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The recession has only just begun. The next few quarters will likely show negative to flat growth in the economy. The dollar will likely continue to show strength as the rest of the world falls into turmoil. This means demand for US made products will decrease and manufacturing will continue to slump. The Fed will likely cut interest rates by another 25-50 basis points. Consumer confidence will remain low as inflation persists and unemployment continues to rise.

Indeed, we are entering a critical time with Q3 earnings looming at large, and with the election, the holidays and the winter season all just around the corner. I suspect a few more financial firms will fail before this all ends in 2010. We are certainly forging into new found territory.

I wrote in a previous article that you should allocate at least 50% of your portfolio in cash, and use the rest to trade non-speculative markets outside of financials. Of course, everything seems to be speculative right now with the market fluctuating wildly each day. What you need to realize is that wild fluctuations often mean opportunities for both the long term and for the short term. There are still ways make money in this environment, albeit it is not as lucrative as before. As an investor, this means you need to be more alert, more disciplined, more patient and more savvy than everyone else.

I see two ways to play the market right now, which I am both doing for my own portfolio.

Strategy #1: Play For the Long Term (2+ years)

This is the Warren Buffett value investing strategy. Here, I am betting that the economy will recover from the recession a few years out. And that when it recovers, it will be better than what it is now. Please note that I am not calling a bottom here – no one can, if you think you can call tops and bottoms, you really should not be trading.

I think there is a lot of value in the market particularly in healthcare, commodity and shipping companies. The long-term fundamentals for these industries are strong. Many companies have been beaten down so badly that there is a severe disconnect between their true worth and market pricing.

In particular, I like Pfizer (NYSE:PFE), GlaxoSmithKline (NYSE:GSK), TBS International (NASDAQ:TBSI), Agnico Eagle Mines (NYSE:AEM) and Harmony Gold Mining (NYSE:HMY).

Strategy #2: Play For the Short Term Swings (few hours to few days)

If you are not a believer of long-term value investing, or if you are simply looking for more action, swing trading may be a great way to improve your portfolio. Because of the wild market fluctuations, it is particularly important to create a robust strategy and be extremely disciplined in following your strategy. The following are essential tips to trade through the current conditions:

  • Form buy and sell target prices prior to triggering the trade
  • Look for high risk to reward ratio trades
  • Monitor no more than five companies religiously and only trade these five companies
  • Use tight stops; never risk more than a few percent of your portfolio
  • Be very disciplined with entries and exits; don’t turn a losing trade into a long-term investment
  • The contrarian is often right in this hostile environment
  • Never chase after a price movement

While the market may be violent, there are plenty of short-term and long-term opportunities. It is in trying times like these, that great traders are born.

Disclosure: none

Source: Trading Strategies for Today's Markets