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