4 Things to Do During Market Corrections
08/26/2015 6:00 am EST
Joe Fahmy of JoeFahmy.com reminds traders that why the market went down is not nearly as important a question to ask as what to do from here, which is why he offers four important tips for traders to adhere to during corrective markets.
I got many emails over the weekend asking me “why the market went down last week?” We never know the reason why until after the fact. The markets could be anticipating a slowdown in global growth, it could be China related, who knows? Personally, I think many funds who made big macro bets are in trouble and last week’s selling was forced liquidation. The problem is we don’t know how long it will take for them to unwind their positions and to decrease their leverage. I don’t think the why is as important as what to do from here:
1) Protect Capital. The best traders all preach defense first. I moved my clients to a large cash position last week and will keep it that way until market conditions improve. If you don’t protect your capital, you’ll have nothing to trade with when a new rally begins.
2) Protect Confidence. Many traders get killed and chopped to death during corrections. Unfortunately, when the next uptrend begins, they hesitate and can’t pull the trigger because their confidence has been crushed. Keep your head up, learn from your mistakes, keep a watch list of strong stocks, and don’t get discouraged.
3) Raise Cash and Minimize Trading. Most people don’t like to admit their mistakes because we all want to let the world know how great we’re doing. I have no problem admitting that I used to struggle tremendously in corrective markets (like the one we’re in right now) until I made a few adjustments. I simply decided to sit out and to not force trades during unhealthy conditions. Remember, it’s okay to do nothing and wait for the dust to settle. If you are going to trade, I recommend reducing your position size.
4) Learn Patience. The technical damage last week was extreme and needs time to repair. How long? Who knows? It could be a few weeks, a few months, or even longer. Either way, all the major indexes are below their 200-day moving averages. My experience has shown me that when bad news happens and we’re below this level, the bad news tends to exaggerate moves to the downside.
I realize that there are other strategies to use during corrective markets, but as I always say: do what works for you. Have a sound strategy and know your time frame. Whatever you decide, my best advice is to keep things light and to stay disciplined. A strong new uptrend is coming in the future, just be patient and save your money for it.
By Joe Fahmy, Trader and Blogger, JoeFahmy.com