The Dow dropped 1,175 points on Monday, marking its biggest single point decline in history. Markets across the entire country responded in kind, with the US market suffering its first 10% correction since 2015.
The headlines that have plagued news outlets and financial blogs have obsessed over Monday's decline, fostering a "sky is falling" capitulation and fear. Those who have been calling a market top for what feels like decades seized their opportunities to gloat that the bear market was upon us. It was impossible not to read something that told you that we were in for troubled waters.
But let's analyze these numbers for a moment. Despite the record-breaking decline point-wise in the Dow, this drop only represented a 4.6% loss in value. This falls far short of the largest single-day percentage drops. Additionally, this fear mongering fails to take into account the incredible amount the market had risen since in January. If you invested all of your money in December of last year, you'd likely still be in the green. When you dig a little deeper into the numbers, you realize that 1,175 points is simply an attention-grabbing headline, and that it hardly signals a market top.
Is there going to be short term volatility in the stock market that could fall further from here? Anything is possible, and it would be best to game plan for such market action to occur. We could easily pull back a little further before continuing to trend higher. If you take a longer time frame into consideration, however, it's hard to justify selling all of your positions. Volatility is a part of trading(even the most effectively built airplanes can still experience turbelence), and we're here to provide you with a guide so you can avoid it.
The market's trend is still intact.
1. Don't let your emotions dictate your decision making.
Don't get me wrong, no one likes to lose money, and no one likes to give up gains. In a perfect world, we'd be able to time every dip and sell every dip perfectly. This is not a realistic expectation, however. Watching a gain go red could cause you to react in a way that causes more pain, and it's important to take emotions out of the equation (winning or losing). Selling a stock position because you don't want to endure more pain is not conducive to a winning trading strategy. We've seen too many traders buy into strength and sell into weakness when the market starts to slip, and this is a great way to ensure you lose money.
In the same vein, cheering on wins and letting them brew cockiness is equally dangerous. A famous trading quote says "There are two types of traders in the world. Those who are humble and those who are about to be humbled."
2. Trade with a plan.
Know your price targets, know your mental stop losses, and trade accordingly. Don't take on more risk than you're comfortable with, even when the market feels like it will never go down again. If you're shooting for a 30% gain, don't risk 50% to get it. Always ensure that your potential winnings are higher than your potential losses. If you ensure that all of your trading rules are adhered to when jumping into a trade, you put yourself in the best possible position to win.
When you trade with a plan, you prepare yourself to endure any potential downside. You can trade with confidence, knowing that any short term volatility is just that, short term. This takes us directly into our next point.
3. Zoom out.
Stop looking at what happened this week if you want to hold a stock for six months. You need to analyze charts based on your planned time frame. We've seen our members buy long-term positions of a stock in January, only to sell a month later because the stock didn't move the way they intended it to right away. Making a decision about a long-term position based on what happened to its price over the course of several days is short-sighted and dangerous.
Now, if you have weekly options or plan to day trade, then you should be diving deep into what happens to the stock each hour. We give you full license to retroactively freak out if you were holding weekly options on Monday. But if you're worried about a long-term F position that you bought in January, it's not time to hit the panic button.
If you're looking for a little extra help navigating the market's murky waters, we've just temporarily lowered membership rates to as low as $5 per month. Click here to sign up today!
- The Minotaur Team