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