The basic principle
For investors, the basic principle to understand is that everything is temporary. Stocks that fall tend to recover. Stocks that rise tend to give up some of their gains. Hurricanes typically don’t create many situations for investments, but many short-term trading opportunities do arise.
How to trade
Please click here for an annotated chart of insurer Travelers Cos. TRV, +0.59%stock.
Historically, insurance stocks recover after a brief dip. The reason is that insurance companies often succeed in raising rates after storms.
To be consistently successful at a large number of trades over a long period of time, traders must look for good setups and refrain from overtrading.
The chart shows that Travelers stock has fallen, but it doesn’t present a good trading setup at this time. A good setup would be if the relative strength index (RSI) drops below 20 on heavy volume and then tries to recover. Such an occurrence is marked on the chart.
This is the kind of setup that is needed on most hurricane-related stocks to trade on the long side. For trades from the short side, the setup is similar, but look for a reversal of RSI from about 80.
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