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Stocks

Equity Markets – A Technical Video Analysis

by Adam Hewison

To many technicians, it is very clear where the equity markets will reverse, and for those folks who don’t follow the technicals, this is a key reversal area in the S&P 500, the NASDAQ, and the Dow.

In my new short video I show you the exact levels that I think will reverse this market, if in fact it’s ever going to reverse to the downside.

Currently the major trend remains positive for all the indices and we would only become negative on the these markets should the key levels I show you  today, are broken.

Watch the free video here: Equity Markets – A Technical Video Analysis (3:41)

As always our videos are free to watch and there are no registration requirements.

Techniques and Strategies in Options Trading

Prior to an investor diving into the options trading market there are some concepts and strategies that must be understood. Some of these include, credit spreads, derivatives, stock options, debit spreads, vertical spreads, options strategies, iron condor, butterfly spread. Lets take a quick look at each of these.

• Credit Spreads are when a high return option is sold and a low return option is purchased. In this case the investor winds up with a credit to your account. In general terms, many online brokers require a minimum of $100,000 in their account prior to the investor being allowed to do a number of credit spreads.

• Derivatives are considered to be a security whose price is dependent on one or more underlying assets of the security. The value of the security is dependent upon the variables of the underlying assets.

• Stock Options are contracts for the holder to buy or sell predetermined stocks at a predetermined price prior to the expiration of a contract.

• Debit Spreads are the opposite of Debit spreads. The investor must put money up to execute the transaction. The investor must put up the funds to cover the anticipated debit. There are no margin requirements in a debit spread and consequently are quite popular with investors.

• Vertical Spreads are a trading strategy in which an investor purchases and sells two similar options with the same expiration dates but at different prices.

• Options Strategies are the group of techniques utilized by the investor to increase his capital.

• Iron Condor Spread is a highly complex trading option. This option is a credit option (see above) and offers the opportunities of both high risk and consequently loss. Again, most brokers will require the investor to maintain a substantial amount of money in their account prior to this option being exercised.

• Butterfly Spread is a trading strategy that benefits from a stock that is either trading in a very narrow range or is stagnant. When an option of this type is utilized three trade options are created at the same time. This option benefits from the fact that one of the options is a credit spread, which allows a lesser price to enable the option. Most brokers will only allow traders with high trading levels to execute butterfly spreads.

As with any other field, the investment field has its own vocabulary and jargon. Careful attention must be paid by the novice investor to fully understand exactly what each term means and its effect on his investments.

Learn a ton more about options trading and great tips at: Options Income Generator.

A Brief Outline of the Uses of Options and How They Work

Outline of the uses of options

Before we get into any fancy trading terms and strategies of options like bull spreads, ration back spreads, butterflies and condors, which just baffle the novice and are more often only traded in books, let’s look at a few more practical uses of options.

Here I think you might want to check out my credentials at the end of this article. – OK hopefully you’re back now. Well what can a normal stock trader or investor use options for?

Well exactly what they are named as “options”. I see three main uses that they are broken into.

1. Hedging = this was the original use of options and is an area much misunderstood by traders, investors and advisors.

2. Increasing yield on an owned stock/share. It is possible to increase your yield on a stock you already own by between 1-4% per month.

3. Trading. This is where instead of using stocks, indexes or futures you use their options. Here options can leverage your gains and limit your risks. It seems, however that a lot of people unhappy on the return stocks give them, generally because they do not have a good system, try options and for the same reason they did not make money on shares loss more money on options, but faster.

Using Options to Hedge

Simply put hedging allows the share trader or investor to put in place and insurance. Just as everybody should have insurance on their life, house and car you should have insurance on you share portfolio.

Just like any insurance it is there to cover you in a worst-case scenario. It has all the same features, price of risk, price of time, and trade in value and guaranteed payment on write off as normal insurance. Although you will get the money quick and no loose adjuster will call!

Lets look at an example (the figures are close enough)

Recently one of my friends who I have been helping with his wealth creation took my advice and bought insurance on all his shares, including AMP. At that time AMP were around $7.80, he had bought them around $7.45. He insured them for $7.50 at a cost of around $0.35 for about 5 months.

Now when the dive on AMP to $5.00 happened he had an insurance policy, that is he had the right to sell AMP at $7.50 to somebody – he did not know who and it does not matter.

Now in that case the $0.35 insurance was worth every penny. But what would have happened to the insurance if they had gone to $9.00? Simply he would have been happy with the $1.55 increase and taken the $0.35 insurance cost as that a cost. Or as I like to call it the cost of SANF, Sleep at Night Factor.

There are also ways to get other people to pay for this insurance but that will have to be covered in another article.

Increasing yield on owned stocks

*This is a great strategy for DIY retirement funds when used conservatively (Always check with you advisors – if they do not know what you’re talking about dump them)

You may have already heard of this strategy, but if you do not I guarantee you know how if works, its just that nobody has told you its name yet.

Covered call work in this way. You own a stock, just like owning a property you can rent out that stock, with the right to buy at a certain price to somebody else.

Lets look at an example

I bought NAB last year at around $31.20. For a number of months I sold call options on it for about $0.50 in rent at a strike price, the price somebody could buy it from me, of $32.50. As the share did go to about $33 I did have to sell it. I made a rental of about $1.50, took the Dividend in Nov and sold the stock for a profit of $1.30.

All in all a monthly yield of 1.6% per month (19% per year) as opposed to the Dividend of about 5%. The $32.50 strike also acted as a profit stop, which meant I took profit when they were there.

In other examples I have make 7% per month on renting shares. But remember some of this should be set against insurance. Are you starting to see a bigger picture here? OK

Options Trading

Trading in options can be an excellent way to make money and manage risk if taken on correctly. I am not, however, going into options strategy but look at what outcomes you want. This is the start of options trading.

OUTCOME: Find the outcome you want, for example high compound growth of retirement funds, replacement of salary etc…

STRATEGY: Which options strategy should I follow. Long big wins and large margin requirement, shorter periods, small gains low risk and lots of trades…

PLAN: Then you then need to build your trading plan.

RULES: When you build your plan it should just be an extension of your existing trading plan. Plan your exit, plan your risk and plan your entry, in that order. This will be on top of all your entry signals, gates, filters etc.

Ok, now once you have all of that in place then you can start to trade options. But wait this is where the fun starts and this is the reason that I put the outcomes first.

With Options there are at least 28 trades you can do, if not more. However, you only need to know the ones that fit your criteria. Let’s say that you are happy to just do long term stuff in the up direction in your retirement fund. Therefore you only need to know about 4 strategies. Therefore you can miss out the other 24 and that makes it a lot easier to become good at it and make money.

Note of using options to go short

One of the biggest issues I see when I talk to people about trading is that 90% of them never trade the short side of the market, that is make money when the market is gong down. I think some of this is due to the issues of using shorts on stocks with margin, limited short stocks and the risk is limitless.

However if you only use options to do one thing let it be gong short. You can buy Put options on a share you think is going to plummet. Buy one with about 3 months of time and in the money, that means just above the share price. And enjoy the concept of making money when 90% of people are losing theirs. Remember markets go sideways and down more than they go up. And they go down very quick.

Good Luck and let your newsletter provider know if you want to have me write more about any of these subjects. Always remain hedged because you can always be wrong.


About the author:

George Slater
www.the-web-master.com
www.1st-retirement.com

George Slater is an Options Trader and author of “Retire Rich using DIY Retirement Funds”. George lives in Perth, Western Australia with his family and trades the US and Australian Options Markets from home. George has experienced trading with Shares, CFDs, Warrants and Options. He trades both personally and within his DIY Retirement Fund. He follows the works of Gann and Elliot and is a member of two trading education groups.

George has appeared on several radio programs and writes a regular newsletter, Superwatch, about DIY Retirement Funds.

Tel +61 8 9291 7343
©George Slater

Research

Overview

These research sites will help you to find general information about a variety of different trading and investment vehicles.

Research: Resources

Hoovers: Comprehensive insight and analysis about the companies, industries, and people that drive the economy, along with the powerful tools to find and connect to the right people to get business done.

Yahoo! Finance: Free stock quotes, up to date news, portfolio management resources, international market data, message boards, and mortgage rates that help you manage your financial life.

Google Finance: Google Finance offers a broad range of information about stocks, mutual funds, public and private companies. In addition, Google Finance offers interactive charts, news and fundamental data.

Stop Loss

This is the point where you admit you were wrong. No one can pick winning stocks 100% of the time. Accept this fact. You can only play the odds.

Let’s say we buy a stock at $20 with the plan that it will go up to $24. Now we have to decide what to do if the stock does not go up, but suddenly starts to fall. Let’s decide that if the stock moves below $19, we will accept that we were wrong about the direction of the stock, sell the position immediately, and take a small loss. By taking small losses, we preserve our trading capital, which allows us to trade again tomorrow.

Before we even get into a position, we have to measure our risk-reward ratio. In the above example, if we were correct about our stock pick, we would have made 4 points. If we were wrong in our stock pick, we would take a loss of 1 point. That is a risk-reward of 4:1. Let’s say we were only correct about our stock picks 50% of the time and we make four trades. Two were winners (2 x 4 points) equaling 8 points. Two trades were losers (2 x 1) totaling 2 points. We now have a gain of 6 points by only selecting winning stocks 50% of the time. Assuming we were the worst stock pickers in the world and were only correct 25% of the time, we would still have a gain of 1 point.

It is important to keep your risk-reward ratio 4:1. If you can only find a risk-reward ratio of 2:1, leave it alone, sit on your hands, and do nothing. If the market is behaving in a way that you can only find risk-reward ratios of 2:1, you probably have no idea as to which way the market is going to move. The market spends most of its time moving sideways. I have seen many traders lose most of their capital by making themselves trade when they should have stayed on the sidelines.

I still remember the first time I stared at the screen the entire trading day from 9:30 a.m. until 4:00 p.m. without making a single trade. I was thinking to myself, “I know the market is normally irrational, but today I have absolutely no idea what is going on.” I made some paper trades in my head, and I was glad I had left it that. All the trades I made in my head were losers. Even though I did not make any trades that day, I felt like a winner. It was a great feeling to know when to sit it out. I was right to stay on the sidelines. You have to have the discipline to stay on the sidelines when you do not feel comfortable. Getting into low risk-reward positions because you want to be in the game is wrong. It shows a lack of discipline and the punishment is losing capital.

About the Author:

Ryan Cooper
www.stockteacher.com

Creating Your Watch List (Universe of stocks)

Some people like to trade the same stock over and over throughout the trading day. Traders tend to get a good feel for how one particular stock moves. A trader becomes familiar with its reoccurring support and resistance areas from trading the same stock repeatedly for a week, month, or even year. The trader knows from previous experience which market makers are the real buyers or sellers, and they know when the market maker has finished filling a big order. Becoming familiar with only one stock gives the trader an advantage over people trading more than 30 different stocks, chasing ticker symbols of companies they have never even heard of before.

It is a good idea for a rookie trader to master trading one single stock before creating a large watch list and following stocks with which he is unfamiliar. New traders need all the advantages they can get. I recommend trading a stock that mimics the futures, whether it is the S&P or Nasdaq Emini. As of this writing, Sun Microsystems (ticker symbol SUNW) is a stock that mimics the S&P E-Mini futures almost exactly tick by tick.

Once the trader masters trading one stock, it is time to move on to the next level: creating a watch list of approximately 30 stocks. You can also create a smaller list of say five stocks; then add five more stocks every month until you are comfortable with a list of approximately thirty. If adding five stocks a month is too many new symbols for you to become familiar with, add only as many to your list as you feel comfortable following.

Assuming we now have a list of 30 stocks, sort them with the trading software to place the strongest stocks at the top of the list with the weakest stocks at the bottom. The watch list should have a diversity of stocks from at least three different sectors. The great thing about sorting stocks from the strongest to weakest is that you can immediately look at your watch list and see which sectors are the strongest and which stocks in that sector have relative strength. You can also do the same for the weakest group, finding which stock in the weakest sector has relative weakness.

Say we have five semiconductor stocks at the top of our watch list and the bottom four stocks on the list are from the software sector. If the market suddenly starts to rally, we now know that buying stocks in the software sector is not a good idea because they are showing relative weakness. We know that the semiconductors on our watch list are showing relative strength, so we look to go long the strongest stock on our list. If the stock on the very top of the list had a very large gap at the open, you would consider going long the second or third stock from the top of the list in the same sector, because extremely large gaps add risk. You can also scan the charts of stocks from this sector that appear somewhere in the middle of the list, looking for familiar chart patterns you are comfortable trading. The opposite is true if the market is selling off.

There is a sector of stocks that each trader feels most comfortable trading; for me it is the software sector. To identify which sector is best for you, review all the trades you made in the last two months and note the sector that had the greatest number of winning trades. Then identify which single stock in this sector made you the most profits. Analyze your best winning stock to see what average price and volume it traded during the past two months. Now you know which sector you are more likely to make the most money in, the stock price at which you have the best odds trading, and the average volume of a stock you feel the most confident trading. You know what you need to continue doing right.

The next step is to identify what you are doing wrong and to correct it immediately. Look at your past two months of trading history and pinpoint your biggest losing sector. Delve deeper and select the stock from this sector that caused you the most pain (financial loss). If in the future you find yourself about to get into a position in this particular stock, say to yourself, “I do not understand the movements of this stock, I do not wish to lose money, and I will not get into this position.” Understand that history repeats itself and you should try not to repeat painful mistakes. You should not trade the stock that causes the greatest pain because of your emotions; you will want revenge. I am not saying you should never trade this stock again. I just want you to realize where you are loosing most of your capital.

There has to be a reason why you consistently lose trading a certain stock. Until you know the reason, stay away. The best market makers usually control our demon stocks. They have thick wallets and can randomly manipulate the stock’s price compared to the futures for no reason whatsoever. How can you make profits from a stock that does not follow chart pattern setups?

The “M” in CANSLIM

What does the “M” in CANSLIM stand for?

According to William O’Neil, it represents the market and direction it is heading in. Over the past several months, you have listened to me write about the “M” in CANSLIM almost every single week. Some of you have wondered why I put so much emphasis on this one letter in the CANSLIM acronym. It is very important to understand and recognize what type of market you are in before you ever make a stock purchase or place a large position. If you don’t know if the current market is a bear, a bull or if it is trading sideways, how can you realistically make money and set goals based on a blind strategy?

Markets trade in trends and 75% of all listed stocks will follow the general direction of the major indices which include the NASDAQ, the DOW and the S&P 500. If the market health is poor and a bear market has developed but you don’t know about it because you haven’t assessed the health of the “M”, you may lose money by placing a long position in a stock. The stock you buy may have a nice chart pattern and excellent fundamentals but it may come under pressure due to the general market weakness and sector weakness. The same can be said in a bull market: a stock that is sub-par may perform strongly and give the investor solid gains due to sector strength and overall market strength.

Study the market and you will see that stocks move in groups and most of the stocks in a strong industry will move in tandem (up). The same holds true for weak markets; if you own a stock in an industry that is starting to churn or breakdown, it may be wise to pull in a potion of you position to lock in gains. More times than not, the strongest stock in an industry group must conform and move in the direction of the others. A perfect example can be the home builders, they have moved in tandem for the past five years. If you look at their weekly charts for the past several years, you will see that they all have the same patterns but with different numbers.

I trade based on two major criteria: a strong up-trending market (a bull market) or a market that has reversed to breakout and follow-through telling us that the “M” in CANSLIM is gaining strength.

Second, I use the daily new high and new low ratio (NH-NL) to compliment the overall strength that the market is presenting. The price and volume alone can fake out many investors and lead them down the path of faulty investing. In order for the market to be strong, the NH-NL ratio must compliment the general outlook and present us with at least 500 new highs per day on a consistent basis. When both the NH-NL ratio and the “M” in CANSLIM are strong, we can justify placing larger positions and labeling the market as healthy. William O’Neil, the founder of Investor’s Business Daily, states that many of the best stocks over the past 50 years have made their advances when the overall market was strong, not weak. The NH-NL ratio is always comprised of the strongest stocks in the current market and we know that these individual leaders are responsible for the bulls and the bears.

How can an investor monitor the market action to tell if it is weak or strong?

As mentioned above, the first thing to look for is a breakout of one or more of the major indices with volume greater than average. Next, I look for the daily new high/new low ratio (NH-NL) to be entering new high territory and reaching new highs of 500-1,000+ stocks per day. In 2005, we have not had one day exceed 1,000 new highs to date (October 22, 2005 – almost 10 complete months of trading). In 2003, we had several instances when this number was reached multiple times in one single week. In 2003 we were in an obvious bull market and in 2005 we are in an obvious sideways market. On a side note: Sideways markets are typically tougher to trade than a market that is trending in one direction, whether it is up or down. Sideways markets whipsaw investors up and down and typically cause frustration that leads them to make poor decisions. It may be wiser to sit in cash during an extended sideways market because you will never know if the market will be up or down the next day. In bull markets, stocks move higher and in bear markets they move lower and a trend can be targeted but sideways markets provide us with many head fakes!

During bear markets, the strongest stocks that propel the market back to the bull side will typical have the strongest relative strength ratings when everything is weak and investor confidence is low. These stocks will become the new leaders and will typically emerge from a few specific industry groups that are gaining strength. When the market reversal happens, the first 10-15 weeks will be crucial as the biggest winners will breakout during this time. It is not to say that additional winners can’t breakout after the first 15 weeks of a new up-trend but the odds decrease and your risk rises. When the follow-through occurs in the market, you must see an increase in market volume from the previous day and substantial price advances that equal or exceed 1%-2% for the NASDAQ, DOW or S&P 500. When we see two or more of the indices follow-through on the same day, it increases the validity of the new up-trend.

Markets typically top after a prolonged period of higher highs and the first sign of a possible climax run or topping of the NH-NL ratio. If the market starts to make new highs on large volume but it is not moving as high as it was during the entire length of the up-trend, it may be topping. If price progress is poor and the volume continues to increase, the market may be churning or topping. I will immediately turn to the NH-NL ratio to gage the strength of the individual leaders to give me a glace at the broad market strength. One of the biggest black eyes that an investor can receive is during the topping of a long bull market where they made extensive gains and have emotions that are telling them they are genius. If an investor ignores the “M” in CANSLIM and holds their winners while the market tops and then starts to decline, their gains will be erased quicker than they were accumulated and their egos will be shot. When red flags appear, such as moving average violations, support levels sliced and the decline of the NH-NL ratio, it is time to lock in profits and move to cash until things settle and you can figure out what is happening.

Never listen to personal opinions on the market offered by talking heads because they are usually wrong or don’t understand the key factors that decide if the market is going up or down. It is most important to understand the exact condition and health of the market today rather than trying to predict where it will be in 6-12 months. Is it currently up-trending, moving sideways or down-trending? When you understand this last question, your trading results will improve dramatically. You could be the best stock selector in the world but that doesn’t mean anything if you buy and sell during the wrong time because you don’t study or understand the “M” in CANSLIM. Always know the exact direction, health and conditions of the “M” in CANSLIM before you ever put on a trade.

Remember, you could be right in every aspect of your stock analysis but if you are wrong about the direction of the market, you will most likely lose money.

Chris Perruna – http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We offer an extended no obligation monthly trial period starting immediately with two free weeks. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Cycles Glossary

Calendar effect:  The tendency of stocks to perform differently at different times, including such anomalies as the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect. [mprofile.com]

Double Witching: Fancy Way to Say: Normal Options Expiration. If the third Friday of the month isn’t a triple witch then it’s a double witch. Since there are four triple witchings a year it leaves the other eight as double witchings. That just means it’s a normal options expiration where the following expire:

  • stock options
  • options on stock index futures

double witching hour: The final hour of the stock market trading session on the third Friday of all months other than March, June, September, and December, when stock option and index option contracts expire. See also triple witching hour.

January Barometer:  Market forecasting tool whose statistics show that the market rises in years when the Standard & Poor’s 500 Index is up in January and will drop when the index is down for that month.

January Effect:  The tendency for securities prices to recover in January after tax-related selling is completed before the year-end. The January Effect is caused by year end selling for tax losses, recognizing capital gains, or effecting portfolio window dressing. Even though the sell off depresses the stocks, it has nothing to do with their basic worth. Bargain hunters may quickly buy in and thus, cause the January rally.

October Effect: The perception that the stock market tends to do poorly in October.  Although historically there has been a slight underperformance in October which most observers attribute to chance, the psychological effects of a few serious market crashes in October have kept the perception alive.

Santa Claus Rally:

Triple Witching: Fancy Way to Say: Mass Derivative (i.e. options, futures) Expiration. Four times a year, on the third Friday of the quarter ending month (March, June, September, December) three different types of derivatives related to stocks expire:

  • Options on Individual Stocks
  • Options on Stock Index Futures
  • Stock Index Futures

The ‘mass’ expiration can cause wild gyrations and false moves in prices as contracts are covered, rolled over, etc.

triple witching hour: The final hour of the stock market trading session on the third Friday of March, June, September, and December, when option contracts and futures contracts expire on market indexes used by program traders. The simultaneous expirations often set off heavy trading of options, futures and the underlying stocks. See also double witching hour.

Stock Trading

Stock Trading: Overview

Most stock trading these days is done over the internet through the website of brokers like TD Ameritrade, ScotTrade, E-Trade, and Charles Schwab.

Stocks: Terms to Know

  • share
  • dividends
  • outstanding shares
  • float
  • certificate
  • exchange
  • broker
  • portfolio
  • capitalization
  • market order
  • limit order

Stock Resources

CANSLIM: Stock screening strategy developed by William O’Neil.

Stock Assault 2.0: 100% Automated Artificial Intelligence Stock Picking Software

Penny Stock Prophet: New math formula developed at MIT accurately identifies and predicts profitable stocks.

Yahoo Finance:

Articles: Stock trading

Creating Your Watch List (Universe of stocks): Once the trader masters trading one stock, it is time to move on to the next level: creating a watch list of approximately 30 stocks. You can also create a smaller list of say five stocks; then add five more stocks every month until you are comfortable with a list of approximately thirty.

Why Paper Trading Is Counter Productive: Paper trading is the biggest mistake that new traders can make. This is the most counterproductive way to learn how to trade properly. When paper trading, every single trading decision is based on zero emotions.

Trading High Priced Stocks: Many people have a hard time sticking to their stop-loss on stocks priced above the $60 to $70 range. These stocks can suddenly move 25 cents or more in a few seconds, triggering and speeding beyond the stop-loss. Because the stock’s price can jump so quickly, the trader thinks that he will take his stop-loss when the price moves back a bit, which never happens.

Stop Loss: This is the point where you admit you were wrong. No one can pick winning stocks 100% of the time. Accept this fact. You can only play the odds.

Channeling Stocks – A Simple, Effective Strategy: Channeling Stocks (or Rolling Stocks) can be a very accurate and reliable trading strategy that will provide the trader with exact entry and exit points.

Where can I find ETF Portfolio Composition Files?

While some ETF marketers distribute stale lists of the stocks that compose a particular ETF, I would like to find a source of machine-readable, up-to-date PCFs. Can anyone point me to a location where they can be found or a service that sells access to them?