Monday, May 2, 2016
You're hearing lots of different opinions about the stock market right now...
Some folks are predicting a crash. Others are calling for new highs.
So you're likely asking yourself, "Which is it? Should I be bullish or bearish?"
It's a good question. But even if you're confused, you don't need to stand on the sidelines...
As a trader, you should have a working thesis for any asset class you trade... stocks, bonds, gold, or cash.
What do you expect to happen in the short term? What could go wrong? How wrong? What should and could happen over the intermediate and long terms?
Your expectations – even if they're not 100% clear – should guide your trading behavior.
It may sound obvious. But lots of traders don't take the time to think this through. They hear a compelling idea, place the trade, and that's it.
But "the trade" can take different shapes...
For example, let's say you decide an asset is in a long-term bull market, but due for a pullback in the short term. You could just buy for the long term and forget about the short term. But then you run the risk of stopping out of your position on a pullback you expected.
Instead, you could wait for the pullback before you buy. But then, if you're wrong about the pullback, when will you buy? You might miss out altogether.
So what do you do?
One solution is to buy half of a position initially. You can buy the other half either once the pullback comes (if you're right about it) or when the asset continues higher (if you're wrong). You won't get the absolute best entry price either way, whether you're right or wrong. But that's OK...
One benefit of this strategy is that you can use a wider stop loss on the half position, without taking the additional risk that would come with a full-size position. This makes it less likely you'll stop out on a pullback.
Another benefit is that if you're wrong about the pullback, you at least have half of a position. And when you add more, your average entry price will be better than if you hadn't bought earlier.
Is this the same as trying to time the market?
No. It's the opposite. You're adjusting your trading strategy to account for one of the main risks that comes with time – market volatility.
I don't like the idea of taking large, new bullish positions right now. The risk of a sharp pullback in the market – and in most individual stocks – is too great. But by using the "half now, half later" approach, you are able to trade setups you like with less risk.
So back to the opening question... Are you bullish or bearish? Or confused?
Most folks are confused. But confused doesn't have to mean paralyzed. As long as you know that you don't know, you can work with that.
If you don't have a working thesis, though... if you don't set your expectations... you can't. You're trading blind.
My advice: Hear the bulls out. Hear the bears out. Come to your own conclusions. Then, build your ideas in to your trading strategy. It's one of the best ways for traders to gain an edge.
Editor's note: Last week, Ben told his DailyWealth Trader subscribers that a bull market could be starting in one of the world's most important metals. If it happens, 200% gains are possible in the next two years with one of the sector's largest companies. To access this trade – and all of Ben's premium research – click here.
In August, Ben and Brian Hunt explained a stock market strategy that can help you make money no matter what the market does. And they shared a handful of the best ways to use the technique. Get the details here: Bull Market, I Win... Bear Market, I Also Win.
Jeff Clark recently told Growth Stock Wire readers that the market has even confused one of his most valuable technical tools. But he's giving it one last chance. Learn more here.
The gold bull market continues... Barrick Gold, Newmont Mining, and Agnico Eagle Mines all hit 52-week highs.
Natural gas and coal firm Consol Energy goes from "bad to less bad"... rallies 200%-plus from its January low.
Aluminum maker Alcoa climbs nearly 70% in three months.
Medical-waste company Stericycle plunges 20% on bad earnings... shares fall 35% since mid-October.