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Step 1
Sell in May and go away. Don't fight the trend. Another saying on Wall St. is "the trend is your friend." So, systematically lock in gains in your short term positions. (If you are a long term investor and are taking advantage of the tax code by holding your positions for more than a year, obviously this doesn't apply to you.) But if you've held for more than a year, or are a day trading or momentum investor, get liquid as May comes to a close. By being in cash, you will have the most leverage to trade stocks in the summer.
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Step 2
Do your homework. The market is a turbulent place. There is no panacea or guide that one can offer to follow every single time and make money. Look for sectors or stocks that are out of favor or getting beaten up. Even if the market is going up through June, there is always something out of favor. This is called value investing. When you receive a stock quote, you will usually be given something called a "p/e ratio" as well. This is the price to earning ratio. Take that ratio and compare it to other competitors of the stock. Then check the stocks year over year growth rate. Ideally you want to look for companies that are growing faster (higher percentages) and that have relatively low p/e ratios. If a company is growing really fast (like Google from 2003 to 2007), it is accepted on Wall St. to pay a higher p/e multiple when buying the stock. To get more information about doing this homework, check out thestreet.com, read the Wall St. Journal and Barrons, and watch CNBC.
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Step 3
Allot capital. This is going to be different for every person. But take 50 percent of your capital and systematically put it to work in the stocks you have chosen. Do NOT buy your shares all at once in any given position. If you are going to invest $10,000 in a company, place a third in, and then watch it. Then add more as you get a feeling for how the stock trades. Add another 1/3, and the final 1/3 when you feel comfortable. If you miss some upside, so be it. If you happen to catch downside, you'll be able to buy at a lower price, thus lowering your entry point and giving you a better price in the position. This is extremely important when trading stocks during the summer. Save the other 50 percent of your liquid cash for post Labor day investing as the "big money" goes back to work.
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Step 4
Lock in gains. Because trading stocks can be volatile in the summer due to lightened volume, be sure to lock in profits as they arise. This is short term money you are playing with anyway. There is nothing worse than seeing a gain turn into a loss. Better to miss a few points on the upside then catch some on the downside!
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Step 5
Re-evaluate. The stock market takes consistent homework. As the long days of summer turn into the cool nights of fall, continue to do your homework in the manner described. This is the basis for something called "value investing." Of course there are other more aggressive types as well. But value investing tends to work best in markets with light volume and strained liquidity as you are buying securities that have already taken their "hit." Congratulations, rather than "sell in May and go away," you have learned how to trade stocks in the summer!
