Stock market tumbles have sent some traders onto the sidelines worrying that a crash could cause big losses
City Index May 22, 2012 2:57 PM
<p>Sandy Jadeja is the Chief Technical Analyst at City Index. With a strong focus on technical’s, chart patterns and statistical analysis. Sandy also provides weekly […]</p>
Sandy Jadeja is the Chief Technical Analyst at City Index. With a strong focus on technical’s, chart patterns and statistical analysis. Sandy also provides weekly educational seminars and market commentary for major financial news channels.
Favorite market quote “The game taught me the game.” Jesse Livermore.
Chief Technical Analyst
How to trade a market decline
Stock market tumbles have sent some traders onto the sidelines worrying that a crash could cause big losses. But savvy traders can make money from other people’s fears.
Nobody likes to take a loss. But in trading as markets fall this creates an opportunity to collect a profit.
There is a big difference between investors and traders. Where investors are looking for growth, a trader will seek to make a profit on price movement. An investor will fear a market decline because they are looking for markets to rise as this is when they profit. But a trader does not care if a market rises or falls and as long as there is movement and it really does not matter if it is a stock, commodity or a currency pair then savvy traders will be zoning in on potential trading opportunities.
Fortunately, there are several techniques one can use to take potential advantage of market declines. But it is essential to remember that risk control is essential to protect your account from large losses. City Index offers Stop Loss Orders as part of our trading platform to help you manage risk.
But what does a “trading opportunity” look like?
In Technical Analysis, traders observe key price levels referred to as Support and Resistance. A simple observation that can be utilised is a break of a Support Level. This is where price has breached a specific level where markets have found stability in the past.
Looking at the example below, we can see that the FTSE 100 chart had provide trading opportunities by taking a Short position once the index had broken below key lows.
Notice that each key low was followed by a rally. This would suggest that this was considered as an important low and therefore considered as a Key Support level.
A trading opportunity is created when the market breaks below this low indicating market weakness. The idea is that if the market truly is weak then once the support level is breached the market should continue to weaken and fall lower. A trader can benefit from market falls as the Short position will pay off as long as the market continues to fall and does not breach the protective Stop Loss Order.
Now that you understand how to benefit from a market decline rather than fearing this movement you also need to be aware of how to protect your profits.
As the market falls there are a number of techniques that one can employ to help a trader stay on the right side of the trend. Part of the City Index education program is to teach traders the various techniques that can be utilised to profit from the markets.
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One simple concept to consider is that if we have traded on the basis of the market breaking below a Key Support level then conversely we would also respect a Key resistance Level. This is where a market has made a significant high and rejected the price level to fall lower.
In the above example the Monthly highs were important levels. These were also levels where the index moved away from by more than -1% and so proved that the price level could potentially turn out to be a future Resistance Level. So as long as the market does not breach this level then it can be considered as an area to place the initial Stop Loss Order.
Once the trade moves in the desired direction which in this case is to the downside, and the market makes lower significant highs then the Stop Loss Order can be lowered just above the new lower high to protect profits. A more enhanced technique can be used by incorporating specific Candlestick Patterns and also the use of Technical Indicators which are taught at our in-house professional trading seminars.
Positions can be closed at a desired profit level or when the market has reached a Key Support Level or again using Candlestick Reversal Patterns to exit the trade.
In volatile market conditions the financial markets can experience very fast moves and create fantastic opportunities to profit from. Our professional market updates help keep traders aware of Key Market Levels.
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Whilst some are fearing further market declines and especially with the concerns over the Euro Zone Crisis, this could create potentially profitable trading opportunities for traders who are swift, disciplined and willing to trade with volatility.