Option Investor
Educational Article

A Little Bit Can Go a Long Way

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By David Popper

Is it a bear market, or is it the start of a bull market? Will the Fed raise rates? If the Fed raises rates, will it be the last time this year? How does the election affect the market this year? Are stocks setting up for a run or is this another bear trap? Will the earnings season prove to be profitable or will there be earnings disappointments? How much money is on the sidelines? What about the Barron's article predicting a huge bear market? Which "play of the day" will I play? Jim says the Nasdaq is forming a bullish wedge. How do I play it?

Indeed, there are huge cross currents in the market right now. One currently guarantees smooth sailing, while the other currently promises disaster. The problem for those of us who do not trade for a living and cannot watch the computer all day is that it is difficult to predict at this point which will prevail in the short run. Many tech stocks appear to be setting up for a bull run, but the Fed still looms. So how do you play a market that has the potential to explode either way? Very carefully.

One way to play the sideways market is to trade only market leaders with good chart patterns and to trade less amounts of the stock than you would normally would trade.

For example, this week I have chosen to trade CHKP. It successfully broke above resistence at $200 eight sessions ago and has bounced off $200 two times during these past eight sessions. The stock has encountered resistence at approximately $236 and thus, has been range bound in a $36 range for the past two weeks. Range bound stocks present great trading opportunities. Trading 100 shares of CHKP may yield $500 to $1,000 a day. Purchasing CHKP toward the bottom of its trading range and holding until it returns to the upper end of the trading range could yield $2,000 to $3,000 per week - and with less risk. This would be poor performance for someone trading for a living, but for the person using the market to supplement his income, it is good income.

Yeah, you might miss a breakout, but there is always tomorrow. The market offers opportunities every day. If you miss one wave, you can always catch the next. The point is you must treat the market as a business and only take reasonable business risks. You must trade in light of your risk parameters and time limitations. You must trade in light of reasonable goals and not in light of a fantasy mega return. You do not have to heavily invest until the conditions are right. It is better to make a decent second income without major risks and wait for a trend to be established before a major investment is made. Again, if your account does not allow you to buy 100 shares of CHKP, check out EMC, JDSU, TQNT, CMTN or a host of others.

In short, range trading during sideways markets provides the trader with the opportunity to make a consistent income, while waiting for the major trends to be established. I am confident that there are many people that have the time and experience to invest heavily in this market. They may be rewarded handsomely, or maybe not. I, for one, simply do not have the time to monitor a large position when conditions are uncertain and therefore, it is better to trade within these limitations. For me, it is better to make a decent second income without major risks until a definitive market direction is established. After all, I am looking for a predictable second income over the long haul.

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