Indexes Break Above 2010 Highs

As of this writing, the 3 main Indexes, namely the Dow Jones Industrial Average, the S&P 500 and the Nasdaq, have reached their 2010 highs. This is mainly due to the  Federal Reserve’s decision to spice up consumer spending and lower the unemployment rate by buying $600 billion in Treasury bonds.

By looking at the market index charts above, you’ll realized the bullish trend has been established since early Oct 2010. As I’m a swing trader, I first look at the 30-day simple moving average (SMA) of the 3 market indexes. If they are pointing up, it’s a clear cut decision that I will establish a trade with a call option. If the 30-day SMA indexes are pointing down, I will only enter a swing trade with a put option. My kind of swing trading is mainly on riding with the trend. I do not like to fight the trend. Since now the trend is bullish, I first scan stocks which have the potential to ride on this trend. I then select the most suitable call options to trade the stocks. I choose options which are near the money and have more than 1 month of time value. This is to avoid theta decay which happens the fastest in the last month of an option’s life span.

Having said that, the market is always unpredictable and I don’t expect every trade that I made to follow my intended direction and attain my expected profit target. Thus, I always protect every trade with a stop loss so that if the market decides to throw tantrum and turn against me, I will be stopped out of a losing trade earlier and protect the trading capital which are tied to that trade.

Speaking of capital, I wish to stress that money management is the single most important discipline that a trader has to adopt diligently throughout his or her trading journey. Money management, simply put, is to allocate a fixed sum or percentage of the trading capital in each and every trade. This has 2 significant benefits. The first is to preserve and protect our trading capital in case we encounter a few or even a series of unprofitable trades. The second is to discipline us from taking “revenge trades” and bet the whole farm on the next trade when we are encounter those unprofitable trades. Capital is the most important asset for a trader. Learn to preserve our capital by making trades only when they strictly meet our trading rules (no ifs, no buts) and that we apply stop loss and money management in every trade. You will survive longer in this trading journey and eventually achieve a level of success where the gains from your profitable trades will out-weigh the losses that you cut short from your losing trades.

Guest Post by Tony Chai http://www.options4u.blogspot.com