Minimizing Risk in the Stock Market | How to Minimize Risk Trading Stocks
Running Time: 7 minutes
The Stock Market is going to crash, and we are all going to die!
In this video, I am going to be discussing what you can do when the Stock Market is up, what to do if the market is down, and steps you can take to minimize any losses.
What Happens if the Stock Keeps Going Down?
Well, you can hold and wait, but it may take a month or two for it to go back up.
A possible better option is what’s called Dollar Cost Averaging. This is where you will keep buying as the price keeps dropping. I used to buy some more if it dropped a dollar or so per share. However, I often found that I would run out of an acceptable amount of money before it even reached the bottom. Now I tend to wait longer before putting more money in, maybe $2.
At some point it will seem to level off and start coming back up. That is when I buy more, as it starts coming back. Then you can periodically buy into the small Dips when it comes back down a bit. Eventually your lower priced shares will make up for the higher priced shares, and you will break even somewhere in the middle. Then you can decide at what point you want to sell it off.
Let’s say a stock is worth $100, and you buy one share. If it drops down to $90, then you have lost $10. However, if you buy a second share, then combined, your average price is $95. So when the price goes back up to $95, that is where your break even point is. This means each time you buy more, you lower your loss threshold. If you are able to hold on until it comes back, then if the price rises to $110, then your first stock makes $10 profit, and the second stock makes $20 profit, for a total of $30.
Winning and Losing Stories
So, there was one day when Lemonade was down 5%, so I bought a few shares. As the day went on, it kept going down, and I kept buying. I kept buying until I ran out of money. The next day, the market came to its senses, and the price rose back up over $20 profit per share, and I made a few hundred dollars overnight. This is called a Dip. If you can buy in a Dip, then you can make a killing. But don’t just keep putting your money in until you run out, because sometimes, it won’t come back for a long time, and then you are stuck with a very long wait, and/or selling at a loss.
That happened to me, just today. I was faced with stocks that had been stagnant for at least month, with noticeable loss. Meanwhile, another share I own has been making money like gangbusters. Fed up, I finally sold at a loss, then purchased the stock making the money. It is now turning a profit, and is expected to make up all of the initial loss tomorrow.
When a bad day hits the stock market, do I panic and sell. No. Does that stop me from buying more stocks? No, quite the opposite, I buy more. I’ve seen lots of craziness in these stocks, and often they make very little sense. Companies give good news, and prices fall. Bad news comes, and stock goes up. It’s kinda crazy like that.
But it’s the mental state of mind you need to get over. We are trained that Negative Red Numbers are bad. But I’ve spent the past year retraining myself. Negative Red Numbers are an opportunity to buy in, if you believe it will soon become Positive Green Numbers. As soon as you forget the stock market is a waiting game, that’s when you lose money. I owned a stock for a month, and it was down quite a bit. Fed up, I finally sold it at a loss, but figured I could make the money back elsewhere. Would you believe after waiting a month with nothing but negative, 2 hours after I sold it, it had a spike and would have turned into profit. Unbelievable. A friend once told me, “Never sell, always add”. But these emotions, you know, terrible things.
I had one stock being a -$125 loser for 2 months. One day it came back and made me $100 profit. Sucks I had to wait that long for one good day, but it happened. The lesson here is not to sell at a loss. Unless you actually need the money, just hold out as long as you can. Sell it at the end of the year and take the tax write off against your profits.
What To Do When Everything is Up?
Sometimes the stock market is doing so well, that nothing is a particularly special deal. I prefer to buy the stocks that I already have in my watchlist. This is because I know what they can do, and most of them have already made me money. But when all my existing stocks are up for the day, and no good deals are available, I’ll go out to Yahoo Finance’s “Biggest Losers of the Day”. This is riskier, as I have no working knowledge of the company.
But still, I try to look for new companies to try out. I need for them to have lost more than 5% today. I’ll pick one, and start looking into the company. Due Diligence and all that. What is the current news that may (or may not) have caused the sudden price drop? Was there a good reason, or is it just a dip. Often, I’ll find companies that are simply having a bad day for no particular reason. The market works like that. >cough< HedgeFund manipulation.
First, I calculate how much the current price is, and if I can sell it within the week for a 10% profit. I’ll compare the current price, plus 10%, with the past week’s rolling average. I’m trying to determine how much I can reasonably sell it for. If it looks like 10% is possible, I buy 5 or 10 shares. Until they are proven, I don’t want to put too much into them.
When it looks good enough I buy it, and at the same time I’ll set my sale price as well. Then I wait. It may take a day to get a full recovery, it may take a week. After that, I’ll then look at the past week’s average high again, and see if lowering my expectation is more reasonable. I mean, any profit is profit, so it’s not like I’m going to be losing anything. No, this isn’t the most scientific, however I’ve done pretty well like this, and learned about many great companies to keep in my portfolio. And it all started with them having a single bad day.
The first trick in my book of Day Trading is hold onto 5-15 stocks every day, owning 10 to 50 shares of each. Odds will be some will stay down, but others will go up. When I am happy with profits, I sell. I get my money back, then I can invest it again in something else. Other stocks I own will likely still be down, so I just sit on them and hope tomorrow will be a better day. But a lot of this is overall market trends. Everything could be down on Friday, but Tuesday has some good news, and everything wakes up at once. Last month the market was down for a week, then one day it woke up and I sold 7 stocks I bought the week before. It happens.
The second trick is that I’ve had stocks that I sold at only $2.00 profit, total. I finally sold because I had enough of it tying up my money for weeks or months. I simply won’t buy it again. That’s all. But if you stick with it, get to know the stock prices intimately. After a while you learn which ones will drop 5% for the day, and be back positive 2% the next day, making you 7% overnight. Even if you have to wait 2, 3, 4 days, it doesn’t matter. It was all passive income on your part. You spent 5 minutes of energy, and made $50. How long would it take you to otherwise make that $50 from your day job? 1 hour? 2 hours? 5 hours?
I understand that while I am losing a lot of technical analysis by being an uneducated investor, I do believe that if I stick with what I know, Corsair, Lemonade, Jumia, etc… they are constantly going down and going up. That seems easy to me. Buy low, sell high. Know when a company is simply having a good day vs. a bad day. It’s only when I start playing around with stock I know nothing about, when I may win, or I may have to hold onto it for 4 weeks before seeing a small profit. You can look at past numbers, but your still gambling and hoping for the best.