Stay Positive. Be Flexible.

By Kenneth Robson on September 26, 2013 • ( 1 )

A good motto for investors is to be flexible. Everyday the market moves against one or more of one’s open positions. We need to stay positive, and not become fearful and negative, simply hoping the market will spontaneously align with our interests if we do nothing.

Constantly be on the look-out for strategies to negate our losses by exploiting the new market outlook.

Remember there are still two legitimate lines of attack to profit from market movements

To be long (buying for selling later at a higher price) when the market is bullish for the stock(s)
To go short (selling for buying back later at a lower price) when the market for the stock becomes bearish.

When the trend changes, and moves against you, the first issue to check is the direction of the long-term trend. Is the long-term trend intact? Has there been a loss of momentum, move to a trading range, or a reversal pattern such as a double top, or a head and shoulder pattern?

If you are long to exploit a long-term up trend, and the trend is still intact, the likelihood is that the price retreat is simply a retracement, which may provide an opportunity to add to one’s position at a lower price.

On the other hand, if there is TA evidence of trend change, you need to consider changing your strategy to being short.

There is a tendency for investors to then look at exotic derivative options and not sell their long positions. However the first and most important consideration is to close your open long positions. The sooner you do this the better. The more capital you will keep.

If you are reluctant to sell, believing in the company and its long-term prospects, think of selling as an interim step. You will most probably be able to buy a larger holding when the price stops falling. Furthermore you can re-enter when the risk has eased.

If the market is moving against you, you do not need to wait for your stop positions to be hit. Why not act immediately the need to sell becomes clear?

Having quit your long positions, you can then profit from the impulsive move lower by using derivatives. Many retail investors wish to benefit from shorting, but do not know which stocks to short. One way to chose is to select the stocks that have lost money. Trends frequently extend much longer than anyone thinks possible, and you should stick with the trend until there is evidence of it petering out,

It is not in the scope of this post to discuss the possible derivative plays. Naked (not owning the shares being shorted) short selling is illegal and legal short-selling is the province of institutions able to obtain the required stock to cover their positions.

The options for retail investors are:

To buy a put option in the stock(s)
If you still own the physical stocks, you are in a position to write call options on your long positions
You can open a short CFD position. The ability of retail investors to go short when indicated is probably the single most useful attribute of CFD trading.