Market Neutral Strategy: Staking The Odds in Your Favor

Copyright (c) 2007 CashFlow Avenueplace.�Money management ensures that the
Is there a trend in stock and optiontraders will always be in business despite a bad
trading?�spell.�Good traders will lose
Let's start of by defining a trend.�A trend ismoney.�Bad traders lose more
simply the general direction of theoften.�Whatever you trading level, a good
market.�The market can only move in 3money management system will prevent a wipeout
directions � up, down orof your portfolio.
sideways.�It is as simple as that.Risk Control: How much can you afford to lose in a
For directional traders, knowing the trend is importanttrade if it goes wrong?�That must be
because that is how money is made.�Ifdetermined before any position is
there is no trend, then how would the buyer of theopened.�Setting your rules upfront will curb
uptrend profit when the market movesemotional and irrational decision making.�For
sideways.�They need to buy low and sellmost traders, emotional decisions can almost certainly
high.�Likewise, short sellers can only benefitbe the worst decision that they
when they sell high and buy backmake.�Knowing what to do before trouble
lower.�Trend followers will always wait forcome knocking will help keep you on your toes.
the market to shift or turn before jumpingAny trader should already know the below questions
in.�Directional trading, like any tradingbefore entering into a trade.
strategy, requires discipline andHow and when to enter the market?
patience.�Directional traders can only benefitHow many contracts or shares to trade at any time?
when the market moves in their direction �How much money to risk on each trade?
up or down.How to exit the trade if it becomes unprofitable?
Directional trading demands strong self-discipline toHow to exit the trade if it becomes profitable?
follow precise entry and exit rules. Successful tradersWhile trading trends can be extremely profitable, the
utilize strong risk management systems that useodds are unfortunately staked unfavorably against
current market price, portfolio allocation system in anthe directional traders, even more so for directional
account and takes advantage of market volatility.option traders due to time decay.�A
Directional traders use an initial risk strategy thatrelatively unknown but superior trading strategy does
determines their capital exposure at the time ofnot forecast nor predict market movements exist
entry. This means that they must know how much� a Market Neutral Trading
to buy or sell based on their account size. On theStrategy.�Prediction is impossible in the stock
other hand, adverse price movements may lead tomarket.�The Market Neutral Strategy is
an early exit for their entire trade for a small loss. Tocertainly not a holy grail.�It is not some
be a successful directional trader, the risk rewardpassing fad or hyped-up secret trading
ratio should be 1:3 for any trade to bestrategy.�It is the strategy that takes full
worthwhile.�That is because despite theadvantage of the depreciation of options premium as
technical tools available, directional traders are wrongit approaches expiration.�Markets may move
most of the time.�If they are profitable 4 ofup, down, or even sideways for this strategy to be
10 trades, then they can be considered as excellentprofitable. If you must trade everyday, the market
traders.�Directional traders have the marketneutral trading strategy will not work for
odds staked against them every time that theyyou.�A sound trading strategy should only
enter into a trade.�So when they are right,limit you to 3 to 6 trades per month which should
they have to let their profit run, and when they areprovide decent returns of up to 10% per
wrong, they must quickly cut their losses fast.month.�With all the discipline and rules of a
Before entering into any trade, any trader mustdirectional trading strategy applied, the market neutral
already consider the below.strategy can be used to devastating effect.
Price: One of the first rules of directional trading isWhat do you need to get started?
that price is the main concern. If a market is at 50An active mind, willingness to learn, strong discipline
and goes to 47, 49, and 46 - the market is in aand passion to succeed.
down trend. Sometimes technical indicators can showNo knowledge of what is happening in Shanghai or
otherwise. There are many different indicators thatthe ability to read financial statements is required.
can supposedly show where the market shouldThe key is the price on the chart.
move.�While that is always a nice tool,Discipline and common sense to do the right thing.
successful traders should only be concerned withAbout ten minutes a day to check on all open
what the market is doing, not what the marketpositions.
might do. The price tells you what the market isA reliable PC/Notebook and internet connection.
doing � not the indicators!Trading is a zero-sum game. For every winner, there
Money Management: The most critical factor of anyis a loser.�If you are tired of losing in the
trading system.�Successful traders willmarket, then it is time to arm yourself with Market
already have a money management system isNeutral Trading Knowledge.