Tactical Investing Might Be The Weapon You Need For Today’s Markets

Dedicating a portion of your overall portfolio to tactical investing can help you take advantage of markets when they seem to be changing as quickly as your TikTok feed. That’s the beauty of this style of trading: it allows you to be agile, and to adjust and rebalance your allocations, based on what’s going on in different assets. So, here’s my ten-point guide to navigating markets, tactically.

First, decide what kind of trader you want to be.

There's the nimble, quick-thinking scalper, who holds onto positions for just a few seconds or minutes to grab many small profits a day – a tough choice if you’ve got a day job. Or, there’s the day trader, who picks a direction at the start of the day and sells out of those positions by the end of it. There’s also the swing trader, who holds positions for a few days or weeks (this is how I trade most of the time). And lastly, there's the position trader, who holds positions for a minimum of weeks, but as long as years to capture a major fundamental theme.

Second, get in some practice.

If you don’t already have a broker, look for one that’s regulated (publicly listed is ideal), and has low trading costs and good user reviews. Then, spend some time on its demo account. This should allow you to practice placing different types of orders, closing positions, and trading on margin. This will help you avoid making mistakes once your hard-earned cash is on the line.

Third, decide what to invest in.

Trade what you know and understand. If you don’t know a lot about lean hog futures, don’t trade them (I sure don’t). But if you’re a computer engineer or just well-versed in the latest gadgets and services, you might have a view on Big Tech. Or if you travel a lot for work, you might have an opinion on airline stocks or the price of the euro. Starting out, focus on nailing one asset – be it a stock, currency, commodity, or whatever. Remember, we’re adding tactical trading to just a portion of your overall portfolio. And I’d suggest having a maximum of three open positions that you’re handling at once. Any more than that, and it can be pretty overwhelming: that’s where you increase your chances of mistakes and, worse, losing money.

Fourth, protect your capital with the 2% rule.

Risk management might not be sexy, but it’s what keeps your portfolio from going to nada, zero, zilch. Tactical traders follow “the 2% rule”, which goes like this: let’s say you have $20,000 in your total trading account. In that case, you’d want to risk only $400 – or 2% – on any one trade. That means setting your entry and exit levels so your loss doesn’t exceed $400. The beauty of this 2% rule is that a single losing trade – or even a string of them – isn’t going to wipe you out. It essentially limits your downside. And that’s important. As this chart shows, it takes a much higher percentage return to make up for a loss in your portfolio.

Percentage trading losses with equivalent percentage gain necessary to bring your portfolio back to break-even. Source: Medium.

Fifth, set your stop-losses.

These trusty sidekicks can really help you manage risk. Stop-losses are automated orders, set up through your online brokerage account, that allow you to exit a trade when it hits a price you determine in advance. It’s useful: not only does this ease the pressure you might feel to constantly monitor your investments, but it also helps you remove some of the emotion from the process when an asset you liked moves against you.

Remember: you can keep your risk percentage the same by widening the distance between your entry and exit points, but reducing your position size. In other words, if you’ve got three contracts, and your stop-loss is 100 points away from your entry, you’re risking 300 points. But you can have the same risk if you have six contracts but tighten your stops to 50 points. This works well in more volatile markets. Just be careful not to set your stop-loss too close to your entry level: it can be really frustrating when your stop-loss is triggered and just moments later, the price moves in the direction you were hoping for. You need to give your trade space to breathe.

Sixth, adjust those stop-losses.

You should never lose on a winning trade. Once your trade is working, move your stop-loss up to your entry point. In this way, if the trade does turn against you, you’ll just be back where you started.

Seventh, set up your charts and KISS (keep it simple, stupid).

They say the best traders can just use price candles to make all their decisions. So keep your chart setup simple – you don’t want it looking like a Jackson Pollock painting with so many signals and indicators that you end up frozen with analysis paralysis.

Personally, my setup is this: I use daily price candles – red signifies a price close below the open for that day and green signifies the opposite, and I overlay the 21-day exponential moving average (purple line), and the 50-day (blue line) and 200-day (pink line) simple moving averages. The shorter-term exponential moving average reacts faster and puts more importance on recent data. The other two are better at tracking longer-term trends. They’re also used by the large institutional players who can sway markets, so when the price comes near them – pay attention.

I also like to use a popular momentum indicator called the relative strength index (RSI, bottom panel), which helps me tell when the asset in question is overbought or oversold and could be reaching an inflection point. (You can read more about the RSI here). Lastly, trendlines, chart patterns, and support and resistance (white solid lines) can be very helpful too. Support areas are price levels that act like a floor, and resistance areas act like a ceiling. They can help you decide where to set your entry, exit, and take profit levels.

Chart drawn on IG’s platform.

Eighth, remember your goal.

Your primary goal should be to find asymmetric tradeable opportunities, which occur when the potential upside (or profit) is much higher than the potential downside (or loss) you could make. Ideally, this involves a risk-to-reward ratio (R/R) of at least 1:2. This at least gives you a buffer for trading costs and “slippage” (when your orders aren’t filled at the price level you want because of a fast price move or a lack of liquidity). It also allows you to have a lower win rate of 30% to be profitable – as your gain is twice your losses. I’d say at an absolute minimum the lowest risk-to-reward opportunities you should be trading are 1:1.5, which would need a slightly higher win rate of 40% to achieve profitability.

Ninth, keep a trading journal.

This is the best way to become a better investor. It lets you track which assets delivered the best profit, and whether you did better with long trades or short ones. Here’s a simple framework you can use to document your trades.

Trading journal template. Source: Finimize

Tenth, learn to love your losses.

By having discipline and sticking to your pre-determined exit rules (hello, 2%), you can avoid much worse ones.