In the rush to make a quick profit, some traders may be tempted to enter into a long trade. This is an especially attractive option for those who want to take advantage of a market upturn and avoid the more risky short selling strategies. But when dealing with volatile markets, prudent traders should remember that now may not be the time to start a long trade.
The recent market conditions have caused wild swings in stock prices — both up and down. While this volatility can provide some short-term opportunities for traders, it also carries a high degree of risk. As such, savvy traders should be more conservative with their trading, and avoid long trades.
Long trades involve purchasing stock and holding onto it for a long period of time in the hope that it will increase in value. The benefit of this type of trade is that investors won’t have to worry about managing their position daily, and if the stock does increase in value, they could make a profit. However, the downside is that the value of the stock could also decrease significantly, leading to a significant loss.
Given the current market conditions, those who are considering a long trade should temper their expectations. With stock prices bouncing around, any luck in the market could prove fleeting. What’s more, investors often underestimate the amount of time it takes for a stock to move in a predictable manner. It can take months, if not years, for the stock’s underlying fundamentals to start to support the stock’s price.
As such, seasoned traders should exercise patience when considering a long trade. They should make sure they understand the stock’s fundamentals, watch for potential catalysts that could spark a rally, and monitor the stock’s price movements leading up to the purchase.
Additionally, it is important to have an exit plan for a long trade. Traders should determine an endpoint — or a profit/loss limits — that they will target when deciding when to exit the position. This will help minimize losses if the stock fails to move in the desired direction or in the expected timeframe.
In volatile markets, now is not the time to start a long trade. Instead, traders should take the necessary time and steps to ensure they understand the stock’s fundamentals and have an exit strategy to best manage the risk associated with any potential trades. Only by taking a measured approach can traders ensure their success in the long run.