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Market Correction Strategy

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This post was originally written in October 2017…. 1 year later…. we’ve had 2 corrections and 3rd highly likely.

Before publishing this, I thoroughly considered whether to publish this now, or to wait until a Market Correction comes into full effect (which it WILL at some point in the not too distant future), and I figured that rather than leave everyone that follows me wondering what an effective strategy is when it happens, I decided that it is best to publish this now so that when the big event happens - you can at least be prepared for it.

Soooo... we've all had a good time of it recently.... the markets are at All Time Highs - lots of money is being made - but the 1 thing that i don't see getting covered a tonne - is how we deal with the inevitable temporary market downturn - a Market Correction.

In giving my views on this, it is important to be aware of some statistics -

On average the stock market corrects once a year (this is NOT the same as a Market Crash) and typically this ranges from a 5% - 9% drop. A correction generally lasts for a few days, and during this time - it is incredibly important to manage your positions closely (in case it IS a Market Crash) and it is also incredibly important to have an actionable plan in place for when all the panic selling takes over the markets which ultimately drives the prices down across the board.

As a Trend Trader - we always have a bias toward the overall trend, which is defined by some key Technical indicators.

During a market correction - what quite often happens is that these lines act as levels of support, and only once price drops below these levels can we say the bias of the sector or stock has switched to Bearish - this is critical in how we approach a testing period such as this.

There are 2 options available in my opinion - 

1. You can choose to sell off all your positions and take a loss or reduced profit and wait for the market to settle down again before buying back into positions after a period of sitting on cash. (which quite a lot of people choose to do) - make no mistake - this is both wise and effective.

OR

2. You can take another view, and more of an “Investing” mindset, and simply recognize what is happening within the Markets (that it is likely only a correction rather than a Crash) and that the bias of the trend is likely still in your favor - and therefore the correction should be seen as opportunity and something that is embraced and acknowledged as a standard function of time within the markets. They are perfectly normal.... and some say are healthy for the markets. Do they suck when you’re caught on the wrong side and been overly optimistic? Of course, I don’t think anyone enjoys eating a shit sandwich.

But what it will give you the opportunity to add to your portfolio and enter into fast moving high value stocks at a significant discount - something that has been VERY profitable over the last few months since the minor Tech correction in June 2017.

In most cases, the stock market correction drop, is made back up within 4-6 weeks and if we look at NVDA which went from $170 to $140 and has this week sliced through $200. We can also look at another stock TTWO which dropped from $80 to $70 and today now sits at $105 - those are just 2 small examples of what happens with corrections during Bull runs and how an effective strategy in place prior to a correction can be incredibly profitable

We cannot predict when these events will occur and what will trigger them, but what we can do is be as prepared as possible by managing our positions correctly, and ensuring all leveraged products are removed from the game. Wall Street has a nasty habit of forcing us into reconsider our thesis on a moments notice, and this is what happens during a correction.

Remember - Trend Traders with a time horizon in weeks / months - short term impacts have no real baring on our philosophy - we should look to add further positions upon significant dips. This approach will lead you down the path that has been laid out before us by the likes of Warren Buffett etc.

The most important piece of advice I can give, is that - you only take a loss if you sell your position, and unless there is a full blown Market Crash, it is proven that holding your position during this minor downturn is the most profitable method if your Capital allows, and by adding to your positions on fast moving stocks at a huge discount, you will likely further strengthen your portfolio / profit in the long run and I would suggest identifying strength if you choose to add further positions.

Of course though…. All bets are off in the face of a full blown Market Crash, and those sitting on cash, are those best placed to capitalize.

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Sam McCallum2 Comments