Investors throughout the world are currently experiencing a down market that is correcting the excesses of the runaway markets of the late 1990's. Despite the fact that the major market indexes have been down three years in a row, a condition that hasn't been equaled since the start of World War II, we may still have a long way to go. Thus, if you want to protect your investment fund, please consider the following suggestions.

Doing so should improve your bottom line and safeguard your assets.

1. Invest with the current trend of the market.

Before you invest in the market you need to ask yourself, what is the market doing? Is it going up or down? Avoid having a major position in the stock market until you can safely say that the market is going up. But how do you determine that?

First, look at what the S&P500 index is doing. This index is a composite of the 500 largest companies in America. To determine how well it is doing, compare the close of the market today, with the average price of the market over the last 200 days.

The latter is called a 200-day moving average. When the stock price is above the 200-day moving average, the market generally goes up about 12.6% each year. When the stock price is below the 200 day moving average, the market generally goes down by 1.6% each year. Isn't it better to have that average on your side?

To find the average, you can go to www.bigcharts.com. Plug in SP500 and click on the interactive charting button (at the topin "200" in the space beside SMA. Scroll up and then click the red button "draw chart." You will now see a chart of the SP500 with a 200-day moving average, like the one below. All you have to do is ask yourself, "Is today's price above or below that average?).

You will then see a one-year chart of the SP500. On the left hand side you will see a set of buttons. Click on "indicators." The first indicator will be moving averages. Click on SMA and then fill " If the price is below the average, then don't buy any new positions. It is that simple.

The chart tells us that the price has been below the 200 day moving average since last May. This is a danger signal to stay away from new market positions.

2. Never Enter A Position in the Market Without Knowing Where You Will Get Out.

Most people enter into a market position with the idea of holding onto it for a long time. However, the wisdom of that idea is strongly questioned when we enter down markets such as the current one. And even in the glorious markets of 1999, you still needed to protect yourself.

For example, you could have purchased JDS Uniphase Corp (Symbol: JDSU) in early 1999 at a stock split adjusted price of about $8 per share. The stock then went to a high over $140 per share around March of 2000. But today it is under $3 per share. That's a huge drop in price from which you need to protect yourself.

JDSU had a huge gain, followed by a huge loss. However, a firm exit point would have allowed you to make a profit and protect that profit.

I recommend that you use a 25% trailing stop. Suppose you enter into JDSU at $8 per share in early 1999. You'd sell if it dropped 25% to $6 per share. In addition, the trailing portion of the stop means that when JDSU makes a new high, you trail the stop 25% from that new high. Thus, when JDSU moves to $12 per share, your new stop is $9.

It's important to note that with a trailing stop, you only raise your exit point, you never lower it when the stock drops in price. Thus, when it moves up to $40, your stop moves up to $30. And when the stock hits its all time high of $153 in March of 2000, you would have a stop 25% away at $114.75.

Yes, you would have been able to ride the stock from $8 to $153 and would have then been stopped out of the stock at $114.75 for a very nice gain. The 25% trailing stop was far enough away to allow you to experience the entire gain, but more importantly, it got you out before the major fall started.

Notice that in our example, your initial risk was $2 per share (25% of the $8.00 entry) . Your profit was $106.75 per share for a risk reward ratio of over 53 to 1.

Part 2 of this article: Five Ways To Improve Your Market Performance (part 2) >>