A three point survival plan

May 20, 2012

A guest entree from Alan Green, managing director of Tradersown.co.uk

The bullish performance from the FTSE100 year to date convinced many investors that a new bull market had begun. After spending 4 years in the doldrums, the definitive bullish moves higher seemed to be those of a market in recovery mode. But even after this bullish Q1 surge, although many took the view that the old adage ‘Sell In May’ was the correct course of action, few could have guessed that gains made during the Q1 2012 rally would be wiped out in a week long trading session.

The sheer volatility in the markets now is leaving many investors asking questions over their buy and hold trading strategy, and in some cases investors are walking away from the markets altogether.

Trading volumes are still thin, PLUS Markets, the entry level market for wannabe listed stocks has bought by interdealer broker Icap for just £1. All of this stands in sharp contrast to the market shocks of 1987 and 2001. During these two events, normal trading levels resurfaced within two years of the initial crisis. The recovery in trading activity this time around has been painfully slow.

The Eurozone crisis has undermined confidence for investors, and while for the active trader the intraday swings present many opportunities to make money, staying ahead of the market should be the primary goal. And with some planning and foresight, there are still opportunities to beat the markets, despite uncertain economic conditions.

  • Many smaller stocks are still expensive in spite of the market falls. Try to identify shares you can acquire at a substantial discount. The big momentum stocks may appear to be the attractive and easy option, but investing in stocks with the fundamental backing to weather a storm of selling will always deliver superior returns in the long term.
  • If the markets continue to fluctuate, timing your entry could be the difference between a losing trade and a great investment. You must use all the tools at your disposal to pinpoint ideal entry prices. If a stock’s chart isn’t backing up the fundamental story, move on to other options. There’s just too much risk in trying to guess when a crashing stock will stabilise. Don’t try to catch the proverbial falling knife.
  • When the market gives you opportunities to book profits, you take them. Another old broker adage springs to mind: ‘No One Ever Went Broke Taking A Profit’. On the flip side, when the market warns you that one of your stocks might underperform, you should sell. What’s left is a lean portfolio containing the stocks that offer the best chance to lead you to profits. There’s nothing wrong with taking profits on a favourite stock – you can always buy it back when the dust settles.

At the risk of boring you with old sayings, my last one is this. ‘No One Ever Plans To Fail, One Just Fails To Plan’. The strategy points outlined above will at the very least provide a framework around which to build some ideas. At best it could even make money.

What next?

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