Don't Bet the Farm


Editor's Note:

So far so good. Okay, may be not "good" but we have been expecting the market to correct on us. Granted I wasn't expecting it to happen so fast but stocks do fall a lot faster than they climb. Several stocks on our portfolio were stopped out thanks to Thursday's market plunge. Yet that same plunge triggered several candidates from our watch list. I do want to take advantage of market weakness to launch new positions but the ferocity of the declines is a warning sign. We need to limit our risk.

You have probably heard of professional traders using the term "getting small" with their trades. When the market turns volatile or acts erratic traders try and limit their risk by decreasing the size of their trades and/or tightening their stop losses. Getting smaller lets you stay in the market but you minimize your exposure. The details are going to be unique for each trader. Cautious traders will want to consider sitting out until some of this dust over Greece finally clears. More aggressive traders will trade less often and use smaller positions. If you have open positions you may want to sell a portion of your investment to take some money off the table. In a "fast market" your stop losses may not be honored.

The 10% correction in the major averages is healthy but I'm not sure the correction is over yet. I've adjusted some of the triggers on our watch list and added three more candidates in case the sell-off isn't done. Keep your risk limited by using small positions. You can always add to positions down the road.