Friday, 4 July 2008

How to make money in a falling market?

First things first - you may make money by following the suggestions if you are lucky enough. I have been losing money ever since I figured out how to make money in a falling market. So apart from the various instruments, you need to have a great timing to enter the market.

You need to be informed and take calculated guesses. A very obvious news might not move a market, an unexpected news does. For example, everyone knows that crude/bbl will continue to move around $140-$150 this week if it reaches $160 this week you can expect a crash. Same goes with inflation, the market will react if it reaches 14% instead of 12% this week as everyone has already guessed.

In one of my previous blogs I wrote about "Positions" in a market. It could be either Long or Short. You go long in a rising market. You expect that the price of a stock will rise, so in that speculation you buy at lower levels and sell at higher levels. In other words, you go Long. An active Demat account is a prerequisite.

In recent time markets have been witnessing a free fall, obeying Newton's laws of gravity. Just like migratory birds go south during summer, the market is going south these days. The reasons are many. So, going long is a bad idea. But the scenario can change any time. Once people start to think that its over-sold you will see an uptrend. The market fundamentals are strong and in safe hands.

So the strategy for the season is to go Short. You speculate that the market will fall, so instead of buying first, you sell. Yes, this is possible. You take a short position and expect the price of the stock to go down. Sounds like a winning idea? Not always. Just as you can't guess when its going to rise, you can't guess when is it going to fall. There are millions of factors that drive the market, so you need to be well informed of all the major business activities around the world. As I said, I have been losing as I always enter the market at the wrong time :(

Alright, so you have the strategy in place, but you don't know the products. The products that I know are: Individual stock, Index and Commodities. You can short "n" number of an individual stock like Reliance Capital, but you will have to square it off(perform equal and opposite trade) within a specified time frame.

However, in Futures contracts you can keep the contract until expiry. Its usually a 3 month contract with 3 contracts active at any point in time. Depending upon the market trend and your position in the market you can continue to make or break money. If the market is going up and you are long you will make money. No points in guessing, if the market is going down and you are holding a short position you will make money till the time you hold the contract before expiry.

Whenever equity is in tatters, commodities take over. Have you checked Gold, and Crude these days? Futures in commodities promises to be a hedge for any possible risks in Futures in Equities.

Just an FYI. The crude oil price is touching new heights each day due to speculation and futures trading. You must be aware of the fact that OPEC doesn't control price of crude anymore... US does. For in depth analysis read this: The real reason why oil prices are rising

All the best.

2 comments:

George said...

Interesting post... I can see that you put a lot of hard work on your blog. I'm sure I'd visit here more often. George from how to make money fast.

Nishanth said...

Nice post. However I believe the technical information in the charts reflect the immediate trend than the fundamentals like what is going around.

I had written a related article few weeks ago. Do post your views.
You may read it at:

http://never-ending-race.blogspot.com/2011/06/sometimes-being-sheep-helps.html