How To Trade Choppy Markets

 


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A lot of people wonder how in the world to make a trade in a market where choppy mood swings are an every day event. When this happens, instead of blindly throwing money at a stock you think should run, you have to take into account what “could" happen if you are on the wrong side of a huge drop.

What is the average trader to do? Well, during the worst volatility, sitting out is probably the wisest choice because you can get so whipsawed it makes your head spin. But, if you are one of the personality traits that says “I'll conquer this volatility, and anything else that gets in my way" here are some suggestions to help you do just that. First realize that every average and every stock has a “trading range" that it goes through every day. For some issues it's only a 1/2 point, but on some issues it can be much more. It becomes very necessary for you to look at some charts and get a feel for how much your stock ranges in the course of normal trading before you can identify a move that is “outside" its “normal" course.

So what do you do about that “abnormal" move? Do you sell in fear, or hold and hope? Here is a tip for you that may help. Unless a stock has some fundamental reason to move higher such as a news release, a stock split, an upgrade, etc. it will pretty much behave in step with the overall market. A “good stock" in the tech sector may be up nicely and moving well with the NASDAQ up 40 points, but if the NASDAQ tanks, you can bet your stock will too. So, your tech stock that is now down outside the “normal range" could certainly be there because the NASDAQ as a whole is now down 80 points. Now the question really isn't “what's wrong with my stock" because the answer is nothing, the question is “what's wrong with the NASDAQ?"

This is where technical analysis actually becomes important and learning to spot support levels comes in. Let's say that your tech stock that just took a beating has good support at a certain level. If the move down hasn't violated that support level, keeping the trade in play probably isn't a bad idea since chances are the NASDAQ will have a move to the upside and bring your stock back up with it. But, if the loss violates that support level, bailing out may be the best choice since so many buy/sell programs are based on resistance and support that it could cause even more damage to the issue.

On the other hand, if the stock you were in was a pure momentum play and support is several points below, it is often wisest to cut your loss quickly and get out while you can. When a momentum stock gets pulled back outside it “normal" range, it is often a bad sign, no matter what the averages are doing. So, in times of big volatility, knowing where technical support levels are in your particular stock, will often help you decide if you are still “okay" or about to get creamed. Learn the basics of reading a chart and study them so you can recognize support and resistance in a heartbeat, they will ultimately help you a lot!

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