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