Investing Advice: Managing Risk in the Market

Posted On May 23, 2018 2:17 pm

Don’t be afraid of the whipsaw. It’s not a bad thing. To the contrary, I think getting whipsawed and getting back in can be a very profitable strategy. Some of my best trades have come that way and some of the best traders I know have shared similar stories. The psychology behind it is very simple. Think about it – you’re not the only one who saw this trade developing. If you’re piling in on a breakout, for example, with everyone else, then if the stock falls back below an important “support”, then all of those participants piling in are having the same experience as you are, which is not a pleasant one. This, many times, can be the final shakeout before the big move.

Sometimes market participants see an “obvious” bottoming pattern in a stock. The trade becomes a situation where investors get long with stop losses below the recent lows. The risk vs reward is very favorable. But what happens when the stock falls below that level, executing all of those stop losses and even triggering new short positions from the bears? Well, this one more low, shakes out the weak hands but then gets back above support creating a momentum affect that drives prices substantially higher, without most of the participants that got taken out. The idea is to not be one of those that got taken out and then did not re-enter.

Two great examples of these whipsaws near epic lows were Gold Miners $GDX in January of 2016, and before that, U.S. Treasury Bonds $TLT in late December 2013. Those are two that I will personally never forget, but there are many more.

I approach the market from the perspective of a market participant and someone who needs to execute. This is very different than a journalist, economist or analyst who have no interest in participating. We’re here to make money and we’re here to not lose money. Those are the two things that matter most, and not necessarily in that order.

 Related: The Real Reason ETFs Are Pushing Out Active Managers

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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