On a day like Wednesday, August 12th, it’s really easy for a trader to lose money. The day started out with very sharp drops. At one point during the day, the S&P 500 had lost more than 30 points. However, the S&P ended up a tiny bit, indicating that although some people lost money, some also made a lot of money. It was a basically flat day on the surface, but if you look at the chart–and this goes beyond the S&P and into both the Dow Jones Industrial Average and the NASDAQ–you will see that it was anything but flat. In fact, it was a very wild day. While this can be frustrating, you should see it as an opportunity for profits. There are a number of ways to do this, but the best is to give yourself the best information possible.
You need to first understand the reasoning behind the swings. Why did the major indices drop so much to begin with? Why did they recover so quickly? Let’s look at each question individually.
First, know that the initial drop was not a surprise. The severity of it was, but the Dow has now finished down 9 out of the last 10 trading sessions. One extra doesn’t make much of an impact here, especially when it’s the current trend. A big reason has been the instability of the price of oil, which started to level off on Wednesday. There’s also the uncertainty of what the Federal Reserve will be doing with interest rates.
Next, the stock recovery that drove the indices back up in price was due to two big reasons. The first was because the Chinese yuan weakened significantly today. However, this appears to only be a surface concern. The Chinese market has proven to not have much of an actual impact on how the U.S. economy is performing. That’s good news for companies, especially low cap businesses that can suffer big price swings. It also shows us what the second, and stronger, reason was for the quick recovery: consumer sentiment. When experts make an announcement or a prediction, the people that follow them tend to react quickly. Whether or not their actions are fundamentally sound is debatable, but that doesn’t change the fact that they happen. A trader can take advantage of this when they recognize what’s going on. By entering a trade and exiting before the fundamental strength or weakness of an index or individual stock takes over, you can make a profit based solely upon group reactions. A basic knowledge of the stockmarket is needed, but that’s it. You don’t need to understand the inner workings of technical indicators or how to read a price to earnings number. Just follow the latest current happenings, and know how others will react to them. Then stay with the trends. It’s a strategy that’s perfect for short term binary options traders and day stock traders.
The best traders look at these things, acknowledge that they are happening, and then adjust their current trading strategies. This is a good thing for you to do, too. However, the very best tend to take it a step further. They start to look toward the future, both immediate and distant. If this is something that you want to strive toward, look toward the fundamental indicators of the biggest companies in each of the indices. Intrinsic strengths will drive prices up while intrinsic weaknesses will make prices go down. Look out for these, and you will have a very strong estimate of what the future has to hold for your trading. It’s subject to change of course, but you need to be aware of what current projections are to give yourself a loose framework for future trades.