1 Unique Method To Successfully Play A Volatile Market
Summary One way to make money no matter what the stock market is doing. Choosing the right sector is the key – in my case is was specific commodities. Knowing consistent price movements over time will determine the trading spread to work within. There is no doubt we’re in a stock market environment ruled by fear, as confirmed by the extreme volatility in the movement of the various indices. Much of this was triggered by the crash of the Chinese stock market, but even before then there was a growing concern about the dizzying heights the market had shot up to without a correction. The U.S. has went through a mini correction, but many believe we need a deeper and more prolonged one to bring share prices back in line with actual values of companies Other factors given as reason for volatility are low interest rates, which have tempted companies to be more reckless in their spending; uncertainty concerning whether or not the Federal Reserve will raise interest rates; slowing Chinese economy; commodity deflation; and signs manufacturing in America is slowing. I could add many more to the list. Together what it says is investors no longer have some clarity on the future, and that has been the impetus behind the extreme volatility in the market. When visibility is down and parts of the global economy collapsing, it generates an environment of fear. And that’s where we are today. One thing we must do as investors is to ignore the endless financial news headlines about the last big plunge in the stock market, and the soon-to-follow “rebound.” That’s stock price movement that historically precedes a major correction. The day-to-day movements are irrelevant. What’s relevant is if after all the movements the direction remains level or continues on down. Trading in times of fear With future uncertainty can come investing paralysis and fear, as investors move their money to the sidelines to wait to see where things go. That’s a good strategy, but there are many others that still want to find ways to grow their capital in these volatile times. I’m going to share one strategy I’ve used to capture profits in situations similar to this. As a matter of fact, it doesn’t matter whether the stock market is going up or down with this type of trade, as it has volatility built into it either way. I’m talking about silver, although I’m simply using it as a proxy for other commodities or markets that are volatile in nature. I’m going to say that again: I’m only using silver as a proxy for a number of opportunities to make money using this method. I’ve used this with silver in the past, but know of some colleagues that are using it with other commodities right now, and in your specific expertise, there could be many other sectors or segments to do the same thing. Silver trade The first thing to do is identify a highly volatile commodity that moves in predictable patterns. The one I know the best is silver, and it’s one I made a lot of money with several years ago. I decided to go with stocks and not silver options or futures. At the time I was trading was when gold and silver were still soaring, and among the top-performing and predictable silver companies at the time was Silver Wheaton (NYSE: SLW ). It was highly volatile, but it still have a primary upward share price movement, which made up for the occasional timing mistake I made, which forced me to hold it a little longer than usual. Remember, it doesn’t matter whether a commodity is going up or down in price, as long as it’s operating within a trending pattern. That’s where a lot of the risk is mitigated. The other thing is there has to be discipline in not trying to get every penny out of the trade. I always sold when the share price moved within the parameters I had put in place. Once it rose within those guidelines, I didn’t get cute, I immediately pulled the trigger and sold. Did I miss some upside? All the time. But I never regretted it. I made money on trade after trade as long as I stayed within my pre-set parameters. How was the trading performance during this time? At the best I had fourteen straight trades I made money on. Under normal conditions I would make five or six trades, and then lose on one. Keep in mind I was trading with a similar amount of money, so it was like taking 5 steps forward and one step back. It could have been even better, but within my parameters I had a holding restriction, meaning if the stock didn’t perform as expected within a specific time frame, I would sell it. That protected me from losing more than what I would make on one trade. What needs to be known In my silver trading I needed to identify the overall trend direction of silver and the daily share price movement of Silver Wheaton within that trend. Everything else I ignored. When I say everything else I ignored, I mean with the exception of something that would point to a reversal in overall trend. For example, when Silver Wheaton surpassed the $40 mark, I knew it was either going to explode in growth or move up a little more, and then start to pull back. That is how it did move, with it topping off between $46 and $47 a share. I don’t believe it ever closed at that level (during the time I was trading it), but it did reach that in intra-day trading. This isn’t rocket science. Volatile markets like silver, still have patterns within them that can be observably known, and it only takes a little research on the level of the price movements of a stock within that pattern. The only tricky part in my experience was when it not only dropped per its normal volatility, but then dropped a little more than usual for some temporary reason. If I hadn’t committed to a trading time frame, I I would have simply held a little longer and waited for it to rebound, which during the trend, it literally always did. That’s how I could hit it so many times in a row. Again, it’s understanding the flow of the pattern, which can be easily identified with any day-to-day chart. What about making money on the downside? After getting some confidence with Silver Wheaton because of my success, I started thinking about a way I could make money when the price dropped. Keeping within my preferred method of stocks or an instrument that would trade like a stock, I decided to go with ProShares UltraShort Silver (NYSEARCA: ZSL ). What ProShares UltraShort Silver does at its basic level is short silver via different financial instruments. My only problem there was I only allowed myself a certain amount of money to use with this type of trading, so I had to break up the amount I spent on Silver Wheaton if I wanted to take advantage of the downward price movement of silver. It wasn’t really a problem, but it limited my upside because of my refusal to break my discipline. That’s the key to success in this type of trading: you have to stay disciplined within your predetermined parameters. Stray outside of them and you’re likely to get hammered, even if you occasionally get lucky. What has to be watched if playing silver for upside and downside, is one of them aren’t on trend, and if it suddenly moves off trend, you could be hit hard. This is another reason I always sold when it reached the level I was looking for; whether the price of silver was going up or down. This protects you from starting to believe you know what you’re doing in regard to price movements. We can know the trends and daily movements, and within a tight trading discipline, do very well. I can’t emphasize that enough. Don’t start to think you have an inside handle on a volatile segment of the market. That’s why there has to be a system in place that is religiously followed, no matter much more that could have made on a trade. Take the gains and run. Then do it over and over again. To give an idea of how one could lose on a trade if you’re not careful and disciplined, check ZSL when it was trading at just under $5,600 a share. That happened because it was going against trend because the price of silver was moving up. On December 1, 2008, it closed at $5,598. On December 15, 2008, it closed at $3,928. You can trade against trend, but that is far riskier. I had no trouble with it, but I kept a constant eye on it throughout the day. Also understand, these were trades I would usually make within an hour or two. Rarely would I hold on longer than that. This isn’t investing, where I was analyzing the company, it’s trading, where I only analyzed price movements and the trend. I was doing this to play both volatile movements. If silver was going down in price, one could play only ZSL and drop Silver Wheaton. Conclusion Unless you have a nice chunk of extra money lying around for high-risk trading, I would stay with one trend direction and first get a grasp of its consistent daily price movements. I say that because you won’t make as much playing two different trends unless you have significant capital to put into play. You’ll have to wait for your trade to clear, which could take several business days before you have access to your capital again. And if you do that on both ends of the trade, the daily price movement could be up, which if that’s the way you’re playing it, you may have to wait a day or two before it rebounds. That means if you sell on a Thursday, you may have to wait until Tuesday before you have access to your money, and then maybe an extra day or two for the price to be positioned correctly for an entry point. If you haven’t done this type of trading before, that may seem like it’s not a big deal. But when you’re used to moving in and out of the market based upon price movements, it can seem like an eternity, and you may be tempted to get in just to be in the game. Once you decide on a commodity, or possibly a volatile stock, be sure you know the macro-economic situation, the general trend of the sector, and then the consistent price movement intervals of the commodity or company. After you have a handle on that, then develop a simple system to work within, with the most important being the price spread you will buy or sell within. You could make more money without the parameters, but you could lose more too. Under this type of discipline I’ve used it to generate significant earnings time and time again. Keep in mind I’m not suggesting to trade in Silver Wheaton here. It’s only a proxy I used because I made a lot of money using this technique with silver and Silver Wheaton in the past, and it represents the type of predictable volatility needed to make money. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.