Trading a Market Correction

Trading a Market Correction
By: www.ProfitableTradingTips.com

Market rallies last as long as they last
and then the market corrects or
crashes. The business of trading a
market correction comes to mind as
the S&P 500 passes the 2000 mark.
By: http://profitabletradingtips.com/profitable-trading-tips/trading-a-market-correction

The S&P 500 is an index of stocks
and is a broad measure of the US
economy.

Before We Continue…
Click the links below to get your
FREE training materials.
Free Weekly Investing Webinars
Don’t miss these free training events!
http://www.profitableinvestingtips.com/free-webinar
Forex Conspiracy Report
Read every word of this report!
http://www.forexconspiracyreport.com

As the country has climbed out of the
worst recession in three quarters of a
century so did the S&P 500 climb out
of the abyss.

In early March of 2009 the S&P 500
fell to its low after the market crash. It
touched 683, down from 1503 in June
of 2007.

Anyone who bought into an ETF that
tracked the S&P 500 made money as
it rode up to 1340 by June of 2009.

The index corrected at that point by
about twelve percent and then has
risen steadily to its current level.

Both June 2007 and June 2009 were
good times to make money by trading
a market correction.

Now, as the broad advance of the
S&P 500 goes on five and a half years
is a correction in the offing.

If so how can a stock trader make
money trading a market correction?
Think about technical analysis and
think about trading stock options.

The Value of a Stock

Stocks are trading at historically high
price to earnings ratios. Bears will say
that this is a sign of a coming market
correction.

But, as rallies play themselves out
there is always a point at which some
stocks appear to be overpriced but
continue to go up in price.

The point is that stock value, like
beauty, is in the eye of the beholder.

The stock investor who does not see
any better places to put his money will
likely continue to pour money into an
overpriced stock market because in
his mind’s eye the market is not
overpriced.

Europe is still flirting with recession
and offshore investing in places like
China is suspect with Chinese
manufacturing slowing down and the
distinct possibility of a Chinese real
estate bubble bursting and taking the
Chinese economy with it.

So many third world economies are
dependent on selling raw materials to
Chinese industry that a Chinese
collapse would take many other
nations with it.

Thus the USA with its slow and steady
recovery may appear to be the best of
the lot for many investors.

But there comes a point when enough
is enough and you find yourself
trading a market correction or its
aftermath. How can you hedge risk in
this event?

Options

Perhaps you have purchased a
volatile stock and have been pleased
to see that it just keeps going up.

Your analysis of the stock and the
market tells you that the stock has a
little way to go before you need to get
out.

But, there is always the chance that
you will get caught in a correction
when the market gaps down one
morning and opens on the bottom side
of your trading stops.

Think of trading strategies for an
uncertain market. There are two
things that you can do to prevent this
problem. One is to habitually take a
little profit as you go.

The other is buying puts on the stock.
Buy puts on your rising stock and you
have locked in a price at which you
can sell, even if the market tanks and
takes your stock with it.

The price of this insurance is the
premium you pay for the option.

If the stock continues to climb you can
exit the contract and purchase again
at a higher price.

Trading a market correction in this
way guarantees that you do not lose
everything that you gained on the way
up.

Trading a Market Correction

Recomendados

Recomendados

Mais conteúdo relacionado

Destaque

Destaque (14)

Mais de InvestingTips

Mais de InvestingTips (20)

Trading a Market Correction