The Ftse Mib lived a week on the roller coaster. After the violent declines of the beginning of the week, the markets regained their share trusting in a happy ending to the Greek drama and aided by the recovery of the Asian markets thanks to the counter-moves of the Chinese government. Investors who breathed a sigh of relief: over seven days, the balance sheet of the Ftse Mib is still positive with an increase of 1,42%.
However, invest in the stock market, albeit with a more speculative slant, does not only mean trusting in increases in indices and shares. But also being able to bet on market declines by exploiting the current of sales that invests shares in waves, but also other asset classes, such as bonds, which in recent times have been experiencing a volatility that has brought them ever closer to equity . In technical jargon it is said to go short, i.e. to bet that the sales of a specific stock, index, or financial instrument will continue and will bring its value to lower levels than the current ones.
A trade for experts, of course, that small savers cannot copy lightly. But it is good to know and keep in mind: beware of selling on the wave of panic, the so-called panic selling, thanks to the violent and one-way sell-offs there is someone who is making money. That's how.
RETRACEMENT OR TREND REVERSAL?
- tools to earn even in the downturn they are multiple and differ in efficiency, riskiness and complexity: futures, options, certificates, ETFs and even some mutual funds.
However, the first thing a good trader does is analyze the market phase. In fact, a current of sales does not always correspond to an opportunity to go short. "After a very important rise like the one that occurred in Italy in the first four months, a rapid upward trend, it is necessary to understand whether it is a retracement or a violent trend reversal", he explains to FIRSTonline.info Alessandro Aldrovandi, traders of tradingstrategies.it. “When you think it's a retracement - he continues - it's usually not worth doing anything because, in the event of a sale, then it's difficult to understand when to buy back, it becomes a question of timing. Instead, when there is a trend reversal, it is better to go short. The declines of these days have not yet led us to a trend reversal because we have not broken the 21 thousand points (of the Ftse Mib Ed), we have gone very close, we have reached an excellent minimum on which we can buy back ". And in fact yesterday the Ftse Mib closed up 3% at 22.937,40 points.
How do you know if it's a correction or a trend reversal? Experts have at their disposal graphs, patterns (patterns), indicators, oscillations, algorithms, i.e. all the tools of technical analysis and quantitative analysis. And when they spot a downtrend, they know the earnings potential is there. “If you believe it, the declines are much faster, faster, violent and profitable, and do not reverse. While when you go up the dynamics are slower, then you go back down, then you go up again… The ascending trend is weaker and more uncertain than a descending one. 80% of purely directional days (moving in the same direction from start to finish) are descending”, he explains Aldrovandi that for his portfolio he has chosen 50% to follow discretionary trading, i.e. his analysis of monitors, indicators and graphs and for the remaining 50% trading systems, i.e. software that develop strategies based on the past and reapply them in time real to the current situation. “”The trading system doesn't think, the discretionary trader thinks too much – he says – the mix is the best thing”.
THE TOOLS TO GO SHORT
Already with the actions it is possible to speculate on the declines: you borrow the shares from your broker and sell them hoping that they will go down to buy them back at a lower price and return them to the broker. The gain will be the difference between the stock price at which I borrowed them (+ an interest rate on the loan) and the value at which I buy them back.
Then there are futures which, on the basis of the same reasoning, do not have the problem of lending securities and allow you to bet on significant figures by paying only a part of these (the margins). In other words, by physically investing 10 euros you can have an underlying of 200 euros (they are therefore leveraged instruments). They are also very efficient (liquid) and inexpensive. The other side of the coin, however, is the risk. “They have too much volatility – he says Aldrovandi – is the easiest way to short but has more risk. It is quick to lose everything and it is necessary to apply the stop loss”. That is to put a limit on the losses that one is willing to accept: in futures the calculation of losses is done and debited on a daily basis, the so-called re-margining, and erodes the base capital while with the action the losses incurred can only be potential. "With futures - explains Aldovrandi - you are condemned to gain, if you lose you hurt yourself too much, you don't have time to wait to be right". In other words, you can't go wrong with futures, because you can't afford to wait, as with stocks, for the wheel to turn in your favor.
Un trader he can afford to use futures for most of his portfolio, while from an investment point of view, futures are used for specific objectives, i.e. hedging other long positions (ie bets on the rise of the markets). For example, with 5 euro of futures betting on the decline of European markets, I can hedge the risk of a 50 euro investment in European equities.
Then there are the Short etf, funds that replicate an underlying index but with an opposite sign, which represent a less risky solution: it is as if they were a future with leverage 1 and, by betting on an index, they are diversified. If with the Ftse index you make -3%, with the Age on the index you make +3% and with the future +60% (but also -60% if you bet wrong). “However, ETFs have an important flaw – he explains Andrea Cattapan of the independent consultancy firm Consultique – since returns are compounded daily, I can also end up with a different performance from the underlying index. Furthermore, in lateral periods, or when there is no full management on the price lists, I systematically lose with short ETFs. This means that they should be used when there are very strong expectations of quite marked downhill phases, otherwise they are not too efficient".
A solution to deal with lateral markets (i.e. markets that move flat neither up nor down) are the certificates, structured options that allow you to use more complex strategies already “packaged” through options. For example, options allow you to buy put shares with which you acquire the right to sell a security at maturity at a certain price with the advantage that if you make a mistake in your bet, you "only" lose the cost of purchasing the right. "Some certificates allow, for example, to have a positive result if the underlying (the financial instrument on which they are built, shares, indices, etc. Ed.) does not touch a certain barrier - he explains Cattapan – and in this case I can earn even if the market goes sideways. They allow you to strategize that you could by no means do. However, they are less liquid instruments because they have to adapt to a particular market view. And now that we are coming from an upturn in the markets, there are few short certificates”.
NEVER UNDERESTIMATE LIQUIDITY
On the other hand, experts know that downward situations are not the exception, rather the other side of the market that every saver must learn to keep in mind. And it is necessary not to be "carried away by the market". “The main tool is liquidity – he explains Salvatore Gaziano, investment director of the consulting firm SoldiExpert SCF – in market phases like the past ones we have increased liquidity, liquidating some positions”. Which means having the strength to resell. Maybe to buy later. “You don't have to wait,” he says Gaziano – that the headlines arrive in the newspapers or on the websites. By working with quantitative analysis and with the algorithms we have developed, we have signals that, if followed methodically, increase the statistical probability of doing better than the market”. Because in this field, there is never certainty. But the method and foresight pay off. “It is always better to follow the market and adapt to what it says rather than trying to figure out where it will go. Theories based on long-term diversified portfolios are less and less successful”. In other words, it is no longer enough to buy aiming at diversification and over the long term. “You risk finding yourself with the same money and having only enriched the promoter,” he says Gaziano for which it is important to know how to exit the market with a more opportunistic attitude.
But handling futures, short ETFs and certificates is not a game of chance. “It is essential to operate with very rigid entry and exit signals – he says Gaziano – but most savers tend to hurt themselves because they tend not to follow them and add their emotionality to them. It's not a question of a single play, but of the ability to build a broader and more methodical strategy and knowing how to resist phases of great emotion also due to the information overload to which we are exposed. Over time, those who are not methodical do not survive”.
Always remembering, as the famous Fidelity manager said Peter Lynch (That of the Magellan Fund), that market downturns are like blizzards in Colorado. That is normal things.
