Trading education » Risk

Trading Stocks – How to Buy Safer Stocks?

admin — Wed, 16 Jun 2010 08:30:32 +0000

So you bought yourself a stock and it crashed losing 30 percent overnight. What do you do now? Good question, indeed. And it’s a tough one too, so there is really no right general answer. Your trading plan, which you should have prepared before you even started trading, should answer this.

But let’s ask an easier question and one that is related to the problem at hand. Namely, is it possible to tell how risky individual stocks are so that we could avoid situations like that in future. Certainly, not too many people enjoy waking up to a disaster like that.

In other words, we would like to know if there are some measures of risk for the stock market. Yes, there are and one such a measure is called the beta or the beta coefficent.

What this coefficient measures is the stock volatility. It measures it relative to a broader market, which has the beta of one. A stock whose beta is one is about as volatile as the general market. Stocks with their betas lower than one are less volatile and those with betas higher than one are more volatile than the general market. The beta is not constrained from the above, in principle, so there are stocks with betas as high as 3 or 4. And even higher. Many stocks like that are penny stocks, which is one reason why penny stocks should be avoided.

Now, the more volatile a stock is, the more risky it is to your portfolio. On the other hand, if you only swing trade or day trade, you want stocks like that as they move more rapidly and generate faster gains. Or losses, depending on your luck.

To be more precise, the beta measures the correlation with the broader market. For this reason, this coefficient can be even negative for stocks that are negatively correlated with the general market, meaning they rise when the market heads south or vice versa. This, for instance, is often true of gold stocks. And since beta is not constrained from the below either, some highly volatile gold stocks can have pretty negative betas.

If you want your portfolio to be immune to excessive volatility, you should look for stocks with betas of one or lower. There are plenty of those out there too. The stocks of companies that produce staples tend to have lower betas. For instance, Procter&Gamble can serve as a classic example. They make soap. And last time I checked, there was really nothing exciting about soap, which is why the stock of a company like that is unlikely to generate much volatility. Another example is provided by utility stocks. Just like soap, energy is needed by everyone and all the time, meaning the stocks of companies that deliver those have little tendency to be cyclical and hence less tendency to fluctuate wildly.

Now, how do we find betas? That’s another good question. One way to do this is to use a stock screener, such as the one you can find at Yahoo! Finance or similar larger finance related sites.

Remember, though, that there are really no risk free stocks. Just some are less risky than others.

By: Waldemar Puszkarz

Swing Trading Method – An Easy Swing Trading Method For Anyone

admin — Thu, 03 Jun 2010 01:04:58 +0000

The best swing trading method is easy and can be used by anyone. Swing traders profit from trading by taking chunks out of the market as price swings or trends over several days. This method of trading is perhaps the best because it reduces the amount of risk a trader exposes themselves to along with offering the highest possible returns with lowest risk. Any good swing trading method addresses the following.

First, the method should primarily be used to trade only with the trend. The trend is your friend. This is something you have probably heard many times over and there is a reason. Trading with the trend means you are trading with the smart money. This alone greatly increases your chances of entering into a profitable trade. Any trading method should primarily be used to trade with the trend, especially for beginners.

The second point is that swing traders need to know where value is. Value means that the stock or currency’s price has dropped down to a point where you can get in at a cheap price before it continues on with the trend. This allows you to get a bargain price while everyone else has been paying top dollar and have paid too much. Getting in at value makes your trades even more profitable.

The most simple and easy swing trading method is one that allows you to trade with the trend and helps you get into the market at possible areas of good value. This will increase your chances of becoming a profitable long term swing trader in any market.

By: Jolon Warren

Forex: Money Management Principles

admin — Sun, 02 May 2010 20:35:25 +0000

Trade With Sufficient Captial

One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.

The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.

Exercise Discipline

Discipline is probably one of the most overused words in forex trading education. However, despite the cliché, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.

It’s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you’ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.

Employ Risk-to-Reward Ratios

The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.

Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)

40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,

40/80 (1 to 2) = 33.5%,

60/20 (3 to 1) = 75%,

60/60 (1 to 1) = 50%,

60 /90 (1 to 1.5) = 40%,

60/120 (1 to 2) = 33.5%

Important Note

Never risk more pips on a trade then you plan to make. It doesn’t make sense to risk 100 pips in order to make only 10. Why? See below example.

Profit taking level (pips): 10

Stop used or pips at risk: 100

You win 10 times which makes 100 winning pips.
You ONLY lose once and have to give back all profits!!!

This type of trading makes no sense and you will lose on the long term guaranteed!

By: Toby Smitz

Sound Strategies For Options Trading

admin — Mon, 19 Apr 2010 20:31:21 +0000

Although there are many recognized strategies for options trading they are not of value if they don’t guarantee some basic results. For example, options trading was first implemented as a means of helping investors to find some new ways to hedge investments or manage risk in their portfolios. This means that it is an approach to investing that reduces risk and costs while also protecting profits and allowing a bit of diversity.

This also means that strategies for trading are extremely wide-ranging. Consider that an investor is going to have to have a good and reliable technique to apply when they are holding a somewhat bullish stock in a market that seems to be a bit shaky or unreliable. The same investor may need to determine what to do with items that are remaining neutral or even beginning to decline. Generally speaking then, most strategies for trading should be able to build wealth regardless of market conditions – this means that they are supposed to do more than just insure against loss or hedge current holdings.

So, how do you develop strategies for options trading? The primary step in creating some infallible plans is establishing goals. It is impossible to draw a map without an actual destination in mind, and this applies just as equally to the creation of any investment strategy that relies upon options trading too.

While knowing where to go is essential, the terrain or conditions must also be taken into consideration too. This usually requires a bit of study, research and education because trading can be a bit trickier than it might initially appear to be. Consider that an investor considering the purchase of a call option is going to have to look at the strike price, the expiration date, and the premium that the seller is requiring. Only by making a fully informed decision can the investment be an assured winner regardless of current conditions.

Of course, the information required for a sound investment will also usually include a few other details such as the “moneyness” of the option and the implied volatility that can usually bump up the costs as well. Such factors tend to indicate that the investor has to have a good bit of knowledge around the option too, and how it is expected to perform over the short term.

For example, the strike price and expiration are usually flexible and if the investor knows that an asset is going to rise dramatically in a short period of time they can use their established system or strategy to make the right decisions.

By: Mark Summer

Day Trading Training

admin — Thu, 08 Apr 2010 00:19:41 +0000

Day trading training is to financial success as a professional day trader as medical school is to a doctor. In fact, no serious endeavor that involves risk and requires skill can be achieved without the proper education, unless you are hell bent on gambling solely on the basis of luck, or on the basis of your “gut instinct”.

A solid foundation in day trading education can make the difference between amassing a fortune and incurring massive financial loss.

You may know someone or may have heard stories about people who have given up their day jobs to take up day trading as a full time endeavor. They only work a few hours a week, maybe only a couple of hours a day, doing some research and then programming their buy and sell thresholds, and then letting the market do its thing. These people are making money on autopilot, right?

Successful people always make their achievements look easy to others who are not in the know. But the reality is that success is the outcome of fierce determination, intense study, and a relentless drive to achieve your goals. Day trading is no different.

A truly successful day trader will have read books, attended seminars, enrolled in training classes, watched demonstrations, or enlisted the help of a mentor. Having a mentor who is committed to your success is in fact, one of the most effective ways to become successful. You are following in the footsteps of someone who has blazed the trail to success ahead of you, and he or she is able to guide you and show you the way to your own success.

Never underestimate the importance of a solid foundation in day trading training.

By: Paul Messner

Don’t Forget About Time Decay When Trading Options!

admin — Thu, 18 Mar 2010 08:55:44 +0000

One of the quickest ways to lose lots of money, when trading options, is to completely ignore the fact of time decay on options. If you are fairly new to options what I am about to explain can help save you money by not letting you learn the hard way. Time decay cannot be ignored when trading options. If not ignored it can be very beneficial to you, if you forget about it, I guarantee it will hurt.

There are three concepts you must understand about options in order to understand time decay. First you must understand that a premium is what you pay to give you the right to buy or sell an option. You want to keep this amount as close to the intrinsic value of your option as possible to help minimize your risks. For instance if a stock is selling on the open market for $12 and you have a call option to purchase the stock for $11 then you don’t necessarily want to pay a high premium, depending on the amount of time.

For example if you pay a premium of say $4 for the right to buy for $11 then the total cost to you, if you were to exercise the option, would be $15. This means, that this option would have $1 of intrinsic value and $3 of time value. The closer to the time that your option expires, the more time value you lose. If the price remains the same and doesn’t move within the time frame of the contract then you could lose the full $3 of time value. And remember these contracts are purchased in 100 share lots.

You really have to consider the stock you are picking. The above deal might still be good, depending on the stock and your ability to afford the risk. You must keep in mind that you will lose the time value in every option. Time to expiration will always decrease; it is one of the golden rules to options. You need to take into consideration what part of your premium is time value and if you have any intrinsic value when trading options, because time value is subject to decay.

It is easy to keep track of these numbers if you pay attention to the Greeks. The Theta in your options brokers’ platform tracks the time decay for you. This comes in really handy when you are putting on multiple positions. I would highly recommend that if you are just starting out with options that you learn the Greeks, and what they mean.

For the purposes of this article just remember that all options are subject to time decay. Remember that not all time decay is bad. In fact it can be quite beneficial if you are the one selling the option. If the option expires without being exercised you get to keep the premium and the stock. If you are purchasing an option try to keep the amount of time value as low as possible to increase your odds of the option being in the money enough to make you a profit.

For more information on trading options basics, you can sign up for this free video basics course on trading options.

DISCLAIMER: No personal investing advice is implied or stated in any video or written presentation. The information presented is for educational purposes only and should not be construed as personal legal or investment advice.

By: Michael A. McIntosh

Important Forex Trading Terminology

admin — Sat, 13 Mar 2010 02:54:49 +0000

For somebody who is new in the forex business, it is a must that he or she should be knowledgeable in the differing terminologies that are used in this kind of trading business. Forex trading terminology is a must learn for those who plans to involve themselves in this undertaking. Otherwise, they would subject themselves to greater risk of losing their investments if they do not fully well know the meaning of basic forex terms. Hereunder are the different basic terminology and their meanings that you will be well advised to take note of if you have plans to invest in forex trading.

Base Currency: The value of a particular currency in relation to another currency as denoted by a currency quotation represented in this expression as USD/CAD whereby the first currency is always the base currency. This example shows USD as the first currency, which makes it as the base currency.

Quote Currency: This will be the second currency in a currency quotation expression. The above currency quotation indicates CAD as the second currency in the expression thus, it is the quote currency.

Long Buy: In forex trading, you are considered in a long position if you buy base currency and sell quote currency.

Short Buy: The opposite of long buy. Your position is considered short if you sell base currency and buy quote currency.

Ask: This is a forex trading terminology whereby the dealer has come to a decision to call on a currency quotation whereby he will be selling on an ask price a base currency in exchange of quote currency.

Bid: When the dealer has decided to call a currency quotation whereby he will be buying on a bid price a base currency in exchange of a given quote currency.

Pips: Pip is a shortcut for price interest points which would be indicative of profits for forex traders. One pip is equivalent to one hundredth of one percent of a currency contract price.

Leverage: This is one attraction given to forex investors by forex brokers. You deposit 100 dollars with your forex broker and he will lend you 1,000 dollars from his own account for you to trade in the forex market. This will give you a good leverage in your trading but the moment your broker is not satisfied with your trading, he can cut you off depending on their policy on leverage.

Slippage: This situation would usually result to the disadvantage of traders due to lost opportunity in gaining pips because of the broker’s inability in correctly handling and fulfilling the order at the requested price. This situation does not happen often, however.

Spike: These are sudden fluctuations in currency rates brought about by global breaking news that can impact heavily on a currency traded pairs. These fluctuations can either swing wildly for or against a pair of traded currency depending on the nature of the global breaking news.

Retracement: The peaking out of a sudden and wild swing of a rise or fall of a particular currency in a currency pair caused by an international breaking news that would impact on subject currency. Once this sudden rise or fall of a currency reaches its peak or bottom and starts to normalize, we call this process as retracement.

Stop Loss: A forex trading terminology that denotes a mechanism used by traders to limit losses. A particular amount estimated by the trader will be set up by him as his stop loss mechanism whereby once this amount of trading losses will be reached; trading for this trader will automatically be cut off.

By: Peter Flemming

Learning Forex Through Forex Education

admin — Fri, 19 Feb 2010 07:18:35 +0000

Investing a great amount of money is no joke. Much more when you are trying to invest on a dynamic and highly demanding business as the foreign exchange or forex. This is the reason why most of the time, only those that are already experts in the business are trying their luck in this trade. But did you know that it does not have to be that way? That an ordinary investor can be a valuable and bankable trader in forex too? That is when you do enroll yourself to various forex educations available in the web. You can even join ‘webinars’ or web seminars that are manned by senior forex specialists.

Online forex education is chopped into many different courses. These involve workshops, practices, and trainings that will provide not only knowledge and skills but also build the attitude required for a successful trader. Part of the education is to teach you on how to gather fresh researches and forex charts to accompany your big decisions of buying and selling. You will also be taught about how to tabulate your own platform, and to pick the perfect type for your account.

As soon as you are all set, a demo account will also be provided for you to do practice bidding on. This will help you establish your skills during final and live dealing environment. There is nothing for you to worry on because these demo workshops are free of risk, just to boost your confidence relying on your own abilities and capabilities

By: John F Smith

How a Day Trading Stocks Newsletter Can Help You Succeed

admin — Mon, 08 Feb 2010 23:40:08 +0000

Education

One of the greatest benefits a good day trading stocks newsletter provides is the chance to learn from experienced professionals. The best day trading stocks newsletter will give you pointers on stock and market analysis, using various trading strategies, and money management, as well as less concrete aspects of trading like the psychological issues involved on both the trader’s side and the market’s.

Save time

The staff at a day trading stocks newsletter have the time to do in-depth stock analysis and report their findings back to you. After all, if you’re honest with yourself, do you really have time to do sufficient research on the stocks your interested in?

Catch trends fast

Turn your back on the market for a moment and things can change fast. While you can’t spend every waking moment watching your stocks, as a day trader you need to keep on top of trends if you expect to turn a decent profit. A quality day trading stocks newsletter can not only help you quickly identify tends, but also let you know how those trends may change. Many online newsletters even send out email alerts when a stock’s situation is really changing fast.

Protect your trading capital

A good day trading stocks newsletter will give you tips on how to limit risk and keep your trading capital safe from large losses and market drawdowns by using sound stoploss and money management techniques. The quality newsletters offer more than just theory. Many even provide you with exact stop loss levels.

Access the professionals

Many stocks newsletters conduct interviews with top investors and business leaders, quizzing them about their trading and money management strategies. Writers for these newsletters not only have access to such people, but they know exactly which questions to ask to get exactly the information their readers need.

Get specific instructions

If you’re relatively new to day trading getting clear, specific instructions on what to buy and sell when can make a huge difference in your profits as well as cut down on a lot of stress. Even if you’re already an experienced day trader, though, these instructions can give you valuable insight into the minds of other expert traders. Either way, you’re bound to learn a thing or two.

Avoid mistakes

Let’s face it, when it comes to day trading, even professional make mistakes. They might be due to technical miscalculations, misjudgments or simple psychological reactions that lead to rash decisions. Checking your decisions against the recommendations in a high quality day trading stocks newsletter let’s you see when you might be going astray.

Whether you’re just starting out in day trading or you’ve already got some experience, the guidance available through a good day trading stocks newsletter can increase your profits while making lighter work of research and buy and sell decisions.

By: Mark Crisp

Forex Trading Education – 2 Simple Tips To Start Winning

admin — Fri, 29 Jan 2010 22:13:13 +0000

In this article I’m going to share with you 2 uncommon tips that most losing traders don’t know about. Try demo trading with these tips in mind, and chances are you’ll find that you’ll become a better trader.

Tip #1 – Trade Less

This doesn’t mean that you should pay less attention to your trading charts. What I mean is that you should enter into fewer trades which have a higher probability of winning.

Many new traders make the mistake of entering into every single “decent” trade setup that they see. The problem with this approach is that these traders are concentrating too much on maximizing their chances of winning (more trades, more chance to win right?), without considering that they are actually increasing their chances of losing too! Generally speaking, the more trades you enter into, the more risk you are taking.

Forex trading is a risky business, so try not to increase the amount of risk that you’re already taking. When you enter into trades less frequently, you’ll naturally choose those with a higher probability of winning, and NOT enter into trades with a lower probability of winning.

Remember, in Forex trading, it’s not about how many times you win, but how MUCH you win. Even if you only have one successful trade each month, it’s enough for you to be rich if you can be consistent about it.

Tip #2 – Put Your Eggs In One Basket

I’m sure you’ve heard of the phrase, “Never put all your eggs in one basket” which refers to the diversification of your funds. Generally, this is good advice.

However, in the Forex market, a better piece of advice would be “Only put SOME of your eggs in one basket”.

Similarly to Tip #1, placing too many trades at the same time will dramatically increase your risk of losing. Trading too many currency pairs at the same time, is a tactic used by many inexperienced (and often losing) traders. They think that by diversifying their trades, they can better limit their potential losses.

This is a big mistake unless you have a large capital pool to trade with.

If you only have $2,000 of capital to trade with, for example, your stop loss levels are going to be very tight if you have too many trades open at the same time.

This often results in most of your stop losses being triggered, causing you to immediately lose in your trades.

By: Harold Hsu