Stock Market Trend

For example, a stock may be in a long-term uptrend over many months, but you might still decide to sell one-month naked calls after a sharp spike rally that breaks widely above its uptrending channel because you expect a retracement, or a “regression to the mean.” Typically in such situations call option premiums are high, and if you get the timing right this can be a lucrative trade.

Caution: While usually as an option writer it’s best to let profitable positions simply decay to zero rather that paying another commission and giving back part of your income buying them back, this is one time when it often pays to take the lion’s share of the premium when you can, by closing out the trade early. Since you are temporarily trading against a longer-term (and thus more powerful) stock market trend, there’s a high risk of that trend suddenly resuming in a strong manner and taking back your profit.



Regression to the mean, or average movement, can be a useful guide to help you time your trade entries and exits regardless of the stock market trend.

In uptrends, as in the example just discussed, regression to the mean implies a likelihood that the stock price movement will stay within an uptrending channel most of the time, and when it breaks above that channel the probability increases for a retracement back down in price.

In downtrends, as in the example just discussed, regression to the mean implies a likelihood that the stock price movement will stay within a downtrending channel most of the time, and when it breaks below that channel the probability increases for a retracement back up in price.

In trading ranges the probability is that rallies to the top of the range or even slightly above it will fail and return back down to the middle of the range, while sell-offs or “dips” to the bottom of the range or even slightly below it will bounce back up into the middle.

Of course, a breakout from a trading range sometimes can actually be a signal of a new trend. The stock might never come back into that range. But remember, that’s the exception, not the rule. Your aim should be to milk the maximum profit out a the current stock market trend whatever it is, despite the risk that, obviously, at some point that trend will change. Until proven clearly wrong, always have the courage to sell rallies at the top of a trading range and buy dips at the bottom of a trading range. This will give you the best chance of making money. When the trading range is finally broken, you definitely will lose some money at that time because of this approach, but hopefully by then it will only be a portion of the profits you’ve racked up by betting all along with the current stock market trend, not fighting it. Those who view every rally as an invitation to greedily chase it and buy, or who view every dip as a warning to panic and sell, are the victims from whom you derive your stock market trading income. Don’t join them, beat them!



If you want to be a great trader, you need to have the courage to trade along with the trend regardless of the emotional stress of "news noise" or apparent fundamental valuation reasons that would lead you to doubt.

You must also, when the time comes, know how to adjust to a new stock market trend when it arrives, even though at that time you will have just suffered a financial loss for the reason explained above.

If you only make the easy trades, always trying to play it safe, the best you can hope to become is a good trader, no matter how advanced your trading strategies are.

By the way, the only difference between a good trader and a bad trader is how much time it takes for the great traders to wipe you out.

There is no reward without risk. The key is not to try to avoid all risk, like a deer frozen in the headlights, but to seek out risk where the reward lies. Control it to some extent, but don't seek to eliminate it because by doing so you will also eliminate your profit potential. Take the risk. Just take it at the right time in the right direction, knowing that you can never be 100% sure anyway and sometimes you'll lose; that's part of trading.

It is not brains that win. It is not strategies that win. It is not sophisticated mathematical models or expensive technologically advanced computerized automatic heuristically-adapting self-learning artificially intelligent neural network black-box trading systems based on arcane Greek option parameters that win.

What wins?

Human guts to act correctly at the right time.

Timing is not everything in trading -- it's the only thing.