By being able to see a snap shot of a public sector, we can get a good idea how well, for instance, the Telecoms market is doing. All telecommunication companies are in this sector. If we see the sector rise, we can either trade the sector as a whole – this may depend on the broker you are with – or, more importantly, use it as a means of finding trades quickly, and to also, if the market is turbulent, protect open trades. Let me explain.
To find a trade quickly we simply look at the sectors, for example look for the ones that have been very bullish the last few days. In each sector, we can look for the key stocks that are pushing that sector. More than likely, it will be the ones that are in the FTSE 100, as these are the ones that are traded more often than the others; they also have a higher value and are more easily recognizable. For example, going back to our Telecoms sector, we’d look for BT, as that’s the key one, and probably the main driver. It would also give us some others too, but for now, we’d look at BT.
If the sector had been bullish, then more than likely BT will be and also, with it being the main driver, it may be more bullish than the others. This could lead to a possible good (for us) point of being overbought, and therefore be likely to be good to short. Having reached an overbought position, it will be more than likely close to a resistance, and looking to retrace.
You don’t have to simply trade those that are the key ones though. What I want to highlight with the above, is that there are plenty of opportunities within each sector. Just look for the ones that are the main drivers to the sector’s current strength or weakness. These will then give you a good chance to find either overbought or oversold stocks to retrace or bounce accordingly.
The other tip concerns hedging. When you hedge, you basically protect any open trade against market conditions. Say you have some BT stocks open and you were going long on them. However, things were looking shaky, and you were over exposed a little and didn’t want to risk any capital, but wanted to keep the trade open, as you’d got in initially at a good price. What you can do, is trade the reverse on the companies sector. Therefore, if you thought BT was bullish, you’d short the sector, resulting in covering any possible loss on the BT trade. That is, if BT went up as you expected, you’d be ‘quids in’, as the saying goes; if it disappointed you and went down, the sector would be going down and you would profit from having shorted it, which would alleviate some of the financial pain of losing on BT.
This is a common tactic, and something that many brokers will do automatically. If there’s a great deal of trading on one particular stock in one direction, the broker will open a contrary position in the market, to protect any money he may have to pay out, above and beyond what the losers pay.
I am over simplifying on hedging, but I wanted to whet your appetite a little with some of the other things you can do to protect yourself. We should all know by now about using stops and using guaranteed stop losses, or even part closing a position. Sometimes though, that still involves too much risk, when simply opening a contrary posi-tion on the sector would help and protect your trade.
Sadly (but it does make sense), you can’t short a stock that you’re long on already, and vice versa. And you should know why? You do, don’t you?
We buy to sell, and we sell to buy! If you don’t know what I mean by that, please, please go back to the course and check through the types of trade that we can do. Once you’re done with that, then come back.
When we open a trade long, we buy it, to eventually sell it at a profit. When we open a short, we open a contract to sell the trade at a particular point, at the price we opened the trade at, and for this we have to buy at that future time to cover the trade. I will cover this in more detail in concepts of leveraged products below. In trading leveraged products, spread betting, and CFDs (contracts for difference) are based in the theory of their older brother and sister; Futures and Options.