Stock Market Strategies

In the stock market, there are a great many strategies that allow a trader to earn money under any conditions - when the market grows (bull market), when the stock markets fall or collapses (bear market), when the trend is sideways without pronounced fluctuations, when the trend is sideways with high volatility (neutral market).

Strategies of the stock market also differ in the level of possible profitability and risk. Not all strategies are equally suitable for beginners and professional traders.

A novice trader should not immediately start with complex and risky strategies. He is best suited for trading using simple and low-risk strategies in real trading and at the same time using more complex strategies on a gaming, training account.

Next, we will consider a wide variety of strategies - from the simplest and most reliable, to the most risky and little-known.

Rising Stock Market Strategies - Bullish Strategies

Strategies in a rising stock market are called bullish. This is a historical tradition, which is based on the fact that the bull beats with horns from the bottom up - raises to the horns.

There are a lot of bullish strategies. The simplest of them is known to almost everyone: buy and keep. But for a trader and a professional investor, knowledge of all available bullish strategies, as well as possible ways to minimize risks, is necessary. Therefore, in this section, all known bullish strategies will be gradually considered, such as:

Long Calls, Covered Calls, Protective Put and more...

Purchase of call options (Long Calls)

If a trader is firmly convinced that the market will grow in the near future, then he can use the Long Calls strategy, that is, buy call options. In other words, instead of buying shares, one acquires the right to buy them at the price set by the option for the period determined by the option.

For example, consider Microsoft (MSFT) stock, which was worth $55.00 at a certain point in time. It would take $55,000 to buy 1000 shares.

Instead of buying shares, you could buy MSFT call options with an exercise price of $55 and an expiration of 1 month. For example, in the month of May, June options could be purchased at $2.50.

This means that by purchasing 10 options for a total of $2,500, you acquire temporary control of 10,000 shares of Microsoft stock. So youre investing in the trade and only risking $2,500 instead of the $55,000 that would have been spent if you had bought stocks instead of options.

Note: One option gives the right to purchase 100 shares. The purchase price is calculated as follows: $2.50 * 100 shares * 10 contracts (options) = $2,500.

Buying call options. Pros and Cons

Purchasing call options (Long Calls) is a fairly effective strategy in the bull market. It should be noted that this strategy has several undeniable advantages when compared with the usual purchase of shares.

Firstly, for the purchase of one call option, which gives the right to purchase one hundred shares at the price specified by the option within a fixed period, an amount is required that is several times less than for the purchase of the shares themselves.

Thus, an investor can enter the market with significantly less capital. Whats more, with the right combination of circumstances - the right time to buy call options and a strong upward movement in the market - the return on each dollar invested will significantly exceed that of the resale of the same shares.

Another important winning point is that, in case of a negative development of events, the amount of losses will not exceed the amount spent on the purchase of options. Naturally, when buying a share, this amount will be much higher.

But the option strategy also has one big minus - the time factor. We must not forget that the value of an option is related not only to the price of shares, but also to the remaining time of the option. The shorter this time, the cheaper the option.

The investor, in the case of buying call options, must not only correctly determine the direction of the stock price movement, but also the time at which this change will occur. But even this is not all - he must also correctly determine the delta by which the stock price will increase over the specified time.

Otherwise, it is likely that he will face losses.

That is why, at the initial stages of work in the securities market, investors are not recommended to use option strategies. There is only one reason for this - lack of experience and knowledge. It is known that both options trading and stock trading on the stock exchange is a rather difficult task. It takes years of practice and a certain sense of smell to successfully buy and sell options.

The most effective way is to practice for a year or two on a gaming brokerage account without exposing your money to the slightest risk. And only after that move on to real options trading. Or forget about it forever, deleting it from the list of acceptable strategies for yourself.

Bearish Stock Market Strategies

Bearish strategies are used by traders and investors in a falling stock market and allow you to benefit from falling prices for certain types of securities. A falling market and related strategies are called bearish because the bear is believed to strike downward with its paws, pinning the opponent to the ground.

The number of bearish strategies is no less than bullish ones, but they are much less known among novice investors and traders and, accordingly, are much less frequently used. But in order to become a successful trader or investor, you need to know how to earn income in any situation on the stock markets.

Neutral Stock Market Strategies

From time to time there are situations in the stock market when the prices of securities fluctuate around a certain value without a noticeable movement up or down. In such a situation, the use of bullish or bearish strategies is not very effective and it is best to use neutral strategies.

This will only have a positive effect if the trader or investor has correctly identified the market situation as neutral. If suddenly the entry to the market was made at the wrong time, on the eve of a bullish or bearish trend, then instead of income, you will have to calculate losses.

But, sometimes, the absence of a pronounced change in prices is justified by fundamental reasons and with a high degree of probability it is possible to predict the stability of the situation for a certain period. It is during this period that neutral strategies can give the greatest return.

In this section, we will consider such strategies in detail, since a qualified investor should be able to receive income even during a stagnation in the securities market.