This money-making tip comes from our Tech Expert, Michael A. Robinson:
Market volatility has been rampant. Last week, the Dow Jones Industrial Average saw triple-digit gains or losses on four out of five trading days.
This volatility will continue in coming months as investors grapple with economic data and try to gauge when the U.S. Federal Reserve will raise interest rates.
You can survive - and even profit from - market volatility using the five tools discussed below.
They'll keep you from making mistakes and help you navigate the volatility we're seeing right now.
And, in the long run, they'll help make you wealthy...
Five Tools to Help You Profit from Market Volatility
No. 1: Make Lowball Offers
It's a time-honored investment principle: Make your money when you buy, not when you sell.
With stocks, it's easy to make lowball orders. These are called "limit" orders, meaning you only buy when the stock hits your chosen personal target price.
Let's say momentum investors have piled into XYZ Software Corp., causing it to double in a short amount of time. Now, it's sold off a bit and is locked in a directionless, "sideways" market.
You want to buy the stock for the long haul: It has great financials, strong management, excellent products, and a strategically sound position in a growing market.
Suppose XYZ had a recent high of $100 and then dropped to $75. A lowball limit order of, say, $60 (a 20% discount) will protect your risk of losses and greatly boost your long-term gains.
No. 2: Buy "Test Shares"
The idea is to conduct a personal "reality check" for a particular stock. I recommend this method so you don't wind up sitting on the sidelines only to watch a desired stock run up before you have a chance to act.
Let's say XYZ Software is reporting earnings in two weeks. If the company beats estimates, the stock will soar. If it misses, the stock could get crushed.
Buying a few test shares is a great way to establish a position. As the term implies, you would buy only about 5% to 10% of your usual position on XYZ, using it as your initial entry point.
That way if it tanks, you won't get killed. You've only devoted a small amount of your risk capital to this investment.
This next tool serves as part 2 of solid one-two punch when combined with buying test shares...
No. 3: Limit Your Exposure
A good way to stay in the market and limit your risk of loss is simply to make smaller entries.
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Let's again assume the standard position for you is the $10,000 we discussed in the example of XYZ Software. To limit your exposure - and "wade into" the position - cut that buy in half.
You can even combine the test-share and exposure-limit strategies. Start by purchasing your test-share block, re-evaluate both the stock and the market, and then purchase the remaining shares required to establish the smaller than usual "exposure limit" position.
This is a savvy one-two punch that will help protect your portfolio from a knockout blow.
No. 4: Play "Moneyball"
In a bad market, when you find yourself nabbing gains of 50% on a stock in a very short stretch, lock in at least some of the profit - before a whipsaw market reversal takes it away.
Once again, let's say you invested $10,000 in XYZ Software Corp. After the stock advances, you want to protect profits against sudden reversals by taking gains off the table.
For each investor, the profit figure will vary. But in choppy conditions, the average investor should take some profits by selling half the position when a stock is up 50% or so.
No. 5: Always Have Some Cash on Hand
When there are a lot of bargains out there, the last thing you want to do is run out of money.
When that happens, not only do you miss some great opportunities, but being cash poor can make you indecisive and set you up for further losses.
Let's say you've invested your entire cash pool in the market, and then the market starts to drop. Without extra funds, you can't take advantage of great stocks that are "going on sale."
In a choppy market, cash-poor investors tend to freeze. So, when everyone else is confused or panicked, you can be bold and pick up great stocks at a huge discount - as long as you have cash.
Combine these five rules, and you have yourself a powerful tool kit for market volatility.
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