Internet Stock Trading for Beginners

Elder Force Index (EFI) Explained

2012-01-07T19:28:00.000-08:00

“You can befree. You can live and work anywhere in the world. You can be independent fromroutine and not answer to anybody” - Dr. Alexander Elder, Trading for aLiving

Introduction

The Force Index is an indicator that uses price and volume to assessthe power behind a move or identify possible turning points. Developed byAlexander Elder, the Force Index was introduced in his classic book, Tradingfor a Living. According to Elder, there are three essential elements to astock's price movement: direction, extent and volume. The Force Index combinesall three as an oscillator that fluctuates in positive and negative territoryas the balance of power shifts. The Force Index can be used to reinforce theoverall trend, identify playable corrections or foreshadow reversals withdivergences.

Calculation

The force index is calculated by subtracting yesterday's close from today'sclose and multiplying the result by today's volume. If closing prices arehigher today than yesterday, the force is positive. If closing prices are lowerthan yesterday's, the force is negative. The strength of the force isdetermined either by a larger change in price or a larger volume; eithersituation can independently influence the value and the change in force index.

The raw value of force index is plotted as a histogram, with the center lineset to zero. A higher market will result in a positive force index, plottedabove the center line; a lower market points to a negative force index, belowthe center line. An unchanged market will return a force index directly on thezero line. The raw line that is plotted over the day-to-day on thehistogram forms a jaggedness and the moving average smoothes the line.Therefore, at minimum, you'll want to use a two-day exponential movingaverage (EMA) for the appropriate level of smoothing.

Calculation formulas:

Force Index(1) = {Close (currentperiod) - Close (prior period)} x Volume

Force Index(13) = 13-period EMA ofForce Index(1)

Interpretingthe Force Index

In general, traders will want to buy when the two-day EMA of force index isnegative and sell when it is positive. These traders, however, should alwayskeep in mind the overarching principle of trading in the direction of the13-day EMA of prices. The 13-day EMA of force index is a longer-term indicator,and, when it crosses above the centerline, the bulls are exerting the greatestforce. When it is negative, the bears have control of the market. Of particularimportance are divergences between a 13-day EMA of force index and prices,which correspond with precise points, indicating crucial turning points of themarket.

As indicated by closing prices, the difference between yesterday and today'sclose gives the degree of the day-to-day victory of either the bulls or thebears. Similarly, volume is added into the calculation to give a greater senseof the degree of bulls or bears' victories. Volume also indicates the level ofmomentum in the market, as propelled by the power of either bulls or bears.Force index is one of the best indicators for combining both price and volumeinto a single readable figure. When force index hits a new high, a givenuptrend is likely to continue. When force index hits a new low, the bears havegreater strength and the downtrend will usually sustain itself.

A flattening force index is also an important situational circumstance fortraders. A flattening force index means that the observed change in prices isnot supported by either rising or declining volume and that the trend is aboutto reverse. On the opposite side of the matter, a flattening force index couldindicate a trend reversal, if a high volume corresponds with only a small movein prices.

So, this is the basic manner in which force index can be used alone, or inconjunction with a moving average, to identify whether bulls or bears havecontrol of the market. When volume is considered, an accurate sense of themarket's momentum may also be quickly garnered.

Example

The All Ordinaries Index (Australia) is shown with 13-day exponentialmoving average (EMA) and Force Index.

A deep spike marks the end of a down-trend but it also warns traders to expect a re-test of the previous bottom.
Go long [L] on the bullish divergence. Wait for the EMA to turn upwards.
Declining peaks signal that bulls' strength is fading. No action is taken on the bearish divergence - the EMA is still rising.
The Force index falling below zero indicates that the bulls have lost control. On the strength of the bearish divergence - go short [S] when the EMA turns downward.

Trend Identification

The Force Index can be used to reinforce or determine the trend. Thetrend in question, short-term, medium-term or long-term, depends on the ForceIndex parameters. While the default Force Index parameter is 13, chartists canuse a higher number for more smoothing or a lower number for less smoothing.The chart below shows Home Depot with a 100-day Force Index and a 13-day ForceIndex. Notice how the 13-day Force Index is more volatile and jagged. The100-day Force Index is smoother and crosses the zero line fewer times. In thisregard, the 100-day Force Index can be used to determine the medium orlong-term trend. Notice how a resistance breakout on the price chartcorresponds to a resistance breakout on the 100-day Force Index. The 100-dayForce Index moved into positive territory and broke resistance in mid February.The indicator remained positive during the entire uptrend and turned negativein mid May. The early June support break on the price chart was confirmed witha support break in the Force Index.

Summary

The Force Index is uses both price and volume to measure buying andselling pressure. The price portion covers the trend, while the volume portiondetermines the intensity. At its most basic, chartists can use a long-termForce Index to confirm the underlying trend. The bulls have the edge when the100-day Force Index is positive. The bears have the edge when the 100-day ForceIndex is negative. Armed with this information, traders can then look forshort-term setups in harmony with the larger trend, such as bullish setups in alarger uptrend or bearish setups within a larger downtrend. As with allindicators, traders should use the Force Index in conjunction with other indicatorsand analysis techniques.

Sources andAdditional Information:

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index

http://www.investopedia.com/articles/trading/03/031203.asp#axzz1ipfLUk7g

http://www.incrediblecharts.com/indicators/force_index.php

How TheStreet helps you to become better investor?

2011-09-29T21:57:00.000-07:00

We would like topresent one of the best known on the Web resource for stock traders – The Street. We will let specialists togive their overviews and ratings of the site, so you can decide how it can helpto in successful investment strategy development.

TheStreet Self-Presentation

TheStreet is aleading digital financial media company whose network of digital servicesprovides users, subscribers and advertisers with a variety of content and toolsthrough a range of online, social media, tablet and mobile channels. Ourmission is to provide the most actionable ideas from the world of investing,finance and business in order to break down information barriers, level theplaying field and help all individuals and organizations grow their wealth.With an unmatched suite of digital services, TheStreet offers all of the toolsand insight needed to make the best decisions about earning, investing, savingand spending money.

Since its inceptionin 1996, TheStreet has distinguished itself from other financial mediacompanies with its journalistic excellence, unbiased approach and interactivemultimedia coverage of the financial markets, economy, industry trends,investment and financial planning.

Marketheist Review (http://marketheist.com/2010/09/02/thestreet-com-website-review/)

TheStreet.com,co-Founded by Jim Cramer, has a plethora of resources that range from free news,commentary, analysis and charting and quotes to paid subscription products suchas Real Money, Action Alert Plus and Daily Swing Trade. WhileTheStreet.com has a lot of credible products and commentary on their website,it’s extremely difficult for any beginner investor to discern what products arebest for their investment time horizon and their risk appetite. This website ismostly targeted at investors who want some quick trading ideas, whether stocks,ETFs, or options, and who don’t want to deal with all of the countless hours ofanalysis themselves. While a lot of these products are extremely usefulespecially for the beginner trader, a lot of the advice and recommendationsgiven within the subscription services and in market analysis are too broad.This makes it difficult for investors to understand the exact investmentquality of the recommendation and whether or not it’s suitable for them touse. However, the quality of the traders on this site is extremelyprofessional, and the knowledge and experience that they have to offer isreally valuable. As professionals trading a lot of money, you can learn alot about the markets and how money managers think, but what works for themdoesn’t always work for the small individual investor because we don’t havethat much money to work with.

Portfoliobuzz Review (http://www.portfoliobuzz.com/Investing-Buzz/Review-cat.asp?media1Id=806)

TheStreet.Com is amini-conglomerate of free and subscriber services. It could also be called the Empirethat Jim Cramer Built. With the advent of Jim Cramer’s Mad Money and with his constant referencesto the charitable trust, TheStreet.Com and RealMoney.Com Portfolio Buzz decideda visit to the empire was required!

TheStreet.Com is amulti-authored blog where articles and commentaries are cross-referenced todifferent topics and/or web locations and authors. Much of the information isfree and accessible by any site visitor. If a visitor strays into subscriberterritory, then Cramer pops up to help you get a free trial or to subscribe.

Most of the high-powered subscriber services are located at Real Money.Com,which appears to be just a secure section within TheStreet.Com itself. Accessto RealMoney.Com is through the high-level navigation at the top of theStreet.Com page. However, just to confuse the visitor a bit, there are alsofree services listed on RealMoney.Com, much of which duplicates what isavailable on TheStreet.Com’s home page.

Subscriber services are focused on consumers and professionals. There are 13consumer-oriented services plus a bundled subscription that covers a populargroup of individual subscriptions. These services include such topics as “Stocks under $10, “Value Investor” and Cramer’s “Action Alerts Plus” which addresses stock actions within hisCharitable Trust Portfolio. There are 2 subscriber services for Professionalsincluding “The Street View” which is a real-time discussion for hedgefund managers and other buy-side professionals.

Other features include the video-based “TheStreet.com TV” which highlights Cramer’s discussions of stocks and the market,comments by other TheStreet.Com contributors and staff, and interviews withWall Street professionals and Industry executives.

TheStreet.Com also provides a nifty calendar of economic data coming during theweek and a calendar of earnings release dates, each of which can highlight keycatalysts for stock and market movement.

All in all, a comprehensive website with the kind of current, expert articlesand opinions necessary to get homework done before making investing decisions.

While TheStreet.Comcontent is excellent, the website is not easy to use.

Primary navigation is focused on three major sub-divisions: TheStreet.Com,RealMoney.Com and Street Insight. Some free services are duplicated betweenTheStreet and RealMoney, such as all accessible Cramer items and Video andAudio features. Yet, it looks like RealMoney is supposed to be fullysubscription based. Street Insight is the only place where professionalservices are available, yet, most visitors will try going there (professionalor not) because the website design directs a visitor in that direction. For thefirst time visitor, this high level confusion can dampen enthusiasm for thesite.

There are lots and lots of ads and sponsoring partner banners; lots of blinkinglights. And, offers for subscription services and free trials show up everywhere.While the primary purpose of the website is to make money for the owners, manyvisitors will retreat and never consider the content because of the emphasis onmarketing.

TheStreet Ratings

While you got somethoughts for consideration from specialists, it is nice to know, what simpleinvestors, like you and me say about, isn’t it?

The site rating at famous rating site Epinions is 4 out of 5, based on 9 reviews.
The site rating at Investimonials is 3 out of 5, based on 15 reviews.

So, may be, it istime to check for yourself? You can start from exploring free service offeredby this site, and you may decide later to purchase certain premium services.

Buy and Hold Trading Strategy – Pluses and Minuses

2011-05-08T23:57:00.000-07:00

Overview

Buy and Hold is a basic investing strategy where investors buy and hold a security for an extended period of time. The belief is that it is better to allow a security the opportunity to grow over time, versus attempting to trade in and out of a stock for quick gains. Buy and hold traders see stocks as investments and are not concerned with timing each move. The logic behind the strategy is that the economy will grow overtime and by avoiding selling during normal cyclical downturns, a trader will ultimately be more successful over a multi-year timeframe. There have been a number of studies done which show that over the long run, stocks outperform any other investment (real estate, bonds, etc.). Until the advent of hedge funds, many large money managers believed that it was silly to move in and out of the market due to increase commissions and the risk associated with each new trade.

Selecting Stocks for a Buy and Hold Strategy

In order to get the most out of a buy and hold strategy, the odds are stacked in your favor when trading the strongest stocks. An investor should first start out by identifying the strongest performing index. The next step is to target the strongest stocks within that respective sector. This basic top down approach will ensure that the trader is purchasing into a stock with the greatest chance of growth potential.

Negatives

The buy and hold strategy may give the appearance of a safer investment model, but it, like every other strategy is not above the element of risk. For example, traders that bought Microsoft 8 years ago, would have made less than 2% on that investment. The other buy and hold killer is bear markets. If a buy and hold trader purchases a stock prior to a swift market decline similar to the ones in ’87 and ’02, the trader may have to wait 5-10 years to breakeven on their initial investment. Another drawback for the buy and hold strategy is the fact you have to buy and hold. Making money in the market is not like working a job where more effort equals greater results. So, traders will have to fight the urge to overtrade, as the key to a successful buy and hold strategy is quality not quantity.

One more major point against this strategy is that you can never be sure of the stocks you have picked especially in current market when a lot of blue chip and reputed companies are going bankrupt overnight.

Benefits

Buy and hold strategies have the following benefits:

Less Stress. By trading fewer stocks and not concerning oneself with every price movement, it makes it easier for a trader to follow their trading plan and stay the course.
Easy To Understand and Implement. Buy and hold is an easy investment system to employ. You identify strong assets with long-term growth potential, acquire them, and hold them throughout your investment horizon. No need to constantly monitor and trade as the short-term trends and volatility dictate.
Consistent with Investment Theory. Conventional investment theory supports buy and hold investing. Over the long run, higher risk assets will outperform lower risk assets, on average. And historical data shows this to be true. Of course, at times one requires a very long time frame to see this out. It took 25 years for the Dow Jones Industrial Average to recover from its highs of 1929 and subsequent crashes. Had you been 30 or 40 years old and invested the bulk of your assets in the late 1920s, a buy and hold strategy would not have brought you success. So while it works in the long run, realize that long may not be 5 or even 10 years.
Taxes. Since buy and hold strategies often call for a time horizon greater than 1 year, traders are taxed at a lower tax bracket.
Commissions. Active trading can prove costly. Traders can easily rack up commissions in the tens of thousands each year, even with a discount broker. A Buy and Hold strategy can allow a trader to invest large sums of money with minimal costs. With many brokers offering $9.99 per trade for an unlimited number of shares, the buy and hold strategy has never looked more appealing.

Risk versus Reward

The risks associated with using the buy and hold investment strategy varies based on two factors. First being the timing of your initial purchase. If you bought stock near the end of a bull market you will have to either sell at a loss or wait until the stock comes back from the bear market. Second factor relates to the length of your holding period. If you re-balance your portfolio selling poor performing stocks and you are in a bear market.

The rewards of using a buy and hold investment strategy varies greatly based on what stocks you have selected and what timeframes you are holding. What is apparent based off the number of investors who use this investment strategy is that is does have its strengths and can be used effectively to produce good returns.

Supporters

Warren Buffett, considered by many to be the greatest investor of all time, has said that he pays no attention to the stock market, and in fact, would not mind if the market shut down for a few years. He buys stock in a company as if he was buying the entire company. It's the value of the company that interests him, not the value assigned to it by the market. He wants companies that generate consistently growing profits.

Or consider the remarkable case of Anne Scheiber. She represents, not only the superb returns that can be enjoyed from a skillful buy and hold strategy, but also the pluck to jump back in the game after losing everything.

In 1933 and 1934, at the height of the depression, 38 year old Anne invested most of her life savings in the stock market. She let her broker brother make the picks and they were good ones. Unfortunately, his company went bankrupt and she lost everything. But Anne did not give up.

On her modest salary as an auditor for the Internal Revenue Service (just over $3000 a year), she managed to save another $5000 over the next ten years. In 1944 she invested in the stock market again. When she died in January 1995 at the age of 101, that modest investment had grown to $20 million. That's not a misprint. $20 million! That represents an annual compounded rate of return of 17.5%, ranking her among the top investors of all time.

Her secret? Miss Scheiber invested in stocks of companies that she knew and understood. Companies whose products she used. She loved the movies. So she invested in Loew's, Columbia, Paramount and Capital Cities Broadcasting. She drank Coke and Pepsi and bought shares in both.

She invested in the companies that made medications she took - Schering Plough and Bristol Myers Squibb. And so on. And she hung on to them through thick and thin for over forty years. Through the bear market of 1973-1974… Through the crash of 1987…

Miss Scheiber left virtually the entire fortune to New York's Yeshiva University. By the time the estate was settled in December of 1995, it had grown to $22 million.

Sources and Additional Information:

http://www.mysmp.com/stocks/buy-and-hold.html

http://personalwm.com/2011/03/30/advantages-of-a-buy-and-hold-strategy/

http://www.stockphases.com/investment-strategies/buy-and-hold.php

http://stockmarketforbeginnersguide.com/stock-investment-strategies-buy-and-hold-strategy/

http://whentosellastock.com/selling/buyandhold.htm

Short Selling Strategy: Risks and Rewards

2011-04-08T22:10:00.000-07:00

The conventional view for the longest time was that the surest way to make money in stocks was to buy and hold them for the long-term. Anyone who thought otherwise was called a speculator, trader or momentum player. It was alleged that "buy and hold" investors were sure-fire winners. But after 2000-2002 bear market, the view of the Investment market changed, hardly anyone believes that “buy and hold” investors are sure winner.

The most widely published evidence that buying and holding is not the best way to make money in stocks was presented in an article printed September 27, 2002 in USA Today. It featured a chart showing the up and down movements of the Dow Jones Industrial Average from 1966 through 1982. The point of the article was that the Dow opened 1966 at 983.51 and closed 1982 at 991.72. Up 8.21 points, less than one-percent, in 17 years!

The USA Today article, Timing is Everything When Stocks Stall showed that there were six bull markets and five bear markets during this period of time. Had you bought the Dow at the beginning of each bull market and gone into cash at the beginning of each bear market, you would have gained 549%. Had you ridden the Dow up in each bull market and sold it short in each bear market, you would have gained 2,680%.

This example clearly shows that buying long in bull markets and selling short in bear markets is a much better strategy than buying and holding stocks for the long-term. So why does the conventional wisdom on Wall Street teach us that "buy and hold" is the best investment strategy? Why does it tell us you can't "time the market," and warn us against selling-stocks short?

The reason is obvious: The Wall Street brokerage houses and mutual funds want to control your money at all times. Selling stocks when prices go down is very bad for business. Not only does it reduce the assets from which they make money, but it drives stock prices lower which makes them look bad.

Brokers tell you to buy, buy, buy because they don't want to offend the companies they represent. They say you can't time the market because it supports the argument of staying long all the time. They are against selling short because it rubs their customers the wrong way. Incidentally, you are not their customer. You are the victim of their clever marketing schemes.

What is Short Selling?

Have you ever been absolutely sure that a stock was going to decline and wanted to profit from its regrettable demise? Wouldn't it be nice to see your portfolio increase in value during a bear market? Both scenarios are possible. Many investors make money on a decline in an individual stock or during a bear market, thanks to an advanced investing technique called Short Selling.

Short selling is a trading strategy, which is neither terribly complex nor entirely simple. In other words, it's a concept that many investors have trouble understanding. In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. When an investor goes long on an investment, it means she has bought a stock believing its price will rise in the future.

Conversely, when an investor goes short, he is anticipating a decrease in share price. Investor makes money only when a shorted security falls in value.

Sounds good, but selling stocks short involves selling something you don't own. Somehow this has a bad ring to it. How can you sell something you don't own? Don't worry about it. It's done every day. For example, you subscribed to an investment newsletter. The publishing company did not have next month’s issue printed when they took your order. So they actually sold next month’s issue of the newsletter short.

Now the publisher has the responsibility of putting the newsletter together and delivering it to you as promised. You expect that they will because they have done it over and over before, but you have taken a risk.

The publishing company also took a risk in accepting your order. They have to get the newsletter to you at a profit. Otherwise they eventually will go broke. In summary, you took a risk in buying something the provider didn't have. The provider took a risk in delivering it at a profit. Most businesses are run this way. So selling short is NOT a bad thing.

Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept.

Here is how it works

When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account.

Sooner or later you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

The selling of a security that the seller does not own is called a short sale. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Short Selling is a trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.

A market transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal number of shares at some point in the future. The profit that the investor receives is equal to the value of the sold borrowed shares less the cost of repurchasing the borrowed shares.

Suppose 1,000 shares are short sold by an investor at $25 apiece and $25,000 is then put into that investor's account. Let's say the shares fall to $20 and the investor closes out the position. To close out the position, the investor will need to purchase 1,000 shares at $20 each ($20,000). The investor captures the difference between the amount that he or she receives from the short sale and the amount that was paid to close the position, or $5,000.

Most of the time, you can hold a short for as long as you want. However, you can be forced to cover if the lender wants back the stock you borrowed. Brokerages can't sell what they don't have, and so yours will either have to come up with new shares to borrow, or you'll have to cover. This is known as “Being Called Away”. It doesn't happen often, but is possible if many investors are selling a particular security short.

Since you don't own the stock (you borrowed and then sold it), you must pay the lender of the stock any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, you'll owe twice the number of shares at half the price.

There are two main motivations to Short Sell a Stock :

1. To Speculate

The most obvious reason to short is to profit from an overpriced stock or market. Probably the most famous example of this was when George Soros "broke the Bank of England" in 1992. He risked $10 billion that the British pound would fall and he was right. The following night, Soros made $1 billion from the trade. His profit eventually reached almost $2 billion.

2. To Hedge

For particular reasons, very few sophisticated money managers use short selling as an active investing strategy (unlike Soros). The majority of investors use shorts to hedge. This means they are protecting other long positions with offsetting short positions.

There are some restrictions on the size, price and types of stocks you are able to short sell. For example, many brokers impose large margin requirements on clients who short stocks with a market price that is less than $5.

Before July 2007, the Securities and Exchange Commission had “Up-tick Rule (also termed as zero plus tick rule)”. This rule required that every short sale transaction be entered at a higher price than that of the previous trade and kept short sellers from adding to the downward momentum of an asset when it was already experiencing sharp declines. This rule is now eliminated.

The whole idea of selling stocks short is to make money from stocks that are going down in price. It's the exact opposite of buying stocks long expecting that they will go up in price. In selling short, you sell stocks that appear to be high in price and buy them back at lower prices.

For example, let's suppose ABC is trading at $30 per share. You think it could go down to a lower price. So you call your broker and say, "I want to sell 100 shares of XYZ at $30 per share or higher to open." You can make transaction on most of the online brokerages which will have a check box that says "short sale."

Clearly, short selling can be profitable. But then, there's no guarantee that the price of a stock will go the way you want (just as with buying long). You can think of the outcome of a short sale as basically the opposite of a regular buy transaction.

Short selling is another technique you can add to your trading toolbox. That is, if it fits with your risk tolerance and investing style. Short selling provides a sizable opportunity with a hefty monkey of risk on its back.

You need to have a margin account in order to sell stocks short. A margin account allows the broker to extend credit to you in accordance with Federal Regulation T of the Federal Reserve Board. If you do have a margin account and you place an order to sell short, the broker will check to see if you have sufficient cash in your account to satisfy Reg T.

This means that you must have at least 50% of the amount involved in short-selling the stock in your account as cash. This cash shows that you have sufficient funds available to buy the stock back should it go against you.

Once the broker verifies that you have sufficient cash in your account to make the trade, he or she will borrow the requested shares of stock, and credit your account for the amount received from selling the stock.

For Example, In the case of selling short 100 shares of ABC at $30, you would need to have half or $1500 cash in your account and you would receive a credit of $3000 less commissions. Overall, you would have a credit balance of $4500 in your account.

Can you go out and spend this money? Not on your life. At least not until the price of the stock starts going down. Let's suppose ABC goes to $20 per share. You've made $1000. Your credit balance is still $4500, but the market value of the stock is only $2000. So your equity is $2500, ($4500 - $2000). Although your paper profit is $1000, but your buying power is now $2500. This is the amount you can spend to buy stocks long or sell stocks short.

Although you will always pay interest on money you borrow from the broker, most brokerage houses do not pay interest on the proceeds of short sales. You may, however, be able to negotiate an interest payment if you have a sizeable account. You will also be charged by the broker for any cash or stock dividend payments on your short positions.

How to Manage Risk on Short Sale?

The potentially unlimited loss associated with a short sale makes it important to proactively manage the risk.

Just as a sell-stop or trailing sell-stop orders can help control losses on a long purchase, a buy-stop or trailing buy-stop order can help to manage loss on a short sale, in case the stock price goes up.

For a short sale, buy-stop orders trigger a market order to buy back when the ask price is equal to, or greater than, the stop price entered.

A trailing buy-stop involves an entered dollar or percentage amount above the current market. If the ask price only moves upward (against you), the trailing stop will track the ask price until it reaches or surpasses your entered trailing amount. However, unlike the standard buy-stop order, when the price moves downward (in your favor), a trailing buy-stop will readjust the trigger price from the new low ask price reached.

Questions to Ask Yourself Before Short Selling Stocks

Before you even began to sell stocks short there are a couple questions that you should ask yourself. Don’t start thinking about “how to short a stock and make big bucks” until you can say yes to these questions.

1. Am I Eligible to Short Stocks? Is my trading account not for long only trades?

2. Do I have Any Experience with Short Term Trading?

3. Am I comfortable with Short Term Trading?

4. Do I have a Plan, a reason to short a stock?

Illegal Short Selling

As of 2009 Naked Short Selling is illegal. This is simply selling a stock without having something to back it up with (like a borrowed stock). Your broker should take care of this, so you don’t have to worry about breaking a law.

What it does mean for you, is that you can only short stocks that your broker has available. So make sure if you are going to short a stock that your broker has some of it in reserve, otherwise your order will not get filled.

Sources and Additional Information:

http://www.bearstocksreport.com/bsr/short-selling-strategy.jsp

http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/trading/short_selling.html

http://www.online-stock-trading-guide.com/short-selling.html

http://www.stocks-simplified.com/Short-Selling-Stocks.html

Donchian Cannels and Turtle Trading

2011-03-19T20:15:00.000-07:00

Donchian Channels

Donchian channels were developed by Richard Donchian, a pioneer of mechanical trend following systems. The two outer bands are plotted as the highest high and lowest low for a set period, originally 20 days, with the optional middle band calculated as the average of the two.

Donchian Channel Trading Signals Applicability

The system is only suitable for trending markets.

Despite its obvious shortcomings, as a trend-following system, - it works well in up or down trends, but not sideways trends - the Four-week Rule is a tool that should be in every technical analyst's repertoire. It was developed by Richard Donchian in the early 1970s for commodities and futures, and has been successfully applied to stock analysis.

Also known as the "Price Channel" or "Donchian Channels," the Four-week Rule may be a basic tool. But in the right hands, it can be powerful. In other words, the rules may be simple, but applying them is not. It works to the extent of the analyst's abilities.

Donchian's Four Week Rule

The Four-week Rule is a method that includes a set of charting rules that are generated from the price channel as well as a set of trading rules. The mistake that some analysts make is to use the price channels without the trading rules. It is the combination of both sets of rules that make the method effective.

The charting rules

The price channel generates the following signals when applied to stock charts:

buy signals are produced when the price closes above the upper band of the price channel; and,
sell signals are generated when the price closes below the lower band of the price channel.

When the price is at its highest in a four week period, buy long and cover short positions.
When the price falls below the lows of a four week period, sell short and liquidate long positions.
This last rule only applies to future traders, which is "to roll forward, if necessary, into the next contract on the last day of the month prior to expiration.

The objective is to enter the trend on a breakout and to ride the trend for as long as possible, avoiding shakeouts.

Complimenting the Four-week Rule

So what can you do to increase the effectiveness of the Four-week Rule so that you don't miss opportunities due to the lagging indicators? And equally as important, how can you ensure that you aren't going to lose money in a volatile or sideways-trending market due to false signals?

One way to add certainty to the Four-week Rule is to use complimentary indicators or methods to generate additional signals that provide a warning or confirmation.

For example, you can use another trend-following system, the Five- and 20-day Moving Averages Method, also developed by Donchian, in conjunction with the Four-week Rule, to create combined signals that help you determine if the price has really generated a strong trend. Note: The rules in these two systems do not conflict with one another.

The Five- and 20-day Moving Averages Method

The Five- and 20-day Moving Averages Method includes several general and supplemental rules. These rules were initially intended for currency markets but can also be used to analyze stocks.

The method consists of the following rules:

Basic Rule A: Act on all closes that cross the 20-day moving average by an amount exceeding by one full unit the maximum penetration in the same direction of any previous closing when the closing was on the same side of the moving average.

Basic Rule B: Act on all closes that cross the 20-day moving average and close one full unit beyond the previous 25 closes.

Basic Rule C: Within the first 20 days after the first day of a crossing that leads to a trading signal, reverse on any close that crosses the 20-day moving average and closes one full unit beyond the previous 15 closes.

Basic Rule D: Sensitive five-day moving average rules for closing out positions and for reinstating position in the direction of the 20-day moving average are:

Close out positions when the currency closes below the 5-day moving average for long positions and above the 5-day moving average for short positions, by at least one full unit more than the greater of either the previous penetration on the same side of the 5 day moving average, or the maximum point of any penetration within the preceding 25 trading days. Should the range between the closing price in the opposite direction to the Rule D closeout signal be greater than the prior 15 days than the range from the 20-day moving average in either direction within 60 previous sessions, do not act on Rule D closeout signals unless the penetration of the 5-day moving average exceeds by one unit the maximum range both above and below the 5-day moving average during the preceding 25 sessions.
Reinstate positions in the direction of the basic trend (a) when the condition in paragraph 1 are achieved, (b) If a new Rule A basic trend is given, or (c) if new Rule B and Rule C signals in the direction of the basic trend are given by closing in a new low or new high ground.
Penetrations of two units or less do not count as points to be exceeded by Rule D unless at least two consecutive closes were on the side of the penetration when the point to be exceeded was set up.

Combining the 5- and 20- day moving average cross system with the Four-week Rule can help to confirm information about the potential trend change. These modifications are not intended to replace basic trend-following techniques - but to provide more information about the trend when price channel signals are generated.

Turtle Trading

Curtis Faith in his book Way Of The Turtle describes a variation of the Donchian system used by the legendary Turtle Traders.

Enter long when price crosses above the 20-Day upper Donchian Channel and exit when price penetrates a 10-Day lower Donchian Channel.
Enter short when price crosses below the 20-Day upper Donchian Channel and exit when price penetrates a 10-Day upper Donchian Channel.
Use the 25-Day/350-Day exponential moving average as a trend filter. Go long only if the 25-Day EMA is above the 350-Day exponential moving average and go short only where below the 350-Day EMA.

The system also uses ATR trailing stops with a multiple of 2. Faith, however, demonstrates that replacing the 10-Day Donchian Channel and ATR stops with a simple time-based exit, where all trades are exited after 80 days (16 weeks), achieves similar results — with no stop losses at all.

Example

Goldman Sachs displays the Turtle Trading settings for an up-trend, 20-day upper and 10-day lower Donchian Channels, with 63-day exponential moving average as an added trend filter.

Mouse over chart captions to display trading signals.

Go long [L] when price crosses above the upper Donchian Channel while above the 63-day exponential moving average
Exit [X] when price crosses the lower Donchian Channel
Go long [L] when price recovers above the upper Donchian Channel
Exit [X] when price crosses below the lower channel.

Donchian Channel Setup

The default setting for both Donchian Channels is 20 days. The middle line is optional.

Donchian Channel Formula

The upper band is calculated as the highest high for the selected period.
The lower band is calculated as the lowest low for the selected period.
The selected period does not include the day on which the band is plotted (otherwise the band would never be crossed). For example, the 20-Day Donchian Channels for today are the highest high and lowest low for the preceding 20 trading days.
The middle line is calculated as (Upper Band + Lower Band) / 2.

Sources and Additional Information:

http://www.incrediblecharts.com/indicators/donchian_channels.php

http://www.chartfilter.com/Technical/donchians-four-week-ruleprice-channel.html

http://www.findyourfinancialfreedom.com/donchian-channel-indicator-helps-determine-the-trend/

http://www.secretsforstocktrading.com/blog/stock-trading-strategy/donchian-strategy/

How you can beat Stock Market with Piotroski Strategy?

2011-02-27T00:14:00.000-08:00

Unknown Investment Guru – Joseph Piotroski

If you haven't heard of Piotroski, you're far from alone. Of all the excellent investment minds upon whom I base my Guru Strategy computer models, Piotroski is probably the least known. He’s probably the least well-known of the investment “gurus”. Actually, he’s not even a professional investor, but instead an accountant and college professor. But while he lacks the fame and reputation of investors like Buffett and Lynch, his contribution to the investing world has been quite significant.

In 2000, however, Piotroski showed that you don’t need to be a smooth-talking Wall Street hot-shot to make it big in the market. While teaching at the University of Chicago, he authored a research paper that showed how assessing stocks with simple accounting-based methods could produce excellent returns over the long haul. No fancy formulas, no insider knowledge — just a straightforward assessment of a company’s balance sheet.

His study turned quite a few heads on Wall Street. It focused on companies that had high book/market ratios — i.e. the type of unpopular stocks whose book values (total assets minus total liabilities) were high compared to the value investors ascribed to them (their share price multiplied by their number of shares).

Quite often, such firms have low book/market ratios because they are in financial distress, and investors wisely stay away from them. On certain occasions, however, high book/market firms may be good companies that are being overlooked by investors for one reason or another. These firms can be great investment opportunities, because their stock prices will likely jump once Wall Street realizes it’s been shunning a winner.

Through his research, Piotroski developed a methodology to separate the solid but overlooked high book/market firms from high book/market ratio firms that were in financial distress. He found that this method, which included a number of balance-sheet-based criteria, increased the return of a high book/market investor’s portfolio by at least 7.5 percent annually. In addition, he found that buying the high book/market firms that passed his strategy and shorting those that didn’t would have produced an impressive 23 percent average annual return from 1976 and 1996.

Diving into the Balance Sheet

Piotroski wasn’t the first to study high book/market stocks. But his research took things a step further than many past studies. He noted that the majority of high book/market stocks ended up being losers, and that the success of high book/market portfolios was usually dependent on the big gains of a small number of winners. Much as low price/earnings ratio investors like John Neff used a variety of tests to make sure low P/E stocks weren’t rightfully being overlooked because of poor financials, Piotroski sought to separate the high book/market winners from the high book/market losers.

The first step in this approach is, of course, to find high book/market ratio stocks. In his study, Piotroski focused on the stocks whose book/market ratios were in the top 20 percent of the market.

That’s the easy part. The harder part is determining whether investors are avoiding a low-B/M stock because it is in financial trouble, or whether the company is a solid one that is simply being overlooked. The Piotroski-based model looks at a variety of factors to determine this, including return on assets and cash flow from operations, both of which should be positive.

Several of Piotroski’ other financial criteria don’t necessarily look for fundamental excellence, but instead for improvement. This makes a lot of sense; a company whose return on assets had declined from 10 percent to 1 percent and whose cash flow from operations had dwindled from $10 million to $10,000 would pass the above ROA and cash flow tests, for example, but it certainly wouldn’t be the type of strong performer Piotroski was targeting.

Among the other “change” criteria Piotroski examined were the long-term debt-asset ratio, which he wanted to be declining; the current ratio (current assets/current liabilities), which he wanted to be increasing; gross margin, which should be rising; and asset turnover, which measures productivity by comparing how much sales a company is making in relation to the amount of assets it owns (That should be increasing).

Piotroski Approach Criteria

Despite the differences in portfolio construction, the underlying variables that the strategy looks at are same. The approach begins by looking at bottom 20% of the market based on Price/Book ratio (this is the same as firms with high Book/Market ratios). Piotroski found that just buying low Price/Book stocks does not produce excess returns over the long term, however, because many low Price/Book companies are trading at a discount because they deserve to. Piotroski thus applied a series of additional tests of financial strength to identify a set of criteria that did lead to market outperformance. The 10 criteria are listed below.

- Book/market ratio
- Return on assets
- Change in return on assets
- Cash flow from operations
- Cash compared to net income
- Change in long-term debt/assets
- Change in current ratio
- Change in shares outstanding
- Change in gross margin
- Change in asset turnover

Examples

Few firms usually pass all of Piotroski-based model's strict criteria, and often they are very small stocks, some of which are too illiquid for most investors. But the Piotroski-inspired portfolio has found big winners among stocks that get scores of 90%, 80%, or even 70% from the model, and, right now, a number of stocks fall into that category. Let’s see some examples of what types of stocks the Piotroski model currently likes:

Photronics, Inc. (PLAB): This Connecticut-based small-cap ($365 million) makes photomasks -- high precision photographic quartz plates containing microscopic images of electronic circuits -- that are used in the manufacture of semiconductors and flat panel displays.

Photronics gets a solid 80% score from my Piotroski-based model, thanks in part to its 1.22 book/market ratio. And, in its most recent fiscal year, the firm upped its return on assets from -7.75% to 3.25%, lowered its long-term debt/assets ratio from 17% to 11%, and increased its gross margin from 16% to 22%, all reasons the Piotroski model gives it high marks.

Audiovox Corporation (VOXX): This New York State-based consumer electronics firm owns such well-known brands as RCA and Energizer. It makes a wide variety of mobile electronics and consumer electronics and accessories, ranging from vehicle security and remote start systems to MP3 players and digital camcorders to headphones, speakers, and batteries.

Audiovox is a small stock ($171 million market cap), so it is likely to be more volatile than larger stocks. But the firm has taken in more than $570 million in sales over the past year, and it gets a solid 80% score from my Piotroski-based model. One big reason: Its impressive 2.17 book/market ratio. (Looked at another way, that means its shares are trading for less than half of book value.) The firm also posted a 4.14% return on assets in its most recent fiscal year, a sharp turnaround from -13.88% the prior year, and it kept its long-term debt/assets ratio steady at just 2%. Gross margin also improved to 19%, up from 17% the year before.

M&F Worldwide Corp. (MFW): M&F ($480 million market cap) is the parent of several businesses, including Harland Clarke Corp., which makes checks and check-related products, direct marketing, and contact center services; Harland Financial Solutions, which makes software for financial firms; and Scantron Corporation, which offers testing and assessment systems and data collection and analysis services. And then there's an intriguing fourth member of the group: Mafco Worldwide Corp. -- a world leader in the licorice -- that's right, licorice -- industry.

M&F shares surged early this week after a weekend article in Barron's was bullish on the stock, and then slid downward Friday. Its book/market ratio remains in the top 20% of the market, however, at 1.25. It also has the balance sheet and fundamentals to boot: Its return on assets (3.24%) almost doubled in its most recently reported fiscal year, while its current ratio rose to 1.63 (from 1.18) and its long-term debt/assets ratio fell to 62% (from 64%). Overall, the stock earns a 90% score from this approach.

AXIS Capital Holdings Limited (AXS): Headquartered in Bermuda, AXIS provides specialty insurance and treaty reinsurance across the world through operating subsidiaries and branch networks based in Bermuda, the U.S., Canada, the U.K, Ireland, Switzerland, Australia, and Singapore.

AXIS ($4.5 billion market cap) gets a 70% score from the Piotroski-based model. It has a book/market ratio of 1.22, which is in the market's top 20%, and in the most recently reported fiscal year it increased return on assets (2.65%, up from 2.15% the previous year) and had positive cash flow from operations (about $850 million). Its number of shares has also declined in recent years, which this model considers a good sign -- Piotroski found that an increasing number of shares outstanding might be a sign that a firm couldn't generate enough internal cash to fund its business.

Sources and Additional Information:

http://theguruinvestor.com/2010/02/05/the-best-investment-guru-youve-never-heard-of/

http://theguruinvestor.com/2009/01/20/little-known-gurus-strategy-nets-big-gains-through-downturn/

http://money.msn.com/top-stocks/post.aspx?post=fb7709e8-13dc-4a08-849b-e003876d3d57

http://www.globes.co.il/serveen/globes/docview.asp?did=1000296576

Financial Statements for Fundamental Stock Analysis

2011-02-13T00:18:00.000-08:00

If you are serious on getting to the bottom of the stock investment success through Fundamental Stock Analysis, your first step would be to understand how you can use the financial statements disclosed by the companies. While these financial documents look confusing at the first glance, when you get the basic understanding, what the numbers mean, you will get a nice impression on the real company standing, expressed in monetary terms. While the numbers might be slightly tweaked by the professional accountants, the corporate reporting guidelines and independent financial audits limit the company’s abilities for the major public deception.

Financial statements are the medium by which a company discloses information concerning its financial performance. Followers of fundamental analysis use the quantitative information gleaned from financial statements to make investment decisions. The financial statements of a company are the most useful tools in analyzing the potential of a stock. Companies publish numerous financial statements, and they can vary from company to company depending on the sector. The most important ones to look at, however, are the income statement, balance sheet, and the cash flow statement.

The Major Statements

The Balance Sheet

The balance sheet represents a record of a company's assets, liabilities and equity at a particular point in time. The balance sheet is named by the fact that a business's financial structure balances in the following manner:

Assets = Liabilities + Shareholders' Equity

Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes.

Assets are generally listed based on how quickly they will be converted into cash. Current assets are things a company expects to convert to cash within one year. A good example is inventory. Most companies expect to sell their inventory for cash within one year. Noncurrent assets are things a company does not expect to convert to cash within one year or that would take longer than one year to sell. Noncurrent assets include fixed assets. Fixed assets are those assets used to operate the business but that are not available for sale, such as trucks, office furniture and other property.

Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.

Liabilities are generally listed based on their due dates. Liabilities are said to be either current or long-term. Current liabilities are obligations a company expects to pay off within the year. Long-term liabilities are obligations due more than one year away.

Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.

Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of retaining them. These distributions are called dividends.

A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period.

The Income Statement

An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.

Income statements also report earnings per share (or “EPS”). This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period.

To understand how income statements are set up, think of them as a set of stairs. You start at the top with the total amount of sales made during the accounting period. Then you go down, one step at a time. At each step, you make a deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how much the company actually earned or lost during the accounting period. People often call this “the bottom line.”

At the top of the income statement is the total amount of money brought in from sales of products or services. This top line is often referred to as gross revenues or sales. It’s called “gross” because expenses have not been deducted from it yet. So the number is “gross” or unrefined.

The next line is money the company doesn’t expect to collect on certain sales. This could be due, for example, to sales discounts or merchandise returns.

When you subtract the returns and allowances from the gross revenues, you arrive at the company’s net revenues. It’s called “net” because, if you can imagine a net, these revenues are left in the net after the deductions for returns and allowances have come out.

Moving down the stairs from the net revenue line, there are several lines that represent various kinds of operating expenses. Although these lines can be reported in various orders, the next line after net revenues typically shows the costs of the sales. This number tells you the amount of money the company spent to produce the goods or services it sold during the accounting period.

The next line subtracts the costs of sales from the net revenues to arrive at a subtotal called “gross profit” or sometimes “gross margin.” It’s considered “gross” because there are certain expenses that haven’t been deducted from it yet.

The next section deals with operating expenses. These are expenses that go toward supporting a company’s operations for a given period – for example, salaries of administrative personnel and costs of researching new products. Marketing expenses are another example. Operating expenses are different from “costs of sales,” which were deducted above, because operating expenses cannot be linked directly to the production of the products or services being sold.

Depreciation is also deducted from gross profit. Depreciation takes into account the wear and tear on some assets, such as machinery, tools and furniture, which are used over the long term. Companies spread the cost of these assets over the periods they are used. This process of spreading these costs is called depreciation or amortization. The “charge” for using these assets during the period is a fraction of the original cost of the assets.

After all operating expenses are deducted from gross profit, you arrive at operating profit before interest and income tax expenses. This is often called “income from operations.”

Next companies must account for interest income and interest expense. Interest income is the money companies make from keeping their cash in interest-bearing savings accounts, money market funds and the like. On the other hand, interest expense is the money companies paid in interest for money they borrow. Some income statements show interest income and interest expense separately. Some income statements combine the two numbers. The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax.

Finally, income tax is deducted and you arrive at the bottom line: net profit or net losses. (Net profit is also called net income or net earnings.) This tells you how much the company actually earned or lost during the accounting period. Did the company make a profit or did it lose money?

Statement of Cash Flows

The statement of cash flows represents a record of a business' cash inflows and outflows over a period of time. Typically, a statement of cash flows focuses on the following cash-related activities:

Operating Cash Flow (OCF): Cash generated from day-to-day business operations
Cash from investing (CFI): Cash used for investing in assets, as well as the proceeds from the sale of other businesses, equipment or long-term assets
Cash from financing (CFF): Cash paid or received from the issuing and borrowing of funds

The cash flow statement is important because it's very difficult for a business to manipulate its cash situation. There is plenty that aggressive accountants can do to manipulate earnings, but it's tough to fake cash in the bank. For this reason some investors use the cash flow statement as a more conservative measure of a company's performance.

10-K and 10-Q

Now that you have an understanding of what the three financial statements represent, let's discuss where an investor can go about finding them. In the United States, the Securities And Exchange Commission (SEC) requires all companies that are publicly traded on a major exchange to submit periodic filings detailing their financial activities, including the financial statements mentioned above.

Some other pieces of information that are also required are an auditor's report, management discussion and analysis (MD&A) and a relatively detailed description of the company's operations and prospects for the upcoming year.

All of this information can be found in the business' annual 10-K and quarterly 10-Q filings, which are released by the company's management and can be found on the internet or in physical form.

The 10-K is an annual filing that discloses a business's performance over the course of the fiscal year. In addition to finding a business's financial statements for the most recent year, investors also have access to the business's historical financial measures, along with information detailing the operations of the business. This includes a lot of information, such as the number of employees, biographies of upper management, risks, future plans for growth, etc.

Businesses also release an annual report, which some people also refer to as the 10-K. The annual report is essentially the 10-K released in a fancier marketing format. It will include much of the same information, but not all, that you can find in the 10-K. The 10-K really is boring - it's just pages and pages of numbers, text and legalese. But just because it's boring doesn't mean it isn't useful. There is a lot of good information in a 10-K, and it's required reading for any serious investor.

You can think of the 10-Q filing as a smaller version of a 10-K. It reports the company's performance after each fiscal quarter. Each year three 10-Q filings are released - one for each of the first three quarters. (Note: There is no 10-Q for the fourth quarter, because the 10-K filing is released during that time). Unlike the 10-K filing, 10-Q filings are not required to be audited. Here's a tip if you have trouble remembering which is which: think "Q" for quarter.

Measures

The data collected from the financial statements can be used to calculate some more useful measures, like:

• Debt / Asset ratio
A high ratio means a highly leveraged company.

• Current ratio = current assets / total current liabilities
A value of less than 1 shows liquidity problems.

• Working Capital = current assets - current liabilities
The Working Capital is a measure of a company’s liquidity.

• Turnover Ratio = Goods sold / inventory
An indication of how quickly a company can sell its inventory. A higher number among similar industry companies is favorable.

• Margins
Margins are generally earnings as % of sales. A useful measure is the Net Margins which is net income divided by net sales, and a low value is a sign of a struggling company.

• EPS (Earnings per share) = Profit / number of shares
It is a rather straightforward calculation. However, the more useful prospective EPS growth rate is calculated through the consensus forecast earnings for the following year.

• P/E ratio (Price to earnings)
More useful than EPS to compare companies, it is the price per share divided by EPS and makes sense only for a company that has (positive) earnings. For a company with loss there is the PSR (price to sales ratio).

• PEG ratio (Prospective earnings growth)
PEG is calculated by dividing a company’s expected annual percentage earnings growth taking by it’s stock’s P/E ratio.

• P/B ratio (Price to book) = market cap / book value.
Shows how much more than the book value of the company the market is willing to pay.

• ROE (Return on Equity) / ROA (Return on Assets)
ROE is an indication of a company’s efficiency. It is calculated by taking a company's after-tax income and dividing by its book value (or the Total Assets in the case of the ROA).

• Dividend Yield & Dividend payout ratio
These measures show how much pay in dividends an investor can expect from his stock and the percentage of company earnings given as dividends respectively.

Sources and Additional Information:

http://www.investopedia.com/university/fundamentalanalysis/fundanalysis4.asp

http://www.sec.gov/investor/pubs/begfinstmtguide.htm

http://www.benbest.com/business/finance.html

http://www.textbiz.org/fundamental.html

http://www.essortment.com/yourself-fundamental-stock-analysis-54768.html

Coffee Commodity Trading Basics

2011-02-02T22:13:00.000-08:00

Coffee is an important commodity and a popular beverage. Over 2.25 billion cups of coffee are consumed in the world every day. Over 90% of coffee production takes place in developing countries, while consumption happens mainly in the industrialized economies. Worldwide, 25 million small producers rely on coffee for a living. For instance, in Brazil alone, where almost a third of all the world's coffee is produced, over 5 million people are employed in the cultivation and harvesting of over 3 billion coffee plants; it is a much more labor-intensive culture than alternative cultures of the same regions as sugar cane or cattle, as it is not subject to automation and requires constant attention.

Climate is crucial for success in achieving good yields as well as having an optimum temperature range of between 17 and 23 centigrade and favorable soil conditions. While there are about 60 different varieties of coffee, the main two which are of any real economic significance are Arabica and Robusta. These are the two varieties which are actively traded as futures on the major commodity exchanges.

Coffee is the second most commonly traded commodity in the world (measured by monetary volume), trailing only crude oil as a source of foreign exchange to developing countries, according to the International Coffee Organization. While production and consumption of many commodities tend to rise and fall based on price, shifts in coffee supply and demand are not so prone to price changes as people continue to look for their morning cup of coffee at whatever the price is. An important distinction for coffee futures traders is that two different types of coffee are traded on the world's exchanges.

Coffee Prices & Rates

Arabica coffee futures and options are traded in New York on the Intercontinental Exchange (ICE, formerly the New York Board of Trade).

The size of the Coffee "C" futures contract is 37,500 pounds.
Coffee commodity trading is now done electronically.
Coffee futures prices are quoted in cents per pound, and the minimum price fluctuation is 5/100 cent/pound, equivalent to $18.75 per contract.
A 1-cent change in price equals $375.
The coffee futures contract months are March, May, July, September and December.
The contract prices physical delivery of exchange-grade green beans from one of 19 countries of origin in a licensed warehouse to one of several ports in the United States and Europe.

Coffee Trading Fundamentals

Robusta coffee futures are traded in London on Euronext.liffe.

The size of this coffee futures contract is 10 metric tons.
Coffee futures prices are quoted in U.S. dollars per metric ton with the minimum price movement $1 per ton or $10 for the contract.
Contract delivery months are January, March, May, July, September and November with 10 delivery months available for trading.

Other international exchanges that trade coffee futures include the Singapore Commodity Exchange (Robusta), the Commodities & Futures Exchange (BM&F) in Brazil (Arabica) and the Tokyo Grain Exchange (Arabica and Robusta).

Coffee Trading Tips

Veteran traders will give you a couple of tips about trading related to weather:

Never be short orange juice going into January.
Never be short coffee going into July.

The reasoning is the same: the threat of winter freezes. In the case of coffee futures, a freeze or threat of a freeze in Brazil that could be severe enough to damage coffee trees and reduce coffee production, perhaps for several years, can have a substantial impact on prices because of the dominant role Brazil has in the world coffee market. Depending on the world coffee supply situation, some traders are reluctant to be short coffee after May, looking ahead to the Southern Hemisphere s winter season. However, this seasonal tendency is not real strong because other countries such as Mexico can fill in with coffee supplies.

Coffee Trading Information

Coffee futures traders should be aware that because coffee production occurs in relatively few countries, it is possible that coffee shipments might be controlled in an effort to boost coffee prices, such as has occurred in the past and similar to what has happened in crude oil and some other markets. Coffee futures prices have been relatively quiet for a number of years but are not immune to blow off price explosions, as older price charts will reveal.

Coffee Trading Supply

A coffee tree can provide enough coffee beans to fill a one-pound can of ground coffee during each growing season. Coffee beans are the seeds of cherry-sized berries, the fruit of the coffee tree. It takes 3 to 5 years after planting a coffee tree before it can produce marketable coffee beans.

The bulk of world coffee production comes from the tropical highlands of the Western Hemisphere and in the low, hot areas of Africa and Asia. South and Central America produce the majority of coffee traded in world commerce. The world's major coffee producers are Brazil, Vietnam, Colombia and Indonesia. Brazil and Colombia produce mostly Arabica coffee and together account for more than 40 percent of world coffee production. Vietnam produces Robusta coffee, generally considered to be a lower quality type of coffee than Arabica.

The world produces about 120 to 140 million 60-kilogram bags of coffee per year (one 60-kilo bag equals 132.276 pounds). Coffee production can vary significantly from year to year, depending whether Arabica coffee trees are in the on-year or the off-year of their biennial production cycle. Simply comparing this year s output to last year s may be misleading for the U.S. coffee futures trader.

From plantation to market

Arabica, which represents about 70% green coffee bean production, is grown in warm, humid climates at altitudes above 4,000 ft, and this combined with the soil conditions helps it achieve its characteristic aromatic flavor. Arabica is mainly grown in the high altitudes of Latin America, such as Brazil, Peru, Venezuela, Ecuador and Columbia. One of the best grades of Arabica coffee in Brazil is Santos, where the beans are picked within the first 4 years of the coffee tree’s life. Normally with Arabica there is a long lead time of 4-5 years, while with the lower quality Robusta, grown in South East Asia, the beans are picked after 2-3 years.

Robusta is normally grown on land between sea level and 2,000 feet, and can cope with more volatile changes in climate, hence its name. Drought can cause crop yields to collapse, and so lead to coffee futures prices rising. If rainfall is too high this can also lead to lower crop yields, with similar impact on prices. Freezing can impact a crop for the current year and the following year. This is usually a problem for Arabica varieties in the higher altitudes in Latin America. Statistics show that in recent years serious freezing has happened in one in every six years in winter (June to August) months in the southern hemisphere.

The coffee tree first produces white blossom and then over a period of two weeks to 6-9 months green cherries begin to grow and these fill out into reddish and then black cherries. Each cherry contains 2 coffee beans. Most coffee is processed using the “dry” method where the cherries are stripped off the tree and the green beans are dried and graded, ready to be shipped for roasting. A rough calculation is that about 2,000 cherries (4,000 beans) produce one pound of coffee. The characteristic flavors and aroma of coffee are developed during the roasting process, when these diverse flavors, up to now trapped in the green coffee bean, are released.

Coffee Trading Demand

The United States is the world s largest importer of coffee. Kraft, Nestle, Procter & Gamble and Sara Lee are the major roaster companies and account for purchases of about 50 percent of all the annual production of coffee. Demand for coffee is price inelastic: When coffee prices rise, people do not reduce their coffee consumption proportionally; when coffee prices fall, consumer demand for coffee does not proportionally increase to any great extent. Seasonally, U.S. coffee consumption tends to rise in the winter, which may lend support to coffee futures prices.

Coffee Trading History

The International Coffee Organization produces statistics on international coffee production and shipments and promotes coffee trading among nations. Based in London, the ICO consists of 55 coffee producing and consuming member countries and makes available a great deal of data and other information to coffee futures traders.

The Foreign Agricultural Service of the U.S. Department of Agriculture also offers a wealth of coffee information and statistics, including production data by country and for the world, import and export data, etc. The various exchanges that trade coffee futures also have lots of information.

Sources and Additional Information:

http://en.wikipedia.org/wiki/Economics_of_coffee

http://www.tradertech.com/information/coffeetrading.asp

http://www.commodity-trading-today.com/coffee-commodity-trading.html

http://etrades.net/focus-on-coffee-commodity-trading-coffee-market-tips/

http://www.investopedia.com/university/commodities/commodities2.asp

Platinum Trading Basics

2011-01-25T22:23:00.000-08:00

Platinum is the principal metal of the six-metal group that bears its name; the other platinum group metals (PGMs) are palladium, rhodium, ruthenium, osmium, and iridium. All possess unique chemical and physical qualities that make them vital industrial materials.

Platinum and palladium are the most widely used of the six platinum group metals, especially valued for their catalytic functions, their conductivity, and their resistance to corrosion. They are essential in key manufacturing processes in the automobile, chemical, petroleum refining, pharmaceutical, and electronics industries. On a relative volume of the amount mined on an annual basis, platinum has more industrial uses than gold and silver combined.

Platinum is also used in jewelry, because its resistance to wear and tarnishing are well-suited for fine jewelry. If silver is the poor man’s gold, then platinum is the rich man’s gold it is sometimes called white gold. Platinum is the rarest of all the precious metals, 16 times more rare than gold and 100 times more rare than silver. It is estimated that all of the platinum ever mined throughout history would fit into a cube less than 25 feet on each side.

Coins and medallions made of platinum, though more expensive, provide another way to invest in this precious metal.

Platinum Trading Prices & Rates

The New York Mercantile Exchange (NYMEX) is the world's premiere exchange for trading platinum futures and options.

The size of the NYMEX platinum futures contract is 50 troy ounces.
Trading is conducted over 15 months beginning with the current month and the next two consecutive months and then the quarterly cycle of January, April, July, and October.
Platinum futures and options are priced in dollars per troy ounce with a minimum price fluctuation of $0.10 per troy ounce or $5 per contract.
The maximum daily price limit is $25 per troy ounce ($1,250 per contract) except for the current delivery month, which has no daily price limit.
Platinum options strike price intervals are in increments of $10 per troy ounce. Exchange of Futures for Physicals (EFPs) may be used to either initiate or liquidate a platinum futures position.

Tips for Trading Platinum

Platinum prices are sensitive to shifts in the U.S. economy. Seasonally, platinum prices tend to increase during the first quarter of the year as industrial production tends to be strong during February and March. Then, platinum prices typically decline during the summer as industrial production generally slows and easier transportation makes supply more readily available. Prices also tend to weaken in August/September as the biggest rush of auto production, the leading industrial consumer of platinum, is completed for the new model year.

Platinum Trading Supply

Annual production of platinum is only about 118 tons, or only 6% (by weight) of the western world’s annual gold production and less than 1% (by weight) of the world's annual silver production. To put the supply of platinum into perspective, more than twice as much steel is poured each day in the United States than the amount of platinum produced in the world each year.

Platinum is among the world's scarcest metals as new mine production totals only about 5 million troy ounces a year compared to about 80 million ounces for gold and about 550 million ounces for silver. Platinum occurs as a native alloy in placer deposits or, more commonly, in lode deposits associated with nickel and copper.

The vast majority of platinum mined today comes from just two parts of the world: The Bushveld Complex north of Pretoria, South Africa (80% of total supply) and the Noril'sk-Talnakh region of Siberia in Russia (11% of total supply).

Unlike gold and silver, there are no large above-ground stocks of platinum to fill the gap against significant supply disruptions in fact, probably less than a year’s supply in reserves. About eight tons of raw ore must be mined to produce just one pure ounce of platinum, and it takes 6-9 months to go from extraction to processing. With labor unrest/strikes and shortages of electrical power in South Africa interrupting mining output and with uncertainties about the flow of supplies from Russia, platinum remains vulnerable to sudden supply and price shifts.

Platinum Trading Demand

Jewelry creates the largest demand for platinum, accounting for a little more than half of annual platinum consumption, with Japan accounting for about a half of the platinum demand for jewelry. Automotive catalytic converters consume about 30% of the platinum supply and chemical and petroleum refining catalysts, 13%. The computer industry and other high-tech electronic applications account for about 7% of consumption because platinum is an excellent conductor of electricity, does not corrode, and has a low reactivity with other metals.

Gasoline, hard disk drives, anti-cancer drugs, fiber-optic cables, LCD displays, eyeglasses, fertilizers, explosives, paints and pacemakers all rely on platinum. Platinum is also the key catalyst used in fuel cells. It has been estimated that 20% of all goods manufactured today either contain platinum or is produced using equipment containing platinum.

Platinum is especially useful in auto manufacturing, where the metals-especially platinum-are key ingredients in catalytic converters, which clean up noxious car exhaust fumes. Car manufacturers now account for about 55% of global platinum and palladium use, making the industry extremely vulnerable to metal shortages and price increases.

Demand for platinum in high-technology applications is soaring due to its unique properties: It is virtually impervious to corrosion, has a melting point in alloy of 3,215 degrees Fahrenheit, is a powerful catalyzing agent and is highly conductive.

Platinum Trading Background

The first European reference to platinum appears in 1557 in the writings of the Italian humanist Julius Caesar Scaliger (1484-1558) as a description of a mysterious metal found in Central American mines between Panama and Mexico. Spanish conquistadors had discovered platinum when they were panning for gold in the Choco region of today’s Colombia. Because platinum interfered with gold panning, it was considered a nuisance and discarded as worthless.

However, in 1751 a Swedish assayer, Scheffer, successfully melted and worked the substance that had stymied the conquistadors, and by 1780, French glass workers were using platinum to make crucibles of glass because platinum did not melt at the extreme heat needed for making glass. Platinum's resistance to heat, corrosion, and strength made it an important industrial metal.

In the early 1800s, platinum was found in the gold fields of the Ural Mountains in Russia...and the Russian government decided to take that rare element and turn it into a monetary metal by producing platinum roubles. Over the next 18 years, the Russians minted nearly half a million ounces of platinum roubles and transformed the metal from a mere commodity into a precious metal that was and is, like gold, a store of value.

When jewelers were able to melt platinum in the 19th century, "white gold" began to replace silver in jewelry. The lustrous white color of platinum better accentuates diamonds, and the bands can be much smaller as platinum is more than 100 times stronger than silver.

Platinum Trading Resources

Platinum traders may not have the organizations or associations on which they can rely for information, but exchanges and brokerage firms have resource materials on platinum and palladium. Platinum prices are covered by all major publications, and sources for the automobile or jewelry industries also have information about the use of platinum in their businesses.

Sources and Additional Information:

http://www.tradertech.com/information/platinumtrading.asp

http://www.monex.com/prods/platinum.html

http://seekingalpha.com/article/134045-trading-platinum-and-palladium-ahead-of-the-etf-launch

http://www.tkfutures.com/platinum.htm

Silver Trading Basics

2011-01-13T23:13:00.000-08:00

Investing in the Silver Market

Silver has often been called the poor man’s gold, taking a back seat to gold when traders looked for a safe-haven investment. Silver is considered a precious metal but not as rare as gold. While silver prices have always been far below the value placed on gold, prices of the two metals have generally tracked together as the factors that affect gold also tend to affect silver. Silver, however, has a wider range of uses and is priced for its industrial uses in electronics, photography, jewelry and elsewhere in addition to its financial role, increasing its significance for an investment portfolio.

Like gold, there are a number of vehicles for investing in silver in addition to silver futures and options. Those who choose to invest in physical silver can buy silver bullion, silver coins, silver medallions or silver certificates backed by silver in vaults.

Silver traders who prefer to express their interest in silver prices through stocks can invest in mining companies including penny stocks or in silver exchange-traded funds.

Silver Trading Information

Like gold, silver is traded at a number of exchanges around the world, including Sydney, Tokyo, Dubai and the world’s major silver futures exchange, the Comex division of the New York Mercantile Exchange (NYMEX).

The full-size NYMEX silver futures contract is 5,000 troy ounces of refined silver, not less than .999 fineness, in cast bars weighing 1,000 or 1,100 troy ounces each.
Contract months are the next two calendar months, any January, March, May and September within a 23-month period and any July and December falling within a 60-month period beginning with the current month.
Silver Prices are quoted in dollars per ounce, with the minimum price fluctuation one-half cent per ounce or $25 per contract.
Straddles or spreads are traded in tenths of a cent, equivalent to $5 per contract.

NYMEX also trades a half-size miNY silver futures contract. However, activity has been limited and may not be liquid enough for active traders.

A report on silver warehouse stocks provides a daily amount of silver inventory on hand for possible delivery on futures contracts. A decrease in inventories can provide support for silver prices to move higher.

Another venue for trading silver futures is NYSE Euronext, which purchased the metals complex including mini- and full-size silver futures contracts that were traded at the Chicago Board of Trade prior to the CBOTs merger into CME Group.

Silver Trading Fundamentals

Newly mined metal provides most of the needed supply of silver, with much of it coming as a byproduct from mining for other metals. About 75 percent of the worlds annual supply of silver comes from mining production, with the remainder coming from government sales of silver stocks and from recycled scrap, including what is termed dishoarding as silver coins, jewelry and other silver products are melted down.

Future silver prices depend directly on this supply. In 2008, 20,900 metric tons of silver were mined in the world. The overwhelming leader in mine production by region was Central and South America. Peru, Mexico, and Chile alone combined to produce 8,600 metric tons of silver, or 41% of global silver production. Individually, the global leaders in silver mine production as a percent of global production are as follows: Peru (17%), Mexico (14%), China (12%) and Chile (9.5%). Production is only one of the factors affecting the future silver price. The second factor is the demand. There are many uses for silver other than jewelry.

On the demand side, about 54 percent of the world’s supply of silver is used in industrial applications, including a variety of uses in the electrical and electronic sector. Until 2005, the single largest demand for industrial or commercial use came from the photography industry. Currently, 15% of fabricated silver is used for photography. In the past 10 years, demand from the photography industry has been almost cut in half resulting in the decline of silver’s percentage of overall demand from 27% to its current level of 15%. The jewelry market surpassed photography as the leading consumer of silver in 2005. The reason for this decline has been the increasing use of digital cameras. This has been, and will most likely continue to be a growing trend affecting the future silver market.

Even with the decline in photography demand for fabricated silver, overall demand has held relatively steady. Making up the slack has been the growth in fabricated demand from industrial applications other than photography. These industrial applications include: batteries, bearings, soldering, catalysts, medical, solar energy, and other electronics. Demand for these industrial applications has grown by 45% and now makes up almost 55% of fabricated silver demand. That compares to the 38% figure of 1998.

Other uses for silver include coins, medals, and silverware. These three sectors round out demand and make up 11% of total fabricated demand. Many people are surprised to hear how much of the silver demand goes towards uses other than implied investments by private and government interests. Silver is classified as a precious metal, but that doesn’t mean it can’t be used for industrial and commercial purposes. As you can see, that really couldn’t be less true. Understanding silver’s uses and leading suppliers is an important part of trading future silver markets.

Silver Trading Tips

If you trade silver, you want to watch gold and anything that influences gold prices as the two markets tend to move together. Particularly important for the prices of both precious metals are the government economic reports such as quarterly gross domestic product, monthly Consumer Price Index and Producer Price Index figures that measure the inflation rate and any other reports that reflect the country’s economic growth. Economic reports from other nations can also provide clues about silver demand.

Watch the spread between the gold and silver prices to move to one extreme or the other and expect it to come back to normal, buying silver and selling gold at the high end of the spread, for example.

Silver is an excellent commodity to have on hand if you are expecting high inflation and/or chaotic economic conditions because silvers lower values provide more flexibility for purchasing smaller items. For that reason, some people prefer to hold silver coins.

Be careful when holding silver futures overnight. In the volatile market conditions that have marked silver trading in recent years, the price of silver can make big moves from one day to the next. An unexpected crisis can occur at any time anywhere in the world, causing traders to look to the gold or silver markets to preserve their wealth. It is not uncommon for silver prices to open 20 or 30 cents higher or lower than the previous day’s close $1,000-$1,500 per contract and silver futures have been known to move $1 or even $2 intraday $5,000 to $10,000 per contract. That’s hardly a poor man’s contract.

Silver ETFs

ETFs (Exchange Traded Funds) have become highly popular in the last two decades. They give you the benefits of both stocks as well as mutual funds. Now, you can find many ETFs tracking a basket of commodities. You can find Gold ETFs as well as Silver ETFs. The most popular one is the iShares Silver Trust Fund that is managed by the Barclays Bank. The bank holds the silver bullions in its vault. This ETF tracks the spot price of silver. So by investing in this ETF, you can profit from the silver price volatility. However, right now there might not be many ETFs that solely track this commodity. As the demand for silver increases and its price skyrocket, you will soon find many new ETFs tracking this precious metal.

Silver CFDs

Many people are learning how to trade silver using contracts for difference (CFD), as this is a convenient way to profit from an increase in price without the headaches of storing the physical metal. Silver is particularly interesting for the trader, as it differs from gold in a couple of respects. Nearly as much gold as has ever been found is still in existence in the world in the form of jewelry and other items; whereas there is very little silver left of what has been mined, as it gets used up in many different industrial processes.

When you use contracts for difference to trade silver, you will find that it is extremely efficient. The margin requirement, the amount you have to put up to enter a trade, can be as little as 0.5%, giving you the leverage of 200 to 1 on your money. In the futures market, another way to trade on commodities, you may only get a leverage of 25 to 1, which makes the CFD far more effective.

Depending on your CFD broker, you may be able to trade on the spot price of silver, that is the current price, or you can also take out a contract on the price on a future date. Using CFDs it is as easy to profit from a fall in value as from a rise, so you are also able to make money during periods of price consolidation. Your chief cost of trading is in the spread, which makes it easy to understand.

Say for example that you wanted to take out a contract for difference for a long position in silver anticipating that the price will increase. You may be quoted 20.44 -- 20.49. The lot size may be 500 ounces, and one advantage of using CFDs is that you're not restricted to the lot sizes offered on standard futures contracts. One long contract on 500 ounces would be worth $10,245, so the margin requirement could be as little as $50, depending on your broker.

If the price now goes up to 20.72 -- 20.77 and you close the position, your points gain from 20.49 to 20.72 is 23. The value of the contract has gone up to $10,360, an increase of $115 for a modest gain in price on a margin of $50. Of course, leverage can work against you, and if the price had fallen you could be facing a margin call from your broker to make up your losses. Therefore it's important that you take time to educate yourself about CFDs, and make sure that you cut your losses whenever it becomes apparent that you don't have a winning position.

Silver Trading Resources

There are multiple sources for finding news and information about purchasing silver as an investment or trading silver for profit opportunities. Most major newspapers and other financial news sources that cover metals report the pricing and sales of silver. Government sources, exchanges and brokerage firms all offer many resources for silver traders.

One of the major sources of information is The Silver Institute, an international association of miners, refiners, fabricators, and wholesalers of silver and silver products established in 1971 to promote the interests of silver worldwide.

Silver Trading History

Civilizations have been using silver going back 6,000 years, as silver deposits were on or near the earth’s surface, and the durable, malleable metal was used for jewelry and other artifacts that have been recovered. Mesopotamian merchants used silver as a form of exchange as early as 700 B.C., and the ancient Greek drachma and Roman denarius coins were made from silver. And then there is the English shilling "sterling," originally denoting a specific weight of silver, which has come to mean excellence.

Silver played an important role in the early days of the United States when Congress based the currency on the silver dollar and its fixed relationship to gold. Silver was used in U.S. coinage until being discontinued in 1965.

Silver gained a more important economic function as an industrial raw material at the beginning of the 20th century as new processes for photography, jewelry and electronics began to develop.

Sources and Additional Information:

http://www.tradertech.com/information/silvertrading.asp

http://commoditysilver.com/silver-market-fundamentals/silver-basics/

http://www.bforex.com/Online-Silver-Trading

http://www.zimbio.com/Trading+and+Investing/articles/RnZjm5N1-P4/Investing+Silver+Coins+Silver+Futures+Silver

http://www.contracts-for-difference.com/markets/Silver-CFDs.html

Directional Movement Index (DMI)

2011-01-01T15:13:00.000-08:00

Overview

The directional movement index (DMI) is a technical indicator created by J. Welles Wider in 1978. Wilder is also the architect of another commonly used indicator called the relative strength index. The DMI is extremely helpful for measuring price direction as well as the strength of the movement. It is generally suitable for trading trending and ranging markets. Many traders use the directional movement index as part of their entry-exit strategy and to make decisions about whether to go long or short.

The DMI is a tool commonly used by traders to distinguish between weak and strong trends. It is extremely popular with individuals who utilize trading strategies based on trend following systems. It can be used to trade a wide variety of assets, including stocks, commodities and currencies. The directional movement index is actually a moving average of the price range and is typically calculated over a 14-day period. The DMI calculation is based on the price range of the asset over a specific period. Then the most recent price is weighed against the previous price range.

A line scaled from 0 to 100% is used for the purpose of rating the directional movement of a price. The higher the value of the DMI is, the stronger the signal for a trend. On the other hand, the lower this value is, the less the potential for a trending price movement.

Two lines are needed that reflect the buying and selling pressure in the drawing of a DMI indicator chart. The positive directional indicator, marked as DMI+, measures how strong the price movement in an upward trend is, whereas the negative directional indicator is marked as DMI- and measures how strong the price movement in a downward trend is.

The first thing to look for when examining the DMI lines is which of the two is higher. Some trend traders refer to line on top as the dominant DMI line and consider it stronger and more likely to forecast the trend direction. It is regarded that bullish market conditions are experienced when the -DI is lower than the +DI. The vice versa is true for bearish market conditions.

Trading Signals

A number of different trading systems have developed around Directional Movement. The following rules are based on the system presented by Dr Alexander Elder in Trading for a Living:

Go long when DMI+ (+DI) is above DMI- (-DI) and either:

ADX rises while +DI and ADX are above -DI; or
ADX turns up from below +DI and -DI.

Exit when +DI crosses below -DI.

See ADX for further details.

Go short when -DI is above +DI and either:

ADX rises while -DI and ADX are above +DI; or
ADX turns up from below +DI and -DI.

Exit when -DI crosses below +DI.

Use stop-losses at all times.

Additional Notes

The DMI crossovers can generate many false signals, so the other indicators should be used for confirmation of the DMI crossovers.
The Average Directional Movement Index (ADX) is an important addition to the DMI+ and DMI- indicators. In fact, the ADX is calculated using both DMI lines.

Sources and Additional Information:

http://www.onlinetradingconcepts.com/TechnicalAnalysis/DMI.html

http://www.forex-trading-gurus.com/forex-technical-analysis/directional-movement-index-dmi-technical-indicator.html

http://www.wisegeek.com/what-is-a-directional-movement-index.htm

http://www.incrediblecharts.com/indicators/directional_movement.php

http://www.esignalcentral.com/support/futuresource/workstation/help/charts/studies/dmi.htm

What Is Fill or Kill Order?

2010-11-30T23:25:00.000-08:00

About Fill or Kill (FOK) order

A Fill or Kill order can be placed with a financial broker when buying a security. This is commonly used in the stock market, commodities market and Forex market.

With this type of order, the buyer specifies that the entire amount of the order must be filled or the broker is to disregard the order entirely. The buyer does not want any partial order fills for this particular order. In many cases, if you do not specify the type of order, and there is not enough of a particular security to fill the order completely, the broker will make a partial fill at that price. This might provide you with only a fraction of the amount of securities that you want to purchase.

A Fill or Kill order differs from immediate or cancel orders in that immediate or cancel orders allow partial executions. The Fill or Kill order in stock trading is an exchange that will never trade partially. It can be very useful when someone wants to buy or sell immediately, but the standard market order is too dangerous (because of possible price fluctuation), as a limit FOK trade will only act if it can immediately fill at the set price or better, which means that it will cancel if it cannot buy or sell all shares at a price that is satisfactory to the investor who set the order.

Fill or Kill Trading Orders

Application

This type of order is commonly used in transactions that involve purchasing large numbers of securities. For example, if you wanted to buy 20,000 shares of a particular stock, at a particular price, you might want to use a fill or kill order so that you do not end up with only 5000 shares of the stock at that price. Not getting a full order could affect your investment strategy in a way that you would dissatisfy you.

Restrictions

Not all brokers and markets accept Fill or Kill orders and many brokers have restrictions in placing these orders like 1) the order must be equal (or exceed) a certain number of stocks, 2) orders can be only placed at market hours, 3) these orders are not allowed at/near market closing, 4) the orders cannot be stop or short orders, etc. Often FOK is considered as a restricted order than useful trading tool.

For example, Fidelity posts the following restrictions for the Fill or Kill orders:

are for 101 shares or more
are only placed during market hours
are good only for the current day
are not allowed for use with stop loss, stop limit, or sell short orders

Examples

Suppose that a stock has been trading at around $5 for the past few hours. An investor looking to purchase 1,000 shares could set a buy limit order with the FOK component, and as soon as the order is enacted, either 1,000 shares will be bought at $5 or less, or none will be bought at all. If enough sellers are available, and the value is within the $5 limit at the time of the order, it will fill completely.

A sell order works the same way. Suppose that an investor is looking to unload 1,000 shares of a stock with a limit price of $10. As soon as the order is placed, it will fill by either unloading all 1,000 shares at $10 or better at once, or it will cancel.

Sources and Additional Information:

http://www.finance-insurance-loans.com/finance/insurance/what-is-a-fill-or-kill-order/

http://en.wikipedia.org/wiki/Fill_or_kill

https://scs.fidelity.com/webxpress/help/topics/help_definition_f.shtml#fillorkill

http://www.suite101.com/content/what-is-a-fill-or-kill-order-in-stock-trading-a301534

Learning Curve for Stock Trading

2010-11-21T00:09:00.000-08:00

How long does it take to become good at stock trading? No trader’s journey to learning and succeeding in the markets is the same, but here are some basic guidelines and time frames to becoming a competent stock trader:

The First Year

Your beginning months should be spent researching and developing your stock trading plan. No one should ever begin trading in the stock market without a plan of action. Will you be a day trader? Long term investor? What rules and guidelines will you establish and follow for making trades? Without this information, you’ll rarely succeed and never be able to duplicate success you do obtain through luck.

Attend seminars and workshops designed for stock trading. Don’t fall for the ones that claim to share “secrets of stock trading” as there are no secrets! Look for seminars and workshops which teach you to read charts, discuss the psychology of trading, creating trading plans and guidelines, or basic money management courses for investors.

Purchase and begin using charting software. Observe the changes in the market, and look for patterns and trends. Don’t make any decisions now; this is just an observation stage.

Read books about stock trading. Don’t read them the way you would a novel – really analyze what the author is saying, see if you can put the information into real-life context, and watch how the information is reflected in the market.

At the end of the first year of learning and studying stock trading, you should have a stock trading technique chosen and a plan for your own trading in place. You may have decided stock trading is not for you in which case you’ve just saved yourself a whole lot of money!

Year Two

Now that you’ve put in the research and planning time, your second year should begin your initial attempts at making trades. Open an account with an amount of money you can afford to lose, and consider it your educational expense into the world of stock trading.

Before making any purchases, test out your planned strategy through “back testing”. Look at various stocks and see how you would have done if you had purchased a certain number of stocks during a particular time period. Would you have made a profit or lost money? Once you see how it works, decide on your first purchases.

Continue observing trading charts, attending seminars and workshops and studying books. Continue making trades and monitoring your progress. Adjust your stock trading plan according to the results you’re obtaining. You’re looking to create a plan that profits more than it loses, so that you can put the strategy you’ve chosen into place and stick with it.

Year Three and Four

By now, you should have a plan you’re comfortable with. You should be making small gains in the market. Keep to the plan and maintain discipline – each time you make a trade that is outside your stock trading plan, you risk losing more than you can gain.

Becoming competent in stock trading is a lot like obtaining a college degree – it takes you three to four years of studying and applying what you’ve learned to become successful.

Source: http://www.stocktrading.net/2010/10/time-frame-to-competent-stock-trading/

Should You Consider Emerging Markets Exchange-traded Funds?

2010-11-13T21:35:00.000-08:00

Emerging Markets Overview and Characteristics

Emerging markets include Brazil, Russia, India and China as well as Taiwan, Argentina, Turkey, Pakistan and others.

Faster Growth

Emerging market economies are generally growing at a faster rate than the developed world and this is set to continue for many years. The economies are increasingly driving their own growth as domestic consumer spending and trade between emerging market countries are becoming much more important. As a result, emerging markets rely less on global economic growth than in the past.

Improving Balance Sheets

Emerging markets have better overall economic fundamentals than the developed world, in terms of current account balances and government debt. There has also been structural improvements across many of these countries in recent years, with foreign debt levels down sharply and increased foreign exchange reserves.

Long Term Outlook

Although there is near term uncertainty due to the potential for a global recession and a constant battle against inflation, the medium to long-term investment case for emerging markets remains compelling.

What is Emerging Market ETF?

An exchange-traded fund that focuses on the stocks of emerging market economies, such as Latin America, Asia and Eastern Europe. The underling indexes tracked by emerging market ETFs vary from one fund manager to another, but all should be passively managed and contain equities from multiple countries, unless otherwise stated.

Within the broad class of emerging market ETFs, there are fund members that focus on certain market-capitalization ranges, high-dividend stocks, or funds with high allocations towards specific sectors.

How does an Emerging Markets ETF work?

A sponsor, mainly a huge bank or a big financial institution, creates a plan of an investment scheme to test its attraction value. If the reception to such a scheme is good, the bank purchases the necessary stocks. However, that may differ from industries to regions, and sectors. Once the portfolio is completely bought, it is deposited with a trustee. The trustee issues ETF certificates which are later marketed. The value of the stock is priced slightly higher than the real value for profits.

Advantages of EFTs

There are many advantages to these ETFs besides hedging like:

Foreign markets and the local markets do not behave similarly all the time. Therefore, when one economy does not do well, the losses can be neutralized.
When the emerging economies perform well, the ETFs’ value increases. Brazil and South Korea are two good examples.

Disadvantages of EFTs

The disadvantages of these ETFs are:

In difficult times like recession, the decreased money flow can limit the growth of emerging market, and thus impact the value of the ETF.
If the ETF has markets that are dependent on each other or on a common market, then a slight disturbance in one market can create turbulence elsewhere.

Types of emerging market ETFs

The popularity of Emerging Markets investing has lead to the introduction of several types of ETFs.

Total Emerging Markets

The most popular ETF is iShares MSCI Emerging Markets Index Fund (EEM) which tracks an index that captures 85% of the market capitalization of the emerging markets. Vanguard has a similar offering with a lower expense ratio of only 0.25% - the $6 billion Vanguard Emerging Markets ETF (VWO).

Other ETFs that capture most or all of the emerging markets include State Street's SPDR S&P Emerging Markets ETF (GMM) and PowerShares FTSE RAFI Emerging Markets Portfolio (PXH).

Market Cap

The single large cap ETF is PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE). Two small cap offerings include the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) and the recently introduced SPDR S&P Emerging Markets Small Cap ETF (EWX).

Specialty

For dividend investors, WisdomTree also offers the Emerging Markets High-Yielding Equity Fund (DEM). Technical investors can choose the DWA Emerging Markets Technical Leaders Portfolio (PIE)

Short

Two ETFs are available for taking short positions on the Emerging Markets. ProShares' Short MSCI Emerging Markets (EUM) and UltraShort MSCI Emerging Markets (EEV) enable investors to hedge their portfolios without having to borrow shares.

Regional Funds

State Street has introduced a series of regional Emerging Market ETFs that cover the Middle East and Africa (GAF), Latin America (GML), Asia Pacific (GMF) and Europe (GUR).

In addition single country ETFs are available for some of the emerging market economies.

Bond Funds

Fixed income ETFs are also an option for Emerging Markets investors. The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) and the JPMorgan USD Emerging Markets Bond Fund (EMB) are the two choices.

Investing in Emerging Markets – How much is Right?

Emerging market companies make up 20% of total global market capitalization and emerging economies make up nearly 27% of global GDP. Harvard and Yale Endowments have found emerging markets investments compelling enough to allocate 30% of their equity investments.

While such large allocations may be suitable for some institutions, most individual investors would do well to consider volatility and their capacity to take on roller coaster rides. Over the past two and a half years, emerging market stocks have proven to be nearly 70% more volatile than U. S. stocks and 44% more volatile than developed market stocks. Limiting emerging market exposure to less than 15% of one’s assets may not be a bad idea for most individual investors.

Sources and Additional Information:

http://www.economywatch.com/etf-exchange-traded-funds/emerging-markets-etf.html

http://www.etfmarketpro.com/emerging-markets-etfs.html

http://etfdb.com/2010/seven-things-every-investor-needs-to-know-about-emerging-market-etf-investing/

http://www.fool.com/investing/general/2010/05/19/are-you-scared-of-emerging-market-etfs.aspx

http://www.alphaprofit.com/Money/Emerging-Markets-ETFs-Mutual-Funds-Investing-1.html

Bearish Options Trading Strategies

2010-11-07T14:45:00.000-08:00

Introduction

Bearish Options Strategies are options trading strategies that are designed to profit when a stock goes down.

For stock traders, the only way to profit when a stock goes down is by shorting the stocks itself. Shorting the stocks itself does not only offers no leverage at all but also exposes you to unlimited risk should the stock rise instead of fall and also requires a significant margin.

Bearish options strategies overcomes these issues by having more than just one way of profiting from the same drop in stock price. Some bearish options strategies not only require no margin because there is no need to short anything but also has limited risk should the stock go up instead. Indeed, you can get such a wide variety of ways to profit when a stock goes down only by options trading through the use of bearish options strategies.

The Main Component

The main component of most Bearish Options Strategies are put options. Put options completely revolutionized the way traders profit when a stock goes down because there is no need to short anything at all. Traditionally, profiting when a stock goes down only happens when you short the stock itself. Shorting a stock means to "sell" something you do not yet own (through borrowing from your broker actually) and hoping to buy it back when the price drops later, resulting in a profit. This approach is unfavorable in many ways and one of these is the fact that you have to short something (the stock in this case). Having to go short places a margin requirement on your account which actually puts you in debt to the broker and exposes you to unlimited liability of returning the same number of stocks to your broker no matter what the price is in future. This is also why so few stock traders are short sellers. Short selling is simply not as convenient as buying for more retail investors. However, options trading opened up a totally new door as put options are the only financial instrument you can buy that will gain in value when a stock goes down. Yes, put options are contracts that you actually buy to own and then profit when the stock goes down. If the stock goes up instead, the put options simply expire worthless and you lose nothing more than the money paid on those put options. This limited loss potential along with the leverage put options offers is the reason why put options are the backbone of bearish options strategies.

Debit & Credit

There are two broad categories of Bearish Options Strategies; Debit Strategies and Credit Strategies. Debit Bearish Options Strategies are bearish options strategies which you need to pay cash for. These are Bearish Options Strategies that may have incorporated short options but does not cover the premium paid for the long options entirely. Credit Bearish Options Strategies are Bearish Options Strategies that credits your account with cash when the position is put on. These are Bearish Options Strategies that are made commonly by shorting call options instead of buying put options in order to profit from time decay as well. An example of credit bearish options trading strategy is the Bear Call Spread where Call options are used instead of put options. Credit Bearish Options Strategies certainly increases the odds of winning since it puts time decay in your favor but it limits the maximum options trading profit that can be made.

Lowering Initial Outlay

One main reason for the development of Bearish Options Strategies is the need to lower capital outlay when buying put options. The lower one pays for a put option position, the higher the ROI one makes from the same move, right? Bearish Options Strategies does that primarily by shorting or writing out of the money put options on top of buying the at the money or in the money put options. As long as the stock does not move lower than the strike price of the out of the money Put options, the premium earned from selling those put options partially offset the higher cost of the at the money or in the money put options, lowering the initial capital outlay of the position. An example of this is the Bear Put Spread.

Profiting From Time Decay

Bearish Options Strategies are not only capable of producing a profit only when the underlying stock goes down but also when the underlying stock remains stagnant through time decay. Bearish Options Strategies put time decay in your favor through the use of short call options instead of long put options. Short call options profit as long as the underlying stock closes lower than its strike price during expiration but has a limited profit and unlimited risk potential. The most direct example of such a bearish options trading strategy is obviously the Naked Call Write options trading strategy. The problem with such Bearish Options Strategies is the high margin deposit requirement of most options trading brokers and that is why other options are also combined with short call options to produce credit Bearish Options Strategies with lower margin requirements.

The Trade-off

Options trading is all about trade-offs. Utilizing Bearish Options Strategies rather than simply buying put options normally limits the maximum profit that you can make when the underlying stock goes down dramatically. This is the price you pay for having all the other benefits that these more complex Bearish Options Strategies grant.

Some of the Options Trading Strategies

Buying Puts

Buying puts is a bearish, somewhat speculative technique in which the investor anticipates that a stock will decrease in price during a set period of time. The trader realizes a profit when the stock and its underlying put option decrease in price during a set amount of time. The profit potential in such a deal is limited because a stock price can never go below zero. Also known by the term “buying in-the-money puts”, this technique is speculative; if the price of the stock remains steady or rises during the option period, it is possible for the trader to lose the initial investment. This risk reward ratios, however, are limited to the amount paid for the premium on the put option.

The technique of buying puts is dependent on timing and charting a stock’s movement to catch a downward price movement. Accurate charting of a stock and technical analysis of its performance and direction are critical when buying puts. There are a variety of events that can move the price of a stock down as desired, such as poor earnings reports, buyout or acquisition of the company, and new product introduction are among the events that can shape the views of investors and impact the stock market. This strategy of buying puts can also put more money in the pockets of successful traders.

The downside of this technique tends to be the possibility of an error of judgment. If an investor decides to buy puts on a stock without properly researching its position or charting its movement, it is possible that stock will be bullish or changing from bearish to bullish. In essence, if a stock reached its bottom or is rising, the trader has moved at the wrong time and is in danger of losing the premium for the trade. Investing mistakes such as this are a prime example of what can go wrong when buying puts.

Buying puts is actually an alternative to selling short on a stock. While being similar to buying calls, the advantage of buying puts over selling short lies in the ability to leverage the transaction and make your trading more successful. Since the puts can be purchased on the margin, it is possible to control a much larger number of shares, thereby increasing the profit potential on the purchase. Downward movements in stock prices and their underlying put options create much larger returns than by simply selling short.

The price of a premium for buying puts is affected by two variables. First, the time period involved for the option is a determining factor in price. The longer the time between purchase and expiration dates, the higher the price. Second, the movement of the underlying stock affects the price of the premium, especially in relation to the stock’s strike price. A stock that has been in a bearish trend will have a higher premium than a stock in a bullish trend. This is a stock market basic that can be successful even for a beginner investing in the stock market.

Buying puts is one of the stock option trading strategies that provides the investor with the opportunity to make money on a stock expected to be bullish. Remembering to follow a proven stock market trading system will help deter the trader from moving on the wrong stock.

Selling Calls

When an investor is feeling bearish on the market, another good stock option trading strategy to employ is Selling Calls or Selling Bear Calls. This method is also known by the name Vertical Bear Calls. This is considered a bearish strategy because the trader profits if the underlying stock decreases in value. Basically, the strategy is to buy out-of-the-money call options and sell in-the-money call options on the same stock with the same expiration date. The plan is that the in-the-money stock closes lower than its strike price at its expiration date, and then the trader realizes maximum profits from selling calls.

When selling calls, the investor will experience maximum loss when the stock price increases above the higher, out-of-the-money call option strike price at the expiration date. This loss will be the difference between the two strike prices minus the net credit of the spread when it was originated. While there is risk involved, this stock investing concept allows investors to find profits even when the market is bearish by selling calls.

The downside of selling calls is that, while it is lower risk than simply buying put options, it has a limited profit potential as well. The break-even is at the lower strike price plus net credit. The maximum profit potential is when the stock decreases below the in-the-money call option strike price. In such cases, the investor will review his / her stock trading plan to see if the data and potential risks of the strategy are likely to create successful trading when selling a call.

For example, an investor wants to sell calls on ABC, Corp. The stock price is $39.875. The trader sells an in-the-money call option with a June expiration at a strike price of $35 for $5. At the same time, the investor buys a out-of-the-money call option with a June expiration at a strike price of $40 for $1.56. Selling a call such as this is a net credit of $3.44, spread of $5, or the difference between the costs of the two options. If the stock price is lower the in-the-money strike price on the expiration date, this would be a maximum profit of the net credit when selling the calls: $5.00 - $1.56= $3.44 x 1 contract (100 shares) for a maximum profit of $344. Conversely, the maximum loss would be if the stock closed above the out-of-the-money strike price on its expiration date: $5.00 Call Spread - $3.44 net credit received = $1.56 x 1 contract for a maximum loss of $156.00. Because the risk is low, the risk reward ratios when selling calls are still very good.

A successful trader will adequately investigate such a move prior to selling calls. That way, he / she can be assured that the trade has a high probability of being successful. As with any trade, the investor needs to understand the risks and potential profits involved in order to make a wise decision. Using a stock trading system such as Japanese Candlesticks, the investor has access to charts that are understandable and powerful data in the attempt to sell calls to make a profit.

Put Hedge

A Put Hedge is the stock option trading strategy of buying puts during a bearish market to protect stock shares that, while the trader is reluctant to sell, are vulnerable to a decline in the market. Successful traders utilize strategies such as Put Hedges to insulate their portfolios from loss in a bearish market. This method also has the potential of unlimited profits, while at the same time limiting the potential loss by the investor.

When a trader is utilizing portfolio diversification and feels that the portfolio is exposed to a market decline, it is possible for the investor to have several options available to create a Put Hedge. An excellent technique, if the trader feels his, or her, portfolio is sufficiently diversified, is to purchase index puts to protect the entire portfolio. To implement a Put Hedge, the investor needs to select an index that best represents his / her portfolio. If the trader has successfully utilized his / her stock trading system, such as Japanese Candlesticks, and identified a declining market, any losses incurred with the decline in assets will, in turn, be offset by the gains made as the value of the index puts, or Put Hedges, experience an increase.

In such a stock market strategy, the profit reward has the potential to be unlimited, since both the traders’ portfolio and Put Hedge could rise instead of fall. In this instance, the investor would make money on the portfolio and the index puts minus the cost of the premium paid for the puts. If the stock market technical analysis of the trader is correct and the market declines, the losses on the established portfolio will be limited because they will be offset by the gains realized on the Put Hedges that were purchased. These puts, in turn, have been successful and the investor has created a Put Hedge which protected the trader’s portfolio in a bear market.

When the market turns or the investor once again has confidence in its stability, he / she can sell the index puts if the retain any value, giving the trader another avenue of profit. If the market index puts have expired, the trader will need to determine an appropriate course of action. If the market has truly turned, the investor can simply do nothing, since he / she no longer needs a Put Hedge to protect the stock portfolio. If the market is still bearish and unstable, the trader will need to determine whether it is necessary to purchase an additional Put Hedge as protection against the stock market. If so, the method for this transaction will be identical to the original purchase.

As with any strategy in the stock market, it is important to analyze the expectations for the underlying asset and for the market before proceeding. Remembering that this practice occurs during a bearish market, the investor must realize that any strategy should be conservative and consistent with his / her stock trading plan. Whether using Put Hedges or buying out-of-the-money calls, it is important that the investor understands that the ultimate goal is to make money, as well as to protect the money already made.

Bear Call Spread

A Bear Call Spread is a stock market strategy employed when the market is extremely volatile and moderately bearish. Because of the erratic movements in a bear market, an investor will, in many instances, look to make moves that are profitable, yet hold low risk. The Bear Call Spread, also known as the Bear Credit Spread, is just such a technique that successful traders use in times such as these.

The stock option trading strategy for a Bear Call Spread is as follows. A trader sells a call option at one strike price and buys a call on the same asset which is further out-of-the-money (at a higher strike price). In most cases, both options will have the same expiration date. The profit and loss strategy for a Bear Call Spread is quite similar to a Bear Put Spread; however with this technique; the trader immediately receives a net premium when establishing the position. In a Bear Put Spread, the premium is paid when the position is established. Because of this difference, the investor already has money in hand at the inception of the Bear Call Spread.

The Bear Call Spread is lower risk than the Bear Put Spread; however, the profit potential is lessened as well. In a Bear Call Spread, the risk is minimized because the investor purchases lower priced calls that are protection if the price goes up significantly. Conversely, in a Bear Call Spread, profit potential is limited to the premium collected for the calls sold, less the cost of the premium paid for the calls that were purchased. As the name implies, this strategy is used in a bearish market, unlike the Bull Call Spread, which is employed when the market has become bullish.

A Bear Call Spread is a perfect example of successful trading. When an investor, through stock market technical analysis, realizes the presence of a bear market, it is imperative to modify the stock investing system. A bull market brings more opportunities for profitable trading; a bear market typically moves a trader into a more conservative approach of minimizing risks and finding trades that, while lucrative, are less risky. A Bear Call Spread is a perfect example of such a conservative move to find profits.

During a bearish period of trading, it is necessary for the investor to follow his, or her, stock trading plan. This requires solid stock technical analysis, stop loss strategies, and utilization of a stock trading system such as Japanese Candlesticks. This system, which has more than 200 years of success, helps the investor to evaluate the data obtained through technical analysis. Japanese Candlesticks is invaluable, especially in bearish times, as it assists the trader in drawing conclusions about the movements of the market.

A Bear Call Spread is one technique that an investor can use to find profits during an especially bearish market or a market experiencing volatility. Through technical analysis tools and learning how to read stock charts, a trader can focus on making money even when the market wants to take money from its investors.

Sources and Additional Information:

http://www.optiontradingpedia.com/bearish_options_strategies.htm

http://www.candlestickforum.com/PPF/Parameters/16_1324_/candlestick.asp

http://www.candlestickforum.com/PPF/Parameters/16_1333_/candlestick.asp

http://www.candlestickforum.com/PPF/Parameters/16_1348_/candlestick.asp

http://www.candlestickforum.com/PPF/Parameters/16_1329_/candlestick.asp\

http://www.optionseducation.org/strategy/default.jsp

Demarker Technical Indicator

2010-10-31T20:29:00.000-07:00

Definition and Overview

The Demarker Indicator is a technical analysis tool developed by Tom Demarker for identifying high-risk buying or selling areas in a given market. It is a technical indicator that attempts to measure the demand of an asset by comparing the high and low prices with the previous high/low prices.

It is composed of two others indicators which are DeMax and DeMin. The first compares the current bar high with the previous bar high while the second compares the current bar low with the previous bar low.

These two indicators moving average are then assembled to create the DeMarker indicator.

The period using to calculate the moving averages discussed previously is the DeMarker indicator input, and this is the only one this function accepts.

The indicator is bounded between -100 and +100, and is subject to different interpretation. But generally, it is considered as an overbought/oversold indicator, so when the DeMarker value rises above a certain level (70 for example, but it depend on the period you set), it is considered as bearish signal, while a fall below a certain level (30, also depends on the period), it is considered as bullish signal.

Algorithm

Prediction Algorithm:

1. Calculate DeMax (i): If HIGH(i) > HIGH(i – 1), then DeMax(i) = HIGH(i) – HIGH(i – 1), else DeMax(i) = 0

2. Calculate DeMin (i) If LOW(i) < LOW(i - 1), then DeMin(i) = LOW(i - 1) - LOW(i), else DeMin(i) = 0

3. Calculate DeMarker indicator : DMark (i) = SMA (DeMax, N) / (SMA (DeMax, N) + SMA (DeMin, N))

4. If DMark<30, predict BUY ElseIf DMark>70, Predict SELL

Where:
HIGH (i) – current maximum price;
LOW (i) – current minimum price;
HIGH (i – 1) – previous maximum price;
LOW (i – 1) – previous minimum price;
SMA – simple moving average;
N – number of periods used in the calculation

Limitations

DeMarker oscillator works in a very similar way to RSI, Stochastic and other overbought/oversold oscillators, oscillating between -100 and 100. Main drawbacks of DeMarker are the same of other oscillators: usually works fine in sideways markets or in slow trending markets but it is not able to deal with strong vertical trends.

Trading with the Demarker Indicator

DeMarker Indicator is an oscillator, and it is possible to use with it all the common techniques that are applied to oscillators. The oversold and oversold levels of the indicator are at 0.3, and 0.7, respectively. When the oversold value is exceeded, the expectation is that the prices may soon stop falling. In the opposite case, we anticipate that the uptrend will run out of steam in a short time.

If you remember how the RSI is constructed, you will note that the formulation of the demarker indicator is almost the same as that of the RSI with the difference being that the RSI most often uses an exponential moving average, while the demarker indicator uses the simple moving average of the prices. But on the whole, both indicators compute the same formulae for the min-max values, and interpret them in very similar ways.

In short, it is fair to say that one will never need to create technical strategy where both the Demarker and RSI indicators are necessary. They are both oscillators, but beyond that, the great similarity between the two indicators means that using one will always grant us all the information that can be derived from the other.

The indicator is most suitable to a ranging market. If it is used in trending markets, it must be used as an auxiliary to a trend indicator, and divergence/convergence configurations must be sought out for its interpretation.

Conclusion

The Demarker indicator is a solid, simple and reliable oscillator in general, and can be used as a substitute for the RSI when the trader chooses to do so. It doesn't possess any great qualities distinguishing it from the latter, however, so there is no point in creating a combination of the two in just about any conceivable scenario. Arguably, the decision to use any of these two indicators will depend on availability. It is a good idea to use one when it is available and not to worry too much about the other.

Sources and Additional Information:

http://www.quantshare.com/item-121-the-demark-s-demarker-indicator

http://www.anxw.org/2010/06/demark-technical-indicator/

http://ta.mql4.com/indicators/oscillators/DeMarker

http://www.forexindicators.net/demarker.html

http://vtsystems.com/resources/helps/0000/HTML_VTtrader_Help_Manual/index.html?ti_demarkdemarkeri.html

Investopedia Stock Simulator

2010-10-25T23:20:00.000-07:00

Investopedia is one of the best sources to get useful information for all investors: beginners and quite experienced traders. It is offering a free stock stimulator for all users. Beginners are able to enjoy risk-free skills and experiences acquisition, and those who already got taste for real moneymaking on market that may just serve as nice competitive game.

Why Use a Simulator?

Investing in the stock market can seem like an intimidating and complex task for many new investors. Investing brings a considerable amount of rewards, as well as risks. So, before putting your hard-earned savings on the line - why not practice with a virtual account?

The Simulator uses real data from the stock markets in order to reproduce the experience you’d have using a real online brokerage account. Users are provided with a virtual cash balance and can place virtual trades using real market data. Some use it to test out new investing strategies and others use it to experience what it “feels” like to place a trade. Whatever your level of financial knowledge, the Simulator can help make you a better investor.

Using the Simulator for Placing Trades and Managing Portfolio

Investopedia has made is extremely simple for you to join new games, create games, and trade stocks in your portfolio. The big plus about Investopedia is that everything is free game: market orders, limit orders, stop orders, buying on margin, and even trading options.

So once you register and make your first trade and it shows up in your portfolio, you will see exactly how that position is performing.

Advantages of using Stock Stimulator

* Join the Investopedia Simulator for FREE and receive $100,000 in virtual cash! Put your trading skills to the test against other users and see where you rank among the thousands of Investopedia traders. Beat the rest of the pack and trade your way to the top!

* The Investopedia Simulator is the ideal platform to get your financial feet wet! Submit trades in a safe simulated environment before you start risking your own capital. Put your knowledge to work in a formal and realistic way; stop reading and start doing!

* Interact with thousands of other users on the Simulator! Connect with other traders from diverse backgrounds and experiences, and learn the methods behind their trades to become a better investor.

* You have ability to leave yourself tips on your stocks, as well as check out the tips that other people have left on their stocks to see what is on people’s minds as they play the game. There are also excellent forums that you can take part in to talk with other players and learn new strategies and tips as you try to make your millions in the stock market.

Developers Website: http://simulator.investopedia.com/

Screens:

Scottrade review 2010: Best Discounted Brokers for Online Stock Trading

2010-10-19T23:27:00.000-07:00

Scottrade Commissions, Fees and Investment Products Offered (2010)

Stocks and ETFs: $7
Options: $7 plus $1.25 per contract
Mutual Funds: 2,800+ for free, $17 for all others
Investment products: stocks, options, mutual funds, CDs, munis, Canadian stocks, ETFs
Minimum to open account: $500

Scottrade offers flat rate $7 trading commission for stocks over $1. But what we really like are over 2,800 no transaction (free) mutual funds, which allows mutual fund investors invest for free.

Scottrade Account Application

Scottrade made the account opening process easy and painless. Their Money Direct feature allows customers to instantly transfer cash from their checking account. Minimum to open account is a reasonable $500.

Scottrade.com Trading Tools

Scottrade customers can now trade on a newly redesigned Web site that is easy to navigate with even more advanced stock trading features. Customers can manage their accounts, trade, find stock research and get quotes all within a site that has a new, updated look.

Customers can also trade on Scottrader, where they have access to live streaming quotes, news, top ten lists and interactive charts. Other valuable tools include personal stock lists and quick quotes to help customers track individual stocks and make timely trades when investing online.

So what do they offer in-terms of an actual trading desk? How do you make trades? Scottrade offers several options for you to do your trading:

Scottrade Trading Web Site – make all your moves from any computer.
ScottradeELITE Advanced Trading Platform – an application for your desktop.
Scottrader Streaming Quotes – monitor in the real-time.
Scottrade’s OptionsFirst – an options focused application available for download.
Scottrade Mobile Trading Site – monitor and trade from any internet enabled mobile device.

ScottradeELITE is an advanced trading platform built exclusively for active traders. ScottradeELITE launches right from the trader's desktop and offers complimentary Dow Jones News, Comtex News, advanced charting capabilities, technical analysis and integrated Level II Quotes. And now, ScottradeELITE offers NASDAQ TotalView, which shows traders every bid and ask for every market participant, allowing them to more quickly make better trading decisions. (Level II and TotalView fees may apply.) ScottradeELITE is free to those who qualify. To download ScottradeELITE, customers have to maintain a minimum account value of $25,000.

Screenshots (click to Enlarge):

Scottrade Account Pros/Advantages

Branch Access: Perhaps the best thing about Scottrade is that you can visit one of their 467 branches across the United States while still enjoying “online-only” pricing. In addition, Scottrade continually receives high marks from J.D. Power & Associates and others for their excellent in-person and telephone customer service.
Free Real-Time Quotes: Most brokers charge you extra to get real-time pricing; not Scottrade.
Speed: Fast .66 second trade execution speed.
The Prices: Although not the absolute cheapest, Scottrade’s $7 trades are pretty close. Plus, Scottrade has no account maintenance, inactivity, or account closing fees.
Mutual Fund Choices: Scottrade offers an impressive number of investment options from stocks to bonds to ETFs, but they really shine when it comes to mutual funds. With Scottrade you can access over 15,000 funds, more than on Fidelity, TDAmeritrade or E*Trade.
Low Opening Deposit: All you need to open an account is $500 ($2,000 for a margin account).
Great support for beginner investors with massive amount of educational resources. Many years ago, when I just started my investment activities, that was my choice, and I was never sorry for my selection.
Margin rates are among lowest of national online brokers

Scottrade Account Cons/Disadvantages

No Dividend Re-investments: Ideally, when you earn dividends from an investment, you should reinvest them (reinvested dividends are like giving your compounding returns a shot of adrenaline). Some brokers will do this for you automatically at no charge, but Scottrade distributes your dividends as cash, meaning you’ll need to pay another trade commission to buy more shares with your dividends.
No Electronic Withdrawals: Although you can fund Scottrade accounts by electronic transfer from your checking account, if you want to withdraw money, you’ll have to wait for a check.
Not the Cheapest: It’s hard to have a beef with Scottrade’s $7 fees, but if it’s purely low-cost trades you’re after, Zecco and TradeKing may be cheaper.
Commission: Additional 0.5% of the principal value commission for stocks under $1

Media Reviews / Rating

Consumer Reports performed solid survey in March 2009 of 8,969 online subscribers about their experience between January 2008 and January 2009 (not necessarily those of the general population) in relation to 17 online discount brokers. Scottrade scored 83 of 100 in consumer satisfaction, ranking 5 of 17 participating companies.

According to the Barron's review, Scottrade is ranked 16th out of 25 overall participants. However, it was highlighted that the company has a lots of investor education possibilities, from live events held at one of Scottrade's branch offices to the new Knowledge Center on the firm's Website.

Scottrade lands in seventh place in the SmartMoney.com rankings of the 16 brokers in the survey, which also names the best performers in six categories. The review says Scottrade has "limited banking services," but that "filling a trade is fast and easy."

Consumers Rating

Viewpoints - Average Rating 3.36 of 5 (33 votes)
BrokeBrokers – Average Rating 3 of 5 (10 votes)
RateItAll – Average Rating 2.06 of 5 (78 votes)
Epinions – Average Rating 3 of 5 (37 votes)
TradingWinner – Average Rating 3.71 of 5 (21 votes)

Scottrade Review Summary

Scottrade is one of the veterans of the discount stock trading -- a solid, well-established company that has been around for over 30 years. The firm has $7 flat rate commissions (with exception for penny stocks).

Scottrade keeps customers happy by avoiding unnecessary fees for things like IRAs, large orders, after-hours trading, account maintenance or inactivity. It's also one of only two firms that does not charge account closing and transfer (ACAT) fee. Scottrade is a leader in customer service and investor satisfaction according to JD Power and Associates.

Scottrade is an excellent choice for beginners, those who invest in mutual funds, and long-term "buy and hold" investors (mainly because of no account inactivity charges). No-fee IRAs make the company one of the Top IRA Brokerages.

Because Scottrade is a stable, seasoned brokerage firm with a good reputation, it is the natural choice for people who don't trust their money with newer companies but also don't want to pay $10+ for trades (and multiple fees!) with other established brokers.

Contact Information

Phone: 1-800-619-SAVE; 1-800-619-7283
Phone Hours: Monday - Friday: 6 a.m. to 10 p.m. CT Saturday: 8 a.m. to 4 p.m. CT Sunday: Closed

Website: www.scottrade.com

Sources and Additional Information:

http://www.brokerage-review.com/stock-broker-reviews/scottrade-review.aspx

http://www.moneyunder30.com/scottrade-review

http://online-stock-trading-review.toptenreviews.com/lite/scottrade-review.html

http://ptmoney.com/2010/06/18/scottrade-review/

http://www.consumersearch.com/online-brokers/scottrade

What are Stocks and why does company issue Stocks?

2010-10-12T21:49:00.000-07:00

What are stocks?

Plain and simple, a “stock” is a share in the ownership of a company. A stock represents a claim on the company's assets and earnings. As you acquire more stocks, your ownership stake in the company becomes greater.

Note: Sometimes different words like shares, equity, stocks etc. are used. All these words mean the same thing.

So what does ownership of a company give you?

Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim to everything the company owns. This means that technically you own a tiny little piece of all the furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well.

These earnings will be given to you. These earnings are called “dividends” and are given to the shareholders from time to time.

A stock is represented by a "stock certificate". This is a piece of paper that is proof of your ownership. Review some examples of stock certificates throughout the history:

Stock Certificate

However, now-a-days you could also have a “demat” account. This means that there will be no “stock certificates”. Everything will be done though the computer electronically. Selling and buying stocks can be done just by a few clicks.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, “one vote per share” to elect the board of directors of the company at annual meetings is all you can do. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run.

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.

For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets.

Profits are sometimes paid out in the form of dividends as mentioned earlier. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid.

Another extremely important feature of stock is "limited liability", which means that, as an owner of a stock, you are "not personally liable" if the company is not able to pay its debts. In other legal structures such as partnerships, if the partnership firm goes bankrupt the creditors can come after the partners “personally” and sell off their house, car, furniture, etc. So, owning stock means that, no matter what happens to the company, the maximum value you can lose is the value of your stocks. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.

Why does a company issue stocks?

Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to "raise money". To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods come under "debt financing". On the other hand, issuing stock is called “equity financing”. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way.

All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

The money a business raises from an IPO comes not from the sale of the actual shares, but from a bank or group of banks that underwrites the offering. Once a market capitalization is determined, the bank lends the business the full amount. The bank, in communication with the SEC, then divides the amount of the loan into shares, which are priced and sold to recoup the principal of the loan. Often, underwriters retain some portion of the publicly traded shares in their investment portfolio.

Subsequent to the IPO, a company may choose to raise additional capital by issuing more shares. This is done through either a private placement or a secondary offering. In both cases, because more shares are created, the percent of ownership in the company represented by each share is diluted. The price of each share in a secondary is determined through a similar process as in the IPO, but dilution in general decreases the value of the initial shares.

In general, there are both certain advantages and disadvantages for the companies to issue stocks. Here are some of them:

Advantages of Issuing stock:

A Company can raise more capital than it could borrow.
A Company does not have to make periodic interest payments to creditors.
A Company does not have to make principal payments.

Disadvantages of Issuing Stock:

The principal owners have to share their ownership with other shareholders.
Shareholders have a voice in policies that affect the company operations.

Debt vs. Equity

It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments.

This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

Sources and Additional Information:

http://www.indiahowto.com/what-are-stocks.html

http://www.investopedia.com/university/stocks/stocks1.asp

http://www.ehow.com/about_4571014_why-does-company-issue-stocks.html

http://www.qwoter.com/college/Trading-Basics/why_do_companies_issue_stock.html

The Psychology of Trading and Behavioral Finance: Introduction

2010-10-04T21:36:00.000-07:00

While we may not like to admit it, we’re all a little biased. In trading it’s no different, and if we can learn to understand our biases, we can become better traders.

The psychology of trading and investment is both a theoretical and practical discipline that can be used as a tool to preserve your capital and to improve your overall performance. The psychology of trading applies research, methods, and models developed in the field of psychology to the challenges facing traders on a daily basis. It includes perceptual and emotional biases, stress control, and offers models of learning that can be used as a map or guide. The Comprehensive Model of Trading Competence highlights the composite areas of tactical and strategic actions required by traders to achieve competence. If a trader can understand and define the composite skills required, learning will be fluid. Traders also should strive to incorporate attainable goals, which can act as milestones in their personal development.

As a trader, I need to know how to improve my performance in an understandable and relevant format. As a simple working definition, behavioral finance examines how groups of individuals perform in an economic context, while the psychology of trading examines how the individual performs under conditions of uncertainty. Moreover, the psychology of trading provides methods and techniques that apply to specific challenges an individual trader may encounter. Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process. However, empirical research in cognitive psychology demonstrates that this is not the case. When faced with uncertainty, the evidence reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways we arrive at decisions and choices.

The recent academic discipline called “behavioral finance” examines theories of cognitive psychology and attempts to understand and explain how emotions and cognitive errors influence investors and the decision-making process. Many economists believe that the study of psychology and other social sciences can shed considerable light on the efficiency of financial markets as well as explain many stock market anomalies, market bubbles and crashes. Some researchers (not all) believe that these human flaws are consistent, predictable, and can be exploited for profit.

The Art of Speculation

Speculation comes from the Latin root “speculatus,” meaning to watch for or observe. This derivation implies that investors must be guided by an accurate picture of the facts and be aware of the cognitive and emotional pitfalls that relate to making investment decisions. The biases of decision-making are often referred to as cognitive illusions, and as with visual illusions, the mistakes of intuitive reasoning are not easily overcome.

The purpose of learning about cognitive illusion is to develop the skill of recognizing circumstances in which a bias is likely to occur and where critical and analytic thinking must support intuition. As investors, we are vulnerable to numerous cognitive biases that wrong foot us. We each have a personal inclination to succumb to certain biases of thinking and perception, which may or may not be shared to any great degree with our investor colleagues and friends. Let us examine a common perceptual bias and how it influences our beliefs regarding investment software and training courses.

The “Halo” Effect

If a person has one salient good quality, his other characteristics are likely to be judged by others as better than they really are. Handsome men and women tend to be rated highly on intelligence, athletic prowess, sense of humor and so on. In fact, physical appearance has little to do with such characteristics. There is a small correlation between being handsome and being intelligent, but it is not enough to account for the mistakes people make in their judgments. There is the opposite effect, which is known as the “devil effect.” The presence in an individual of one salient bad trait like selfishness can lower people’s opinion of all his other characteristics; he tends to be seen as a more dishonest and less intelligent than he really is.

Although psychologists have known about the halo effect for more than 75 years, it is remarkable how little notice is taken of it. Traders are prone to be influenced by the halo effect, and it is one of the strongest influences on a trader’s decisions in purchasing trading software or courses and developing a trading style. People marketing trading courses appear to have a good level of expertise, good physical looks, and extensive interpersonal and verbal skills. Furthermore, they are people with whom we are familiar, or to whom we feel close, and to whom we are attracted. Such people are able to exert more influence on us than others. The appearance of credibility to promote a trading course or software is important and used by marketing folks extensively.

Some famous investment gurus have used the halo effect to support their theories and views, whether the theories are accurate or not. For example, some traders who have no formal training in psychology have invented anecdotes to demonstrate the psychological dynamics of fear and greed at work in the individual and how this influences their trading. Some have even become experts in neurophysiology by making unsubstantiated claims about the functioning of the brain and its relevance to trading. In addition, I have seen traders run seminars using psychometric tests with little understanding of how to interpret the scores. But they can easily convince the audience that they know what they are doing and label their actions as methods of behavioral finance. The halo effect in these circumstances is potent and has been used equally effectively by stage “hypnotists.” Many of you will have completed “psychological” tests in trading books. Have you ever stopped to think - “On what data is this test based to ensure a reliable and valid score?” Traders would certainly ask this question of any trading system or methodology where they would invest time and money.

Be wary of traders who pretend to be gurus or Nobel Prize winning psychologists. (In fact there is only one Nobel winner in psychology of finance: Daniel Kahneman in 2002.) Be aware of how the halo effect biases your own perception. Many investment gurus have recognized that their credibility has been questioned as a result of not holding psychology qualifications and have allied themselves to the relatively recent discipline of “behavioral finance.” There are many valid reasons why the new discipline of behavioral finance is becoming popular. However, it is generally more acceptable for a trader to be an “expert” in behavioral finance than in psychology, especially if he has no formal qualifications whatsoever.

Don’t Be A Sheep!

Let us now explore the psychology of groups and how our decisions and beliefs may be influenced. Traders are generally aware that a person’s behavior tends to conform to that of any group of which he is a member. Belonging to a group, however, has other implications, and the interaction between members has significant effects on attitudes and their behavior towards other groups. As individuals, it would be reasonable for us to assume that our attitudes would drift towards the mid-position (regression to the mean) held by the rest of the group. However, research demonstrates that if there is a prevailing attitude in the group, it becomes accentuated in its members. For example, a group of traders who have an affiliation with, say, Elliott wave theory will see their techniques and methods as far superior to those employing other methodologies.

Experiments have been designed to analyze the decision processes of investment clubs and the results have been replicated and confirmed many times. The research assessed the degree of risk acceptable by an individual club member in purchasing risky stocks. After each had independently given the acceptable odds, they discussed the risks as a group in order to reach joint agreement about the acceptable odds. The group as a whole opted for significantly different odds than the individuals. In other words the group was prepared to take a greater risk than its members acting separately. This phenomenon has been termed the risky shift.

The demonstration that group attitudes are more extreme than those of individuals has been replicated many times and in different circumstances. The phenomenon occurs for a number of reasons. First, the group members want to be valued by the group. They may suppress arguments that are opposed to the attitude and beliefs of the group, and they may be prepared to be more extreme in the group because we know that membership of the group reduces individual responsibility.

The Optimists Club

Research also indicates that investment groups manifest an illusion of invulnerability coupled with extreme optimism. For example, they ignore inconvenient facts; they hold stereotyped views of rival groups. Individual members attempt to silence dissent from others in the group, and each member suppresses his own doubts in order to conform. In addition, there is an illusion of holding a unanimous view, and they protect other members by concealing information not in line with the group’s views. In fact, group leaders tend to pick those candidates whose ideas and attitudes most suit their own when a decision needs to be made regarding group membership. It is therefore likely that the group, through selecting these members, will become even more extreme in their views. I have been to numerous trading seminars where this phenomenon was evident and I am sure that many readers have observed something similar.

Stereotypes: A Dangerous Trap

It is difficult if not impossible to think of one’s own group and trading methodology as special without thinking that other groups or trading methodologies are inferior. Such prejudice against other groups is usually accompanied by the formation of stereotypes. Some reasons explaining the inflexibility and failure of some traders to adapt and learn new methodologies in response to changing market conditions are rooted in the same dynamic that forms stereotypes. One reason for stereotypes is that they are convenient; we do not have to assess the individual case. A second reason is we tend to notice anything that supports our own opinions but don’t pay much attention to those that might not support our view. Third, we are attentive to the actions of another group, which appear more noticeable than those of the larger group. They are conspicuous because they are rare. Forth, stereotypes can be self-fulfilling. Finally, when discussing the halo effect in relation to individuals, it is shown that the person who has one salient quality may be seen as having other related qualities that he does not in fact possess. For these reasons and others, prejudicial stereotypes are common and powerful and very hard to eradicate, and their basis in truth is unfounded.

It is comforting to belong to a cohesive group of traders showing a common philosophy, discipline and method of trading. It is difficult to think of your colleagues and tutor as special without at the same time making others appear “inferior.” These prejudices against other traders holding different beliefs about market trading are not based on facts. In other words, advocates of a particular method, or members of an investment club, are likely to pre-judge traders, their actions and their methods based on a false belief system.

Understand Your Biases

The risky shift and halo effect biases are discussed in detail in my book Financial Risk Taking and by other authors. The challenge for behavioral finance is to identify the mechanisms of biases and provide a model of learning for investors. The challenge for the psychology of trading is to make those models relevant to the individual investor and also to provide tools to overcome the damaging effects of biases on our trading accounts. The rest is up to us because we are our responsible for our success and failure. Recently I managed to increase one of my trading accounts by 256 percent. I increased my leverage and added positions with discipline, but I became distracted and made an error. Weeks of concentration, effort and profit were wiped out to near breakeven, and even though my emotional control is competent, I can’t help feeling discouraged. But I have a map, and I accept that I have no control over the markets; I only have control of myself.

Author: Dr. Mike Elvin

Source: http://www.woodiescciclub.com/forum/viewtopic.php?p=5891&sid=b63d0eda99c03916e7d5050f3891ad29

SmartMoney 2010 Discount Brokers Rating

2010-09-26T22:26:00.000-07:00

For the 18th annual ranking of brokers—itself top-ranked by the Web site ConsumerSearch—Smart Money scrutinized a wide range of factors, from trading commissions and account fees to the cost of certain banking services and margin rates. In addition to parsing survey responses from the brokerages, we consulted with research firms and put brokers through our usual litany of customer-service tests.

General Ranking of discount brokers

The top ten (of seventeen) are (list) with fees per trade:

Fidelity – $7.95
E*Trade – $9.99
TD Ameritrade – $9.99
Charles Schwab – $8.95
TradeKing – $4.95
Scottrade – $7.00
WallStreet-E – $7.99
Firstrade- $6.95
Just2Trade – $2.50
Muriel Siebert – $14.95

The top five winners this year are the same top five last year (2009 Smart Money Broker rankings) with a few shifts. E*Trade lost the top spot to Fidelity while TD Ameritrade shot ahead two spots to take third. It’s interesting to note that in the top five, only TradeKing charges less than $5 a trade.

Individual Awards

Commissions and Fees

Best: Just2Trade

Worst: Banc of America

If you trade online, you might be spending less this year on commissions. A wave of price-cutting by the firms sliced the average commission for a 100-share trade to $8.47, down 8 percent from last year. But while brokers are quick to highlight that online prices keep falling, some of their under-the-radar fees aren’t changing. Getting help from a live broker to trade a stock can more than triple the cost of a trade. Some brokerages charge fees of up to $100 a year if customers don’t trade frequently enough. Even closing account costs money at some firms.

The winner in this category is Just2Trade. The company’s stock trades costs $2.50. Commissions for options trading is also among the lowest, although like majority of the competitors, Just2Trade charges additional fee for paper statement.

At the bottom of the rankings is Banc of America, the discount-brokerage arm of Bank of America. Unless you keep a hefty $25,000 at the bank, online stock trades can cost $14 a pop, with broker-assisted trades costing as much as $54. Marc Wood, director of the Banc of America online brokerage, says some bank customers with less than $25,000 and certain types of checking accounts can qualify for cheaper trades.

Customer Service

Best: TradeKing

Worst: ShareBuilder

Steve Brorby was stuck. The retiree was reviewing his Fidelity online account but had trouble including an account from another brokerage. He says he sent an e-mail to Fidelity and made three separate phone calls, but still couldn’t resolve the issue. Finally, he contacted Fidelity’s branch manager near his home in Pasadena, Calif., and found the solution: switch to a different Web browser. “She stepped up to bat,” says Brorby. Discount brokers are finding that good customer service matters more than ever at a time when many investors are nervous about their future. That helps explain why six of the firms in the survey added branches in the past year and why laggards are trying to catch up. Last year Wallstreet-e didn’t respond to one of the e-mails. The company says it has staffed up its e-mail and phone centers. The result: a speedy response to the queries helped the firm improve on its dead-last ranking from a year ago.

The category winner, TradeKing, had swift and courteous answers to all e-mails and phone calls. But ShareBuilder took three and a half minutes, on average, to answer the calls during the testing period, a performance the company blames on an upgrade to its phone system under way at the time.

Trading Tools

Best: Fidelity

Worst: WellsTrade

New arms race has broken out among discount brokers. The must-have tool: applications for the iPhone, Blackberry and other smartphones. Matthew Poepsel, vice president of performance strategies at Gomez, a Web site–monitoring company, says the new smartphone applications are much more useful than the older mobile versions of sites. “Ten years ago you were just glad when your broker had a Web site,” says Poepsel. The top-ranked brokers also have a full suite of trading tools, from stock screeners to streaming quotes. Fidelity has before-hours and after-hours trading and a free app for the iPhone and iPod touch. Online investors also want speed, and the differences can be a lot more than clients realize. In tests conducted by Gomez, Fidelity clocked in at an average of four seconds to sign in and place a trade, while Wellstrade’s Web site took more than four times as long. Wellstrade says part of the delay is due to stringent security measures, but that it’s looking at ways to speed up the process.

Mutual Funds and Investment Products

Best: Charles Schwab

Worst: SogoTrade

We look for discount brokers that offer a wide array of investment products. But when do they risk information overload? TD Ameritrade, which offers more than 15,000 mutual funds, says a recent survey of its customers found that nearly half who invest in these products think there are too many.

Sandy Motusesky, TD Ameritrade’s director of mutual funds and ETFs, says that to help investors narrow the choices, the firm recently updated its list of recommended funds, focusing it on specific investment strategies, such as generating income or hedging against inflation.TD Ameritrade is among a trio of five-star brokers in the investment-products category, which also includes Charles Schwab and Fidelity. This year Schwab edged out last year’s winner, Fidelity, in a photo finish. Schwab has all the investment products we were looking for, including a Coverdell account—an education-savings account similar to a 529 plan—something that Fidelity does not offer. (Fidelity says its customers are more interested in 529 plans than in Coverdell accounts.) Like Ameritrade, both firms sell about 15,000 mutual funds. But about half the funds on Fidelity’s site come with a sales charge, while fewer than 4 percent of the funds on Schwab’s site are load funds. A Fidelity spokesperson says the company wants to give investors a wide range of choices.

Of course, some brokers don’t want to be all things to all people. Dave Whitmore, Sogotrade’s president, says he has no intention of offering CDs, bonds or mutual funds anytime soon. “Our strategy is to remain price competitive for the active trader,” he says.

Banking Services

Best: E-Trade and Fidelity

Worst: OptionsXpress

More investors are looking for one-stop shopping in financial services, and many discount brokers are happy to help—especially if they can profit from the trend. “As prices continually drive down, firms have to find other ways to make money,” says David Lo, director of investment services at J.D. Power and associates. Sure, lots of brokers will pay you interest on any cash in a brokerage account; they just won’t pay you much. The highest amount any of the 17 brokers in our survey pay is a paltry 0.80 percent, and some pay zero. Nevertheless, the highest-ranked brokers—Fidelity and e-trade—offered a variety of bank-like options, including online bill payment, debit cards and even a storage service for precious metals.

Not all firms want to be one-stop financial shops, however. “We’ve decided not to compete with the banks,” says OptionsXpress CEO David Fisher.

Research

Best: Charles Schwab

Worst: Wallstreet-E

When it comes to research, self-directed investors are getting harder to please. More than ever, they want a robust suite of news, data and education to help them make investing decisions. The survey found that 16 percent of investors say having access to research is the most valuable part of being a customer at an online brokerage, up from 4 percent in our previous survey. Many discount brokers are happy to oblige: Investors who use the research, planning tools or educational seminars on brokerage Web sites are much more satisfied customers, says Lo, of J.D. Power. The biggest area of growth is social media, as more adults jump into an arena once thought the province of the young. Most of our firms are on both Facebook and Twitter. Of course, social media can work both ways. E-Trade, for example, has more than 40,000 “fans” on Facebook, but not all seem happy. “The platform has been real buggy lately,” one wrote recently.

Schwab wins in our research category again this year. It was also among the fastest Web sites to navigate and provides research reports from many outside firms, including Argus research, Ned Davis research and standard & Poor’s. Zecco, which tied with Wallstreet-E for last place a year ago, earns a second star in this category after adding real-time quotes, detailed sector- and industry-performance analysis, and technical charting.

Wallstreet-e gets the lowest marks for research. The site was also among the slowest to navigate, and our Web testers never found the commission price list. (The company says the list is on its publicly available site and that it will add it to the customer site.) Also in the works at Wallstreet-E: a new mutual fund screener and a social-media presence. “We always have plans,” says CEO Francisco Otalvaro.

Published May 20, 2010 Sources and Additional Information:

http://www.smartmoney.com/investing/economy/smartmoneys-annual-broker-survey-23119/

http://personal.fidelity.com/misc/smartmoney-annual-broker-survey.pdf

http://www.bargaineering.com/articles/smart-money-2010-best-online-brokers.html

What Questions You Should Ask before Investing in Commodity Mutual Funds?

2010-09-16T22:38:00.000-07:00

Before you invest in a mutual fund, you should gather as much information as possible about the fund itself, as well as about the mechanics of investing in the fund. You can get answers to these questions directly from the fund manager or the fund’s prospectus.

Here are some useful questions to help you zero in on the key points of mutual fund investing:

What is the fund’s investment objective? Different funds have radically different investment objectives. While one may focus on capital gains, another may specialize in income investing.

What securities does the fund invest in? A number of funds claim their main investment products are commodities when in reality only a small percentage of the fund is commodities-related.

Who manages the fund? You want to know as much as possible about the individuals who are going to be managing your hard-earned money. Most money managers in the United States have to be registered with the National Association of Securities Dealers (NASD). You can get information on the manager’s personal background by checking the FINRA Web site.

What kind of strategy does the fund use? Some funds follow low-risk, steady income strategies, while others have a more aggressive strategy that uses a lot of leverage. Identifying the fund’s strategy right away is critical.

What is the profile of the typical investor in this fund? The fund will cater to the profile of its investors, which can be anywhere from highly conservative to extremely aggressive.

What are the main risks of investing in this fund? Whenever you invest, you take on a certain degree of risk: interest rate risk, credit risk, risk of loss of principal, liquidity risk, hedging risk, and geopolitical risk.

What is the fund’s track record? Although past performance does not guarantee future results, it’s always important to examine the fund’s track record to get a sense of the kinds of returns the managers have achieved for their investors in the past.

What is the fund’s after-tax performance? Be sure to pay close attention to after-tax returns when looking at historical performance, because these are a more accurate measure of the fund’s performance — and how much money you get to keep after you pay Uncle Sam.

What are the fund’s fees and expenses? Fees and expenses are always going to cut into how much money you can get out of the fund. Look for funds that have lower expenses and fees.

What is the minimum capital an investor must commit? This can range anywhere from $500 to $10,000 or more. The minimum requirement may also vary according to the type of investor. Someone investing for an IRA may have to put up less money up front than someone investing through a brokerage account. Finally, many funds also require minimum incremental amounts after the initial investment amount.

Are there different classes of shares? Most mutual funds offer more than one class of shares to investors. The different classes are based on a number of factors, including sales charges, deferred sales charges, redemption fees, and investor availability.

What are the tax implications of investing in this fund? Talk to your accountant in order to determine the tax consequences of any investment you make.

Source: http://www.dummies.com/how-to/content/questions-to-ask-before-investing-in-commodity-mut.navId-323666.html

Commodity Channel Index (CCI)

2010-09-10T22:15:00.000-07:00

The Commodity Channel Index (CCI) is an oscillator originally introduced by Donald Lambert in an article published in the October 1980 issue of Commodities magazine (now known as Futures magazine).

Since its introduction, the indicator has grown in popularity and is now a very common tool for traders in identifying cyclical trends not only in commodities, but also equities and currencies. The CCI can be adjusted to the timeframe of the market traded on by changing the averaging period.

Calculation

There are 4 steps involved in the calculation of the CCI:

Calculate the last period's Typical Price (TP) = (H+L+C)/3 where H = high, L = low, and C = close.
Calculate the 20-period Simple Moving Average of the Typical Price (SMATP).
Calculate the Mean Deviation. First, calculate the absolute value of the difference between the last period's SMATP and the typical price for each of the past 20 periods. Add all of these absolute values together and divide by 20 to find the Mean Deviation.
The final step is to apply the Typical Price (TP), the Simple Moving Average of the Typical Price (SMATP), the Mean Deviation and a Constant (.015) to the following formula:

CCI = ( Typical Price - SMATP ) / ( .015 X Mean Deviation )

Interpretation

Traders and investors use the Commodity Channel Index to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment. It is often used for detecting divergences from price trends as an overbought/oversold indicator, and to draw patterns on it and trade according to those patterns. In this respect, it is similar to Bollinger bands, but is presented as an indicator rather than as overbought/oversold levels.

The CCI typically oscillates above and below a zero line. Normal oscillations will occur within the range of +100 and -100. Readings above +100 imply an overbought condition, while readings below -100 imply an oversold condition. As with other overbought/oversold indicators, this means that there is a large probability that the price will correct to more representative levels.

The CCI has seen substantial growth in popularity amongst technical investors; today's traders often use the indicator to determine cyclical trends in not only commodities, but also equities and currencies.

The CCI, when used in conjunction with other oscillators, can be a valuable tool to identify potential peaks and valleys in the asset's price, and thus provide investors with reasonable evidence to estimate changes in the direction of price movement of the asset.

Lambert's trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a security is considered to be entering into a strong uptrend and a buy signal is given. The position should be closed when the CCI moves back below +100. When the CCI moves below -100, the security is considered to be in a strong downtrend and a sell signal is given. The position should be closed when the CCI moves back above -100.

Since Lambert's original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.
As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.
Trend line breaks can be used to generate signals. Trend lines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trend line breakout could be considered bullish. From overbought levels, a decline below +100 and a trend line break could be considered bearish.

Example

The 20-day CCI for Brooktrout (BRKT) provides an example using Lambert's guidelines. Even though a few signals are good, using crosses above and below +100/-100 resulted in plenty of whipsaws. In January, the stock broke resistance at 20, and proceeded to double in the next few weeks. The CCI moved above and below +100 several times, but the stock remained in a strong uptrend. The CCI did manage to remain above +50 for about 7 weeks (blue oval), but the whipsaws below +100 could have caused an early exit. Whipsaws do not make an indicator bad. However, traders and investors should learn to use the CCI in conjunction with other indicators and chart analysis. In addition, various time frames for the CCI should be tested, and you should test buy and sell points, as well. What works for one stock may not necessarily work for another stock. For Brooktrout, a buy point on a cross above and below +50 may have worked better.

Sources and Additional Information:

http://en.wikipedia.org/wiki/Commodity_Channel_Index

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_index_cci

http://www.mysmp.com/technical-analysis/commodity-channel-index.html

http://www.stockbreakthroughs.com/articles/commodity-channel-index.htm

SocialPicks – Social Network for Stock Traders

2010-08-31T23:23:00.000-07:00

Getting a smart idea in time might worth a million for an active stock trader. SocialPicks might be one of these places for you where you can get nice and profitable stock picks and ideas. SocialPicks is a community where stock investors exchange ideas and track performance of well-known financial bloggers.

How it works?

Members are assigned rankings based on the average return of the stocks selected, the accuracy of picks (gains need to be above 0%), and the quality of brokerage analyses. These rankings can then be used to compare members to one another. In addition, SocialPicks also tracks picks by gurus (e.g. Warren Buffett & Jim Cramer), professional analysts, and various financial bloggers so you can see how well you perform against them. SocialPicks also provides a forum to share investment ideas and market research, with the assumption that as a community, members can better understand the market to make informed decisions.

What you can do there?

1. You can get daily fresh investment ideas provided by fellow investors and by prominent investments Gurus.

2. Make you research and check how other relevant investors are evaluating your potential investment choices.

3. Establish a credible investor identity and sharpen your technical research skills for choosing right stocks to trade.

4. Receive email alerts & RSS Feed for any new activities in your community in area of your particular interests.

5. Collaborate with fellow investors in your network, establishing contacts with people who share your interests and passion for stock trading.

Participation is free with no strings attached. Sign in: http://www.socialpicks.com/community

Symmetrical Triangle Stock Chart Pattern

2010-08-23T23:44:00.000-07:00

Introduction

The triangle pattern, also called the "coil," appears in three varieties:

1. symmetrical, 2. ascending, and 3. descending.

Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.

Symmetrical triangles are generally considered neutral, ascending triangles are bullish, and descending triangles are bearish. From a time perspective, triangles are usually considered to be intermediate patterns. Usually, it takes longer than a month to form a triangle. Seldom will a triangle last longer than three months. If a triangle pattern does take longer than three months to complete, Murphy advises that the formation will take on major trend significance.

The symmetrical triangle, which can also be referred to as a coil, usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. You could also think of it as a contracting wedge, wide at the beginning and narrowing over time.

What does a symmetrical triangle look like?

Converging trendlines of support and resistance gives the triangle pattern its distinctive shape. This occurs, Kahn explains, because "the trading action gets tighter and tighter until the market breaks out with great force." Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.

As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the "apex," located at the right of the chart. The "base" of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.

A symmetrical triangle shows two converging trendlines, one is ascending, the other is descending - creating a sideways symmetrical triangle. The formation occurs because prices are making both lower highs and higher lows. Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia's Board of Advisors, notes that the pattern should display two highs and two lows, all touching the trendline as - a minimum of four reversal points is necessary to draw the two converging trendlines. The diagram has these points noted.

Bulkowski divides symmetrical triangles into two groups:

1. symmetrical bottoms - prices trend down then form lower highs and higher lows. Breakout can be either downward or upward. 2. symmetrical tops - prices trend up then form lower highs and higher lows. Breakout can be either downward or upward.

Why is the symmetrical triangle pattern important?

A symmetrical triangle pattern is relatively easy to identify. In addition, triangle patterns can be quite reliable to trade with very low failure rates. There is a caution concerning trading these patterns, however. As mentioned previously, a triangle pattern can be either continuation or reversal patterns. Typically, they are continuation patterns. To achieve the reliability for which the triangle is well known, technical analysts advise waiting for a clear breakout of one of the trendlines defining the triangle.

Triangle patterns are usually susceptible to definite and dependable analysis, with the proviso that the investor must wait for a reliable, as opposed to a premature, breakout. Bulkowski advises that, in general, the failure rate for triangles drops significantly if the investor waits for a valid breakout and, once that breakout occurs, the pattern proves strongly reliable.

Murphy advises that a minimum penetration criterion would be a closing price outside the trendline and not just an intraday penetration. Similarly, Schabacker warns of the "false moves" and "shake-outs" which most commonly attend the triangle.

Is volume important in a symmetrical triangle pattern?

Volume is an important factor to consider when determining whether a formation is a true triangle. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about whether the pattern is a true triangle.

This traditional volume pattern develops because of investor sentiment during the creation of a triangle. Investors are uncertain. This uncertainty means that they are buying and selling sooner, which translates into a narrowing of the highs and lows, creating the "coil" shape, indicative of the triangle . Because investors are uncertain, many are holding on to their stocks, awaiting the market's next move. When breakout finally does occur, there's a surge in market activity because investors are finally certain enough about the direction of the market to release their pent-up supply or demand.

What are the details that I should pay attention to in a symmetrical triangle pattern?

1. Occurrence of a Breakout - Technical analysts pay close attention to how long the triangle takes to develop to its apex. The general rule, as explained by Murphy, is that prices should break out - clearly penetrate one of the trendlines - somewhere between three-quarters and two-thirds of the horizontal width of the formation.6 The break out, in other words, should occur well before the pattern reaches the apex of the triangle. . Adherence to this rule is strongly advised by Yager, She adds that the closer the breakout occurs to the apex the higher the risk of a false breakout.

To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution. In much the same manner as Yager, Murphy warns that if prices don't breakout of the trendlines before that point, the triangle "begins to lose its potency and prices will simply drift out beyond the apex with no surge in either direction.

2. Price Action - Unlike ascending and descending triangles which give advance notice of their intentions, the symmetrical triangle tends to be a neutral pattern. Murphy advises that the symmetrical triangle is generally a consolidation pattern. This means an investor can look to see the direction of the previous trend and make the basic assumption that the trend will continue. However, many experts advise investors that because the breakout direction could go either way that they wait until the breakout occurs before investing in or selling the stock. Schabacker refers to a symmetrical triangle as a "picture of hesitation.

3. Measuring the Triangle - To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation.

To calculate the minimum price objective, calculate the "height" of the formation at its widest part - the "base" of the triangle. The height is equal determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline.

Both these points will be located on the far left of the formation. Next, locate the "apex" of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the apex price if the triangle experiences a downside breakout.

For example, working with a symmetrical triangle, assume the highest high of the pattern occurs at 100 and the lowest low at 80. The height of the pattern is 20 (100 - 80 = 20). The apex of the triangle occurs at 90. The pattern has an upside breakout. Using the measuring rule, the target price is 110 (90 + 20 = 110).

4. Duration of the Triangle - As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications - Once breakout occurs, the symmetrical triangle tends to be a reliable pattern. Bulkowski calculates failure rates ranging between 2% and 6% for symmetrical triangles after a valid breakout.

6. Shape of Symmetrical Triangle - The pattern should display two highs and two lows, all touching the trendline - a minimum of four reversal points is necessary to draw the two converging trendlines.

7. Volume - Investors should see volume decreasing as the pattern progresses toward the apex of the triangle. At breakout, however, there should be a noticeable increase in volume. Like reversal patterns, volume is more important on the upside than the downside. Therefore, an investor will be particularly interested in seeing an increase in volume on breakout if the pattern is moving upwards. Similarly, if prices are experiencing an uptrend, investors should be looking for volume to increase as prices move up and fall as prices fall back.

8. Premature or False Breakouts - Bulkowski calls them "premature" false breakouts and Schabacker refers to them as "false moves" or "shake-outs." Both agree that triangles are among the patterns most susceptible to this phenomenon. Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines.

To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout is a valid one. Typically, a false move corrects itself within a week or so. A key sign of a possible false move is low volume. If there's no pick up in volume around the breakout, investors should be wary. Typically, a good breakout from a triangle formation will be accompanied by a definite surge in volume.

There are situations, however, where a false move will occur with high volume. According to Schabacker, these are the most dangerous variety of false moves. The only advice experts can give to investors who fall prey to one of these false moves is to reverse their positions as soon as they become aware of the true movement of the stock.

It is also advisable to be increasingly suspicious of triangle patterns where the breakout occurs very close to the apex. Because trading is so thin at this point, there is an increased likelihood that a false move could occur. Also, false moves are more likely with symmetrical triangles, maintains Schabacker. With the right-angle triangles, the trend is suggested by the pattern itself. Therefore, a deviation from that trend is more likely to raise the suspicion that it may be a "false move."

How can I trade this pattern?

Edwards and Magee offer different trading strategies depending on whether you already have a position in the stock or whether you do not have a position in a stock experiencing a triangle formation. If an investor already has a position in a stock, he or she may be "locked" into that position as the formation takes shape because it is not possible to definitively predict which way the breakout will take the price of the stock. The key is waiting and watching for a valid breakout before making an investment decision.

If an investor does not have a position in a stock, Edwards and Magee advise staying away from the stock when it's in the process of forming the triangle pattern. Consider a position when a dependable breakout has occurred. "After such a breakout, if on the upside, buy on the next reaction if the Major Trend is up, or if on the downside, sell short on the next rally if the Major Trend is down."

Given contradictory nature of the direction of breakouts from triangles, all experts advise caution with triangles while they're in the process of forming. (". . . it might be better policy to note such formations in the making, and wait until the decisive breakout before making the new commitment.") Once a valid breakout has been detected, however, the same experts agree that triangles are a reliable pattern to trade. As mentioned, this pattern has a tendency to premature breakouts and false moves.

To avoid mistaking a false move for a valid breakout, experts advise waiting a few days to see if the breakout is dependable. According to Murphy, a minimum penetration criteria would be a closing price outside the trendline and not just an intraday penetration. Investors do have time once a breakout has occurred.18 According to Bulkowski, when considering symmetrical triangles, an investor will have over five months to reach the ultimate high after an upside breakout and less than half that time after a downside breakout.

Because premature breakouts (where prices close outside of the trendline) are so common, don't dismiss the pattern if it has experienced such a breakout. According to Bulkowski, however, "premature breakouts do not predict the final breakout direction or success or failure of the formation."

Be wary of breakouts from triangles where the breakout does not occur until the apex of the triangle. Experts, including Edwards and Magee, maintain that the most reliable breakouts occur about two-thirds of the way along the triangle.

The triangle pattern should not show too much "white space," states Bulkowski. If there's too much white space in the middle portion of the triangles created as price moves from lows to highs, then the pattern may not be a triangle. In a valid triangle, price should bounce back and forth in a fairly regular pattern, as price moves toward the apex.

Bulkowski advises that it is very common for a triangle formation to experience a throwback (where prices break upward and then fall back to the formation) or a pullback (where prices break downward and then rise up again to meet the formation). Throwbacks and pullbacks tend to complete within a couple of weeks and the breakout continues as before.

Converging trendlines of support and resistance gives the triangle pattern its distinctive shape. The "Bullish" triangle has 2 "peeks" on the resistance line and 3 waves on the bottom "support line".

Example

Conseco (CNCEQ) formed a rather large symmetrical triangle over a 5-month period before breaking out on the downside.

The stock declined from 50 in Mar-98 to 22 in Oct-98 before beginning to firm and consolidate. The low at 22 probably was an over-reaction, but the long-term trend was down and established for almost a year.
After the first 4 points formed, the lines of the symmetrical triangle were draw. The stock traded within the boundaries for another 2 months to form the last 2 points.
After the gap up from point 3 to point 4, volume slowed over the next few months. There was some increase in volume in late June, but the 60-day SMA remained in a downtrend as the pattern took shape.
The red square marks the ideal breakout time-span from 50% to 75% of the pattern. The breakout occurred a little over 2 weeks later, but proved valid nonetheless. While it is preferable to have an ideal pattern develop, it is also quite rare.
After points 5 and 6 formed, the price action moved to the lower boundary of the pattern. Even at this point, the direction of the breakout was still a guess and its was prudent to wait. The break occurred with an increase in volume and accelerated price decline. Chaikin Money Flow declined past -30% and volume exceeded the 60-day SMA for an extended period.
After the decline from 29 1/2 to 25 1/2, the stock rebounded, but failed to reach potential resistance from the apex. The weakness of the reaction rally foreshadowed the sharpness of the decline that followed.
The widest point on the pattern extended 10 1/2 points. With a break of support at 29 1/2, the measured decline was estimated to around 19. By drawing a trend line parallel to the upper boundary of the pattern, the extension estimates a decline to around 20.

Sources and Additional Information:

http://www.trending123.com/Stock-Analysis-November/Bullish-Symmetrical-Continuation-Triangle-WFT-Chart-Pattern.html

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:symmetrical_triangle

http://www.mysmp.com/technical-analysis/symmetrical-triangle.html

http://chartpatterns.com/symmetricaltriangles.htm

Piggy Market Squeak – Free Tool for Financial Technical Analysis

2010-08-17T22:40:00.000-07:00

Piggy Market Squeak is an easy-to-use alert system for detecting trends in financial stocks and shares quotations based on technical analysis. It comes with a user-friendly graphical user interface and an email alerts system. It can highlight and sort buy and sell signals from diverse market places or personal portfolios.

It is versatile and can easily integrate new markets and indicators.

Piggy Market Squeak can be seen as an easy to use, out of the box technical analysis tool.
Highly versatile, it can integrate any stocks and shares market trend indicators based on open, closed, high and low prices, and trade volumes.

Piggy Market Squeak also provides an extensible interface to interact with third party indicator calculation tools, any market lists and quotations available on the Internet and any email server.
Pure java application using SWT, the more advanced features of Java 6, multi threading, JMS queue, Spring and more. It is highly versatile and customizable.

Screenshots

Click on a thumbnail to enlarge a screenshot:

Download

For installation convenience, the download comes with a small sample data base.
A more consistent database is available for installation the first time you'll do a quotation update.
As it stores historical data, the software will need a minimum of 2 Giga bytes of disk.

Direct Downloading Link: http://www.gthoreton.co.uk/PiggyMarketSqueak.jnlp

User Guidance and Features

Quotations

You first will choose the market you are interested in and the web service provider for the quotations history data.

The custom yahoo indices gives you the possibility of selecting your own yahoo indices among the existing indices offered by yahoo (ex : http://finance.yahoo.com/intlindices).

The already created lists are lists that have already been created during previous market selection.
The refresh items offers the ability to refresh the market list of shares, their quotation history data as well as advisors recommendations.

You can also upload your shares list description from a file if they are not available in any markets or indices.

Portfolios

Offers the possibility to load and export advanced report from gnucash.

In the bottom sash window each tab contains a portfolio. You can add/remove portfolios and in each of these add/remove shares.

You can see the quotations history data for each share in the above portfolio charting window. The quotation history data can be displayed relative to the buy price or to the history of another preselected share.

Events

In the top sash window, we show a tree view of the events triggered for the currently selected market since the start date indicated in the left column.

The events are sorted in different tabs: selling, buying and neutral events.

The weight thresholds and the calculation mode of the events are based on signal indicators. They can be selected and refined in the left hand column menu.

In order to have the events calculated, you will have to refresh them in the left hand side menu.

Automation

Autoportfolio will be automatically updated and managed on indicator signals events following your threshold settings.

Screening portfolio are updated following advisors recommendations from divers sources.

Developers’ Website: http://www.gthoreton.co.uk/

Chaikin Money Flow (CMF) Technical Indicator

2010-08-11T22:11:00.000-07:00

Introduction

Developed by Marc Chaikin, the Chaikin Money Flow oscillator is calculated from the daily readings of the Accumulation/Distribution Line. The basic premise behind the Accumulation Distribution Line is that the degree of buying or selling pressure can be determined by the location of the Close relative to the High and Low for the corresponding period (Closing Location Value). There is buying pressure when a stock closes in the upper half of a period's range and there is selling pressure when a stock closes in the lower half of the period's trading range. The Closing Location Value multiplied by volume forms the Accumulation/Distribution Value for each period.

So, the Chaikin Money Flow is an indicator that is derived on the basis that a bullish stock will have a comparatively high closing price within its daily range and have increasing volume. If a security has consistently closed with a low closing price within its daily range with high volume, then this would be indicative of a weak security.

The best way to interpret the indicator is basically to adopt a positive or negative approach. If the oscillator is generating bullish signals then it is it going to be positive and is indicating that the security is being bought or accumulated. Conversely, if the oscillator is generating bearish signals then it is going to be negative and indicating the security is undergoing dispersion or distribution.

Methodology

The CIENA (CIEN) chart details the breakdown of the daily Accumulation/Distribution Values and how they relate to Chaikin Money Flow. The formula for Chaikin Money Flow is the cumulative total of the Accumulation/Distribution Values for 21 periods divided by the cumulative total of volume for 21 periods.

On the CIENA chart, the purple box encloses 21 days of Accumulation/Distribution Values. The total of these 21 days divided by the total for the 21 days of volume forms the value of Chaikin Money Flow at the end of that day (purple arrow). To calculate the next day, the Accumulation/Distribution Value from the first day is removed and the value for the next day is entered into the equation.

The number of periods can be changed to suit a particular security and time frame. The 21-day Chaikin Money Flow is a good representation of the buying and selling pressure for the past month. A month is long enough to filter out the random noise. By using a longer time frame, the indicator will be less volatile and be less prone to whipsaws. For weekly and monthly charts, a shorter time frame is usually suitable.

Generally speaking, Chaikin Money Flow is bullish when it is positive and bearish when it is negative. The next item to assess is the range, the length of time Chaikin Money Flow has remained positive or negative. Even though divergences are not an intricate part of the strategy behind Chaikin Money Flow, the absolute level and the general direction of the oscillator can be important.

Accumulation Signals

The most obvious bullish signal that the Chaikin Money Flow can illustrate is when it is greater than zero. A reading of more than zero suggests that the security is under buying pressure or experiencing accumulation.
The amount of time that the Chaikin Money Flow has remained greater than zero is also another important feature of the indicator. Basically, the longer it remains positive, then the greater the probability that the security will continue to be pressured by buyers, which will in turn prolong its rise.
Remember – the more positive the indicator is, the more evidence there is of increase buying pressure which should be reflected in the price.

Dispersion Signals

The most obvious bearish signal that the Chaikin Money Flow can illustrate is when it is less than zero. A reading of less than zero suggests that the security is under selling pressure or experiencing dispersion.
The amount of time that the Chaikin Money Flow has remained less than zero is also another important feature of the indicator. Basically, the longer it remains negative, then the greater the probability that the security will continue to be pressured by sellers, which will in turn prolong its fall.
Marc Chaikin also specified that in order to fully comprehend the indicator the level or degree to which dispersion of a security occurred was vital to fully understanding the power of the indicator itself. He considered a reading below -0.25 to suggest that the security was under strong selling pressure and a reading above +0.25 to be indicative of strong buying pressure. This relatively large level has been open to some criticism in the Technical Trading community and most Traders now prefer to use readings of ±0.10.

Trading Strategies

The more positive the indicator is, the more evidence there is of increased buying pressure which should be reflected in the price of the security. Converesly, the more negative the indicator is, the more evidence there is of increased selling pressure which should be reflected in the price of the security. This should suggest that you should:

Go long if price has broken above a resistance band and is confirmed by a positive Chaikin Money Flow figure.
Go short if price has broken below a support band and is confirmed by a negative Chaikin Money Flow figure.

The main other strategies revolve around Multiple Indicator Confirmation. A good set of indicators that do not complement one other are:

Chaikin Money Flow
RSI – Momentum indicator providing absolute levels of overbought and oversold
Moving Averages – Trend-following, or lagging indicator that attempts to identify trend changes in securities.

Weaknesses

The problems with the Chaikin Money Flow indicator extend two-fold:

Firstly, because the indicator does not account for Breakouts or Gaps and,
Secondly because abnormal data patterns effect the calculation of the indicator.

Thus, the indicator is unlike a momentum oscillator and is therefore not influenced by a daily changing price average. Rather the indicator measures the location of the closing price relative to the range for the period – whatever this may be. While some argue that this is a definitive strength of the indicator, many inexperienced traders can vouch that it is also one of its greatest weaknesses.

Normal Formula:

Price is multiplied by the volume and added to the momentum from the previous day. Volume is used to indicate how much of the market was supporting the price change.
It subtracts a 10-day exponential moving average of the Accumulation/Distribution indicator from a 3-day exponential moving average of that same value. As the indicator uses exponential moving averages there will be data present at the beginning of the series. These figures are usually ignored as they do not add any value to the indicator itself.

Typical Charting Program Formula:

D :=(HIGH-LOW);

AD:=IF(D==0,0,((CLOSE-LOW)-(HIGH-CLOSE))/D*VOL);

MV :=MA(VOL,N);

CMF:IF(MV==0,0,MA(AD,N)/MV),COLORSTICK;

Formula Parameters:

- Name: N

- Default Value: 20

- Minimum Value: 1

- Maximum Value: 100

Sources and Additional Information:

http://www.smallstocks.com.au/technical-analysis/chaikin-money-flow-cmf/

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow

http://education.wallstreetsurvivor.com/Chaikin-Money-Flow

http://www.mysmp.com/technical-analysis/chaikin-money-flow.html

Designing Commodity Futures Trading System

2010-08-05T20:42:00.000-07:00

A commodity futures trading system is an essential element for every trader. Without a proper trading system planned, designed and constructed, a commodity futures trader is merely shooting in the dark. He doesn’t know when he should get out of a trade, he doesn’t have a profit objective and most importantly, he doesn’t have a stop loss. While traders may still get away with minimal losses in the stock market, they cannot afford to trade in such way when it comes to the commodity futures market. As each trade is leveraged, traders stand to lose a great portion of their capital within a short span of time especially when they fail to cut losses.

Trend Following System

The first step in designing a system is to identify the type of system to be used. The most common commodity futures system is a trend following system which visually displays the current trend of the market. One of the more common trend following systems utilizes the Moving Average indicator which is a tabulation of the average price of a commodity futures counter over a period of time. Moving average of several timeframes are drawn on the same chart, and crossovers between long term and short term moving averages are considered as entry or exit points for trading.

Breakout System

Another way a system can be designed is to use breakout systems. These are particularly useful for sideways markets where prices are fluctuating between support and resistance levels. The peaks and troughs of prices are usually used to chart these support and resistance lines. Whenever a price breaks out of a support level, it is likely to breakout into a downtrend. Conversely, whenever a price breaks out of a resistance level, it is likely to breakout into an uptrend. Other than using peak and troughs, Bollinger Bands are also often used as breakout indicators. With this indicator, breakouts are indicated when the price line cuts the upper or lower line of the Bollinger bands.

There are many other indicators that can be used to design your trading system, and it’s easy to research on them through books or via a mentor. However, each trading system has its own advantages and disadvantages, which is why traders need to test them out first before putting them into action. Some systems may be prone to whipsaws in the market, while other indicators may trigger entry and exit points a little too late. Thus, a commodity trader who designs his system may need to make adjustments to overcome these shortcomings.

Once a commodity futures trading system has been designed, charting software can then be used to construct your system. These applications allow users to enter formulas, develop constraints and specify timeframes for analysis. Price data is used as input for tabulation, and indicators can be drawn on top of price charts to provide a visual output to the commodity futures trader. In order to acquire updated daily data streams, the trader would often need to subscribe to data providers.

With the trading system in place, it is then entirely up to the trader to make decisions based on what he sees on his charts. Of course, it is always good to back test a system and paper trade for a period of time before putting the system into actual use. This is when the commodity trader can see his system work in real life and start making money from trading.

Sources and Additional Information:

http://commodity-futures-trading.info/system.html

http://commodities.about.com/od/commoditytradingsystems/a/develop_system.htm

Maximize Market Entry Performance with Technical Indicators on Your Side

2010-07-27T22:32:00.000-07:00

This article is written by guest contributor Jennifer Gorton from Forex Traders

Investment securities come in various types and forms, but the investors that buy them generally fall into two distinct classifications. One group, the “Buy-and-Hold” camp, prefers to use fundamental analysis as a basis for finding companies with long-term intrinsic value. If growth prospects are positive, supported by strong fundamentals, then an investment should provide long-term returns sufficient to meet the investor’s goals and objectives. The group in the opposite corner is the “active management” camp. These investors are short-term oriented, use technical analysis to their benefit, and seek short-term profits from arbitrage opportunities in the market. These “traders” have little regard for intrinsic value and rely on wave trends and patterns generated by supply and demand forces in the market.

Each group has its vocal supporters and critics. Debates have been raging for decades from academics and investors alike over issues of style and whether fundamental or technical analysis provide any advantage at all in today’s random markets. Books can be written regarding these debates. It is a given that long-term investors provide stability in our markets, and traders provide liquidity. If each camp were losing money pursuing their respective strategies, then the debate might conclude. However, each side can claim incredible wealth accumulation stories to support its case. The dichotomy is that major investment management firms may preach a “buy-and-hold” strategy to their retail customers, while actively trading the firm’s free capital in its back office operations.

Putting arguments aside for the moment, all value investors would be well served to brush up on a few short-term trading techniques if only to maximize the performance of their market entry points. Complementary lessons of this type are readily available in foreign currency markets where traders must assimilate fundamental data in a synergistic fashion with the signals generated by their favorite technical indicators. Trading currencies can involve short, medium and long-term time horizons with strategies designed to profit from each. However, the notion of “intrinsic value” does not exist with currency pairs. Each currency’s value is “relative”, depending on the market’s evaluation of each respective country’s economic fundamentals. Price behavior then reflects this relative balance on technical charts.

Although currencies are not stocks, their price behaviors are similar. Trends never move in straight lines. Movements tend to be choppy, zigzag waves, driven by supply and demand forces and trader psychology. Ample wave theories exist in physics to describe natural phenomena, and many of these have been transposed over market dynamics to suggest resistance and support levels, overbought and oversold conditions, and predictable directions predicated on certain patterns and trends repeating. Forex traders cannot buy and hold. Major currencies are less volatile than stocks, and over long periods of time, their fluctuations tend to fall between specific ranges. Successful trading equates to consistently choosing your entry and exit points to yield profits.

Forex traders rely on a variety of momentum indicators and moving averages to maximize the effectiveness of entries and exits. Indicators are not infallible, but consistency and skillful interpretation are the keys to success. To illustrate how this technique might benefit a long-term investor, let’s look at a technical chart for the past few months for Microsoft.

Let’s assume for the moment that you have studied the software industry and MicroSoft’s position within it. Company fundamentals are strong, and growth prospects are very positive. You finish your research in March and decide to buy shares in the company. Believing that timing was not an issue for the long-term, you would buy at the prevailing market price of $29.50.

What would a Forex trader have done? First, the Bollinger Bands tightened at that time, suggesting a significant movement was imminent. The positive candlesticks that followed broke through a previous resistance level, signifying a new upward trend. Next, the “RSI”, or Relative Strength Index, signaled an overbought condition in the latter part of April, suggesting that a top had been reached. No one is suggesting that technical indicators could forecast the crisis events in May, but these indicators would have kept you on the sidelines to wait out the market turbulence.

The RSI suggested a “Buy” at the end of June, but the “MACD” did not confirm the trend. The RSI tends to signal a trend change is coming, but not exactly when. Another indicator is often used for that purpose. MACD gave a “Go” in mid-June, but a “double-top” was forming, another signal to wait. Another confirmed “Buy” occurred in early July, perhaps yielding a $23.00 entry point. Short-term trader techniques just saved you $6.50 a share, or 22% on the front-end.

Fundamental and Technical investors may be at loggerheads when arguing the benefits of their respective investing styles. However, at the end of the day, technical analysis can benefit long-term investors in maximizing their market entry points.

TickInvest Stock Charting Freeware Software

2010-07-19T21:12:00.000-07:00

TickInvest is a user-friendly real-time stock charting and technical analysis software. It supports real-time charts, indicators, trading-strategy back-testing, stock screener, drawing tools, and real-time quotes.

Main Features

Real-Time Stock Charts

Customizable Indicators - Use indicators in your charts that are already included in TickInvest or create your own with TickInvest Script
NEW! Customizable Drawing tools - Already included Drawing tools are: Line, Ray, Parallel Lines, Horizontal Line, Vertical Line, Triangle, and Rectangle. You can create your own drawing tools with TickInvest Script.
Multiple Timeframes - For example, you can analyze a stock in a 1-Minute, 5-Minute and in a 60-Minute chart.
Fast chart zooming and scrolling
Candlestick, OHLC and Line Chart Types
Real-Time Quotes

Data providers

Interactive Brokers - Real-time and EOD data
Yahoo Finance - free EOD data

Trading-Strategy Back-Testing

Backtest whole groups of stocks.
You can select a composite for each group of stocks.
History Database - Recall any previous script with back-test results
Very fast back-testing

Stock Screener

Customizable stock screener - Create stock screens with TickInvest Script
Custom result-columns - Add custom columns to your stock-screen report

Powerful Script Language

TickInvest contains a very flexible script language, so users are not limited to the currently available features. You can just create your own way of the stock analysis. You can back-test your trading strategies, create your own indicators, screen for stocks that match your trading-strategy or even create your own drawing tools.

Java Plug-ins

For the users who are able to program with Java, there is even more reasons to use the TickInvest software, as they can easily create new plug-ins for TickInvest. Source code is available for all TickInvest script functions and the documentation explains it in detail.

Future Development

Real-time alerts, more professional drawing tools, new indicators, new script functions, level II stock quotes, time and sales screen, trading simulator, additional data providers and many other unique features are currently under development. Most of these features are not available in other stock charting utilities.

Cost

Download latest software release from May 13, 2010. This is a FREE beta version, valid until August 31, 2010. Before this version stops working, you will be able to upgrade to a new FREE version.

Author: Erich Behmen

Website: http://www.tickinvest.com/

Direct Downloading (for Windows): http://www.ziddu.com/download/10791005/TickInvest_0_5_0.exe.html

Market Timing Strategies

2010-07-11T21:34:00.000-07:00

Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or bonds, and less risky short term securities like Treasury Bills based on "technical", "fundamental" or "quantitative" analyses. Reduced to its core proposition, market timing means "buying low and selling high." Identifying high or "overvalued" versus low or "undervalued" is the complicated thing. Since riskier assets usually have higher returns over longer periods, staying "out of the market" or invested in less-risky short term securities can mean a considerable sacrifice of overall return.

It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his era, said:

"I can calculate the motions of the heavenly bodies but not the movements of the stock market".

His lesson has been learned by most active investors since then. The pricing of long term financial assets like stocks or bonds involves all components of the human condition; fear, greed, optimism, pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have impact.

Vain attempts to divine the direction and outcomes of "the market" have involved astrology, superstition and the supernatural.

Academics have surrendered unconditionally. After quantitative techniques and supercomputers proved duds in predicting the financial future, the most highly educated and qualified financial researchers ran up the white flag of the "efficient market". In their rational world, everyone knows everything and it is only random chance that moves markets in a dice-throwing "stochastic process". Basically, they reasoned, no one could predict the market since there were so many smart people trying to do it. They then set about proving this, hopefully making their insulated lives easier since they would never have to stick their necks out with market predictions.

For most investors however, market timing is too attractive to let pass by. If one could participate in all the 25% up years in the stock market and pass by the -25% years in TBills with a modest 5% return, the rewards would be huge. Even capturing a little of this outperformance would lead to a superb performance compared to a "passive" or fully invested strategy.

A market timing strategy is conceptually easy to understand. Stay invested when the market is up or flat. Avoid the downturns. The market timer develops signals to identify what condition a market is in. An overvalued market is called "expensive", "overbought" or "overextended". A normal market is "fairly valued". An undervalued market is "cheap".

The market timer can use a variety of measures to judge the status of the market. These techniques are a combination of technical, fundamental and quantitative indicators and measures.

Market Timing Strategies

Technical Indicators

The technical indicators are based on "price" and "volume" movements and patterns. The technical analyst looks at the patterns and movements independently of their causes. It is patterns alone that tells the state of the market. For example, the analyst might see a "topping" pattern developing in the overall market or one of the important sectors from his charts. A "head and shoulders" formation would see the market index rise steeply, fall and then rise again. This would be a very "bearish" or negative signal pointing to a large and sudden drop in the market. The analyst might discern the depth of the fall from the length of the neck or relative height of the shoulders. Other technical indicators involve the "volume" statistics or trading activities of investors. A sudden drop in trading activity or a large differential between smaller and larger stocks would be an indication of a potentially large move, with the direction dependent on what "expert" investors are doing compared to individuals.

Fundamental Indicators

Fundamental indicators are financial and economic measures that affect the overall valuation of the market. A good example of this would be money supply. Generally, a loose monetary policy and expanding money supply indicate healthy financial markets. When monetary policy is tightened, as in 1994, the price of longer term assets like stocks and bonds fall as money and credit become scarcer. Another fundamental measure would be the dividend yield on stocks, the dividend divided by the stock price, both the absolute level and the relative level compared to bonds. From a historical standpoint, when the overall dividend yield on the stock market is below 2%, independent of other factors, this means that the stock market is expensive. When the dividend yield on stocks is low relative to bond yields, this means investors are willing to pay more for stocks relative to bonds than has generally been the case historically.

Quantitative Measures

Quantitative techniques involve associating different market measures or "variables" in quantitative equations or "models". For example, an analyst might "build a model" that related the movements in stock prices to money supply, dividend yields and economic activity. From this, he would attempt to indentify the periods when the market had setbacks. The analyst would then develop some "decision rules" or guidelines to dictate his trading positions that would be programmed into his model. This type of investing is formally called "Tactical Asset Allocation" (TAA). It has become very popular and results in large flows in modern financial markets.

Pros of Market Timing Stock Strategy

There are certainly a large number of investors who swear by the market timing strategy for buying stocks. Such people tend to be big fans of technical analysis which seeks to draw correlations between current market conditions and those which affected historical stock prices. It is not uncommon for a great deal of spreadsheets, charts, and graphs being generated when trying to employ market timing as strategy for purchasing stocks. All of these are generated in order to identify any potential trends in the market that may indicate a significant shift in share prices. However, aside from looking very busy and investing a lot of effort, there are a few pros to this investment approach for stocks.

Cons of Market Timing Stock Strategy

The most fundamental problem with the market timing stock strategy is that it remains pure fantasy, at least according to most investment experts. After all, if anyone truly could predict the rise and fall of stock prices with any degree of certainty, then we would all be billionaires because such a strategy could be documented and replicated. But even Warren Buffet does not ascribe to this approach and neither do most investment professionals. There are almost an unlimited number of market and world variables that may ultimately affect stock prices.

Another big negative with the market timing strategy is the fact that it generally involves a large number of transactions, especially when compared to the buy and hold method. Buying and selling all those stocks requires commissions which can start to take a larger and larger chunk of profits - especially when the market doesn't react in the way you predicted. In order to really be effective, a market strategy tends to require a larger capital investment. This allows the investor to purchase a larger number of stocks and thus not need to make as large of a return on the sale price in order to still make a profit.

The differences between bid and asking price can also eat into the profits of a struggling market timing investor - also known as the bid/ask spread. An investor may bid a price for certain stock and be told that it is available, but by the time the actual transaction is made - the asking price actually charged by the exchanges may be higher. Again, the difference may seem insignificant but it can make a large difference between a good and a bad day in the life of a market timer.

Although market timing is an approach that millions of investors pursue every day on exchanges around the world, the truth is that it tends to carry more risk than reward. With the erosion of profits due to transaction fees and the bid/ask spread, market timing tends to require larger investments of capital in order to be worthwhile. While no investment strategy for buying stocks has proven to be risk-free and a sure thing, there are other options that tend to be safer investment alternatives.

Does Market Timing Work?

It has become accepted wisdom in financial circles that it is impossible to consistently "time the markets". This has resulted partly from the theoretical academic arguments that no one can have such an advantage (legally!) in their "efficient markets". In practice, the complexity of modern financial markets means that it is very, very difficult to predict the vast number of variables that can affect the markets. Who knew that Saddam Hussein planned to invade Kuwait in 1990 and the price of oil would soar? An investor predicting the unification of Germany and its resultant affect on the capital markets would have been shipped to the funny farms only a couple of years before it happened.

It is possible to establish a valuation level for the markets, like a stock. Compare these tasks. A small company might have a few competitors, a known product line and management. The cash flows can be identified and assessed. Even so, where we can value this company, its stock might not be appropriately valued for years and its future prospects depend on the economy in general. What about the market overall? Who is the management? What matters most, monetary policy or fiscal policy? What are demographics doing to demand? What about international considerations?

That is why most market mavens have one or two great predictions before they are hopelessly out to lunch in the forecasting wilderness. While it is possible to tie it all together a few times, it is virtually impossible to do it consistently.

Most good market strategists only try to indentify "extremes" when things are very overvalued. They stay invested until these periods, knowing the smaller swings are "noise" that usually work themselves out. Even so, staying in cash until the eventual crash comes gets harder and harder as the markets run ahead. Usually the final charge of the bull market results in public "bears" being hopelessly discredited and throwing in the towel at exactly the wrong moment.

Should you time the markets?

Should you time the markets? Only if you have the necessary insight and discipline to know when to "hold" and when to "fold" as the song says. Both of these are very hard to come by. For most of us, risk is having your money available when you need it. If you can't afford a 30% drop in value, you shouldn't be in longer term assets in the first place.

If you decide to time the markets, remember one thing. Those who are really good at market timing aren't going to do television and newspaper interviews just before the crash. You'll only know what they did a few months after the fact. If you can't do it yourself, you probably shouldn't try.

If you only invest in stocks when the guys at work have made lots of money or your GICs aren't paying anything, you probably are doing exactly the wrong thing. Investing when newspaper headlines are doom and gloom and the boys have been blown away would be a better timing strategy. At the peak, it's impossible to find a bearish forecast. At the bottom its impossible to see the upside.

Sources and Additional Information:

http://www.finpipe.com/strategy/marktime.htm

http://www.investorguide.com/igu-article-980-stock-strategies-market-timing-strategy-of-buying-stock.html

http://www.kansascityfed.org/publicat/reswkpap/pdf/rwp02-01.pdf

http://pages.stern.nyu.edu/~adamodar/pdfiles/invphil/ch12.pdf

TweetMyStock.com - Twitter Meets the Stock Market

2010-07-05T23:17:00.000-07:00

It takes a second to lose an opportunity in the stock market. Want to have immediate access to stock fluctuations? Want to take the right decision on the right time? Than it is quite natural to expect the solution would be given by means of the common communication through instant messaging and Twitter.

TweetMyStock is an easy application that provides shareholders information of the ups and downs of their shares of stock. If stock prices of a company rise or fall more than the values you were expecting, TweetMyStock will immediately send you a direct message to your Twitter account.

There is not much more to add except that this service is free from start to finish. An account is created by merely choosing a username, an email address and a password to go with it. Alternatively, you can sign in using your Twitter credentials.

Website: http://www.tweetmystock.com/

Stocks Trading with Bollinger Bands

2010-06-27T22:10:00.000-07:00

Introduction

Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time.

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle band is a measure of the intermediate-term trend, usually a simple moving average, which serves as the base for the upper band and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average. The default parameters, 20 periods and two standard deviations, may be adjusted to suit your purposes.

Bollinger Bands in Stock Trading

Calculation

Description: Bollinger bands are an upper band (UB) and a lower band (LB) which are a default of two standard deviations (STDEV) of the n most recent prices (Pn), above and below a simple moving average (SMA) of the n most recent prices.
Calculation:
    SMA = (P1 + P2 + P3 + P4 + ... + Pn) / n (20-day simple moving average).
    UB = SMA + STDEV(P1 ... Pn) (20-day SMA + (20-day standard deviation of price x 2)).
    LB = SMA - STDEV(P1 ... Pn) (20-day SMA - (20-day standard deviation of price x 2)).

Trading Use

Bollinger bands are an indication of the volatility of recent prices. If the recent prices have a larger range than the previous prices, the Bollinger bands will expand. If the recent prices have a smaller range than the previous prices, the Bollinger bands will contract.

Bollinger bands are used in many different ways by different traders. Some traders make trades when the price moves above or below the Bollinger bands (i.e. when the price breaks out of the Bollinger bands channel). Some traders make trades near the moving average, and use the Bollinger bands as targets. Bollinger bands are also used by options traders that trade using volatility, because recent volatility is part of the calculation of options' premiums.

Basic Application of Bollinger Bands

So you want to learn how to master Bollinger band trading. That's a smart move because Bollinger bands are probably the best indicator you can use to achieve near perfect entry and exit consistently.

There are the beginning concepts about trading Bollinger bands and then there are the advanced topics. Combined you posses a tool for insight that you really cannot get from any other indicator.

Bollinger band trading requires that you understand all of these concepts completely in making trading decisions using the bands.

1. Bollinger band squeeze
2. Bollinger band continuation
3. Bollinger band reversal

What makes Bollinger bands even more unique are the advanced concepts that accompany these signals that form.

As you observe a continuation, a squeeze or a reversal pay special attention to how the upper and lower bands respond to approaching price action.

Take a look at the following diagram closely and with careful study because grasping the following is the golden key to successful Bollinger band trading.

Bollinger Bands in Stock Trading

Advanced Application of Bollinger Bands

The candlesticks present represent current approaching price action to the upper or lower band. Let’s start with #1.

1. Extremely bearish, price is falling to a lower band and the KEY is of course watching both the upper and lower band as price approaches. In this case the upper is rising while the lower is falling indicating not only a potential explosion in price but one to the downside is extremely likely.

2. Extremely bullish, price is rising to the upper band and the KEY is keeping a watchful eye on BOTH band as price approaches. In this case the upper band heads UP and the lower band falls, indicating a potential price explosion to the upside.

3. Price approaches the lower band while the upper and lower band remains flat. This is very insignificant and should be ignored unless things change.

4. Price approaches the upper band while the upper and lower bands remain flat. This is also insignificant and best left for the amateurs to enter.

5. Bearish candlestick at a lower band while band constrict - this is a sign that price is likely at least for now going nowhere. Wait do not enter.

6. Same here, a bullish candlestick at the upper band while the bands are constricting is a sign that not much is about to happen just yet.

7. Like #1 this is a sign that price is going to make a nice move but the lack of the upper band hooking up indicates that the move for now won't necessarily be explosive.

8. Also similar to its counterpart in that price will likely move but not to the explosive level that would be expedited if the lower band was hooking downward. The lack of the lower band hooking down limits the potential move here.

Sources and Additional Information:

http://www.bollingerbands.com/

http://daytrading.about.com/od/indicators/a/BollingerBands.htm

http://www.bollingerbandgenius.com/Bollinger-band-trading.html

http://www.trade10.com/Bollinger.html

http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:bollinger_bands