Small investor strategy wipe-out
September 22nd 2008 00:52
If you are a stock market trader and you are still alive - well, interesting times, what?
If you are a stock market trader and you are still solvent, then we take our hats off to you. How did you do it?
Global stock markets have served up some brutal turbulence lately, mowing down big and small alike. Bear Stearns was lucky enough to be weak enough to go under early enough, and thereby get baled out. By the time Lehman started struggling for air, the US regulators had decided that survival of the fittest must be the order of the day.
There can be no rescues, except perhaps a plea to the estate of Great Aunt Maude, for the millions of small home traders. Their numbers have grown quickly in the past 20 years, attracted by sexy and powerful charting software. But what has worked well for the diligent and prudent home trader for so many years is not working now.
The problem is volatility, and in particular the unmanageable tendency of markets to open at a considerably different level to the previous day's close, thereby ruining the safety of the small investor's biggest weapon, the stop-loss sale.
Simply explained, buy a stock at, say, $1, and wait for it to rise. There is no limit to the upside - you choose yourself if and when to exit. And the same time as the buy, however, you inform the broker that, should the stock's price fall instead, you wish to sell immediately it hits 90 cents. Now your strategy is in place: you can sit back and monitor the upside; you have limited the downside.
If you have read your charts right and the stocks you buy tend most of the time to move in the direction you anticipated, the consensus is that traders can make money on 70 per cent of transactions.
But no longer. Market volatility is such recently that the stock you bought yesterday for $1 can open this morning at 75 cents. Worse, this triggers a lot of stop-loss sales orders, and drives the price down even further.
Until global stock market conditions settle, I suggest you put your money under your pillow. Or on number 21 on your nearest blackjack table - my favourite number is overdue, it really is.
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