Have you started trading stocks, just to have the stock market pick you up and slam you to the ground, WWE wrestling style? Not only did that happen to me and most everyone else in the February/March 2020 stock market crash, it happened again to me last week. And I wasn’t ready. I know now that defense is everything when it comes to the stock market. Now I have a strong defense, a plan.
Exit Strategy #1
When you buy a stock, you have to have an exit strategy. I know, that seems a little silly, right? Why buy a stock if you think it might go down? But they do go down, and you need to be ready. I have a 7 – 8% loss rule which means if my stock goes down 7 -8% of what I bought it at, I sell it, no questions asked. See my post You Have to Have Sell Rules.
Exit Strategy #2
On the profit side, you need to have a profit taking strategy. No stock goes straight up forever and you don’t want to “round trip” your stock. That’s just a saying for buying a stock and watching it go up and then watching it come right back down to what you bought it for, never taking your profit. See Selling Stocks to Lock in Profits.
What if the whole market is tumbling down?
Those rules address individual stocks. What if the entire market comes down all at once? Then what will you do?
This happened to me (and others) last week. My portfolio tanked 4.8%! That was a big loss and it felt awful! One of the worst parts was that it was already down almost 2% at the opening of the market. There wasn’t much I could do at that point to regain that loss.
Watching the losing game with no strategy
All day long I watched my portfolio go down. I kept a close eye on each stock, ready to cut any that I felt needed to go. The problem was that I really didn’t have a plan. I knew I didn’t want to round trip any stocks, but I hadn’t drawn any lines in the sand for cutting my profit losses.
No stock seemed to lose much more than any other stock. And I hedged my QQQ stock by buying SQQQ. See Stock Trading in Review: Hedging! But I froze like a deer in headlights. No plan, no action.
Many times when the market goes down like that, it will swing back up. If you jump out of your stocks, you don’t get to participate in the upswing. And it did swing back up the next morning just as much as it had tanked at the opening the day before. But then it just sat there for most of the day.
As I write this a week later, my account is up 1% higher than before that big loss. So it feels like a moot point. Even though I did nothing, all the stocks popped right back up and went higher. But this is not always the case. Just look at our most recent Coronavirus crash. If I had waited until the third day to bail out of all my stocks, I would’ve lost a lot of money.
Oh wait, I did wait, until the 6th day, and yes, I lost a lot of money. But I came up with a plan yesterday. (Yes, it took two downturns to spur me to action. I’m a slow learner.) It’s based on the great principle: Cash Is King!
Cash Is King
If you need to sidestep the market slide, start getting into cash. That means to sell some of your stock. But this is when you need your defensive plan ready to accomplish that.
If the market is REALLY losing steam, these are my tactics I plan to use:
If I own any leveraged Exchange-traded funds (ETF’s), I will sell those first. I have owned QLD before and that has twice the movement of QQQ (which follows the NASDAQ index.) So if QQQ goes up 1%, QLD goes up 2%. But the risk is twice as much too. If QQQ goes down 1%, QLD goes down 2%. Therefore, if the market has taken a fast downturn, I want to get out of stocks that are more at risk. I can always buy them back when the market turns around.
Second, hedge. There are multiple ways to hedge, but the one I am currently using is purchasing SQQQ. If QQQ goes up, SQQQ goes down. So if the NASDAQ index is going lower, more specifically QQQ (and I have shares of it), I’ll buy SQQQ. That gives me some protection for my QQQ stock. I have to watch for the reversal and sell the SQQQ; otherwise I’ll be losing money from SQQQ while my QQQ goes up.
Third, sell my swing trades. Those are my short-term trades, and they have been recently purchased. They were never meant to be position (long term) trades so I don’t even need to think about how much of a shakeout I want to stand. I also have a tighter loss rule on them: 2 – 3%. Important: I always look to see each stock’s reaction. Some stocks still hold up in market swings, and I won’t sell every swing trade just because, in general, everything is going down. Each stock needs to prove to me that it needs to be sold or held.
Fourth, sell my less desirable position stocks. It’s important to know ahead of time how you rate your stocks. Then you won’t freeze like that deer. Know which stocks you don’t have as much conviction in or maybe the ones you know you should’ve taken the profit before now anyways.
Lastly, if things are really looking bad, I will sell part of my best stocks. There is no need to sell everything all at once. You can always sell more later if the market continues to plummet. Unfortunately, there is no crystal ball to tell you when you’ve arrived at the bottom of the fall. It could be after day 2 or day 32. If there is a quick rebound and you have sold everything, you have nothing left to participate. But if it does continue down, you can sell most or all of everything.
Loss cutting rules still apply!
Remember, don’t ever throw your loss cutting rule out the window. Mine is 7 – 8%, so if the market is tanking and ANY of my stocks hit that threshold, they are gone, regardless if they are A rated stocks or not! I can’t emphasize this enough.
Yes, there is risk in stock trading but I can control how much risk I’m willing to take IF I act on my rules. Are these great rules? I don’t know. In theory they sound good to me but I haven’t put them all into practice yet. I may be changing them or at least tweaking them. In February I was late in taking action so I systematically sold them all at once.
Great defense followed by great offense
The Part B to this whole plan is when and how to jump back in the market after it turns around. If it’s a quick 1 or 2 day event, you can buy back anything you sold when you see the stock going back up in price and volume. That means other people are buying it back too. If it’s not going back up and many are not buying it, let it go. Find a new good stock to have conviction in.
Remember, always have a plan. Create your own defense and rules that work with your style of trading and your comfort level. If you can’t sleep at night because you are worried about your money, you need to change your plan so you can. A strong defense will always keep you in the trading game!
I have only been actively trading for 3 months as of writing this article. I am never suggesting to buy or sell any stocks. This is for information or entertainment value only. Always do your own research and consult your financial advisor before doing any investing.
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