Financially speaking, 2020 will be known as the year of the Retail Trader. The popularity of retail trading stems from the covid-19 pandemic coupled with easy-to-use platforms like Robinhood. Robinhood is so popular that professionals track the top stock holdings of Robinhood traders to anticipate the movements of this cohort.
Retail trading really started exploding as a result of covid-19, which sent normally busy office drones home – either furloughed, laid off or as remote workers. This coincides with a time when interest rates are at record lows and no matter how you cut it, holding cash is not a lucrative option. Low interest rate environments inevitably lead to capital inflows into higher yielding opportunities. Looking for a way to maximize revenue, retailer traders found role models such as Bar Stool Sports El Presidente Dave Portnoy, who frequently tweets about his day trading adventures.
But what to make of retail trading? Especially if you have only a cursory idea of what is involved? Here are some general guidelines for beginners looking to get started. Consider this a framework and not specific financial advice.
First, mindset and timeframe. Are you a day trader or a long term investor? Dave Portnoy is a day trader and Warren Buffett is a long term investor. There is also a big bucket of folks in-between, generally described as momentum or swing traders. These folks will hold onto a stock for the upswing as a result or in anticipation of a catalyst, such as government approval. They may also “ride the wave” of such good news, getting off as soon as the excitement is over. As you might guess, these folks track stocks very closely with news coverage – positive news often feels like a catalyst.
Second, escape plan. Understanding your mindset, you need to have an out. Are you planning to hold until you’re 65 or next week? Never buy a stock willy nilly. Jot down why you’re interested, what the “bull thesis” is and what you’re out plan is. Then stick to it. Set price targets, on the low and high side.
Third, don’t bet the farm. In other words, don’t risk more than you can comfortably lose. Unlike cash, stocks can drop like a rock in one day, and every few quarters, there is a significant correction event. March 23rd alone saw a 20% drop. Imagine having $50,000 and seeing it go down by $10K in one day. Could you stomach that? Of course if you are holding on to good, “blue chip” stocks, more likely than not, the value returns after a few months as they did after the March drop for most equities. Just take a look at how Apple has recovered since March 23rd – it’s nearly doubled.
Fourth, Don’t put your eggs in one basket. Diversify. Rule of thumb is not not put more than 5% into any one position, but aggressive traders often trade up to 10% or even 20% in a position (working 5- 10 tickers at time). 20 Tickers however, would allow you to see gains in some stocks even if you’re losing in others, giving you a chance to sell for a profit, and giving you capital to buy other stocks that are beaten down.
Fifth – buy low, sell high. Buy on the dip, sell on the rip. It takes a bit of a contrarian personality to be a good trader. When everyone is rushing in, maybe that is the time to ring the register. When hope is lost but just a few days ago everyone loved the balance sheet of a company, perhaps now during it’s bottom, is a good time to “back up the truck” and load up on shares.
Six – let it ride. If a stock has a catalyst, as Apple recently did with the announced 4-1 stock split, don’t sell it, let it ride. That euphoria can last quite a while, and selling early is recipe for low gains. Again, this is dependent on your out plan for the stock, but unless it is a short term play and you don’t really have confidence in it, let it ride. Even if you were to sell on an uptrend, sell with a trailing stop of 2-4% so that you’re only being forced to sell if it suddenly does a u-turn.
Seven – Start with stocks, and blue chip names. Avoid small cap stocks that are more volatile and don’t try options trading until you are battle tested in stocks. Blue chips are great because they have strong “relative strength” so even on bad days they are resistance to dramatic downswings – unlike the highly volatile small caps. Yes, blue chips are also less likely to explode up, but big names like Amazon and Microsoft are better for those seeking growth without too much risk of being “wiped out”.
Options open up the door to advanced techniques that have significantly higher leverage, but we’ll save that for another post. For now, leave that to the pros and start studying the sector you care most about and the major publicly traded players in those sectors.