| Copyright (c) 2007 CashFlow Avenue | | | | place.�Money management ensures that the |
| Is there a trend in stock and option | | | | traders will always be in business despite a bad |
| trading?� | | | | spell.�Good traders will lose |
| Let's start of by defining a trend.�A trend is | | | | money.�Bad traders lose more |
| simply the general direction of the | | | | often.�Whatever you trading level, a good |
| market.�The market can only move in 3 | | | | money management system will prevent a wipeout |
| directions � up, down or | | | | of 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 important | | | | trade if it goes wrong?�That must be |
| because that is how money is made.�If | | | | determined before any position is |
| there is no trend, then how would the buyer of the | | | | opened.�Setting your rules upfront will curb |
| uptrend profit when the market moves | | | | emotional and irrational decision making.�For |
| sideways.�They need to buy low and sell | | | | most traders, emotional decisions can almost certainly |
| high.�Likewise, short sellers can only benefit | | | | be the worst decision that they |
| when they sell high and buy back | | | | make.�Knowing what to do before trouble |
| lower.�Trend followers will always wait for | | | | come knocking will help keep you on your toes. |
| the market to shift or turn before jumping | | | | Any trader should already know the below questions |
| in.�Directional trading, like any trading | | | | before entering into a trade. |
| strategy, requires discipline and | | | | How and when to enter the market? |
| patience.�Directional traders can only benefit | | | | How 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 to | | | | How to exit the trade if it becomes profitable? |
| follow precise entry and exit rules. Successful traders | | | | While trading trends can be extremely profitable, the |
| utilize strong risk management systems that use | | | | odds are unfortunately staked unfavorably against |
| current market price, portfolio allocation system in an | | | | the 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 that | | | | relatively unknown but superior trading strategy does |
| determines their capital exposure at the time of | | | | not 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 the | | | | Strategy.�Prediction is impossible in the stock |
| other hand, adverse price movements may lead to | | | | market.�The Market Neutral Strategy is |
| an early exit for their entire trade for a small loss. To | | | | certainly not a holy grail.�It is not some |
| be a successful directional trader, the risk reward | | | | passing fad or hyped-up secret trading |
| ratio should be 1:3 for any trade to be | | | | strategy.�It is the strategy that takes full |
| worthwhile.�That is because despite the | | | | advantage of the depreciation of options premium as |
| technical tools available, directional traders are wrong | | | | it approaches expiration.�Markets may move |
| most of the time.�If they are profitable 4 of | | | | up, down, or even sideways for this strategy to be |
| 10 trades, then they can be considered as excellent | | | | profitable. If you must trade everyday, the market |
| traders.�Directional traders have the market | | | | neutral trading strategy will not work for |
| odds staked against them every time that they | | | | you.�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 are | | | | provide 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 must | | | | directional 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 is | | | | What do you need to get started? |
| that price is the main concern. If a market is at 50 | | | | An active mind, willingness to learn, strong discipline |
| and goes to 47, 49, and 46 - the market is in a | | | | and passion to succeed. |
| down trend. Sometimes technical indicators can show | | | | No knowledge of what is happening in Shanghai or |
| otherwise. There are many different indicators that | | | | the ability to read financial statements is required. |
| can supposedly show where the market should | | | | The 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 with | | | | About ten minutes a day to check on all open |
| what the market is doing, not what the market | | | | positions. |
| might do. The price tells you what the market is | | | | A 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 any | | | | is a loser.�If you are tired of losing in the |
| trading system.�Successful traders will | | | | market, then it is time to arm yourself with Market |
| already have a money management system is | | | | Neutral Trading Knowledge. |