TradingMarkets Rule 6 - Reduce Overnight Risk; Buy Indices And Sectors Instead Of Individual Stocks

Let's look at two extreme examples. The first is with Biogen, a large, well established Fortune 500 company. In February 2005, Biogen voluntarily withdrew its new Multiple Sclerosis drug because two patients on the drug (at that time) passed away and their deaths were linked to it. Overnight, with no warning, and no possible way to be protected, the shareholders of Biogen lost billions of dollars. The stock lost over 35% overnight and no one could do a thing about it.

Now let's look at an even more calamitous event. On September 11, 2001, two planes flew into the World Trade Center. More than 2000 people died from this event. The stock market closed for days because of this. When it re-opened, the SPY's (S&P Depository Receipts) opened about 8% lower. In spite of the fact that 9/11 was far more catastrophic than the Biogen event, investors and traders who were long SPY's lost far less than those investors and traders who were long Biogen.

If you are looking to minimize the overnight risk in your trading, focus on ETF's, Holdr's, iShares and other indices securities.

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