During tough economic times, volatile markets send traders scrambling for safe or high return securities. Whenever the markets are choppy, it pays to have a plan. Whether a hedger or speculator, here are seven trading strategies that have proven to be effective.
Invest Regularly, Despite Market Volatility
By investing regularly over months, years, and decades, short-term downturns will not have a significant impact on your overall portfolio performance in the long run. Instead of trying to judge when to buy and sell based on market conditions, a disciplined approach of making regular investments will help to avoid the perils of market timing.
Investing through the downturns will not guarantee gains or eliminate loss altogether, but when prices do fall there could be benefits in the long run. For example, when the market falls, the prices of investments drop and regular contributions allow a larger number of shares to be purchased. Buying these shares when they are at the lowest allows them to be sold at a higher price later.
Choose the Right Platforms
A successful forex trading strategy begins with a comfortable and multi-functional trading platform. MetaTrader, for example, is a trading platform designed to arrange brokerage services in Forex, CFD, futures, and equity markets. This institutional multi-asset platform offers multiple technical analysis tools and trading possibilities, as well as enabling the use of automated trading systems and copy trading, eliminating much of the guesswork of trading.
On the community website, thousands of free trading robots, subscriptions to trade signals, and copy deals of successful traders are available, plus discussion boards of trading strategies.
Long Straddle Options
A long straddle combines buying an equal amount of call options and put options on the same underlying security, with the same strike price.
Buying long call options has limited losses, the amount you spend on them, and unlimited potential gains because you can make as much as the price of the underlying security goes up. Buying long put options also has limited losses and almost unlimited gains. The potential gains are limited only by the amount which the price of the underlying security falls.
By combining these two positions allows a return no matter which direction the underlying security moves. When the price of the security goes up, the call option brings a return, and if the price of the security falls, the put option provides a profit. Small price moves are not enough to make profits from this volatile market strategy. This approach should only be used when the price of an underlying security is expected to move significantly.
Long Strangle Options
The long strangle is similar to the long straddle and is used to make profits out of substantial price movements, regardless of the direction of the movements. This strategy has limited risk, is simple to do, and requires a low trading level with a broker, making it ideal for traders that are relatively inexperienced.
This is a simple options spread that requires placing two orders: call options and the same amount of puts on the same security. The transactions should be made at the same time, and on options contracts that are “out of the money.” Generally, it is recommended to buy options that are only just out of the money. The strike, or exercise, price of the two legs are not equal, but should be the same distance from the current trading price of the underlying security.
Providing the profits of one leg are larger than the loss of the other, the spread will make an overall profit.
Breakouts
According to Charles Schwab, one common trading method used by many traders is “buying the breakout.” With this approach, an investor monitors a stock that is trading within some identifiable support and resistance range. As long as the security remains in that range, no action is needed. If the price breaks out to the upside, the trader will buy the stock immediately hoping that the breakout signals the beginning of a new up-tick for that security.
In quieter markets, a stock may breakout to the upside and lose its momentum. In a volatile market, however, where prices move rapidly, an upside breakout can be followed by an immediate and substantial run to higher prices. The downside to this technique is that in a volatile market a reversal from a false breakout can come quickly and the subsequent fall in price may be more severe than during a quieter market. Consider a stop loss-order to attempt to eliminate some risk on this approach.
Market Timing – Don’t Do It
Do not try to move money too quickly or too often. The market timing approach has shown to be ineffective, unless it can be done perfectly. Attempting to move in and out of the market can be costly. Research studies from independent research firm Morningstar show that the decisions investors make about when to buy and sell funds can cause those funds to perform worse than they would if the investors simply bought and held the same funds.
If traders could avoid the bad days and invest only during the good ones, it would be ideal, but the problem is, it is impossible to predict when those good and bad days will occur.
Seek Portfolio Management Help
To help ease the pressure of managing investments in a volatile market, investors might want to consider an all-in-one fund, or a professionally managed account for longer-term goals like retirement. These different approaches offer a range of unique services and varying costs, but depending on the specific options, may provide professional asset allocation, investment management, and ongoing tax management, which all prove beneficial to those who may not have the time to actively manage investments themselves.
Rather than focusing on the turbulence, wondering what the market might do and whether action should be taken, attention should be placed on developing and maintaining a solid investing plan. Sound trading strategies help investors ride out the waves of the market and achieve their financial goals.
