The Golden Rules Of Stock Trading For 2013 (And Beyond)

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Before 2008, you could invest in anything and it would be gold. Housing? Gold. Computers? Gold. Prisons? Somehow also gold. But the market has shrunk, and the investor must be wiser – and the more wise investors are out there, the harder it is to find your own gem. This article is for those who want to know what can be done in terms of investing and trading in the post-Great Recession market. It’s been a bumpy road, but all hope is not lost. There are hands-off and hands-on approaches, cautious moves, and covered strategies that can still help you make a profit in the post-2008 financial markets.

Hands-Off versus Hands-On

Before thinking that you have to be a financial guru to use the markets to your advantage, consider Mad Money’s Jim Cramer’s important note on investing versus trading – what we’ll call here “hands-off” versus “hands-on”. Cramer makes the distinction that investing has a long term horizon, a year or more in a company you trust to grow or provide a return. Trading, on the other hand is taking a hands-on approach, making fast moves when companies you are watching peak and fall, and timing your investments just right. The problem with the hands-on approach, is that – as Cramer points out – it requires significant time dedicated to watching the market and may not provide significantly greater returns than the market average over time. And it may even cost you some money. However, perhaps you’re someone who enjoys this kind of higher-risk activity and really want to jump into market watching. The basic moral is, active day-to-day trading is not for everyone and it doesn’t need to be – you can build good wealth without it.

Cautious Approaches

The Golden Rules Of Stock Trading For 2013 (And Beyond)

Willy-nilly trading with the ups and downs of the markets without much information backing your moves is a surefire way to make sure you are on the losing end of the gamble. One last bit of advice from Cramer is to follow three rules I wholly agree with: know the catalyst, know the exit point, and exercise conviction. That is, know why you are making the trade – be researched about what the company is doing and why. Have an exit strategy that isn’t simply a top and bottom value sell-off point. And finally, use conviction. The market will scare you – stand with the decisions you made when your mind was clear.

Covered Strategies

Another option is to exercise a strong covered call strategy. Call options are options that give the buyer the ability to purchase an underlying investment before a future date at a certain price. Covering the option limits the risk the seller of the call is exposed to because under a covered call strategy, the seller of the option already owns the underlying investment, thereby not being subject to the risk of needing to buy it on the open market. While not without risk, covered strategies are good ways to exercise a hands-on approach while limiting some of the risk to which the seller is exposed.

Active trading is not for everyone and, in fact, more people should be willing to invest in the market without actively trading, so that they can reap the relatively constant long-term growth of the markets as a whole. However, if someone wants to actively trade, thinking of Cramer’s three rules, and possibly using a few covered options in the mix, an average investor could indeed turn a profit in today’s volatile markets.