3 Trading Strategies to Maximize Profits and Minimize Losses
The perfect investment pays off far more than you expect with no chance of turning negative. If such an opportunity existed, investors would create such a high demand with an equally high multiple, that it would eventually become just another trade.
The quest to maximize potential gains, while risking the least amount possible is what drives equity markets across the globe. Complicated strategies used by institutional firms utilizing interest rate swaps and currency carry trades may be a bit too much for the everyday investor, but that doesn’t mean there aren’t strategies you can use to make your portfolio risk-resistant.
Combat risk with these simple strategies
One of the easiest ways to measure risk quickly in a stock is to take a look at its beta. This is a measurement for how much the stock moves relative to an index like the S&P 500 with 1 being virtually equivalent. If the market goes up 1 percent, you can expect the stock to go up 1 percent, as well.
A beta of more than 1 indicates that the stock will move in a greater range than the market average. So a beta of 1.5 means the stock will go up 1.5 percent for every 1 percent gain in the market. But it also means the stock would move down 1.5 percent for every 1 percent drop in the market. A beta of 0 means there’s no correlation between the stock and the market while a negative beta indicates an inverse relationship.
Another way to minimize risk in your investments is to include simple option strategies. If you own the stock already, you can use covered calls to lower your overall cost basis at the risk of having to sell (at a profit) if the stock climbs higher, faster than expected. Selling puts on a stock you’re not quite ready to purchase in another great way to minimize risk. If the stock fails to drop to price you want, you still get to keep the profits from the sold put. And if the stock does drop, then you get the stock at the price you wanted while also keeping the profits from the sold put, which lowers your cost basis.
Finally, buying in stages is a sure-fire way to keep risk at a minimum. By buying a position in a desired stock slowly over time, you can get a better feel for its performance and have more time to make a different decision if you need to. Alternatively, if you buy in all at once and discover next week that the stock is expected to miss earnings and could be headed lower, you’ve already committed the full amount. Instead of selling a partial amount for a loss, you may be forced to sell much more for the same loss percentage, resulting in worse performance overall.
Despite numerous methods for reducing risk, nothing does a better job than a properly diversified portfolio. Spreading your holdings out to include multiple sectors, market cap sizes and regions makes your portfolio resistant against large swings due to unfavorable market conditions. Stay diversified and include a few more risk mitigation techniques, and you’ll have a defensive portfolio that’s able to handle almost anything the market can throw at it.