Don't Let These Stock Market Crash Warnings Scare You Out of Major Profits

There's been a new group of stock market crash warnings released this month by some of the biggest institutional investors on Wall Street. But that doesn't mean you should pull all of your money out of the markets. In fact, doing exactly that caused investors throughout the United States to miss out on the current nine-year bull market.

stock market crash warningsThe problem in the current environment is that too many headlines warn of dire consequences from dysfunction in Washington and the specter of higher interest rates from the Federal Reserve. Even worse, investors are starting to brace for yet another debt-ceiling debacle.

Some of the heavyweights in the money management business, such as Ray Dalio, founder of Bridgewater Associates LP, and "Bond King" Bill Gross, founder of PIMCO LLC and now legendary portfolio manager at Janus Henderson, are getting cold feet. As a group, these folks are saying things like "we're at the highest risk levels since 2008," "time to move toward the exits," and "everything is expensive and we are late in the business cycle."

Quite a scary picture. And they represent a lot of nervous money - in the neighborhood of $1.7 trillion in capital - that can make a big dent in the market should they decide to stampede out of stocks.

Clearly, it makes sense to pay attention to these successful investors. However, it does not mean selling everything and heading for the hills when stock market crash warnings start appearing...

How to Be Careful and Smart at the Same Time

Money Morning Capital Wave Strategist Shah Gilani agrees that there is always a need to be on the lookout for a downturn. However, he cautions that taking your money and sitting on the sidelines is one of the worst moves an investor can make.

Following the financial crisis bear market, investors were shell-shocked, and many never got back into stocks. They watched the Dow Jones Industrial Average rally from roughly the 7,000 level to 12,000 without them. Those who did own stocks may have listened to the naysayers who warned the market was too high and sold.

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They then watched the Dow rally to 16,000 in mid-2014. As the price of oil started to tumble, they listened to the naysayers warn of a slowing economy.

They watched the Dow lift off from the 18,000 level after the election last year, when the naysayers said the political climate was too contentious.

Were they kicking themselves for not being in stocks when the Dow briefly topped 22,000 only a few weeks ago?

At each of these levels, so-called experts warned that the market was too high or overvalued. Or that the economy was not improving. Or that the dollar was about to collapse resulting in hyperinflation. They've been preaching a stock market crash for several years, now.

Through it all, the stock market remained the best place for investors to build wealth, and as the lottery people say, "you have to be in it to win it."

Of course, no market can move in a straight line, and it has been quite some time since we've seen an important market correction. But being bullish on stocks doesn't mean not having a plan in case things go awry.

Gilani agrees, and he has a very important strategy for investors to follow to protect their money from a downturn while still riding the market higher.

Here's how to ride the market higher while remaining cautious of any potential stock market crash...

How to Protect Your Money as Stock Market Crash Warnings Abound

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The stock market offers several ways to trade, and most investors use "market orders" for their buying and selling. Whatever the price is when they place their order is the price they get.

This requires that we pay attention to each and every one of our stocks all the time. That's hard to do, especially if you have a day job or simply enjoy spending your time doing things other than investing.

However, there is a way to have your sell orders ready to go automatically, and it's called a "sell stop." It is an order to sell a stock automatically should it drop down to a certain price. You set it below current trading and forget about it. If the market remains strong, your sell order is never executed and you continue to own the stock.

However, if the market begins a bearish trend, you will automatically sell the stock before it loses too much value.

Gilani uses two metrics to determine where to place his stops.

First, he looks at the stock's chart for a price level that acts as "support" below where the stock's trading currently.

Support is a price level where the stock saw a lot of buying in the past. It could be a level where the stock came down before bouncing back up. Or it could be a level where there was a lot of sideways movement in the stock before it took off higher. Those levels are indicative of past buying - that's why they're called "support levels."

When a stock comes down to support, we often see buyers get a bit more active. Why? Because that is where investors think the stock is cheap. They buy.

But if the stock moves below support, a lot of investors start to freak out because they realize they were wrong. Support can be a very psychological thing.

"I don't put my stop orders down right at support levels, said Gilani. "Instead, I put them down about 2% to 5% (not percentage points) below where I see support."

"That's because aggressive traders often try and push stocks down through support levels so stop-loss orders resting there get triggered. Guess who's buying your shares from you then? Those big aggressive traders, that's who."

Shah ought to know. He used to trade that way in his hedge funds... and it was a very lucrative game to play.

Now, if the stock drops more than 2% to 5% below support, there is probably something wrong either with the stock or the market and it is time to get out. No emotions. And no worrying that you are not paying attention. Your stop orders take care of it for you.

How do you know whether to use 2% or 5% or something in between? It all depends on what kind of stock you have. A volatile biotech stock might need the wider range. On the other hand, a more sedate, high dividend-paying utility normally commands the tighter stop percentage.

Gilani warns that you should not put your stop too close to the stock's price range over, say, the past month. Be sure the stop is at least below that range.

And finally, if your stock keeps going up, be sure to raise your stops to the next support level. And if there is no clear support, as there may not be for a stock on a tear higher, be sure your stop is at least outside the range you've seen previously.

That is called "trailing your stop" because as the stock goes up in price, the stop level trails along behind it.

So, be aware of what the market is doing and what the major players are saying. But in the end, it is up to you to decide what to do. Setting stop-loss orders is a great way to stay in the game and sleep at night because you let the market, not pundits, decide when it is time to ring the register.

An Incredible Win Rate: Since April 28, Shah Gilani's Zenith Trading Circle subscribers have had the opportunity to make average gains of 35% per day (including partial closeouts) on his recommendations. His win record is insane (in a good way). You've got to check this out - just click here.

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