Bear Baiting - A Veteran Trader on Beating the Bear Market
How One Veteran Trader Makes His Killing in a Falling Market
August 10, 2011, Press Dispensary. “As Gordon Gecko says in the classic 1987 film, Wall Street: ‘It’s a zero sum game: someone wins, someone loses. Money itself isn’t lost or made, it’s simply transferred.’ When a market falls, even as dramatically as most markets did at the end of last week, investors don’t take their money right out of the system and shoebox it under the bed: they simply move it elsewhere. And that means there’s still profit to be made.”
This is the wisdom of Vince Stanzione, veteran trader of 25 years and financial coach, who has amassed a personal fortune through the volatility of recent years. “Let’s get one fact straight: money can be made whatever the market conditions. The media love their grim headlines but front page stories don’t tell you how smart traders are still earning money. The trick is to do it with small bets, spreading the risk.”
Aside from his coaching, Stanzione’s fortune comes from spread trading or spread betting: distributing investments across markets in order to make gains whatever the conditions. At its simplest, spread betting allows a trader to follow the money: if it flows out of one market – say, equities – it will be flowing into another, such as gold or bonds. “Though curiously,” points out Stanzione, “Gold may have soared, yet most private investors have not profited!”
Investment in currencies tends to stay in currencies. “In the currency markets,” says Stanzione, “people sell one currency to buy another, not to shut up shop and go home. So as the US dollar or the Euro weakens, the Swiss Franc, say, or the Japanese Yen will be strengthening. And as currencies generally weaken, bonds can strengthen. Even with the recent dollar downgrade, the US Treasury Bond market remains the largest and most liquid market in the world and acts as a safe haven.
“And if everything dives as steeply as last week, perhaps with markets, shares, currencies and commodities all dropping, the smart money switches to short selling.”
Short selling is about as popular in the media as a Liverpool looter but, says Stanzione, that’s because it’s misunderstood: “It’s never explained correctly and is always referred to as being risky, even evil. The truth is that short selling is simply part of a balanced strategy: it’s insurance for your share portfolio, no different to insuring your house or car. And over the years it’s saved my bacon many times.”
‘Shorting’ can also have the added benefit of a speedier profit: as the last two weeks have shown, markets fall far faster than they rise, so earning through short selling is a matter of days, not weeks or months. Two key ways to sell ‘short’ are traded option (Puts) and the Inverse Exchange Traded Fund (ETF), or Note (ETN), nowadays quite popular in the US and UK.
“The advantage of the put option is that once you’ve paid your premium, although of course you aim to make a profit, the option cannot go below 0 so you know the maximum loss you’re exposed to,” says Stanzione. “And the benefit over a spread bet is that you’re buying time. Let’s say you think silver is going down, and you buy, but silver carries on going up for a while before falling: with a spread bet you would likely have been stopped out before profiting from the fall. With a put option, you benefit even if the fall takes a while. If you stick to the basics, traded options are not as complicated as they may seem at first glance. You make the choices but your broker does the hard work.”
An ETF, on the other hand, is a financial instrument designed to do the opposite of whatever the underlying market does. For example the ETF short Cotton goes up as the price of Cotton goes down. A FTSE 100 inverse ETF - such as DB X Trackers FTSE 100 short (LSE: XUKS), issued by Deutsche Bank - can be bought via a normal online broker and is not subject to stamp duty or any extra margin requirements. “Inverse ETFs are not perfect and are not ideal for long term shorting as they’re reset daily and the compounding effect can give unexpected results,” says Stanzione, “but over the short term, and if markets are falling steadily, they do a good job.”
Short selling is normally a short-term activity. But falling markets can also offer more traditional gains, especially for the canny investor who, once again, thinks beyond the headlines. “Some of the best times to buy are when the media’s baying, the crowd is terrified and there’s blood on the streets. Markets go down through a lack of buyers, not because sellers have withdrawn. So for people who were still buying, there have been some terrific opportunities over the past few days and that’s one of the reasons why the indices have risen again today.”
Bounce-backs follow falls and are another place to make money, especially if a bounce is quite large. But Stanzione urges caution: “A bounce back this week does not mean a long-term recovery. Markets will stay volatile until at least October and even then 10%+ falls in major market indices will become common. The way to profit in such volatility is by spreading the risk with small bets.”
Stanzione is a firm believer in spreading risk and not over-reacting in the very short term. Spread betting provides a profit from markets which go down and up, and even allow investors to trade sideways, making it ideal for today’s markets.
“’Day trading’ and short-term bets may sound exciting,” says Stanzione, “but, in truth, my wealth has not come from there. It’s come from trading trends over weeks, months and years. Brokers and bookmakers like to generate more business from active customers but the overall winners can be the more sedentary traders. Perhaps surprisingly, when I look at my own trading students, the best results come from the over-55s, an age group that has learned patience. And I am not normally glued to a screen all day and only check prices at the end of the day and, on some trades, only once a week.”
- ends -
Notes for editors
For further information, please contact:
Tel: 07712 651777
Site: www.fintrader.net http://bit.ly/pc7O2D
Images for download
Click on any image to view or download in higher resolution.