December 21, 2009
Popular Stock Trading Strategies
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There are two basic ways to trade the stock market – shooting in the barrel or using strategies to determine which stocks to buy, when to sell, and how to protect your investment dollars. Needless to say, strategies outperform barrel shooting by a large margin. There are, however, hundreds of trading strategies to choose from. Of all of these there are a couple of tried and trued methods that have worked well for investors over many years. The beginning investor is advised to investigate some of these basic strategies and see for himself how they perform. New strategies can be explored once the basic ones are well-understood.
Hedging
Hedging is a way of protecting an investment by reducing the risks involved in holding a particular stock. The risk that the price of the stock will drop can be offset by buying a put option that allows you to sell at the stock at a particular price within a certain time frame. If the price of the share falls, the value of the put option will increase.
Buying put options against individual stocks is the most expensive hedging strategy. If you have a broad portfolio a better option may be to buy a put option on the stock market itself. This protects you against general market declines. Another way to hedge against market declines is to sell financial futures like the S&P 500 futures.
Dogs of the Dow
This is a strategy that became popular during the 1990s. The idea is to buy the best-value shares in the Dow Industrial Average by choosing the 10 stocks that have the lowest P/E ratios and the highest dividend yields. The companies on the Dow Index are mature companies that offer reliable investment performance. The idea is that the lowest 10 on the Dow have the most potential for growth over the coming year. A new twist on the Dogs of the Dow is the Pigs of the Dow. This strategy selects the worst 5 Dow stocks by looking at the percentage of price decline in the previous year. As with the Dogs, the idea is that the Pigs stand to rebound more than the others.
Buying on Margin
Buying on margin means to buy shares with borrowed money – usually from your broker. Margin gives you more return than if you were to pay the full cost outright because you receive more share for a lower initial investment. Margin buying can also be risky because if the stock loses value your losses will be correspondingly greater. When buying on margin the investor should have stop-loss orders in place to limit losses in the case of market reversal. The amount of margin should be limited to about 10% of the value of your total account.
Dollar Cost and Value Averaging
Dollar cost averaging involves investing a fixed dollar amount on a regular basis. An example would be buying shares of a mutual fund on a monthly basis. If the fund drops in price the investor will receive more shares for his money. Conversely, when the price is higher, the fixed amount will buy fewer shares. An alternative to this is value averaging. The investor decides on a regular value he wishes to invest. For example, he may wish to invest $100 a month in a mutual fund. When the price of the fund is high he puts a higher dollar amount in the fund and when the price is low he spends less money. This averages out his investment to the original $100 per month. Value averaging almost always outperforms dollar cost averaging as a percentage return on the money invested. When used as part of a broader trading strategy it can help secure the growth of your investment fund.
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December 9, 2009
What Are Share Splits?
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One of the alluring myths that surrounds the share market is the prospect that a certain stock may split, giving share holders twice as many shares as before. What is poorly understood by the outsider, though, is that although the investor has more stock after a split, the value of each share is reduced. For example, if a corporation decides to split its stock 2-for-1, it issues one new share for each outstanding one. At the same time, the value of each share is cut in half. So the share holders now hold twice as many shares but the total value is the same as before the split. A stock split is like receiving 2 five-dollar bills for a single ten-dollar bill. Same value – twice as much paper.
Why would a company do this?
A lot of it has to do with investor psychology. The price-per-share of a stock may be so high that the average investor feels it is out of his reach. A share split reduces the price so that it may be more affordable to smaller investors. In reality, the small investor could have bought a smaller number of pre-split shares for the same price, but the appeal of buying a $20 stock as opposed to a $60 may be strong for some investors.
Stocks can be split by a number of ratios but the most common are 2-for-1, 3-for-2, and 3-for-1. shares can also be reverse-split – the company reduces the number of outstanding shares so that each share holder has fewer shares than before. Reverse share splits are less common, but can be used for several reasons: the price per share may be so low that it appears as a poor investment; the company may be attempting to stave off possible de-listment on the stock exchange; to push out minority shareholders; or as a way to go private.
Advantages
Lower prices per share can result in greater liquidity – stocks are easier to sell at lower prices and there is less of a bid/ask spread. This is especially true for shares that are priced in the hundreds of dollars – small investors view them as out of their budget and the high bid/ask spreads (the difference between buying and selling prices) can put off bigger investors.
Other advantages have to do with investor psychology. A split is usually seen as a bullish indicator – stock prices are increasing and the company is doing well financially. There is usually a short-term rally around a share which splits, but the market tends to normalize after a short period.
On the downside, a split may cause investors to expect more about how the company performs. If these expectations are not met investor confidence may be shaken and the result could be a drop in share prices.
The bottom line is a stock split does nothing to affect the worth or performance of a company. It may be nice to own more shares, but in the end your 2 five-dollar bills are still worth the same as your ten-dollar bill.
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November 30, 2009
Up Markets And Down Markets
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The stock market moves up and down every day, but when movements continue downwards for a period of time the market is referred to as a ‘bear market’. Upward moving markets are ‘bull markets’. If a particular stock is doing well, it is said to be bullish. If it is losing value it is bearish.
Bull and Bear are the terms to describe the general conditions of the stock market. These do not refer to short term fluctuations – a bear market is commonly understood as one where prices of key stocks have fallen in price by 20% or more over a period of at least 2 months. Even during a bear market, however, prices may increase temporarily. Bull markets are the opposite of bear markets – they are indicated by a rise in prices of key stocks over a certain period of time.
Usually stock market conditions reflect the state of the economy. During bull markets the economy is doing well, unemployment is low and interest rates are reasonable. Bear markets usually occur during times of economic slowdown. Investors lose confidence and companies may begin laying off workers. At the extremes, an exaggerated bear market can lead to a crash brought on by panic selling. An exaggerated bull market can be caused by over-enthusiasm of investors. It leads to a market ‘bubble’ that will eventually burst.
Although most money can be made during bull markets, there are also opportunities during bear markets. Knowing the characteristics of each type of market allows investors to profit from them. As would be expected, when the market is bullish investors wish to buy up stock. The economy is doing well and people have extra money which they wish to invest in stocks. This creates a situation of short supply which drives up prices even higher. During bear markets, on the other hand, prices are falling so investors wish to unload their stocks and put their money in fixed-return instruments such as bonds. As money is withdrawn from the stock market, supply exceeds demand which drives prices down even further.
It is easiest to make money during a bull market. Getting in right at the beginning will allow you to make the most profits. During a bull market any dips in the market are temporary and should soon be corrected. The upward rising prices can’t go on forever, though, so the investor needs to be able to gauge when the market reaches its peak and sell at that time.
Bear markets represent opportunities to pick up stocks at bargain prices. Getting in near the end of a bear market offers the greatest chance for profit. The prices will most likely fall before they recover, so the investor should be prepared for some short term loss. Short-selling is also an investment strategy during bear markets. Short selling involves selling stock that you do not own in the anticipation of further price drops, so that when it comes time to deliver you can buy the stock for less than you sold it.
Fixed return investments such as CAs and bonds can be used to generate income during a bear market. So called ‘defensive stocks’ are also safe to buy at any time. These include government owned utilities that provide necessities no matter what state the economy is in.
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Brought to you by Why ETF Trend Trading Is Better Than Trading Stocks Or The Forex.
Penny shares are low-priced stocks – usually with a value of less than $5 – of small companies. These shares are traded on the Over-The-Counter-Bulletin-Board (OTCBB) and the Pink Sheets. Both these trading venues do not have the same kind of minimum requirements of exchanges such as Nasdaq or the NYSE set by the Securities and Exchange Commission. Companies which issue penny stocks may be new businesses or close to bankruptcy. A new issue of shares could be a way to inject quick capital to try to save the business.
All of these factors – low price, lack of standards, and lack of stability – make penny stocks one of the riskiest investments around. It is true that if a company succeeds the payoff will be great, but the vast majority of penny stocks end in bankruptcy. Other reasons why penny stocks are risky include…
– Lack of information about the company. Companies listed in the Pink Sheets or the OTCBB do not have to issue financial statements. Most companies also have little reportable history.
– Low liquidity. Penny stocks are infrequently traded, so finding a buyer may be difficult. The price may have to lowered substantially to interest someone in buying the stock.
– Potential fraud. Due to their unregulated nature, penny stocks are often used by con artists who sell them through spam email or off-shore brokers.
So penny stocks are risky but are there any benefits to them?
Not all penny shares are frauds or companies facing bankruptcy. Some represent hard-working businesses that are struggling to meet the requirements to get listed on Nasdaq or the NYSE. Investing in these companies offers real growth potential – you have the opportunity to get in at the ground floor and ride all the way to the top.
The difficulty is finding which companies have this growth potential. Getting this information requires a lot of research and unless you are willing to take the time to personally investigate a company, you may again be the victim of fraud. Some companies specialize in offering ‘inside information’ about companies selling penny stock, but they may simply be fronts for pushing a particular stock on unsuspecting investors.
There are two ways to play the penny stocks – do research or play craps. The low cost of these stocks means that you will not lose a lot money if the company goes under, and as long as you are prepared to lose this money penny stocks can be an interesting and fun addition to any portfolio. It must be stressed, however, that penny stocks should only make up a small portion of any portfolio. The odds are that most penny stocks will end up in a total loss.
If you would like to buy penny stocks you need to find a broker that will place an order for you. Many brokers will not cover them because of the difficulties in tracking them, but some online brokers specialize in penny shares. Regulations require brokers to receive written confirmation from the client concerning the transaction. The broker is also required to give the client a document outlining the risks of speculating with penny shares.
Finally, the broker must disclose the current market price of the stock and the amount of compensation the firm receives for the trade. Monthly statements must be sent to the client detailing market value of each penny stock in the account.
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November 19, 2009
Why not learn about day trading
Every informed investor is looking for that next get rich quick scheme. It is practically an American institution. But there’s a basis why they dub it a plot, which characteristically means a deceitful or covert arrangement of action. The simple fact is that most schemes that promise to make you millions with day trading, most likely have about as much success as spinning roulette wheel. Ya, it is correct that many day trading systems are few more that informed gambling, but they are gambling all the same. Day trading itself is a form of gambling, as you are betting you can time the stock to enter and exit in a few minutes or seconds with a profit.
What will it take to make a good day trade? To begin with, you need to understand that there is no such thing as easy money. You should not approach day trading with the expectation you will make millions. Day trading is all about making small profits several times a day which eventually add up. A day trader that know what their doing will proceed quite cautiously on any particular day trade. Instead, they buy small numbers of shares of companies that they’re familiar with.
How can you figure out which stocks you should trade? Most commonly, traders will choose stocks that they are familiar with. Having analyzed and monitored the numbers over a few a weeks a trader gets convinced to trade a stock.
Though there are a number of different strategies that day traders employ, most day trading strategies rely heavily on technical analysis. Technical stock analysis means that traders believe that he can detect patterns in the way a stock trades by looking at charts. For example, a trader may discover that a certain stock tends to move in a tight trading range most days. This might mean that a stock only moves a few points a day. For example, one day it can open at 33, move to 36, then fall to 34. A day trader closely watches these types of trades and looks for any day to day patterns in their activity.Watching the patterns of how stocks trade day in and day out will really pay off for anyone looking to get into day trading.The real key is to try to concentrate on just a few select stocks in the beginning so that you do not go down the path of information overload.
This strategy may seem a bit simplistic, but it is a proven winner. All a trader has to do is to concentrate on one particular stock and watch its movements each and every day. After a little while, the trader will have the confidence to make a day trade. While this approach probably will not help you to become rich overnight, you should be able to earn some profit numerous times throughout each day, which can add up to a significant income over time. In fact, some day traders trade the very same stock hundreds of times a day. This is because they believe they have discovered the secret to the successful day trade and that the more they trade the more they will make.
November 18, 2009
Swing Trading Without Stops Is Suicide
Trying to figure out the best stop loss when day trading is always a hard thing, even for more experienced traders. One thing is most certain, those traders that consistently do not use stop loss orders face almost a 100% chance of losing a significant amount of money, if not all of it. Even the prudent use of stops, if they are placed in the wrong area, will result in consistent losses no matter how good the stock idea is. In addition, adding positions before market moving news events occurs can assure increased volatility and increased odds of stopping out.
The major thing to concentrate on is the current market conditions - this is very important. Not what the Dow Jones Average is doing, it is what many stocks are doing overall and how they are trading. What is the general volatility level for the day, is stuff trading slow and steady or are they whipping up and down quickly on a slight move in the futures market? This makes a huge difference is not only your stop, but the risk level involved. Most people assess risk by the amount one can lose when day trading or swing trading. What most people fail to think about is the actual odds of that loss happening.
While there is no easy formula to figure out the odds, if you watch the pattern of behavior of how similar stocks are trading, you can get a pretty good idea. If current conditions are calm, you can usually use a smaller stop amount and still have decent oddsit will not get hit. When conditions are frantic, a smaller stop is almost assured to get hit - meaning the 30c stop has a 98% chance of getting hit even on the exact same name.
The way you figure the odds in a stop happening when day trading is somewhat straightforward. Look at the average range over the last 20 minutes or so, the high to the low area of the bars. Do not pick a very calm period of time, as this calmness tends to lead to increased and unpredictable volatility. If the price action currently is very flat and calm, go back on the chart to a more volatile time of the day or prior day and then figure out the range. It does not have to be exact, an approximation is fine. Once you have this range, that is your maximum risk.
What we want to do is to lower this max amount to a lesser level. This can be done 2 ways. The first way is to study the pattern of trading behavior for that stock locallly when it reaches a prior high level - does it normally fade back or does it have momentum and push through? If it tends to push (last few times it reached a high turn point), then its ok to buy the stock on strength. If it tends to fade or try to sell, better off to see it push, then put your order 1/4 of the range you computed earlier, lower than the high its at now. So if the range was 1.00, and the stock was at 40 now, you would put your order at 39.75 to go long. You will miss some names like this, but resist the urge to chase. If a similar pattern is occurring on a lot of other stocks (in general) you have to be extra careful.
A second way to remove some of the risk is to split your entry order into 2 different parts. So if your trade size you want is 500 shares, just buy 200 shares now. Wait until it pushes a decent amount up (meaning it has pushed enought that it has moved past the fade the breakout move area), then look to add the other 300 on a 5 or 10c dip. Move your stop up .45 now (figuring you have a 1.00 stop to start) on the whole thing. The other choice if the price tends to fade after pushing higher is to buy 200 shares now and then place the balance of your order .25 above your stop (assuming it is 1.00). The maximum stop loss level should remain the same on all the accumulated shares. The difference here is if market conditions get poor for going long when day trading for a period of time, you are going to lose a lot more averaging when its selling because you will get filled on the add, then stopout 2 minutes later on all of it.
The way around this is to simply cut back size - when the market gets unpredictable, play ONLY 1/2 normal size or less until it starts to act more predictably. The name of the game to being more profitable is to preserve capital with stops, and secondly to place the stops in the right way to avoid making a loss too easy for the market to hit. While its impossible to tell when conditions improve unless you are actually trading, there is nothing wrong with playing less shares until you see it look better over time.
August 9, 2009
Theories On The Market
An interesting thing has happened in the last 6-8 weeks.There appears to be very little sellers present. Literally.The market has made a massive directional push up and really just holds up and does not correct now.It seems almost funny now how difficult it is to short anything for more than maybe 20 minutes or more. Obviously you cannot fight the market - its doing what it wants how it wants.This action sure makes trading hard, the guys that are really getting the most out of it are the buy and hold.
One thing I know is that no matter what these guys do that are chasing and then bidding the market so it does not sell - it will sell eventually. The only way you actualy make money, whether day trading or longer term investing, is to lock in profits. Until then its just a fantasy. At some point they will tip the tide to the point where a majority are actually fearful of losing gains and then the selling is real.
A key pattern lately has been to break below support and then out of nowhere a massive burst of buying jams the market back to the highs.This sort of thing happens so often now, its completely expected. Often this can result in a new daily low (the break) , only to see a new daily high 30 minutes later as the buyers relentlessly chase the market (im sure shorts are in there too, trapped like dogs).
Even when the economy was plowing along at full steam, we would have 10-15% corrections all the time. And this was when everything was just perfect (or everyone thought so). So I am not sure what is going on now. Several theories are in play that I think about:
- Shorts are completely or mostly out of the market. The SEC messing with the short rules before caused a panic, and now there are many proposals again in regard to uptick rule and shorting. Rather than get caught, they are staying away from day trading and longer term positioning.
- Manipulation factor on high. There is a group of large banks or funds that are pushing the market higher at the Fed's and Treasuries request to try to turn the economy out of the recession by making it appear as if the stock market has it figured out. The way the rescues happen like clockwork, the ramps into the close every friday, and other very odd trading behavior gives this some credence imo. Would be easy for the government to just give these guys money to push the market up.
- Traders all gone, algo's take over. This one can happen as well - computers have taken over more of the futures trading which drives the market.Since no one tries to fight this trend, with all of them doing the same thing it just feeds on itself. This one I like too because the actual variance of price during the rally pushes is actually uncharacteristically low most of the time. I have seen the dow futures push up 100 pts in 20 minutes with maybe an 8-9 point max retrace the whole time. Sure this happens - but not this often as it does now.
Whether any of these theories are true or not, I have no idea and may never find out. All I know is the trading action is very odd and I expect at least half if not more of this gain to be gone when this is done. Note - I am not predicting a top, I am saying that when this is done, these idiots will undo this much faster than it actually ran up as everyone heads for the exits. We could hit 9k, 10k etc. I really dont think 10k is possible, with GM dust, C is dust and a few others they just dont have the fuel for the DJIA to actually push up that high in the short term.
Maybe everyone just needs to learn to trade again – this is the new market to stay!
June 6, 2009
Find Better Trading Ideas With A Day Trading Robot
Once you have learned the basics of trading, it comes down to how many quality ideas you can find during a trading day. Some people subscribe to chat rooms with other traders, some people like to watch real time news, and others like to program computers to scan the market or use a day trading robot to help them find ideas in real time to make money.
One of the advantages of using a day trading robot is that it is completely unbiased in its ability to find the same patterns over and over. The real key is finding a day trading robot that is reliable in its stock picks and is easy to use.This is of course no easy feat, because there are a ton of impostors and stuff that used to work but now is of little use because the market changed but the robot was not able to adapt.
One key component of any day trading robot that should be essential is the ability to find stuff in real time, but give you enough time to actually act on the information it provides. It does no good to use a day trading robot that scalps something so fast that you cannot even get an order in should you choose to follow what it is doing.You can always choose to let a day trading robot have control of your account, but a lot of traders are uncomfortable with this type of situation and like to keep control. In addition, there are always nuances that occur each trading day that a computer program cannot take into account but a human trader can.
Overall, anyone looking to use a day trading robot to help find ideas should realize the limitations and the fact that it should only be used as a tool to enhance a traders own judgement and trading prowess.It is fantasy land to expect a trading robot to be right 90-95% of the time, or for it to make 40% every month in your account. I can tell you 100% anyone who has such a tool would never sell it or lease it out - they would be living on a private island off the wealth it creates daily. This does not mean day trading robots are not useful, you just need to have realistic expectations to get the maximum usefullness out of them.
