DOMINATION REPORT
What Goes Up Must Come Down
A Bull Run Like No Other. From the time President Trump was able to formally announce his victory over Hillary Clinton and become the current President of The United States Of America, the stock market has been recording gains that haven't been seen in almost a decade. Granted that upon the election of former President Obama the stock market did record gains over his eight year reign, as well as recovering from the worst financial crisis of our modern era. This current bull market is stronger than anything recorded during Obama's Presidency.
What does that mean for today's investor? A market on a run like this has not been witnessed in recent years, so you better have your eyes and ears open to what's taking place in the market, because there is a rule of science that will eventually hold true. What goes up must come down.
Experts Warn About Upcoming Stock Market Crash. Are You Protected?
Learn How Investing in Gold ETFs Can Yield Consistent Monthly Returns
Regardless of Which Way the Market Is Moving
Click Here to Register for this Free Video
What does the traders manual say about the procedures that need to be followed when faced with a phenomenal bull market? Absolutely nothing, because a trader's manual full of procedures doesn't exist. Successful traders keep all the knowledge and wisdom they have accumulated over the years catalogued in their minds, not to be shared with the general public. If you are fortunate enough to be able to glean some knowledge from a successful trader most likely those bits of information were not found in a book. Various scenarios that a trader has witnessed over a lifetime in the profession equip him or her with the foresight of how to react to certain market conditions. Unless this knowledge is shared with you, you could be ill equipped or faced with learning things the hard way, when a particular market scenario presents itself. I would like to share with our readers some lessons from my personal life that may be useful in the upcoming weeks.
When faced with a bull market that has reached new heights, protect your precious gains. If you are fortunate enough to have made a great trade in a bull market. You cannot allow yourself to lose those gains for any reason. A useful tool for this situation is a 'sell stop order.' A sell stop order functions in this way, you base the order on a trigger price most times below the current bid, if the stock trades at the triggered level your order will be treated as a market order and trade at the next available bid or trade along with the next transaction. For example if you have gained US $10 a share in xyz stock and the current market bid is $15 offered at $16, you need to decisively pick a level you are comfortable with if the market turns quickly, a rule of thumb maybe 25% of your current gain, the reason being, markets do fluctuate and a sell stop order placed to near to the current bid may execute, but the stock could rebound quickly. You wouldn't lose money in this situation but you could lose the opportunity to ride the wave to higher prices, for this exercise sell stop orders should be used to protect you from the worst case scenario of potential loss. If I had a 10 point gain locked in, I would place my sell stop order at $12.50 to put myself in the best situation to attempt to maintain at least 75 percent of my gain.
One of the requirements for traders today, is to hedge all positions against loss. If the major brokerage firms are requiring their traders to do this. You should also utilize this tool as a matter of trading discipline. One method widely used especially for stock positions that have recorded a solid gain is to use a portion of that gain to purchase stock options related to your position to ensure against loss. Stock options are an effective and simple way for the novice as well as the older, wiser, and more experienced investor trader to maintain gains when a bull market turns south abruptly, without warning.
Just about every financial instrument can be hedged against loss. I find the fundamentals of learning this strategy and using it as a tool for trading comes a little easier with stocks and Stock options. When you purchase an option the name of the contract correlates with the stock you own, the strike price is relative to the current market, making an option purchase easy to understand. The challenge in purchasing an option to hedge against loss occurs when you're faced with the choice of execution when the contract expires or purchasing another option contract. You may have been wondering why I choose the value of 25 percent of gains to fund the hedging strategy. For those of you fortunate enough to have held a stock like Advanced Micro Devices, Inc. (AMD) that has gained more than 600 percent in the last 12 months.
Advanced Micro Devices, Inc. (AMD)
I'm sure there have been times when the share price may have fallen and your gain may have been reduced by 10 percent, maybe as much as 20 percent during the course of the year, yet you had the courage to hold on and see your stock value climb through the roof. Others say your hedge should be placed within a parameter of 2 to 5 percent of your gain. Those experts that suggest that, did not ride the roller coaster with you on stocks like AMD and make the 600 percent gain you did, even when the share price fell close to 20 percent many did not waiver and sell. So recommending a hedge or a safety net for gains within a 5 percent boundary would not have worked for holders of that stock. A stock that behaved the way AMD traded doesn't conform to the 2 - 5 percent parameter hedge. Applying this method may have caused you to lose long term tax treatment for your holding and possibly pay repetitive commission fees jumping in and out of the stock.
Now, market conditions that have recorded unparalleled levels are present, and the odds that this fury of market euphoria may end, are also present. Now is most certainly a time to lock in the gains that you stressfully were able to achieve in the last year. You may have read, or heard these words before but they ring true for every bull market, there are bulls, bears,and pigs, bulls make money, bears make money and pigs get slaughtered. As an investor the discipline needed to control greed is a necessity. So for you holders of stocks that have outran the rest of the pack similar to how Usain Bolt does it on the Olympic track. I suggest the 25 percent level of gains to fund your hedging strategy, at that point that's enough pain and certainly enough gain, if market conditions change suddenly. On the other hand, accepting the fact that this bull market may end soon, selling your position or a portion of your position now and realizing closer to 100 percent of your gains may not be a bad choice either.