the XJO Chart

Most traders can profit from markets that are either rising or falling. But what if the market is stagnating and going sidewards?

When the market is stagnant, it is very hard to use other strategies to profit, and can be a wasteful tie-up of your capital. Instead, traders can use an Iron Condor, where you will make maximum profit if the stock remains between two particular levels. Bullish and bearish movement can occur, but only to a specific point, in order to make maximum profit.

So when would we use one?

An Iron Condor is best used when there is very little movement in the market. The stock can continue to trade up and down, but provided it stays between two particular levels, you will still make maximum profit.

From a technical perspective, an Iron Condor is best used when a stock is trading between a strong level of resistance and support, forming a channel pattern. We can place all our risk both above the resistance level, and below the support level, which acts as protection for our trade. As long as the stock continues to trade in the channel between the resistance and support levels, we can make maximum profit. We can also use both these levels a technical stops; if the share price breaches them, we may close out part, or all of the trade.

Iron Condors can also be setup in a way where if the trade does what you want, and you make maximum profit, you will close out for zero fees and therefore half the cost of the trade.

The other reason traders like this strategy is it can be managed from afar. It doesn’t require too much attention, and is suitable for traders who perhaps work full time and don’t have the capacity to be actively trading day in day out.

Let’s run through an example.

The Below chart is of the XJO or ASX200. It is the index of our top 200 stocks weighted by market cap. It is currently trading at 6,670.

The market recently has been hard to pick direction, and as you can see, we are trading in a broad triangle pattern. When the market becomes hard to predict like this, but is trading in a broad range, we can try to apply an Iron Condor to take advantage of fluctuating sidewards movement.

We want to set up the trade with a close expiry, like the 7th of November, and put our risk beyond both key resistance at 6,775 and below support at 6500. IF the market continues to trade between that wide range, not only do we make maximum profit, but also half our trading costs.