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In the last 18 months we’ve seen a massive spike in the number of retail investors entering the equity markets. The easy access to information and underlying volatility due to the COVID-19 pandemic are key drivers of this recent growth. The stock market has been extremely volatile over the past few months. Furthermore, analysts are predicting a five to ten percent rolling correction to occur before the year ends.
The current bullish market trends seem disconnected from the macroeconomic variables, particularly surging inflation levels and decelerating economic growth. The CBOE Volatility Index’s 11.14% gains over the past five trading sessions shows the rising volatility in the market.
Given the delicate market conditions at the moment, you may be wary of investing heavily in stocks due to fear of extensive losses. However, well-planned investment bets made during this time can reap substantial rewards in the near term.
Here’s how you can look to trade in the stock market especially if you are just starting out:
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1. Read the Latest Stock Market News
Stock markets are extremely sensitive to any economic or geopolitical developments. For instance, after the Chinese government announced strict regulations on US listings of Chinese companies, the benchmark S&P 500 index declined by nearly one percent during the first half of July. Moreover, the UK’s FTSE Index tumbled substantially in late August in the wake of rising Delta COVID-19 cases across the globe.
Staying updated with the latest market news can help investors identify the key market entry and exit points. For example, Plus500 News and Market Insights highlight market-moving events with a detailed analysis of their potential short and long-term impact. At times it may feel implausible to keep updated with such latest developments occurring across the globe. However, reading the major events on digital platforms such as Plus500 can help investors single out the most impactful developments.
2. Set Stop-Loss Orders
Stop-loss orders are used to mitigate losses on a particular stock in the market. Investors can place an auto-sell order at a particular price level of a stock through their broking platforms. It’s essential for a trader to cut losses and lower overall risk in the process.
When a stock reaches a pre-set price, a sell order is immediately executed. This allows investors to exit their position to stop additional losses. Considering the extensive fluctuations in volatile markets, setting a stop-loss order can help investors exit the position without having to monitor the markets constantly, as well as limit tremendous losses.
Investors can also set trailing stops to optimize the timing of selling a stock. Such orders are set at a particular percentage below the purchase price. Two of the most popular trailing stop techniques are momentum-based trailing stop and parabolic stop and reverse (SAR).
3. Hedge Risk by Investing in Derivatives
Assuming an opposite position in derivative contracts can offset the risk of sudden and unfavorable price fluctuation in the stock market. Illustrating with an example, investors who have bought a stock and are holding it for some period can purchase a put option. This gives them the right to sell the shares at a pre-determined price.
In case the price of the stock dips, investors execute the put option at the pre-determined price, typically above the spot price, thereby offsetting losses. However, investors only bear the contract writing expense if the price increases, as the put option is not executed.
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4. Buy the Dip in Fundamentally Sound Stocks
Equity markets remain volatile in the near term. This means high value stocks with solid fundamentals and growth prospects experience a slump as well. Investors tend to limit their trading activities in case of a stock market pullback. However, momentum traders can buy the dip which will allow you to increase capital gains, as fundamentally sound stocks generally rebound rapidly.
However, identifying value stocks and analyzing market trends are critical while selecting such stocks in order to avoid a value trap. To this end, an investor should look at the company’s financials, analyst sentiment, and historical price performance, particularly during periods of market correction and recession.
Also, such promising stocks are ideal for long-term investment goals. This is because the underlying companies expect to witness substantial growth over an extended period, thereby ensuring sizeable shareholder returns.
5. Use Technical Analysis
Technical analysis indicators are used to gauge the price trends of publicly traded equities. As stocks are susceptible to pullbacks as well as price surges, traders can use such heuristic patterns to predict the direction of price movements, thereby identifying entry and exit points with ease. These are ideal for identifying short-term price patterns, forecasted by extrapolating and analyzing historical price performance, open interest, and trading volumes.
Generally, Overlays and Oscillators are the two types of technical analysis. Some of the most used indicators include simple and exponential moving averages, relative strength signals (RSI) Bollinger bands, and moving average convergence and divergence (MACD).
A volatile stock market may often discourage new traders from accessing this asset class especially when concerns regarding an impending market correction are looming. However, adequate research and a disciplined approach towards trading can help you reap substantial returns on investment.
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