Tools of the Trade

By Trevor Hoey. Published at Feb 2, 2017, in Investor 101

If you want to hammer in a nail, you use a hammer. If you want to screw in a screw, you use a screw driver, and if you want to saw a block of wood in two, you use a saw. Obviously you need the right tool to do the right job. This is universal and applies from DIY home improvement to your daily profession.

Trading is no different. Traders, not only need to have the skill to pick direction, but also need to have the right strategy to help them potentially profit from their view. It makes sense to have a tool box full of strategies that can take advantage of any market condition and get the job done.

Typical equity investors and traders have a very simple and effective strategy; buy shares low, and sell them high. This is a great strategy for strong bullish markets, just as a hammer is great for hammering in nails.

But what if the market is trending down or stagnating? What if your view is something other than bullish? Good luck using your hammer as a screw driver. If you want to be an active trader, you need to have a plethora of strategies for different market conditions.

So what are the tools that you can put in your tool kit?

Below you will find an overview of a few strategies that will make excellent additions to your tool kit.

However, no matter what the tools, before making any investment decision, you must consider your own personal circumstances before investing, and seek professional financial advice.

Tools for you tool kit:

Falling to sideways: Bear Call

Rising to Sideways: Bull Put

Volatile market: Strangle

Stagnant markets: Iron Condor

Below provides an overview of each of the strategies that will be discussed in the coming weeks on finfeed.com.

The Bear Call spread

The Bear Call spread is a highly flexible bearish trade where if applied properly, even if you don’t get the bearish movement you were anticipating and the stock stagnates, you should profit. The stock can even rise to a certain point and you could still profit. In addition, if this occurs, you can exit the trade without paying fees, reducing the overall cost of the trade.

The Bull Put spread

The Bull Put spread is opposite of the Bear Call spread. If applied properly, it’s a bullish strategy where even if you don’t get the bullish movement predicted and the stock stagnates, you could still profit.

Strangle

The Strangle is quite a unique strategy, as it profits from either a rising or falling market. It’s great to use when the market is at a pivot point and likely to either fall or rise significantly in the short term. Traders often use it when markets are volatile, and may not be showing a clear trend resulting in difficulty in picking a direction.

Iron Condor

The Iron Condor is the opposite of the Strangle. An Iron Condor is best used when there is very little movement in the market. When the market is stagnant, it is very hard to use other strategies to profit, and can be a wasteful tie-up of your capital. Instead, traders can use an Iron Condor, where you could profit if the stock remains between two particular levels. If these levels are far enough apart, it means the stock can continue to trade up and down, and you will still make profit provided it stays between the two predetermined levels.

Finally, a further word of caution; just like how a builder learns their trade, you need to understand and know how to use these new tools properly. Otherwise, you could accidently end up hitting your finger, instead of the nail. Before using these strategies and to reinforce your learning, seek professional financial advice.


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