The Art of Trading: Part I

We are beginning a three-part series on trading, rather than investing. Why? Well because the US markets are in the beginning of a tighter trading range.

With a tighter trading range in order to make any profits you need to trade rather than invest. We have been writing to you over the last month that the following would occur:

1) We would see a correction based on the derivative trading we saw about 4 weeks ago.

2) Trading ranges would be tighter because traders are unwilling to take risk on the call derivatives that are out of the money.

3) Uncertainty – Uncertainty as we have now with sovereign debt issues as well as unemployment issues create uncertainty.

Trading is the ability to get in, get out and take profits. We wrote about this last week and that it’s time to employ this strategy in order to protect your overall portfolio as well as add alpha to your net worth.

Traders in the US markets are still skeptical of the overall ability to add value to current valuations and therefore you need to concentrate on specific sectors that can perform for you. Those sectors are currently commodities/precious metals, biotechnology as well as technology.

We will get into details of what equities or ETF’s specifically within these sectors will best perform but for now trading is the topic and understanding how the markets are trading now is important.

Friday’s will most likely be sell off days at least the second half of the trading day as traders will not hold positions over the weekend with the geo political issues and the risk inherent in having an event occur over a weekend and no way to get in and or get out.

The beginning of the week will hold the most volatility with a day up and 2 days down and understanding the trading dynamics is more important now. Trading within the first half hour is not a great value as the flood of “wanna-be’s” that are trying to jump on any market direction is higher than normal and spreads are not going to benefit anyone, long or short.

Concentrate on increasing positions during the day and avoiding risk as best as possible and we will discuss that combination with specific equities/ETF’s next week.

We base our research on the proven fact that variances in option volume is known to be a predicator of impending moves in an underlying equity and that is what we follow but we take it to a level that filters out the trading that is not based on “smart money” and get to what is really driving a specific equity.

As always, Good Luck investing.

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