niedziela, 16 czerwca 2013

Use A Bear Put Spread To Trade Safely In Down-Trending Markets

By Lou Manning


After years of experiencing a bull run, the recent economic crisis was an eye-opener for many investors and traders. Learning to trade in a bear market is essential for success in the markets. A bear put spread is a very useful tool for taking advantage of a market which is trending downwards and reducing the amount of risk involved in the trade.

While many people fear a bear market, it actually offers huge opportunities to those equipped with the right trading strategy. Bull markets tend to be long and slope, while downturns are much shorter and steeper. This means there is much more money to be made more quickly, so there is huge motivation to learn how to use the available tools effectively.

It might be that people are unaccustomed to falling markets, or because the negative associations make them nervous. This makes such market conditions great for those who know how to profit, as the competition is less, and may often be making losing trades. Knowing how to take benefit from all market conditions makes a trader really versatile, and means there is less pressure to take unnecessary risks.

For serious traders, options present many great trading opportunities. A popular misconception is that options are too risky, and should be avoided. While this is true for average traders, those in the know are aware that it is possible to limit your risk and decide what level of risk you are prepared to take. As volumes on these markets are high and there are many trading opportunities, a sophisticated trader finds this market exceptionally attractive.

One way of limiting the risk on an option is to use spread trading. This involves two trades which act to hedge against the possibility of large losses, while still permitting a reasonable profit to be made. While profits are slightly lower, risks are greatly reduced, making the exercise very worthwhile. Using such techniques helps expert trader achieve steady gains.

Some traders rely on pure gambles, with large risks and large gains. Professional traders are aware that this will eventually result in losing everything, as a series of losses will quickly wipe a gambler out. It is also easy to waste money which comes from a successful gamble, so traders with this mindset do not usually last very long.

Responsible traders husband their resources and control the amount of risk they will accept. The euphoria from big gambling gains produces overconfidence and fuels greed. Control over your emotions, particularly greed, is the mark of a trader who will be able to survive and do well in the long term, and not be tempted by short-term windfalls.

Any investor who wishes to make a consistent living must learn how to control risk. You can never be right all the time, so the object is to minimize the inevitable losses. To do this you need understand how to trade in all market states, and have full understanding of the various types of trade, be it a bear put spread or a butterfly or any other type.




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