Again welcome back to my series on how to trade stock
options successfully. Key number seven is always trade with
the trend. Let's discuss what that means.
As my first mentor, Dr. Stephen Cooper, says "The trend is
your friend". Generally speaking, if the market is trending
up then trade calls, if it is trending down then trade
puts. It really is that simple, why buck the trend?
The general market direction is determined by what the
institutional investors are doing. Institutional investors
are large corporations such as investment banks, mutual
funds and insurance companies. They have billions of
dollars to invest and they move the market. Small private
investors such as us have very little effect on the
direction of the market or a particular stock. If the
institutional and professional investors are putting
millions into the market and certain stocks, follow them.
They may not necessarily know what they are doing but they
do make the market so if the Dow Jones Industrial Average
is down 200 points as a rule don't buy calls, conversely if
it is up 200 points, again as a rule, don't buy puts.
Of course these are general rules and there are always
exceptions. A particular sector or stock may be performing
exceptionally well and just because the overall market is
going down you may still have good fundamental and
technical reasons to be buying calls in that particular
sector or stock. Always double check the news sources I
mentioned in Key #2, check the fundamentals explained in
Key #3 and check the technical reasons for entering a trade
covered in Key #4, if all of these factors combined
determine a good trade then by all means take into account
the overall direction of the market but do not let it stop
you making the trade.
When trading it is imperative that you don't just take any
one factor into account when deciding to place a trade,
always ensure there are at least two good reasons for
entering the trade and make sure there are no reasons not
to trade. Remember overtrading is a common mistake if there
is not a good reason to trade then just wait until another
day, the market is constantly providing good opportunities
to make money, have patience and wait for the right one.
And remember, the trend is your friend!
Until next week, happy trading.
US Government required disclaimer: Options involve risk and
are not suitable for all investors. Prior to buying or
selling an option, a person must receive a copy of the
Characteristics and Risks of Standardized Options. Copies
of this document may be obtained from your broker, from any
exchange on which options are traded or by contacting The
Options Clearing Corporation, One North Wacker Dr., Suite
500 Chicago, IL 60606 (1-800-678-4667).
----------------------------------------------------
Roger Cox was born in New Zealand and has lived in Los
Angeles for seven years. He was President of a freight
company at LAX before setting up his own consulting firm.
Roger has successfully traded stock options for over 4
years and teaches other people how to successfully trade at
http://www.prosperitywithoptions.com
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