Trading Share Market
Global markets in the past few years have taken investors on a wild roller coaster ride, with most investors wanting to sit in cash and avoid the recent market turmoil.
European debt fears, the US losing its AAA credit rating for the first time since the 1940s, China slowing down and Australia attempting to avoid a property bubble that is about to burst.
So who would blame those that are happy to sit out and watch from the sidelines?
More than half a trillion dollars in paper gains were made and lost within just two weeks in September 2011. The S&P 500 jumped 5 percent in the week ending Sep. 16, the second best week this year. The next week it plunged 6 percent, the second worst week this year. In market-speak, it's called volatility: Large jumps followed by deep dives, within the course of a week or sometimes the same day.
The surge in volatility since early August has been blamed for preventing companies from going public and scaring people out of stocks. Some think that even if Europe resolves its debt crisis, large price swings are here to stay.
So how can you take advantage of the recent market volatility?
- It is essential to take a pro-active approach to your investments and ensure that you are not too overweight or underweight to a particular stock and sector.
- Determine your risk tolerance: are you prepared to “ride this latest turmoil out?” or should you be selling now and waiting for the market to fall another 10.0% and look for buying opportunities?
- Diversification is key: work out which sectors will perform well in the current market environment and justify your reasons.
- Stick to a plan and trade to the plan – trading is like running a business. Always ensure that you have an entry and exit strategy and determine your underlying reasons for the investment before you make the trade.
- Greed is not good – this market is volatile. Your trading account will not go backwards if you are actively locking profits. Even small profits are better good. So make sure to lock profits when possible and not hold positions for too long.
So what strategies work in this market?
Pairs Trading.
Pairs Trading, or statistical arbitrage, is a trading strategy first pioneered by Gerry Bamberger in the 1980’s, which enables traders to to profit from virtually any market conditions (bullish, bearish and sideways movements), used by leading hedge funds.
When the correlation (or relationship) between two different stocks weaken, the trading our trading system will buy the stock that has underperformed and sell the stock that has outperformed and simply wait for them to come back together.
In effect, the trader does not care what the market is doing. The market can fall 1,000 points and they don’t care!
Why?
It's because you are always HEDGED.
All you are doing is waiting for the two securities to come back together to their mean.
Example
