Editor’s note: We’re just days away from learning the results of the most contested election in US history. Depending on who wins, the market could get volatile in the months ahead… and even shake investors out of their positions.
That’s why we’re sharing this essay from Chief Trader Justin Spittler below. It’s a good reminder on how to avoid big portfolio losses and exercise proper risk management.
Read to the end for a special video presentation from Justin.
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“Protect yourself at all times, gentleman.”
If you watch boxing, you know this is the last thing the ref tells both fighters before the start of Round 1.
It’s a simple, but powerful, statement.
It means never let your guard down… not even for a second.
Fighters who ignored this advice have paid the price dearly.
Remember when Floyd Mayweather knocked out Victor Ortiz after Ortiz tried to hug Mayweather in the middle of a fight?
Source: The Times
Ortiz was trying to be a good sport after headbutting Mayweather just moments earlier.
Silly mistake.
Mayweather made Ortiz pay the price… delivering a brutal left hook to the chin.
Some called it a “sucker punch.” But, if you know boxing, it was fair game.
Ortiz let his guard down during the middle of a fight. He didn’t protect himself.
I mention this because the same applies to trading. You must protect your account above everything else.
Too often, traders forget this. They obsess over the potential gains… when they should obsess over risk management.
After all, it only takes one bad blow to knock you out of the game.
That’s just one of the many parallels between boxing and trading.
Ever heard the saying, “It’s the punch you don't see coming that knocks you out?”
This, too, applies to trading.
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Usually, the biggest threat to the market (and your account) is what you least suspect. That’s because the market has a knack for fooling the majority.
When everyone is worried about inflation, deflation (i.e., a slowing economy) is probably the bigger threat.
In other words, one of the worst things you can do as a trader is to buy into popular narratives. More often than not, the crowd is wrong.
But perhaps the biggest parallel between boxing and trading is encapsulated in the phrase: “Styles make fights.”
In boxing, this means that the style of a fight often dictates who comes out on top.
For example, a short boxer might have trouble with a fighter who has a reach advantage. The lankier fighter can control the distance much easier… even if he’s the inferior fighter. The style of the fight favors him.
A tactical boxer might struggle against a pressure boxer if the fight turns into a junkyard brawl.
The same principle applies to trading.
At a given time, the market can be more suitable for one style over another.
Trending markets, for example, favor swing traders. On the other hand, volatile, choppy markets are better suited to day traders.
There are also periods when certain kinds of stocks work between.
When the market is “risk on,” tech and growth stocks are usually the stocks to own. When the market is “risk off,” defensive stocks like utilities and staples are a much better bet.
With the election right around the corner, it’s important to know what kind of environment we’re in and how the market will respond depending on who wins.
Right now, I think there’s a strong bull case forming in the market. But now’s not the time to let your guard down.
I just released a video on my election prediction and the implications it will have for certain stocks. To get my uncensored take on who I think will win, why, and how to best position your portfolio over the coming months, go here to watch it.