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Click on image to go to Author website. "THE RACE IS NOT TO THE SWIFT." Eccl. 9:11

Sunday 16 June 2013

Use A Bear Put Spread To Reduce Risk Falling Markets

By Lou Manning


After years of experiencing a bull run, the recent economic crisis was an eye-opener for many investors and traders. Learning to trade in a bear market is essential for success in the markets. A bear put spread is a very useful tool for taking advantage of a market which is trending downwards and reducing the amount of risk involved in the trade.

A number of investor steer clear of falling markets, although they offer huge profits to those who know how to handle them. While bull markets generally rise more slowly and last longer, down market do not last as long and falls are sharp, driven by panic. This pattern means that, once you know how to trade these markets, they are highly profitable

Perhaps people are prejudiced in favor of a rising market, or they have just become more accustomed to this situation. Whatever the reason, the result is that people who can do well in a falling market are rare, and can easily take advantage of the general incompetence in this situation. Being able to do well in any type of market makes you a force to contend with.

For serious traders, options present many great trading opportunities. A popular misconception is that options are too risky, and should be avoided. While this is true for average traders, those in the know are aware that it is possible to limit your risk and decide what level of risk you are prepared to take. As volumes on these markets are high and there are many trading opportunities, a sophisticated trader finds this market exceptionally attractive.

One way of limiting the risk on an option is to use spread trading. This involves two trades which act to hedge against the possibility of large losses, while still permitting a reasonable profit to be made. While profits are slightly lower, risks are greatly reduced, making the exercise very worthwhile. Using such techniques helps expert trader achieve steady gains.

Some traders rely on pure gambles, with large risks and large gains. Professional traders are aware that this will eventually result in losing everything, as a series of losses will quickly wipe a gambler out. It is also easy to waste money which comes from a successful gamble, so traders with this mindset do not usually last very long.

Responsible traders husband their resources and control the amount of risk they will accept. The euphoria from big gambling gains produces overconfidence and fuels greed. Control over your emotions, particularly greed, is the mark of a trader who will be able to survive and do well in the long term, and not be tempted by short-term windfalls.

Controlling the risk is probably the most important factor for those who trade for a living. The options markets offer the best means of taking control and setting the amount of risk you are prepared to accept. You cannot always be right, but all you have to do is gain more when you are right than you lose when you are wrong. To this end, you need to understand all the tools, including the place a bear put spread plays in an investment strategy.




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