Certified Public Accountant
A constant search for stocks which appear poised, for one reason or another, to offer a profit-making opportunity. Even with the help of modern stock screening software, this can be an extremely tedious, frustrating process.
Unfortunately, impatience in the face of a lack of available trades is a big reason why so many novice traders are tempted to gamble on less than optimal set-ups. And unfortunately, they often get burned in the process.
For traders, as opposed to longer-term investors, two of the most crucial factors that should be considered when placing a trade are the volatility and liquidity of the stock under consideration.
Without a history of volatility, there’s little chance of the rapid and significant price movement traders need to capture their desired profits.
On the other hand, volatile stocks that are relatively illiquid are risky for traders because the low volumes being exchanged can make it difficult to exit a position at the desired price.
And once low volatility and low volume stocks are removed from the equation, profitable opportunities can seem few and far between, especially for traders starting out with small accounts. Typically, these traders are restricted to lower-priced stocks.
Fortunately, there’s a straightforward solution to this problem.
After working for years at an unrewarding job, Chris Beacom recently resigned with the intention of earning a full-time living trading the markets. With the help of Davis Martin and RagingBull, Chris has focused his attention on learning to trade the Standard and Poor’s Depositary Receipts ETF “SPY,” as well as options. Both of these instruments offer excellent opportunities for traders like Chris. In fact, he has already recorded many good wins on the road to his goal of financial independence.
As trader Chris Beacom of Ontario has found, the solution is to look beyond individual stocks and consider trading Exchange Traded Funds (ETFs), along with options.
One of the longest-established and most popular ETFs is the Standard & Poor’s Depositary Receipts (SPDR) S&P 500 ETF, which trades on the New York Stock Exchange under the symbol of “SPY.”
SPY aims to track the S&P 500 index, which makes it a popular option for long-term investors. With approximately 80 million units changing hands on a typical trading day, the SPY’s high volume can also make it highly attractive to traders.
At first glance, it might seem counterintuitive that an ETF that tracks a large index like the S&P 500 could also offer considerable volatility, but the fact is, SPY offers day traders excellent opportunities for quick profits, provided they approached it in the right way.
Chris recalls being very interested to learn that “the overall market can, and will, change very fast,” and the opportunity to learn to trade SPY was one of the key factors that led him to Davis Martin and Daily Profit Machine.
Various indicators can be used when trading ETFs, the 50-period Moving Average being especially popular. The most important point is to be ready to trade as soon as the markets open in the morning, which is when the large movements of money and therefore, price tend to take place.
“I worked a lot of years for a company and don’t want to answer to anyone, anymore for a paycheck.”
Another great benefit of trading SPY is that unlike some newer ETFs, it offers us the opportunity to trade options.
Not only does this make it much less costly to enter the market, a crucial point for smaller account traders, but options typically tend to display more volatility than the underlying stock. This gives them the potential to provide more substantial and quicker profits.
True, taking advantage of this added volatility may involve a higher level of risk. That’s why you use robust stop-losses and risk management when trading options.
Nevertheless, with sound technical trading education, and when backed by the indispensable element of self-discipline, options can be a valuable element of a trading plan.
So far, options are working well for Chris, who, with the guidance of Davis Martin, has enjoyed some excellent wins. One, in particular, he remembers well:
“On Aug 23rd, I made a SPY trade with Davis’ market insight and lots of volatility. With Fed Chairman Powell’s comments and the China tariff war, I bought at $2.12 and sold at $3.90, $290 on a put. I could have stayed in the trade for a bigger profit, but I’m new to options and didn’t want to take the risk? So I got out at $287. I took my profits and played it safe.”
“Now that I trade full time, I decided to join RagingBull to acquire more experience in options. I’m learning a lot!”
Chris’ recent trade is an excellent example of how political and economic news from around the world can affect market indexes such as the S&P 500 and instruments like SPY, which track them.
In this case, the escalating trade war between the U.S and China combined with a downbeat assessment of the state of the economy from Federal Reserve Chairman, Jerome Powell, was enough to depress market sentiment and make the buying of options to sell (“Puts”) a smart play for traders who could get in early on the news.
Chris paid $2.12 for options to sell at $290. As the price of the stock declined below that figure, the value of his options increased until he was able to sell them for $3.90 (a tidy 83% profit) when the stock price hit $287.
That’s the beauty of options: a relatively insignificant move in the stock price can still produce a highly-profitable trade.
As Chris noted, he might have made an even bigger profit had he waited for the stock price to fall further, and indeed it subsequently dropped to $284, but he had the good sense to exit upon hitting his predetermined profit target, which is a key element of a sensible trading plan.
“I took my profits and played it safe,” he said. This is a very wise axiom to keep in mind when trading volatile instruments, which are, by definition, likely to suddenly turn against you. This mindset is even more critical for full-time traders like Chris, who depend on the markets for their livelihood.
“On Aug 23rd, I made a SPY trade with Davis’ market insight and lots of volatility. With Fed Chairman Powell’s comments and the China tariff war, I bought at $2.12, and sold at $3.90, $290 on a put.”
Quitting a job, no matter how unrewarding, to trade the markets full-time is a huge step. It’s definitely not for everyone, but it’s a risk that Chris was more than happy to take in pursuit of his goal of financial independence.
“It’s been great,” says Chris, adding bluntly, “I don’t want to answer to anyone, anymore for a paycheck.”
Although it’s a common dream, armed with that kind of clarity of purpose and his ever-growing understanding of the markets, it looks like Chris is solidly on the path to making his dream a reality.
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Certified Public Accountant