99 lines
15 KiB
Plaintext
99 lines
15 KiB
Plaintext
Chapter 10: Swing Trading Options
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S
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wing trading with
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options can be extremely difficult. This is why we decided to create this chapter, in which we go through some of the main ideas and concepts to always keep in mind, to be profitable from the start. Now, it is clear that at the beginning it is not easy to take money out of the market. However, with the right guidelines, it is not that difficult to achieve success in a short period of time. Anyway, let's get into some of the key factors to consider when it comes to swing trading with options.
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“
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If you are undecided, stay still.”
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It is not necessary to invest continuously. If you do not have precise ideas, it is better to do nothing and wait for clearer signs. Often times, the market is full of indecision: keep calm and stack up money for the future.
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"Cut losses and let profits run.”
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This is perhaps the best known and most important rule for those investing in the stock market. An indispensable factor for the application of this rule is the identification, immediately after the purchase, of the stop loss. This is how much you are willing to lose on that investment (consider when determining the average daily excursion of the stock). The cold and systematic application, even if painful, of the stop loss will preserve you from huge losses that would make the sale more and more traumatic, freezing capital that could be invested elsewhere.
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“Learn from your mistakes.”
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Errors are not always negative: if you follow a strategy with a method, if you apply the stop losses, you will not make particularly serious mistakes. Errors are an integral part of stock trading: you need to analyze why you made them and what you can learn from them. In this way, a small loss can become a good investment lesson for the future.
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“Take profit and invest them back.”
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If one of our titles is on the rise, take profit will be applied as the stock grows. A stock cannot grow indefinitely, when the trend is reversed, selling at the top, we will have had a profit avoiding further descents. If then the title should go up again, it does not matter, it will go better next time. You cannot always sell at the top since you cannot time the market.
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"Buy on the rumor and sell on the news."
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When positive news on a certain title officially comes out, pay attention. It may already be too late to invest in that title since the market could already have priced it in.
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Do not believe in “safe investments.”
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If someone tells you that a title will certainly reach a certain price, he either does not understand much of the stock market or is only doing his own interests.
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“Never become emotionally attached to a stock.”
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Some investors always follow a limited number of companies that they consider more reliable than others. There are no titles better than others, but only favorable situations and unfavorable situations. Often, instead of admitting an error, one perseveres on it with the consequence of being heavily unbalanced on a stock. This is really bad, especially if you are overcommitted to a stock in which, at that moment, the market does not believe in.
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"Always maintain certain liquidity available."
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Cyclically we find ourselves in situations of several days of generalized decline of the whole stock exchange and often, for lack of liquidity, we cannot grasp excellent buying opportunities. Keep some money aside to jump on big opportunities.
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“Choose the right platform
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.”
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One important rule for investing in the stock market is that the platform makes a difference. Carefully selecting safe, honest and reliable trading platforms is the first step to make money. Those who start investing in the stock market for the first time must be careful to choose platforms that are really simple to use, perhaps with high-quality educational support. Some platforms also offer add-on tools, such as notifications, social trading and free analysis tools to guide less experienced traders.
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“Invest only in what you understand.”
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As the "guru" of finance Warren Buffett said, "never, never, invest in something that you do not understand, and above all, that you do not know.” The overwhelming majority of investors can achieve their capital growth goals by using the most common financial instruments, which are almost always simple to understand. The complex tools are best left to the great experts in the field.
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“Diversify your portfolio.”
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When investing, the word to keep in mind is “diversification.” Never invest in a single title, because if that sinks, your money will come to the same end. It is always better to have diversified investments to minimize the specific risks of a company, a market, an asset class or a currency. The more you diversify and the lower the probability of having drastic falls.
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“Understand and evaluate the risk.”
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The risk is an intrinsic component of every investment. If it does not exist, there is no return. Whether they are government bonds, stocks or mutual funds, they all have a risk component, which will obviously be greater if you want to hope for higher returns. So, if someone tells you that there is an investment without risk, it means that it is better to get advice from someone else.
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“Look beyond direct investment
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.”
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As an alternative to direct purchase of shares, it is possible to invest in the stock market indexes, through ETFs (listed mutual funds, which replicate the performance of equity and bond indices), or in mutual funds, that offer a high diversification even with minimum amounts, allow you to invest small periodic shares, for example 100 euros per month, and may even provide a monthly coupon.
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“Do not follow the masses.”
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The typical decision of who buys stocks by investing in the stock market is usually strongly influenced by the advice of acquaintances, neighbors, or relatives. So, if everyone around is investing in a particular company, a beginner investor tends to do the same. But this strategy is bound to fail in the long run, and it is not the right approach. There should be no need to say that you should always avoid having a herd mentality if you do not want to lose hard-earned money on the stock market. The world's biggest investor, Warren Buffett, is right when he says, "Be fearful when others are greedy, and be greedy when others are fearful!"
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Do not try to time the market
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.”
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One thing that Warren Buffett does not do is try to time the stock market, even if he has a very strong understanding of the key price levels of the single shares. Most investors, however, do exactly the opposite, which often causes losses of money. So, you should never try to give timing to the market a chance. In reality, no one has ever succeeded in doing so successfully and consistently over multiple market cycles.
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“Be disciplined.”
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Historically, it has often happened that during periods of a high market upswing, we first caused moments of panic. Market volatility has inevitably made investors poorer, even if the market moved in the intended direction. Therefore, it is prudent to have patience and follow a disciplined investment approach as well as keeping a long-term general picture in mind.
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Be realistic and do not hope
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There is nothing wrong with hoping to make the best investment, but you could be in trouble if the financial goals are not based on realistic assumptions. For example, many stocks have generated more than 50 percent of returns during the big uptrend in recent years. However, this does not mean that we can always expect the same kind of return from the stock exchange.
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Keep your portfolio under control
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We live in a connected world. Every important event that happens anywhere in the world also has an impact on our money. So, we have to monitor our portfolio and make adjustments constantly.
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Be sure to be on the legal side of things
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If someone proposes an investment, it must be verified as an “authorized project.” In our country, those who offer financial investments must be authorized by law, and this is an important safeguard for savers. In fact, the authorization is issued only in the presence of the requested requisites and, once authorized, the financial intermediaries are subject to constant supervision. Checking this is not particularly demanding: if you have internet you can even directly access the information held by the supervisory authorities; otherwise you can contact the authorities themselves using traditional means.
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Be skeptical and do your own research
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." Nobody gives anything for nothing: be wary of investment proposals that ensure a very high return. At the promise of high returns, there are usually very high risks or, in some cases, even attempts of fraud. Be wary of the "Ponzi schemes." These "operations," in fact, cannot guarantee any kind of return, as they are normally supplied exclusively by the continuity of the accessions. In other words, when the new signatures are no longer sufficient to pay the "interests" to the previous subscribers, the schemes are destined to fail. Be wary of the vague and generic investment proposals, for which the methods for using the money collected are not explained in detail (what kind of securities will be purchased, at what prices, on which markets, with which risk profiles - interest rate, foreign exchange or counterparty - and whether and which hedging instruments will be used to cover such risks).
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Have a long-term mindset
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According to Warren Buffett, the shares once bought, are not to be sold. It is, therefore, better to evaluate the industrial trends in the long term and then buy them, leaving aside the passengers' enthusiasm.
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When investing in real estate, know the area you are investing in
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To start with, it is good that you put your focus on your area of residence or, if you live in a big city, even on your neighborhood or on one that you know well. If you think to act on a field of action too large, you risk dispersing too much energy towards something that can present totally different solutions. Dedicate yourself only to residential buildings, apartments or houses. The commercial ones, even if they can be very profitable, have other rules and in general greater difficulties. The same for the land: you can do big business, but it is not something suitable for those who start.
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Choose the right leverage and use it to your advantage
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Real estate investments must be done with leverage. If you want to make an investment only with your money, then the essence of real estate investment is not clear to you. In fact, the concept of financial leverage allows you to invest with money that is not yours but to make money directly for you. Leverage an economic tool that allows you to get where you would not get only with your own strength. You can take out a mortgage (if you can afford it) or engage financial partners. It may seem strange to you, but it is not at all: even the richest need partners and remember that a figure that seems almost unimaginable to you, it may be normal to somebody else.
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"
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Verba volant, scripta manent
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the Latins used to say. So never make verbal agreements, even if it is a relative or a childhood friend. Consult a lawyer to have the templates of the documents to be used. Like everything, at first it will seem difficult, but after a few times you will become an expert in basic legal practices for the sale of real estate, and you will be able to create documents in a very short time even by yourself.
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Consider shorter positions
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In the fixed income universe, a short duration approach is potentially able to reduce sensitivity to rising interest rates, while optimizing the returns/risk rations
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Know your risk/reward ratio
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A higher return may be tempting, but you must be sure not to take too many risks about the remuneration you would get. In bond markets, this means avoiding lengthening duration in a context of rising interest rates. Increasing investments in riskier assets may seem appropriate at the moment (when the macroeconomic scenario is quite positive), but it could turn out to be a rather risky choice if the situation should change. For example, the yields offered by high yield debt, on average 3% in Europe and 5.5% in the United States, would not be sufficient to compensate investors if insolvencies passed from their current level of 2% to a more normal one of the 5%. Conversely, market areas with a good risk/return profile, with high-rated issuers offering attractive returns, include emerging market debt, subordinated financial bonds, and hybrid corporate bonds. Aiming at long-term quality makes it possible to take on fair risks, helping to limit the impact of any negative macroeconomic event.
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“Take the currency pairing into account.”
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Global investments are exposed to currency risks. High yield bonds and emerging market funds, for example, are usually denominated in US dollars, but the underlying bonds they hold may be issued in another currency. Fund managers may choose to include currency risk in the overall portfolio risk as exchange rates fluctuate or decide to contain this risk through currency hedging.
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Stay flexible, keep some cash aside
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It is important to have the flexibility to underwrite and liquidate investments to seize the best opportunities. However, trades are expensive and can quickly erode earnings. This happens above all in the bond markets, given the relatively low levels of returns. The bid-ask spread is on average 30-40% of the yield, so an excess of trades erodes this margin and obviously reduces the total return. Even holding portfolios with structurally short duration, allowing short-term bonds to come to maturity naturally, can improve returns because you will effectively pay the bid-ask spread once.
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Build up your portfolio over time
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If investing a small sum such as 5000 Euro, will not allow you to live on that income, it can certainly represent an opportunity, to make money. Also, even if you have good economic availability, the ideal is always "to make it safe," start to invest from small figures and then fuel the investment over time.
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“The past does not equal the future.”
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The story is not indicative of how an investment will result in the future and investors should always try to weigh the potential risks associated with a particular investment, as well as its possible returns.
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Once you have established a profitable options trading strategy that generates a passive income every single month, you cannot fly to Thailand and live the laptop lifestyle just yet. As the millionaire Tony Robbins said,
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just because it works, it does not mean it will last forever
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. I really want this to sink in as it is one of the most important notions of the entire book.
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When things are moving in the right direction, it is time to triple down on your effort and truly commit yourself to mastery. In particular, there is one thing that I'd like you to do once the first profits start to come.
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Find a mentor
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One of the great things about success is that it leaves footsteps: almost anything you would like to do to improve your life has already been done by someone else. It does not matter whether you are starting a business, beginning your trading journey, having a happy marriage, losing weight, quitting smoking, running a marathon or simply organizing a perfect lunch. There is certainly someone who did it very well and has left some clues.
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When you are able to take advantage of these precious clues, you will discover that life is like a game in which you must connect the dots, and all the dots have already been identified and organized by others. All you have to do is follow their project and use their system. |