Geopolitical events have been hitting hard this year.
First, we had the capture of Venezuelan president Nicolás Maduro and his wife Cilia Flores. Then there was the brouhaha around President Trump’s plans to “take” Greenland. Meanwhile, the Russian invasion of Ukraine has dragged on into its fifth year.
But the biggest interruption has been the Iran conflict and the blockade of the Strait of Hormuz. That sent crude oil surging through the $100 level, which threatens to upend the global economy.
Markets sold off in reaction to the hostilities. But after the initial shock, stocks took all of 10 days to break out to all-time highs… If you’re like me, that turnabout makes you leery.
You may be tempted to sit things out and leave this crazy action to the big institutions.
But what you don’t realize is that you have an edge…
Many retail traders assume they’re competing against big Wall Street players managing billions of dollars. Because of that, they feel they don’t stand much of a chance.
However, that couldn’t be further from the truth…
“Big money” institutions have strict mandates they must follow. They can’t easily jump in or out of positions. Vitally, they can’t sit on the sidelines. They typically need to remain fully invested to meet their fund’s investment obligations.
And because those funds are trying to beat (or at least match) a benchmark like the S&P 500, they often mirror each other’s positions. This means they are heavily exposed to that benchmark’s biggest stocks. Otherwise, they risk underperformance.
But this is where retail traders have an advantage…
For a start, you don’t have to be invested in anything. You have the luxury of sitting things out for as long as you’d like. While that might not seem like a big deal when the market’s in rally mode, it makes a massive difference when markets are tanking.
Imagine having to stay long 60–70% equities when markets are in freefall. A retail trader doesn’t have to deal with the same constraints.
Retail traders can also be nimble and change course quickly…
This year, we’re getting an education in how fast markets can move due to geopolitical events like we’re seeing in the Middle East. Stocks can turn on a dime.
But big funds don’t have the ability or flexibility to react quickly. They often have to ride things out.
You can pivot instantly to cut or add to a position. It takes just a few clicks. Plus, you’re not limited by a stock’s market cap or liquidity. You can trade stocks too small for large funds to consider.
Retail traders’ edge is flexibility. But more than that, they can use limited-risk strategies…
Large funds typically hold outright positions in stocks or futures contracts. But you can use options to take part in promising moves while capping their downside.
So when you’re next watching all the turmoil unfold, don’t fret about an army of brokers or hedge fund managers stealing all the wins.
As a retail trader, you have advantages. The key is to understand how to put them to good use.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
