By Scott Sanders There has been a rapid rise in the individual investor. These are self-taught market investors who spend all day trading ...
There has been a rapid rise in the individual investor. These are self-taught market investors who spend all day trading on different stock markets in an attempt to yield profits and increase the returns on their webfolio capital investments. The key to being a successful self-taught trader is ensuring that you familiarise yourself with all aspects of the market you are trading in. One of the most complicated market to trade on is the derivative market and it is important to understand the differences between each investment vehicle. This article will try and break down the significant differences between forwards, future contracts and option trading strategies.
The first step to conquering the derivative market is to understand the strategies associated with each spate investment vehicle and also know how they relate to each other. It would also be to your benefit to tick off the basic understanding of each vehicle. This will require you to understand the lingo, the jargon. It may sound silly, but understanding the concepts is a step closer to understanding the strategies you will have to employ later in your trading activities.
The first thing you need to know as a trader, whether a veteran or a newbie is how the market works, and more specifically how the derivatives market works. This means studying how each derivative works and how you can use each to achieve your desired profit outcome. This way you will know how to maximize your return and minimize your losses and how to hedge against risk where possible. This means learning the difference between a put option and a call option, or what an underlying asset is or what it means to take a long or short position, or what it means to be bullish or bearish or what a strike price is. This means getting a book or a website link and educating yourself on the basics. This way any strategies you learn will actually make sense.
The first strategy you need to know is linked to forwards, this strategy is will help you mitigate the risk of a currency position. Currency trading has become a massive phenomenon amongst traders at is one of the most volatile areas in the market. Using forward contracts, which are essentially agreements between two parties to buy or sell a particular asset, in this case currency at a specified date and a pre-specified price. This means if you speculate your asset to drop in price but still want to hold it for a little longer to see how it performs you can purchase a forward contract to ensure you don t lose more than its current value.
These are the strategies to execute during a neutral market: The Iron Butterfly, The Iron Condor, The Strangle, Calendar Straddle, The Condor. These tactics will help you to exploit the lack of movement in the exchange market in order to still make a profit.
Another strategy that you may want to get closely acquainted with is the married put. This can be used by an investor who either already owns or wants to purchase a particular asset and at the same time purchase a put option for the equivalent quantity of the asset. This strategy is best used when an investor is feeling bullish on the price of the asset and want to hedge against possible short-term losses. At its core, this is a hedge insurance policy by establishing a floor value for the asset in case its price plunges.
There you have it, three different strategies you can use to increase market returns and hedge your investment against risk. If there were any terms that you couldn t quite understand then it may be best to keep on researching before delving into the derivatives market.
Investment truly is great thing to get involved in, it is a way to control your profits and your returns without leaving it to the hands of a broker or another trader. The control is in your hands, you just have to be knowledgeable enough to be in the driver s seat.
The first step to conquering the derivative market is to understand the strategies associated with each spate investment vehicle and also know how they relate to each other. It would also be to your benefit to tick off the basic understanding of each vehicle. This will require you to understand the lingo, the jargon. It may sound silly, but understanding the concepts is a step closer to understanding the strategies you will have to employ later in your trading activities.
The first thing you need to know as a trader, whether a veteran or a newbie is how the market works, and more specifically how the derivatives market works. This means studying how each derivative works and how you can use each to achieve your desired profit outcome. This way you will know how to maximize your return and minimize your losses and how to hedge against risk where possible. This means learning the difference between a put option and a call option, or what an underlying asset is or what it means to take a long or short position, or what it means to be bullish or bearish or what a strike price is. This means getting a book or a website link and educating yourself on the basics. This way any strategies you learn will actually make sense.
The first strategy you need to know is linked to forwards, this strategy is will help you mitigate the risk of a currency position. Currency trading has become a massive phenomenon amongst traders at is one of the most volatile areas in the market. Using forward contracts, which are essentially agreements between two parties to buy or sell a particular asset, in this case currency at a specified date and a pre-specified price. This means if you speculate your asset to drop in price but still want to hold it for a little longer to see how it performs you can purchase a forward contract to ensure you don t lose more than its current value.
These are the strategies to execute during a neutral market: The Iron Butterfly, The Iron Condor, The Strangle, Calendar Straddle, The Condor. These tactics will help you to exploit the lack of movement in the exchange market in order to still make a profit.
Another strategy that you may want to get closely acquainted with is the married put. This can be used by an investor who either already owns or wants to purchase a particular asset and at the same time purchase a put option for the equivalent quantity of the asset. This strategy is best used when an investor is feeling bullish on the price of the asset and want to hedge against possible short-term losses. At its core, this is a hedge insurance policy by establishing a floor value for the asset in case its price plunges.
There you have it, three different strategies you can use to increase market returns and hedge your investment against risk. If there were any terms that you couldn t quite understand then it may be best to keep on researching before delving into the derivatives market.
Investment truly is great thing to get involved in, it is a way to control your profits and your returns without leaving it to the hands of a broker or another trader. The control is in your hands, you just have to be knowledgeable enough to be in the driver s seat.
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