Trading Strategies that work. I’ve heard numerous clients and colleagues over the last 18-months describing how the current markets are the hardest they have experienced in a decade. One of the key lesson’s I’ve learnt in nearly 15 years as an analyst is that no matter what the markets are doing, you have no control over what tomorrow will bring. Hence, Risk management and choosing the right Trading Strategy are the absolute keys to success in the markets.
You might think it simple, but how I view the markets is that they can only trend in one of three directions at any one time: Up, Down or Sideways. So while most people are trying to second guess which way the markets are likely to go, I already know! Fact is, I don’t know what is going to happen in the future, I just know that the markets will either be Up, Down or Sideways.
For this reason, my focus (as a professional analyst and advisor) is not on trying to choose what direction the markets will be on a day to day basis. This will do your head in, as there will be days you get it right, days you get it wrong, and days that just simply do both! My focus, is to choose a strategy that best suits the market conditions now, evaluating the Risk of the position if the markets go Up, Down or Sideways.
Think of it as having all your bases covered.
The Stock Investor is limited in what they can do. They need the stock price to rise higher from where they had bought it, and they need to decide when to Sell. Quite often I will have new clients come to me and find that they had chosen stocks at a reasonable price, but failed to exit for a profit, resulting in holding stocks that were now worth less than where they had bought it. In most cases, the stocks get forgotten about and put in the bottom drawer for “long-term” investment. But did you realise you can profit from the stock market no matter whether share prices went Up, Down or Sideways?
Trading Strategies that work: Did you realise you can profit from the stock market no matter whether share prices went Up, Down or Sideways?
Using a combination of Stocks and (Equity) Options, I have numerous strategies available to me that can benefit from Upward moving markets, Falling markets and Sideways markets. I can adopt strategies that benefit from high volatility or low volatility. That are suited for short-term or long-term time-frames. And due to the Internet and online broking facilities, I can trade any stock, commodity or currency in the world. And I don’t have to do this at a high cost or using higher Risk futures contracts.
Using stocks, options and Exchange Traded Funds (referred to as ETFs), there are many different types of approaches you can take in the markets. Just like a game of Chess, you can adopt a different strategy depending on the flow of the game. And, you can modify your strategy if the game is going against you.
For today’s article, I’m going to concentrate Volatility and Non-directional markets. Which are the trading strategies we have had to deal with throughout 2012.
Non-directional markets are certainly difficult for the Buy and Hold investor. And for the short-term trader, you need to be “In the Zone” with a clear and decisive plan to capitalize on fluctuating markets.
Understanding market volatility is one of the key components that distinguishes the amateur ‘punter’ from a professional trader/investor, especially when the markets are not conforming to normal trending activity.
Volatility is a measure of price over time. Historical Volatility represents past price performance whereas Implied Volatility is derived from the market price of a derivative (usually options). When measuring the broader US market volatility, the VIX index is the benchmark commonly used. But did you realise you can profit from the stock market no matter whether share prices went Up, Down or Sideways?
To read this index, it is treated as an inverse relationship to the markets. When the broader market is rising, the VIX will typically fall. When the markets begin falling, and fear fuels selling pressure, the VIX index rises.
On a global fundamental level, there are great fears over the European financial sector, a slowing Chinese economy, and a stagnating US economy. Yet, the VIX index is trading near long-term lows.
This suggests investors are not completely fearful, on the short-term, and that there is a lower probability that the markets will decline. And this is where the contradiction lies.
Weak fundamentals compared to rising stock markets are a conundrum that can bewilder the most seasoned of analysts. Yet, we have been able to capitalize on this low volatility period using Exchange Traded Funds (ETF’s) and options using Volatility as a benchmark to our decision making process.
Trading strategies are pivotal to success in the markets. The old school “buy and hold” approach works fine if you are willing to watch prices fluctuate wildly and can trade through long-term depressions of the markets. But we are now in a new paradigm where volatility is the driving factor behind global growth.
Professionals use trading strategies that can profit no matter whether the markets rise, fall or consolidate. The focus of the trader should be choosing the right strategy to suit the current conditions of the markets, and not trying to second guess what will happen in the future.