Post-downgrade Volatility: 4 Tips for Trading
Today’s guest blog post comes from our friends at Lightspeed Trading. This original post debuted on their Active Trading Blog on September 20th, 2011. In this post, Lightspeed shares 4 tips for trading in a time of great volatility and uncertainty. Enjoy!
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There is no question that this is a superior environment for active trading. The “fear index” VIX recently hitting 50 combined with ultra wide swings provides traders with numerous opportunities for profit. These moves are triggered by the economic confusion that seems to be affecting the entire global system. The Eurozone debt crisis, Standard&Poors’ US downgrade, and whether or not Ben Bernanke will institute QE 3 all add to the inherent volatile nature of the stock market. However, these same moves that lead to outsized profits can also result in heavy losses for traders not skilled and prepared for the volatility. This article will provide 4 critical tips for dealing with market volatility.
Tip 1. Stay Nimble
Not getting married to any one position is a key for success in volatile markets. In fact, it’s a key for success in any market condition. Trading skill combined with a robust trading platform can enable savvy traders to quickly take profits or cut losses within ultra volatile environments.
Tip 2. Fade the extremes
Buying after a very sharp decline and selling after a sharp rise can be a tactic for profiting in heavy volatility. Just take a look at a recent daily chart of the DJIA or S&P 500 to see an example. The snap back rallies and the subsequent plunges are custom made for fading.
Tip 3. Use options
Options can be a powerful tool to use in volatile markets. A strategy known as a straddle can be used to profit from sharp moves, even if you don’t know the direction. A classic example of an excellent time to use a straddle strategy was prior to the pending S&P downgrade. No one knew for certain what way the market would move after the rumor became reality, creating the perfect straddle environment. This strategy provides profits if the underlying instrument moves substantially in either direction. Straddles are the simultaneous buying of a Put and a Call at the same strike price and expiration date. This position has the trader covered in the case of the economic surprise, bullish or bearish. Just keep in mind that the subsequent move must be aggressive for the straddle to profit. You are betting on the magnitude, not direction, of the move.
Tip 4. Ride the trend
If you are able to recognize a solid move in one direction, jumping on board can lead to profits. This so called trend trading can work nicely for short term traders, as many moves even in volatile markets can last for several days or longer prior to reversing.
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***The views and opinions expressed in this post are that of the featured Guest Blogger. This post does not necessarily reflect the INO.com’s own views. All trading involves a level of risk. Individuals should fully understand risks before entering the market. None of the information contained in this post should misconstrued as advice or any sort of solicitation to buy, sell or otherwise invest in any fund, company or security. ***
How to Position Size and Allocate Capital
Today the Trader’s Blog welcomes back Marc Nicolas of TradingEmini.com. In previous posts Marc has shared invaluable trading concepts on risk management and using runners to increase profits. Today will be no different as he discusses the often overlooked method for calculating proper position sizing to stay in the game by taking into account your total risk capital and stoploss level.
Visit TradingEmini.com to learn more about trading psychology, money management and Marc’s trading strategies.
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In my 17 years of trading and having traded for a hedge fund, it is Proper Position Sizing and Capital Allocation which has kept me consistently in the game as a professional trader. Even if you have a great trading strategy, if you do not understand how to properly size your positions, you are unlikely to achieve a comfortable level of consistency and you risk blowing account after account. Proper Position Sizing and Capital allocation protects your risk capital by determining how big a position you should take on any one trade. This will mean fighting the urge to buy an arbitrary number of shares because you “feel” a trade is a sure winner. It is the bridge between your chart analysis and risk management plan. Unfortunately position size is the most overlooked aspect of trading and yet is the most important aspect, especially with the volatility we have seen in the markets lately. I hope the 4 steps below will help you.
• Step 1: Capital Allocation
This calculation will split your capital according to the number of different positions or instruments, like futures, stocks, forex, commodities or options you want to trade, or hold in your portfolio. For instance, assume that you have $100,000 Total Risk Capital and you want to include 5 different positions in your portfolio to diversify your risk. Your Instrument Capital Split should be Total Risk Capital/Number of Positions, in this example, $100,000/5 = $20,000 is the capital allocated to each position. Read more
Penny Stock Breakdown
Today’s Guest Blog Post comes from Michael Stone of Penny Stock Bull Reports. “Exactly what is a Penny Stock?” originally appeared as an Introduction to Michael Stone’s latest eBook. In this post, Stone explains the basic concept of what a penny stock is and what the risk vs. reward ratio’s entail. If you enjoy this post, please click here to learn more about Penny Stock Bull Reports and receive a complimentary report which will share 3 potential penny stocks poised to breakout.
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Many people have heard about Penny stocks and their popularity is unarguable due to the fact that on any given day, millions of shares of these stocks are bought and sold in the United States and the rest of the world.
As long as you are reliably informed about the correct strategies for thriving in penny stock market then you can make more profitable trades more consistently.
If you are wondering what penny stocks are, these are defined by the Securities and Exchange Commission as low priced (usually under $5), high risk securities of startups and other small firms. Some market players regard penny stocks as stocks priced $5 or smaller while others believe the limit should be at $10. Generally, penny stock companies have a market-cap of less than One Billion Dollars. Read more
An Early Obituary for the Euro
Today’s Guest Post comes from Michael Lombardi of Lombardi Financial. “An Early Obituary for the Euro,” originally appeared on the Profit Confidential website on July 31st, 2011. In this piece, Lombardi breaks down the fate of the Euro. Enjoy with our compliments and please visit this page to obtain complimentary access to a complimentary report, “A Golden Opportunity for Stock Market Investors” as well as a free e-letter subscription to Lombardi’s Profit Confidential.
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Does America want members of the 17 eurozone countries to go bankrupt one by one? If only a few went under, the American currency would win the currency wars and reaffirm itself as the reserve currency of the world.
If you were someone living outside the U.S., wouldn’t this sound like a “secret” strategy that could work? After all, are not all the major credit reporting agencies (that grant credit ratings to European countries) subsidiaries of major American corporations?
These are the suspicions I’m hearing from people here in Rome.
Let’s give the theory some further attention and you’ll be surprised at what we find… Read more
ETFs to Profit From a Possible Debt Solution
Today’s Guest Post comes from the ETF Corner at InvestorAlley.com (click here to visit original post). In this post, their “Guest Insights” contributor, John Nyaradi of Wall Street Sector Selector gives a fresh perspective on how select financial vehicles could benefit from the August 3rd debt solution deadline. Learn more about InvestorAlley and access a complimentary report, “Do Not Buy These 6 Stocks.”
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Investors, pundits and journalists alike have spent hours of research, television time and column inches speculating about the ramifications of a U.S. default or contagion from Greece spreading throughout the European Union.
Last week the EU was apparently successful in again kicking the can a bit farther down the road while the debate between Congress and the White House over deficit reduction goes way past the 11th hour for meeting the August 2nd deadline.
Everyone expects and assumes that the European Union will be able to save Greece and that our politicians will not take the United States and the world over the financial cliff of destruction. However, that still could very well happen which is why in previous columns we have discussed ETFs and strategies for that possibility. Read more
An Investment Strategy For Higher-risk Periods
Today’s Guest Post comes from George Leong, Senior Editor of Lombardi Financial. “An Investment Strategy For Higher-risk Periods” originally appeared on the Profit Confidential website on July 15th, 2011. In this piece, Leong gives a brief analysis of the S&P 500, as well as explains a strategy to combat the unsure market conditions. Enjoy with our compliments and please visit this page to obtain complimentary access to a complimentary report, “A Golden Opportunity for Stock Market Investors” as well as a free e-letter subscription to Lombardi’s Profit Confidential.
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The current market bias is positive, but there’s some concern about the chart. The S&P 500 breached its 50-day moving average (MA) on Monday before rallying, but has failed to mount any sustainable rebound, currently stuck around its 50-day MA. My concern is that failure to edge higher could drive the index back lower and continue the sideways channel in existence since February.
The absence of any strong catalyst could leave the broader market comatose for the summer months.
On the S&P 500, there is key support around 1,250. A break below would be bearish and see a move below 1,200. I expect the support to hold. On the upper end, there is strict resistance around 1,362. A strong break above could drive additional gains towards 1,400. Read more
Get Big Results with “Optionality”
Today’s Guest Post comes from Chris Mayer of Penny Sleuth. Get Big Results with “Optionality” originally appeared in the Penny Sleuth. In this piece, Mayer explains the concept of “Optionality” as a way to battle the uncertain and fickle market conditions. If you enjoy this post, please click here to learn more about Penny Sleuth and a complimentary report which will share 3 stocks poised to breakout.
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“The world has changed. It is a more fragile and less stable place.”
The speaker was Joshua Friedman, the co-chief at Canyon Partners, which manages $20 billion. He was speaking at Grant’s Spring Investment Conference, which I attended in early April.
Friedman used the imagery of the old bell curves. There is the normal bell curve and the “new normal” curve with fatter tails. In plain terms, it means more crazy things will happen. It means outliers will become more common. It means the unexpected will happen more frequently. Wildness lies in wait, as Chesterton had it.
In many ways, markets have always been this way, as the late Benoit Mandelbrot observed. For instance, financial theory – based on the old bell curve – predicts that a market move of 7% or more in a single day will happen once every 300,000 years. Yet the 20th century alone had 48 such days. “Truly, a calamitous era,” Mandelbrot writes, “that insists on flaunting all predictions.” Read more
Our Sponsor School – Update
If you’ve been following the Trader’s Blog for the last few years, you are probably very familiar with our sponsor school, Stevenson High in Lincolnshire, Illinois. Their Economics Team has been using MarketClub to assist in their research for stock trading competitions. I frequently receive updates from the instructor regarding the students progress, successes and struggles. Please see the message I received yesterday…
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Lindsay,
I wanted to give you an update on our latest competition. Well, we are not doing too badly. One of our teams is in 11th place and another is in 22nd place in the Illinois competition. Both teams follow MarketClub religiously and the results are self explanatory.
Now, the 2 other teams refer to MarketClub on occasion but do not follow the signals. These two teams are in the 50-60 placement range. It sure looks like using MarketClub pays.
Additionally, we have been invited to participate in a national competition which began last Monday. It is too early to give you an update but one will be forthcoming soon.
Thanks again for your help.
Sincerely,
*Teacher’s name removed for privacy*
Adlai E. Stevenson High School
Lincolnshire, Illinois 60069
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Hope you enjoy these updates and we send best wishes to the club for their current stock trading competition.
Best,
Lindsay Bittinger
INO.com & MarketClub
Dan Gramza & Daily Market Studies
For those not familiar with Dan Gramza, he is a well known author, advisor, educator, and trader. Not only is he president of Gramza Capital Management, Inc., and DMG Advisors, LLC, but he is also the author of “Trading In The Eye Of The Storm” and “The Handbook of Japanese Candle Trading Strategies.” Gramza has appeared on CNN’s “Moneyline,” Reuters TV and Bloomberg TV. Watch Gramza’s complimentary daily analysis.
Gramza is a respected educator and analyst, and is an instructor for the Chicago Mercantile Exchange Education Center, the Chicago Mercantile Exchange DePaul University, The Chicago Board of Trade and the Chicago Stock Exchange.
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Daily Market Studies with Dan Gramza
Dan Gramza’s daily market studies is an on-line educational resource brought to you by INO.com and the CME Group. This complimentary sign-up will allow you to accesses videos of Dan Gramza as he discusses some of the prior day setups in each of the CME Group markets. Dan presents graphs in his easy to understand teaching style to provide insights, considerations and implications for trading futures and options on Stock Indexes, Forex, Grains, Precious Metals and more.
Access Gramza’s complimentary daily analysis.
All the best,
INO.com & The INO TV Team
The Greatest Investment Lesson You’ll Ever Learn
Today’s guest post was submitted by Dr. Steve Sjuggeurd, founding editor of Daily Wealth. Dr. Sjuggeurd shares two tips he feels will help you wrestle the markets and come out on top. Feel free to share, comment and enjoy.
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My friend Elwood is as smart as anyone, anywhere.
I met Elwood when I moved to the Northeast Florida coast a decade ago. Elwood broke the hillbilly stereotype. I learned a Southern accent doesn’t mean you’re uneducated (just like a New York accent doesn’t necessarily mean you’re pushy and abrasive).
When Elwood talks, I listen. Elwood stopped by my office the other day. It turns out, he just had his first “ten-bagger”… a stock he owned that went up tenfold. I asked him to tell me the story. Read more
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