% of brokers called their clients to tell them to sell. They did not know either because they have not been taught how to protect portfolio profits. Many investors said I can’t sell here because I will have to pay huge taxes. Well, they didn’t have to pay any taxes because they gave back all their profits and in some cases much of their original investment. Can that happen again? You betcha sweet bibby it can. Has your broker learned anything since 2000? More importantly have YOU learned anything from the 2000 debacle?
There is what I call portfolio insurance that helps you identify how high is up. Really? Yes, really. Having been an exchange member and floor trader for 17 years I learned very quickly (or you go quickly broke) that I had better have my exit strategy planned before I buy.
Did you know that when a general makes a battle plan he also has a retreat strategy for his troops? If the battle does not go well he wishes to withdraw with as many of his troops in tact as possible. The same strategy should be employed for your investments. When you buy any stock or mutual fund you must have a plan to sell before you lose all your money. Any fool can buy. It is the wise investor who knows when o sell.
Your automobile may cost $15,000 and I will bet you have a policy that has a deductible amount to protect you from a total loss in event of an accident. This also the way you should think about buying stocks or mutual funds. The deductible is your stop loss order for every position in your portfolio. No one is 100% right when buying so you must know how much you are risking before you buy and place the open stop loss the moment your order is executed.
When you buy your portfolio insurance (and it is free) it is also prudent to raise that stop as your stock advances so you will not give back your profits. Every professional trader uses stops. You can too.