5 tips for trading in turbulent markets

The share market has been very choppy recently. Markets in Australia and the US have trended lower from their August peaks, but the last few weeks has seen no progress in either direction. Instead, price action continues to look very choppy. Trading in volatile periods may be worrying to some investors. But below are some tips on how to navigate turbulent markets.

Cash is King

Preserving capital is important in volatile markets as share prices move down very fast. Having a portion of your portfolio sitting in cash would avoid being too heavily invested in the share market whilst share prices are volatile. Sitting in cash is the ideal situation in these periods as the investor can avoid risk while waiting for much better charting set-ups to develop.

Selling high beta stocks

Stocks which are high beta mean that they move more than the share market does. Hence these stocks tend to drop more than the share market during turbulent times. Selling out of these types of stock can save the investor more share market falls and further capital losses. An accelerated downward share price decline could erode the profit of a trade very quickly for an investor.

Short selling

There are ETFs on the market that equity investors can buy to short the market. Hence if the investor thinks a market is going to head lower, they can profit from this movement by buying a short ETF such as BEAR:ASX. This ETF tracks the ASX 200 so a fall of 1% in the Australian share market will deliver a 0.9% to 1.1% increase in the ETF. BBOZ:ASX is also an ETF that tracks the ASX 200 and is geared so if the market drops 1% then this ETF will go up 2-2.75%.

Watch support levels closely

Investors should keep a closer eye on their share portfolios during uncertain times and when a stock falls through a support level, investors should think about selling the position before it heads even lower.

Look for buying opportunities

Volatile share markets are a good time for investors to identify buying opportunities. Stocks may have pull backs during these periods and as long as these stocks don’t fall pass support levels, investors may see a good buy opportunity coming up.

Lauren Hua is a private client adviser at Fairmont Equities.

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