5 things to remember in volatile markets like this – May 2010

An article by pgupta

I am sure all of us have been following news lately regarding how the market is going crazy because of Europe Crisis. Spain has been downgraded again and that is going to affect how the markets affect here in US as well. Because of memorial holiday in US, we will not get to experience the reaction of investors of what happened over the weekend until Tuesday morning.

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Some people are predicting a major sell off on the cards! Some are saying we might be nearing the bottom soon. Sad part is that bullish market in the first few months of 2010 has turned investor hopeful that recession is over. Economist around the word are saying that may not be the case.

What does it mean for small investors like us? Following are the things to remember:

Limit Losses By Stop Loss orders (set aside emotions): Have your stop loss orders ready to trigger as soon as stocks hit lower than your tolerance level. I have heard several people setting it at 8% lower than current level. If you are able to successfully limit your losses, your job is already half done. That way you can stay on the sideline and jump back into the game when things start upwards.
Purchase insurance that works (Options): If you have a large investment in a stock which you truly believe will perform well but is kind of volatile, you might want to consider buying put options at the strike price based on your tolerance level and options bid price. That way even if one day the market opens lower than your stop loss limit, you are NOT going to lose more than you expected.
Do not assume small rallies mean end of recession: Several investors fall into that category. As soon as they see small rallies, they start assuming that the market is ready for a bull ride. That may not be the case. So in order to be safe, always assume that market is going to plunge. That way you have instruments in place to handle the crisis if that really happens.
Keep plenty of cash in your account: If you keep cash in your account, you can easily take advantage of other emotional investors (also large firms trying to move the market). There were several opportunities in May when market crashed badly within a day and creating a very nice opportunity to buy solid stocks really cheap. I know people who made 10-15% in a day by purchasing in crashes like that and selling next morning.
Be careful when visiting various stock discussion boards: Most of the stock discussion boards are pathetic these days because of pump and dump people or people who bash stocks to misguide people to sell so that they can cover their shorts in cheap. Yahoo message board is a prime victim of this. So if you want to read these boards, feel free but do NOT make decisions just based on what people are saying over ther

GLTA for trading in the first week of June. Hopefully everyone will be able to purchase a BMW by profits made from the stock market by the end of the year