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