Question:
Do you make money in down markets? If so, how—puts, shorting stocks? I have never been anywhere near as strong in down markets as up markets…usually just go to cash. Don’t lose money, but don’t make any either.
Donn from Down town
Answer:
Donn, you raise an important point about good trading—cash is king, especially in down markets. So, when you tell me you go to cash in down markets, I say to you, that might well be the best course to follow, depending on what you mean by a “down” market.
In my opinion, January 2008 to March 2009 was a “down” market. Not only did the market trend downhill all year (2008), it collapsed in September and October of 2009, as we all know. If you went to cash in December 2007, you played it really well. If you went to cash in the summer, you played it pretty well. If you went to cash in October, hopefully you played it well. If you got caught in the collapse (as I did), well, you did not play it so well.
Now plenty of traders made money shorting the markets all year in 2008, especially in the collapse. Although I am not a fan of shorting the market, and I think naked short selling should be illegal, I understand the counterforce shorting the market provides. Options, of course, provide hedging in any market.
In a market such as today, one that is trending up in fits and starts, shorting can be risky. In my opinion, as you seem to know, a market such as the one we have today is more suited to trading long in the short term, especially if you have the cash that you pulled before the market went south. It is a market in which you want to put your capital to work as much as you can to make as much money as you can.
Your question raises another important point, and that is that preserving and protecting capital is more important than trading; thus sitting out when you are not comfortable speaks to this important “rule.” In my book, you have it exactly right, and I applaud you for your prudent thinking.
Trade in the day; invest in your life…
