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I understand that you have to weather the storms when it comes to longer-term investing, but how do we make sure we’re not catching a falling knife? I don’t want to be stuck in a name that’s never going to bounce.

By Matt McCallAug 23, 2018


That’s a great question, and the key is implementing a risk management strategy. Many think that risk management is all about managing downside, and that’s true. But it’s not all stop-losses and support levels. It actually starts with the timing of our entry.

When it comes to stock analysis, there are two sides to the coin: fundamental and technical. Fundamental analysis looks at the company itself and takes macroeconomic factors into consideration. This can be a valuable strategy when evaluating a stock, but it takes more than just balance sheet review and income statement analysis to identify high-conviction plays in this environment.

Stocks have trading rhythms, and technical analysis is how I interpret those price movements to identify attractive buy and sell points. Increasing profits while reducing risk is the name of the game here. This is especially valuable in a volatile market, when price swings can be hard to stomach. My aim is to cut through that noise and focus only on those plays that are truly viable.

So when it comes to identifying our next opportunity, there are several approaches at our disposal. Generally, the market dictates on strategy over another, but we are in a unique position right now to be able to implement two strategies. The first is buying stocks at a discount, looking in sectors that have been left behind in a rally. At the same time, we’ll also look for stocks that have rallied with the market but still show superb relative strength compared to their peers.

Once we’ve identified the right stock and bought in at a good price, only half the work has been done. Managing the position is just as important, and this is where chart reading really comes into play.

The best way to manage our downside is by identifying critical levels or support on a chart, such as moving averages or previous areas of price support. For shorter-term trades, I’ll look at more recent support points. But for longer-term investments, we’ll look at levels that have held strong over the months or years. Any breach of this level tells us we need to take a closer look at the position and reevaluate if it’s worth holding on for a turnaround.

In the end, there is no perfect risk management strategy, but the one I use is a good compilation of chart reading, fundamental analysis and everyday news flow. It’s  very important tool in both long-term investment and short-term trading, and it will certainly help you sleep better at night knowing that your ultimate downside is limited.

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