Learn the Right Tools for Stock Market Success by Greg Jensen
Your skill with assessment and trading tools will enable you to change direction with the stock market and chart a path to more consistent profits.
You’ve been closely following XYZ stock on your watch list. You have conducted extensive fundamental analysis and found that all of the indicators show a strong, vibrant company poised for growth with an expanding market share and products in high demand. Your technical analysis has provided buy signals with the RSI having crossed over 50, the MACD also having crossed over, indicating a bullish trend, and the EMA five-day moving average having crossed over the 20-day average. Likewise, you’ve conducted rigorous sentimental analysis that has indicated a bullish trend—with a favorable economic outlook, recent Fed movements, and other indicators all supporting that conclusion. Confident that your thorough researches accurately predicted an upward trend for XYZ stock, you take the plunge and buy it.
Change in direction
Not long after making your purchase, XYZ Company unexpectedly announces a downward revision in earnings expectations. Despite having been diligent in your research and prudent in your purchase, you are holding XYZ stock and facing the hard reality that it’s headed in the wrong direction. You know the standard options available to you: get out quickly hoping to minimize your losses, or take the long view by deciding to hold the stock and ride out
the downturn. But are there any better alternatives? What if there was a way to adjust your position so that you could actually profit from the contrary movement of the stock?
While this type of trade adjustment is possibly the most important strategy available, it’s also one of the least understood and underutilized techniques by even savvy traders. Let’s face it, regardless how thorough your research is and how sound your trading strategy is, there will be times when events beyond our control send stock prices in the wrong direction. Your ability to take advantage of this contrary movement through trade adjustments is likely to be the difference between being a consistently profitable trader and just another hit or miss market hack.
Learn other trading instruments
The first step in understandingthis new process is to become familiar with other trading instruments available to you as an investor, beyond simplypurchasing stock. These other investment vehicles are known as options. Options give you the right to buy or sella stock at a set price within a specific time frame. This right to buy or sell is the key that allows you to not only control you portfolio’s risk from sudden changes in market conditions, but also to adjust your current positions to take advantage of current market trends, regardless of what those trends may be.
When I first learned about the two primary options instruments—puts and calls—they seemed to be the answer to this dilemma of not being able to predict where a stock is going all of the time. I felt that I now had an investment vehicle that could make money, even when a stock I owned was going down. Nothing could go wrong. To my dismay, however, I found myself being hit with the same types of returns in the market, still unable to adjust my positions to profit when the stock moved in the wrong direction. It was as this point that stumbled upon the start of a thought process that would change the way I viewed the market.
At the time, I was doing quite well using an options strategy called a covered call. I had developed models that would allow me to diversify across sectors, using the covered calls to help increase my returns. The problem with this strategy was that if I entered this type of trade on a bearish stock, not only was I at risk of a downside move in the stock, but I was virtually locked into the trade for a time period, not being able to close as quickly as I would like, and further increasing my risk with a bearish move in the stock.
That all changed the day I decided to buy a long put, along with my covered call strategy, when one of the stocks I had a trade on was dropping. The stock kept dropping, and before I knew it, my returns broke even. I had bought the stock at $35, watched it drop to $25, and yet I hadn’t lost any money. I felt like Alexander Graham Bell must have felt when he heard a voice coming across the first telephone.
I decided to take my findings to someone I respected in the stock market to let him in on the knowledge I had gained. When I explained my strategy to this person, he quickly stated, “Oh yeah, that’s a collar trade. It’s a great strategy for protecting stock positions.”Well, I was a little let down after realizing I didn’t invent the telephone, but I was also a little excited that the strategy was in fact valid and not some random happening in the market.
Tools for Successful Trading
This realization helped me see that there are more tools out there to help me better understand the market. I didn’t yet have all the tools I needed to successfully trade. These tools included protective puts, collar trades, and other spread trade strategies. I had a few tools that were critical, (i.e. technical, fundamental, and sentimental analysis), and I had experienced some good success with these tools alone. But I lacked the tools to help me change direction with the market without having to just stop and go when the market changed trends. This realization helped me down the path to understanding that there is a way to more consistent profits.
OptionsANIMAL CEO & Founder