In today’s volatile market environment, the need for more active investing and hands-on approach is essential for any investor looking to protect their stock portfolio. No one knows this better than Toni Turner, the best-selling author of A Beginner’s Guide to Day Trading Online, A Beginner’s Guide to Short Term Trading, and Short-Term Trading in the New Stock Market, and the President of TrendStar Trading Group, Inc.
EQ: In the last few years, market volatility has been at some of the highest levels traders and investors have ever seen. How can investors take advantage of that by incorporating some other strategies into their investment approach?
Turner: If you think the market’s overbought, and you believe that more volatility is coming into the market via bad news or other unanticipated events, there are some actions you can take . First, you can use a simple options play by buying puts. If you prefer not to get into intooptions playst, you can sell short one of the major index ETFs such as the Dow Diamonds (DIA), the S&P 500 SPDR (SPY), or the PowerShares QQQ (QQQ).
Of course, you can always sell short a lagging stock in a lagging sector. If you follow a sector that doesn’t do well in a volatile environment, you can sell short a lagging stock in th at particular sector.
Traders also hedge their accounts with the leveraged inverse ETFs that have become so popular since 2008-09 when our markets fell so hard. I hesitate to mention those because, although they can certainly deliver profits, traders and investors really don’t want to get into those instruments, unless they’re very skilled and experienced. Because of the way they are constructed, traders need to know that these ETFs should not be held for more than one or two days. They’re meant to be used for short-term trading, and on a longer-term strategy, they can turn into real widow makers. That’s why I don’t really recommend them to the average person.
If you really want to use leveraged ETFs for speculation in a volatile market, or to hedge long positions, you’re better off selling short the leveraged fund that moves in the same direction as the underlying index, such as ProShares Ultra Dow30 (DDM) and the ProShares Ultra S&P 500 (SSO).
My final recommendation for enduring volatile markets successfully: Head for the sidelines. In an overbought market that turns volatile, investors can always consider taking some profits off the table and then watching and waiting for a period of time. It’s easier on the nerves, and keeps you from reaching for the Maalox bottle.
EQ: Buying low and selling high is arguably the most-used phrase when it comes to trading and investing. It’s obviously easier said than done. Do you think that’s a good mentality to take when entering a position?
Turner: That strategy is one of my favorites. I call it, “I’ve got friends in low bases.” I love the strategy but I only implement it when I have a certain stock targeted for specific reasons. I will take a stock that has done well and for whatever reason–be it fundamental deterioration, missed earnings, or negative short-term news–and watch it fall in a downtrend and make a relative new low. The trick with buying low is you have to identify a real low, and then an orderly base, and subsequent breakout to the upside. The caveat is, a stock in a downtrend can use a period of consolidation that appears to be a base, to rollover and head to yet newer lows.
One has to be adept at reading price charts to spot a real low base, and you want a base to form in an orderly price range. Many times, the On-Balance Volume indicator or the RSI will begin to drift higher before the stock actually breaks out. So when you buy the breakout—“buy low”- it can be a very valid strategy. Then perhaps you hold the position as long as the stock continues higher, in an uptrend. When that trend shows signs of topping out, we “sell high.” I don’t use this strategy all the time and I don’t use it in all markets. Still, it’s been good to me, and it is one of my favorites. You need different strategies for different market environments, and you may use a different strategy in buying value stocks than you would use for growth stocks. So, while “buy low, sell high” is a good strategy, it’s not the only strategy.
EQ: What are some other tools or methods you use to help you identify possible tops and bottoms in your trades?
Turner: Everything trade I make,, whether long term or short term, I execute within the context of the market and its environment. I stay aware of the major indexes, where they are going, and action in the major sectors. After that, I look for top reversal patterns, which are key. You want to be able to spot the kinds of technical patterns–like head and shoulders, double tops, diamonds, and even expanding triangles–that will rollover if your goal is to sell short.
For investors, top reversal patterns are great if you know how to read them. They can help you understand when to take profits before your stock rolls over, and a winning position doesn’t turn into a losing position. . Simple top reversal patterns show us when to take some profits off the table, how to manage risk, and also point to potential short entries. As a trader, I also use other technical indicators, such as moving averages, relative strength, and average true range.
EQ: When, if ever, should a shorter-term trade become a longer-term investment?
Turner: Sometimes traders hold losing trades, and become resigned to holding them as “investments.” On a consistent basis, I believe that’s a bad idea. But when a trade that was originally deemed short-term breaks to the upside and continues in a strong uptrend, that’s a valid time to let a position turn into a longer-term investment.
A good example is Hewlett-Packard (HPQ), which suffered a really ugly year in 2011. In September and October, it came down and actually formed a short-term base. There were all kinds of technical signals indicating that it could be the yearly low for HP. In the first week of October, the stock broke to the upside.
In this case, it started out as a trade, and I’m sure much of the breakout was due to a short squeeze. Traders may have taken some quick gains there, and rightfully so. Still, those who kept a position saw HPQ gradually move higher to present levels. In those situations, a short-term trade can turn into a longer-term investment for the right reasons, and not for the wrong reasons. Whenever you trade or invest, you want to take action for the the right reasons, because you made the right choice and it became an even better situation than you first imagined it might be. . And of course, in those cases, you can adjust your protective price stop orders to suit a longer-term investment strategy.