Although the markets and exchange traded funds (ETFs) have stabilized in the wake of the recent correction, there’s still a lot of uncertainty out there.
The most common measure of investor fear is the Volatility Index, better known as the VIX, which uses options contracts to decipher the degree to which traders think the S&P 500 will bounce up or down over the next 30 days. In May, for the first time in more than a year, the VIX rose above 40 – double the index’s long-term average, says Janice Revell for CNN Money. [Technical Analysis vs. Trend Following With ETFs.]
Here are a few ways to keep your cool when markets heat up, courtesy of Revell:
- Use fear to your advantage: Volatility could be a reality for awhile. But recognize the opportunity in these dips – they could be buying opportunities. Use a trend-following strategy to pick your spots. [How to Follow Trends.]
- Reset your expectations: Many of the conditions that propelled stocks into long-term bull markets in the past no longer exist. Have a “slow and steady wins the race” mentality to preserve your sanity – don’t expect huge gains overnight, because you’ll be setting yourself up for disappointment. [The Case for Trend Following.]
- Protect yourself from yourself: Look in the mirror – you’re looking at your own worst enemy when it comes to investing. Advisors and investors need simple, specific rules in order to follow an investment discipline over an extended period of time. We use the 200-day moving average to determine when we’re in and when we’re out. When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. Whatever strategy you go with, pick one that works for you and be sure you use it.
Peruse the ETF Education section for more articles about trend following, crafting strategies and choosing ETFs!
For more stories about trend following, visit our trend following category.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.