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Riding the Tides of the Market

Love to Surf? It May Assist You in Trading These Markets

I have compared trading stocks and options to many things. Some days the market makes me feel as though I am solving a puzzle with many jagged, sometimes complicated, pieces needing to be placed together as a cohesive whole. Other times I feel like a farmer – sowing new trades into my portfolio while reaping profits on others. Now that I live in southern California, I think my favorite analogy for the market is the ocean and its waves. The more we learn to work with the waves and the tides, and not against them, the more successful we will be in our trading enterprise.

Surfer takes on a massive wave in Halfmoon Bay...

Surfer takes on a massive wave in Halfmoon Bay during the Mavericks Surf Contest (Photo credit: Wikipedia)

I’ll take the ocean visual a step further by comparing primary, secondary and minor trends in the markets to the ebb and flow of ocean waves. The major, or primary, trends are like the tides. The primary bullish trend we have experienced so far in 2012 is like an incoming tide which runs farther and farther up the beach until it hits a crest, at which point it begins to recede. As this major tide is coming in, we have waves that break at the beach. Some are incoming and some are outgoing. The waves continue to push farther and farther up on the shore until the tide reaches its peak. After this point, the waves recede, each one not traveling as far as its predecessors. These waves are the intermediate trends. As all of this occurs, there are constant droplets and ripples in the surface water of the ocean. These are analogous to the day-to-day fluctuations of the market.

It appears we have ridden a bullish tide in the markets, particularly in the first quarter of 2012. Starting in April, it seems that the tide has somewhat peaked as the waves (intermediate trend) are still incoming but at a less aggressive pace. The small “wavelets” appear to be going out, so our short-term trend may be sideways to down.

Why is this analogy useful? If you are a longer-term trader, you may welcome the tide receding as it will give you opportunities to enter positions in equities at a more favorable price point. Here at OptionsANIMAL, we show you how to use a collar trade to take advantage of the change in tides. If you are a shorter-term, perhaps swing trader, you will be watching the waves closely to help determine entry points or secondary exit action points for your shorter term trades.

Whatever your trading style may be, looking at the markets like an ocean may help provide a profitable framework for your trading. Now, if only we could provide that relaxing saltwater air…

Karen Smith
OptionsANIMAL Instructor

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