How to Manage Your Risk the Smart Way

Advertisement

One of the most common questions I hear – whether it’s from my clients, attendees at my seminars or even folks I meet on the street – is, “How do I manage risk in this market?” I understand why I hear it so frequently. The bulls have been running the market to high after high this year, and many are concerned about whether this momentum can last. If it doesn’t, they don’t want to be left with a wiped-out portfolio.

Let me tell you a little story: I bought my first stock 20 years ago during the height of the internet boom that sent the market to unfathomable levels. It was a great time to get into investing, and the wild ride lasted a few more years before the bears finally had their say. In the 17 years since the tech rally peaked, there have been two major bear markets and several smaller garden-variety corrections. There have also been two bull markets that resulted in the S&P 500 more than doubling each time.

My point here is that if you’ve been hesitant to stay invested, trying to time the market will almost always be a losing game. Stocks go up and down all the time. Heading to the sidelines to avoid the potential downs generally means you’ll also miss out on the ups.

That’s exactly why I created my NexGen system. Even in the midst of that second bull, with the S&P up 260% from its 2009 low, I still see opportunities that make me excited for the profit potential we can capture together. Sure, you have to expect to encounter bumps and bears along the way, but the overall trend will head higher and the only way to profit from it is to own stocks.

The key is owning the right companies and having a solid risk management strategy in place that protects you on both the entry and exit of those stocks. I do this through a combination of fundamental and technical analysis. Fundamental analysis looks at the company itself and takes macroeconomic factors into consideration; technical analysis is how I interpret stock trading rhythms to identify attractive buy and sell points. Increasing profits while reducing risk is the name of the game here. This is especially valuable when the market takes those inevitable breathers after a big run, when price swings can be hard to stomach. My aim is to cut through that noise and focus only on those plays that are truly viable.

So when it comes to identifying our next opportunity, there are several approaches at our disposal. Generally, the market dictates one strategy over another, but we are in a unique position right now to be able to implement two strategies. The first is buying stocks at a discount, looking in sectors that have been left behind in a rally. At the same time, we’ll also look for stocks that have rallied with the market but still show superb relative strength compared to their peers.

Once we’ve identified the right stock and bought in at a good price, chart reading really comes into play. The best way to manage our downside is by identifying critical levels of support on a chart, such as moving averages or previous areas of price support. For shorter-term trades, I’ll look at more recent support points. But for longer-term investments, I recommend paying attention to levels that have held strong over the months or years. Any breach of this level tells us we need to take a closer look at the position and reevaluate if it’s worth holding on for a turnaround.

In the end, there is no perfect risk management strategy, but the one I use is a good compilation of chart reading, fundamental analysis and everyday news flow. It’s a very important tool in both long-term investing and short-term trading, and it will certainly help you sleep better at night knowing that your ultimate downside is limited.


Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2017/05/how-to-manage-your-risk-the-smart-way/.

©2024 InvestorPlace Media, LLC