A couple of days ago Steve asked if Louise B could comment on the current sharemarket conditions. I hassled her until she gave me the following short article to post here.
Downtrend doesn’t have to mean doomOne of the benefits of the sharemarket, in comparison to the traditional property market, is that there are some strategies that you can implement to make money when the market is downtrending. Most traders know how to make money in a bull market, but few know how to profit from a bear market. Professionals make money regardless of the market direction. If you have developed confidence in trading, there are several courses of action that you can follow. Let’s have a look at some of the methods that you can use to make money when the sharemarket resembles a waterfall…
Act on Your Stops
In volatile markets, the key is not to panic! Good traders set a stop loss, and stick to it. In a bear market, do not ‘hope’ that your shares will recover. There is no harm in not trading, and waiting for the optimal time to re-enter the market.
Use Options
Professionals in the market have learned about the power of leverage and have developed a healthy respect for it. In summary, writing options involves collecting a small fixed premium, yet incurring a theoretically unlimited loss. Buying options has a lower probability of success, yet due to the leveraged nature of this strategy, the rewards from the 20% of trades that do work, may outweigh the losses from the 80% of losing trades.
In the options market, as the share price drops, the price of put options increase, often very dramatically. In a downtrend, writing calls and buying puts can lead to significant profits.
Short Selling
Usually when we buy a share, we are hoping to buy it at $5.00 for example, and sell it at $10.00 at a later date. Short-selling performs this same process, but in reverse. In effect, you borrow shares that you do not own, sell them with the expectation that the share price will drop, then buy them back at a later date. Your profit or loss is the difference between your sell price, and your buy price – so if the share price drops, you make a profit. This method also harnesses the power of leverage, so make sure you are comfortable with trading shares first. This will maximise your chances of success.
Louise Bedford (www.tradingsecrets.com.au) is a full-time private trader and author of Trading Secrets, The Secret of Writing Options and The Secret of Candlestick Charting
Edited by – [email protected] on 24/07/2002 9:46:29 PM
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