{"id":8008,"date":"2011-07-05T11:00:11","date_gmt":"2011-07-05T15:00:11","guid":{"rendered":"http:\/\/club.ino.com\/trading\/?p=8008"},"modified":"2011-07-05T10:44:38","modified_gmt":"2011-07-05T14:44:38","slug":"why-favor-the-stock-market","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2011\/07\/why-favor-the-stock-market\/","title":{"rendered":"Why Favor the Stock Market?"},"content":{"rendered":"

\"\"Guy Cohen is the creator of The Private Traders Club, Flag-Trader, The OVI Index and OptionEasy. He is also the author of the best-selling trading books \u201cOptions Made Easy\u201d, \u201cThe Bible of Options Strategies\u201d and \u201cVolatile Markets Made Easy\u201d (FT Prentice Hall). Guy specializes in stock market trading and he has created numerous online applications for stocks and options traders, with his hallmark being his user-friendly approach and liberal use of illustrations. His clients include NYSE Euronext, The International Securities Exchange (ISE) and FT Prentice Hall. To see what Guy is working on now, click here<\/a>!
\n-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------<\/p>\n

Why I Favor the Stock Market<\/p>\n

Alright, I admit it \u2026 I\u2019m a stock market fan! Not Forex, not commodities \u2026 the stock market is where it\u2019s at.<\/p>\n

Make no mistake about it, more personal fortunes have been made in stocks than any other investment vehicle out there. That is a fact. Forex and commodities are highly specialized and the failure rate for amateur traders is higher in those markets than with stocks. As you would expect, the success rate with stocks is far higher than with Forex or commodities trading.<\/p>\n

So with that in mind, let me explain why \u2026<\/p>\n

\u2022\tFirst, to make big money with Forex and Commodities you require immense leverage. This means you can win big \u2026 but at the risk of losing big \u2026 really big.
\n\u2022\tSecond, when did you see a currency or commodity double or triple in a matter of weeks? Doesn\u2019t really happen does it?!<\/p>\n

But with stocks this can happen quite often, and it doesn\u2019t require leverage.<\/p>\n

Furthermore, with stocks, they often \u201ctelegraph\u201d their intentions ahead of time, provided you know where to look and what to look for. Stocks offer more diversity, more choice, and typically when something major is about to happen, we have ample warning of an announcement ahead of time (ie. earnings season).<\/p>\n

Of course, surprises can and do happen with stocks, and they can be nasty surprises. However, if you\u2019re sensible and aware, you can massively reduce the odds of a catastrophe, and hugely put the odds of success in your favor.<\/p>\n

So you can see I might be just a little biased (after all, it\u2019s like home field advantage for me!). Although I began my trading career in the options industry, I was quickly drawn to the stock market. In the stock market, massive fortunes can be made from relatively modest starting pots.<\/p>\n

After many years serving my \u201capprenticeship,\u201d my focus narrowed still further on just one type of chart pattern - a breakout from a consolidation pattern. We can narrow this down even further by calling it a Flag pattern. This is what I specialize in. Breakouts from clear areas of support and resistance.<\/p>\n

Why this method? Three reasons:<\/p>\n

1.\tIt forces me to use a simple clear trading plan. Therefore, my discipline is in place for each and every trade. I know in advance my entry and exit points (including when to ride a trend).
\n2.\tIt gives me the opportunity for windfall profits when we catch a trend.
\n3.\tIt rarely, if ever gives a gapping loss. Furthermore, many losses don\u2019t even materialize if the stock never broke out in the first place.<\/p>\n

These points already start to put the odds in my favor.<\/p>\n

However, thanks to my grounding in options, I\u2019ve been able to add something very special to my trading arsenal.<\/p>\n

But the great news is, you don't need to know anything about options to take advantage of what's happening in the options market!<\/p>\n

Over the years, I\u2019ve observed that there are what I like to call \"Informed Traders\" in the market. And once you get a sense of this, you begin to see a whole new picture. These Informed Traders gravitate towards the options market for 3 main reasons:<\/p>\n

1.\tTheir trades are relatively well hidden, and therefore they can trade discreetly.
\n2.\tThey can accumulate vast positions over a period of time without disturbing the underlying stock price.
\n3.\tLeverage \u2013 The ability to \u201ccontrol\u201d a lot by investing a little.<\/p>\n

It\u2019s one thing to understand options. It\u2019s quite another to simply observe options transaction data. That\u2019s what we do to see what the big money is up to.<\/p>\n

For a technophile, I\u2019m looking specifically at options volume, open interest and implied volatility.<\/p>\n

For a technophobe, don\u2019t worry about the above sentence! I\u2019ve combined these factors into the simplest of indicators \u2013 a line that just goes up and down from +1 to -1. When the line is positive we look at bull flags, and when the line is negative we look at bear flags.<\/p>\n

Simple. The line is called the OVI.<\/p>\n

The OVI gives you a serious edge when it comes to monitoring what the big smart money is up to. One of my students has recently mentioned that he\u2019s \u201caddicted\u201d to it! That\u2019s some praise \u2026 and rightly so.<\/p>\n

However, you cannot use the OVI on its own. It must be used in conjunction with a chart pattern \u2013 preferably a flag type of pattern. This is where it really becomes special. And remember, because of the pattern, we already have a robust trading plan in place.<\/p>\n

Take this recent example for instance \u2013 given the bearish market in the last few months until this week, let\u2019s take the example of RIMM:<\/p>\n

RIMM - Bear Flag
\n\"\"<\/a><\/p>\n

As you see, RIMM starts to fall in March, and my OVI indicator also turns negative virtually at the same time. All we need from here is a good entry point.<\/p>\n

Now, there were several as RIMM stepped downwards. However, I\u2019ve been conservative and avoided earnings season and any gapping just to show you what\u2019s possible.<\/p>\n

You can see that a sound short entry point was around $42.50 at the end of May, and from there (within 2\u00bd weeks), the stock had plummeted another $17! That\u2019s a huge profit, for which one of my students claimed they now loved me because I\u2019d been ragging on RIMM for some time!<\/p>\n

So, hopefully you see how this works. We\u2019re looking for a confluence of a simple pattern together with the OVI.<\/p>\n

It may surprise you to know that the OVI \u2013 even though it correlates nicely here with the stock price movement, doesn\u2019t actually have anything to do with the price chart above it, because the OVI is derived from options transaction data. There\u2019s the secret \u2026 it\u2019s effectively spying on what the big players are doing.<\/p>\n

As you can see, with the right patterns in place, that can be very revealing. With the right trading plan in place, that can be very profitable as well!<\/p>\n

Click here to learn more about this OVI..<\/a><\/p>\n

Cheers and best of luck in your trading,
\nGuy Cohen<\/p>\n","protected":false},"excerpt":{"rendered":"

Guy Cohen is the creator of The Private Traders Club, Flag-Trader, The OVI Index and OptionEasy. He is also the author of the best-selling trading books \u201cOptions Made Easy\u201d, \u201cThe Bible of Options Strategies\u201d and \u201cVolatile Markets Made Easy\u201d (FT Prentice Hall). Guy specializes in stock market trading and he has created numerous online applications […]<\/p>\n","protected":false},"author":41,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[3968,3908,394,3907,384,1832,3178],"class_list":["post-8008","post","type-post","status-publish","format-standard","hentry","category-general","tag-flag-patterns","tag-guy-cohen","tag-indicators","tag-ovi","tag-rimm","tag-stocks","tag-trends"],"yoast_head":"\nWhy Favor the Stock Market? - INO.com Trader's Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/wwwtest.ino.com\/blog\/2011\/07\/why-favor-the-stock-market\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why Favor the Stock Market? - INO.com Trader's Blog\" \/>\n<meta property=\"og:description\" content=\"Guy Cohen is the creator of The Private Traders Club, Flag-Trader, The OVI Index and OptionEasy. 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