Technical traders understand that we just came back from the brink…again. The broadest measure of our market, the S&P500, dipped as low as 1040 twice in the last couple of months and held those levels.
This index is now above its 200 day moving average, a widely followed and critical technical level used to gauge support or resistance for the market. Does this mean that we should be buying stocks today?
The short answer is yes but with an importance caveat. Buy stocks or Exchange Traded Funds (ETFs) or even long-term call options (LEAPS) but make sure you are hedging your position. Hedging your position allows you to make good profits if you are right about the direction of the stock or the market but reduces the overall risk in the trade. We take this philosophy of risk management to a new level with our process of making adjustments on our losing trades.
Think about buying a new car. Most likely you will hedge the risk in car ownership by buying car insurance. The same hedging mechanism is available for stock and option owners and is accomplished through option instruments.
To be fair, options can be used to manage risk but they can also be used to speculate or gamble in the markets. Many people only explore the speculative side of options (like buying a call option hoping the stock will move higher) and lose money in this speculation to more experienced traders. They decide that options are too risky because they only see the high risk/high reward side of trading options.
But there is a lot more to options than just gambling. If you are looking at this market and think it has the potential to move higher, you can use options to hedge your trades so you can be profitable even if you are wrong. We follow a process of adjustments for our trades that allows us to profit even if a stock or options trade moves against us. We have posted more than 20 live trades on our website in 2010 without losing money in a single trade. Think about your own performance this year.
If you are losing money on some of your trades you need our education and this process of making adjustments. Come and attend a free online class with us or call our staff for more details on our programs. Technically the markets could move higher in the short term, but what if it starts falling again? Can you really afford to bear another bad year in the stock market?
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