As I’ve mentioned in my last blog post, I starting stock trading again and this time as I trade and learn, I will blog about them. The decisions I made and what I learned in the trades. Hopefully I get other experienced stock traders to share their thoughts and help guide novices like me.
This week, I was coming out from a loss of about $100 and was waiting for my funds to get settled where that date was on Wednesday, February 10, 2016. We are currently in a bearish market, the trend has been going down for the past 3 months.
But that does not mean money cannot be made, but it is often not advised to buy stocks this time because as the trend goes down, the more you lose. By the time it goes back up, you are just making up with what you lost. Some people may advise it is a good time to look for bargains of high value companies that are nearly assured to improved when the market goes on a rebound.
How to make money in a down market?
With my few years of experience in trading, the ways I am aware of making money in a down market. I have 6 strategies here to choose from, but based on my knowledge, amount of time to invest, amount of funds kind of dictate what strategy I can do.
- Buy stocks long for companies that are going up even if the overall market is going down.
- Buy stocks of high value companies as a bargain price and wait it out until the market comes back up.
- Stay in a cash position and keep waiting to bottom fish the turn around.
- Do day trading or swing trading strategies over position trading where you make money on shorter burst of up trends.
- Short stocks to earn on a down trend.
- Buy long of contra EFTs that run in the opposite trend of the market.
Buy Stocks Long (I pass)
I do not consider myself fully in tune with what is happening in these companies, their relationship between each other, and looking well into their financial statements. Gut feel says Gold and Mining companies is the go to, since their value tends to do well in down markets. Still not my choice strategy just because I want to earn quickly. Buying long positions and being a position trader takes a while sometimes. Although there are other companies that are still doing well as the market goes down, but it seems to be a hit a miss where there will be days that they still get hit by the downtrend of the market.
Buy Good Companies at a Bargain and Wait it Out (I pass)
Not my style too, too long of a wait sometimes. And as every day it goes down, I lose more money. When it comes back up, I’ll just be waiting again for make back what I lost.
Stay in a Cash Position and Bottom Fish (I might if I identify it)
I actually like this since I am not losing money , but again it is a long wait and I am always tempted to trade in the attempts to try to make a profit monthly or weekly. Although bottom fishing is sometimes risky because there is a possibility you miscalculated the turnaround, there are more conservative ways of doing it like wait for some uptrend verification with several indicators, and not just rely on a small dragonfly doji, take a look at the MACD also. Pay attention to historical areas of support and resistance and look at the day over day, week over week and quarter over quarter trend changes in the indexes.
Do Day or Swing Trading (I am always attempted to do)
Waiting for the market turnaround makes me impatient, probably emotion is messing with my thinking where greed is in there to make more as the soonest time possible. Problem with this is I need to be as nimble as possible and having a day job does not help me do that. I can sometimes get into the market early as it opens since I am on the west coast so the market opens before I even work. But still with a family, and work, a lot of time is dedicated to many other things. Sometimes I am not able to pay attention well to pull the trigger at the right time. I try to manage my trades well using limits and stops, but often when I did this, it ends up as a loss. Although it is a small loss since the stops are in place, but if they happen consecutively, they also add up.
Short Stocks (I can’t)
When you sell short to make money on the downtrend, this is like selling a stock before buying it, this requires you to have a margin account. And most margin accounts requires a minimum amount of funds to trade, about $25,000 which I do not have. Thus this strategy is out.
Buy Long Contra EFTs (What I prefer)
If I can’t short, then contra ETFs is my choice. The problem is with the current volatility, or longer periods of sideways movements, I seem to lose the money I earn. Just keeps going back and forth. So it goes back to being nimble which I still try to despite the challenges.
My Trades This Week
Since my funds were settled on Wednesday, Feb 10, the market rallied up in the morning and seemed to not stop. After 10am eastern time, it continued to give higher highs and higher lows on all major indices. Making me think a turn around will happen. I even waiting 15 minutes after and went long and did a bullish trade. Started with FEYE, AGTC and ZEN spending slightly more than half of my budget, not investing all amount of my funds to be cautious of the markets volatility. These 3 stocks where the top moving stocks trending up as the market was trending up early part in the day that was within my buying budget and also show good signs of strong upward momentum. In the past few days the market has been taking a direction change at around 10:00 AM Eastern Time and 15 minutes after, the trend seemed to continue. Confident in my trade, I took a quick shower and when I came back, the daily high was met and a downward trend already happened. The indexes and composites did a direction change at around 10:30. Trying to minimize my losses, I initiated a trailing stop in the hopes the trend might still go up. All stocks were closed at the stops with a near $200 loss, In my attempt to fix the damage, my emotional impulse was to look for some contra ETFs right away. And ended up buying 2 contra ETFs. SCO and DTO. Just before I left going to work, my portfolio the gain was already up $100 even with a $200 loss in the morning. Confident the reversal was final, I needed to drive to get to work already which is slightly less than an hour to get there. After parking my car and started walking to my office, my portfolio was in the negative again. Once I arrived at work, I added trailing stops, I hit my stops, except for SCO and I minimize my overall loss for the day at $114. I didn’t realize SCO was purchased with unsettled funds in my scramble to make a bearish trend. So I cannot sell the stock until the funds are settled which makes my stuck with SCO for 3 days. Although SCO closed lower than the Feb 10 price the following day, my buy was at the lowest level of Feb 10 that the close of Feb 11 is higher than my purchase price even if it is lower than previous day’s close. This further decrease my loss to $46.30. I cannot do any other trades for the week and can just sell SCO on Monday at the right time, with the right conditions. Friday comes and it becomes worst. A day where generally most stock traders should be happy, I was forced to be locked in my contra ETF accidentally purchased with unsettled funds that I cannot sell and should hold for 3 days. As the market rallied on Friday, my bearish trade was hammered and now loss a total of $208.30.
Definitely when Monday comes, I am not going to hold on to this unless the mark opens with a strong down trend. I am not going to dwell into this loss, instead I will look into bottom fishing opportunities. My gut feel, instinct, emotion feels like I need to bottomfish ride the uptrend on the right time of the day, go in and go out on the positive, but experience from these mistakes is telling me, I need more confirmation of an uptrend, wait for a good quality, high value stock, with high EPS, basically a good company, but be patience, stay in the cash position and ride once the confirmed uptrend happens.
I am still at a loss and there were several lessons I have learned from this trade.