If you have been in the market over the last year you’ve dealt with global uncertainty, European debt crisis, hard landing vs a short landing in China, and an US presidential election. The market hates that evil word “Uncertainity”!!! It has been an uphill battle even with the S&P 500 posting gains of 13% in 2012. For the retail trader it has been a tough market to pick stocks when the 2012 darling, AAPL, took a brutal, end of the year sell off. I bet if you looked hard enough you could find plenty of other areas of difficulty in trading in today’s market. How would a retail trader make money in 2013?
Uncertainty is the polite term used to explain an indescribable market movement. When the standard fundamentals and technical are overrun by sentiment we have a market like we did last year. Choppy intra-day and quarterly movements of stocks have created a difficult market to trade individual, fundamentally sound equities. The new normal is anything but normal and creates havoc for the retail trader. The retail trader has to now trade in an unknown market with unknown equity movements.
Let me suggest 3 ways to potentially improve trading for the small guy.
First, look longer term. Yes it may be very tough to justify short-term losses for future gains. I’ve never liked day trading because the market moves to fast for us to catch an intraday movement. To be nimble is very hard due to the lack of ability and resources to correctly guess a direction for any period of time. When an investor can take a step back and purchase fundamentally sound companies at a cheap price they are usually rewarded longer term.
Second, look for ways to make up some of the downward movement. This may push investors out of their comfort zone and cause the need for further education. Basic protective put or in the money covered call strategies are great ways to create returns as stocks move to the downside. The protective put acts as insurance on a stock position. You buy to open the right to sell your stock at a certain price for a certain period of time. The put position can make up significant amounts of the downside movement.
Insurance on equity positions give your portfolio a hedge against the covered call strategy helps investors receive a credit as they wait for equity positions to come back. An investor can sell to open a call and receive an credit into their accounts. They are now obligated to sell their stock at a certain price for a certain period of time. As a stock falls in value the investor gets to keep the credit as the option expire. Some worry about having to sell their stocks? This is where we think like an investor and need to not be emotionally attached to the equities we’ve purchased.
Third, is to stick with what you know. If you are familiar with AAPL and the price movement use your knowledge to your advantage. I would challenge anyone to find a better fundamentally sound company than AAPL. Use the option strategies to make up some of the downward movement. When the next big thing comes out from AAPL you could be rewarded with another huge run up. Do your due diligence to wait out the emotional, knee jerk reactions to the equities you trade.
Patience and letting the market come to you is an art and not for the faint of heart. The more experience you gain in the market the better you will trade. Success comes when the account is closed not on an individual trade basis. We all can get a big win or suffer some losses. Use the protective put and covered call to get paid when stock suffer downside movements to lower you cost basis.
Disclosure: I am long AAPL shares.