Trading education » Trading Stocks

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

Trading Stocks -Never Forget About A Past Trade

admin — Wed, 16 Jun 2010 02:41:32 +0000

We all know that emotions control every decision that an investor makes in any type of money related vehicle. Whether is be the stock market, real estate, art work or antiques, emotions ultimately set the final price on both sides of the transaction. Some investors have greater control over their emotions while other investors are destroyed by their emotional reactions to certain events.

One common occurrence that I have seen many investors make, including myself, is placing a position in a stock at the wrong time. My last article detailed the importance of timing, while this article will concentrate on the importance of staying focused and emotionally stable when things don’t work out as expected. In the past, I would study a stock’s chart, the fundamentals, the general market health and everything else that I felt necessary before placing a large sum of cash behind my beliefs. When things went wrong and I was forced to sell for a small loss, I would drop the stock from my watch lists and remove it from my memory. This was one of the biggest mistakes that I was making during my earlier years of investing. The greatest investors study their mistakes and learn why they were wrong. If you don’t learn from your mistakes, you will continue to repeat them and never move to the next level.

I was usually correct with my analysis on the particular stock but many times I was too early with my entry point during a new up-trend. Months later, I would come across the same stock in my screens but it was now up 25%, 50% or more from my initial buy point and stop loss. I would be frustrated for selling my stock too soon and was getting tired of using rules and missing big winners that I sold for a loss. I knew money could be made in Wall Street by using the law of averages to my advantage and employing strong money management skills but I needed to employ the rules more consistently. I started to practice what I was taught by selling my losers quickly and allowing my stronger stocks to ride their trends. Over time, I was experiencing a few more losers than winners but my stake was growing because these losers were smaller in size than the winners. The words written in the books were true; Jesse Livermore, Gerald Loeb and William O’Neil were all accurate with their lessons about cutting losses quickly.

More importantly, I learned to keep strong stocks on my radar even if I bought too soon and was forced to sell for a loss. My timing was wrong and my ego was shot because I was wrong, so I typically decided to stay away from that specific stock because it had already taken my cash and my pride. Emotionally, I was burned by the stock even though this was not entirely true. Investing is a game of trial and error. It is okay to buy a stock at the wrong time and sell, only to buy it again because they timing may be better. If you cut the losses small and allow winners to grow, the averages will ALWAYS work out, I promise. You must be honest with yourself to allow the averages to work out. You cannot allow a stock to drop past your sell point and you must try to always hold the strongest stocks without selling them during a premature pullback. This all sounds so easy but it is not! If it was so easy, we would all be extremely rich and the stock market would be everyone’s full time job.

I kept using my system of trial and error and started to record every thought and transaction I made. With my revised philosophy in place; I continued to study the stocks that I was forced to sell and tried my best to re-purchase, even at higher prices than my original position if the time was right. Even now I have these issues, the greatest traders of all time always had these issues and every fund manager must decide if the time is right. My latest example, which can relate to almost everyone in the community is Paincare Holdings, a stock that was purchased solely as a “test buy” that I was forced to sell. If things turn around and the general market starts to rally, I would have no problem buying the stock at a higher price than my original position if the opportunity presents itself.

LaBarge is another example, first showing up on the screens at $9.35 but during a down-trending market. The new pivot point and buy area was $14, over 50% higher than the original price but a solid entry point regardless of past gains or prices. Mentally it is always the toughest to buy a stock at a higher price than you were watching it at an earlier date but it can be the most rewarding strategy. Never look at a chart and toss away a candidate because it has moved up 50% or even doubled in recent months, the real move may just be beginning.

The moral of this article is to make you understand that timing may be your only issue when buying stocks so never throw away a possible superstar because you bought too soon. Keep it on your watch list and be prepared to initiate another position, even if it will cost you an extra point or two. If you buy again and it doesn’t work out, re-peat the process, there is always a chance that the stock was not meant to be or your analysis was slightly faulty. In either case, learn what you are doing right and wrong so you can be prepared to use those lessons with the next stock.

By: Chris Perruna

Emini Trading – Margin in Emini Futures

admin — Thu, 27 May 2010 09:22:44 +0000

If you are familiar with the margin for stock trading, you know that this is the amount the broker allows you to borrow using your funds as a collateral. Usually, this is 100%, meaning if you hold $10,000 in your account, you can control $20,000 of stock. In some situations, that only pros or semi-pros are allowed to take advantage of, your margin can be greater.

While the margin for trading in stocks is simply your borrowing power for stocks, the margin on futures can be defined as a minimum cash requirement for your futures position. Similar to a performance bond or a good faith deposit, the margin on futures is set by the exchanges based on the corresponding market volatility and can be changed at anytime if this volatility changes. Generally, the margin rates range between 2-15 percent of the value of the futures contract, with most contracts having their margin set around the 5 percent.

Individual brokers can reduce the value of this margin for intraday positions, that is for positions open and close on the same day. Because of this, the margin varies, even widely, from one broker to another, being never higher than the value established by the exchanges that takes into account all kinds of positions, including those held overnight, for which the margin is bound to be higher to compensate for the higher volatility during the times when the trading is not very active.

There are two types of margins in futures: the initial margin and the maintenance margin. The former is the required amount of funds that must be deposited by you before your positions are initiated. The latter is the minimum amount of cash/buying power required in order to keep your position open.

While the initial margin requirements must be met at the time of the trade, the maintenance margin will only become a factor if the account value is decreasing. In the event that the account value falls below the maintenance margin requirement, you will receive a margin call for funds. In this case, you will need to add enough cash to satisfy the initial margin requirement of the position.

In order to illustrate the difference between the initial and the maintenance margin, let us consider the following example.

Suppose you had $5,000 in your futures trading account. You wish to open an intraday position in the E-mini S&P. In order to place this trade, you would need at least $2,250.00 in the account (if you were a customer with the Interactive Brokers, to keep this example realistic), which is the initial margin of one E-mini S&P futures contract set by this broker. Because your account balance exceeds the amount of the initial margin, you would be able to open your position and you would be able to purchase not just one, but even two futures contracts. Suppose though that you purchased only one, to keep this example simple.

Suppose now that after this purchase, the market moved against you causing the account value to fall to $1,700, however unlikely this may be. Since the account value is now less than the maintenance margin of $1,800, you would receive a margin call for $100, the difference between the initial margin and the account value.

By: Waldemar Puszkarz

Trading Stocks Online – The Value of a Trading Plan

admin — Thu, 20 May 2010 22:05:00 +0000

I started trading stocks online about 10 years ago and then in 2004 took some classes on trading options and moved into trading options online fulltime 2005. It was during this period that I learned the value of a trading plan. Most of you probably already have a mental plan but how many of you have actually written down? If you have a plan, how many of you are actually following it?

What Is A Trading Plan?

This is a document describing the methods you will develop and use to become a successful trader. It describes in detail how you will proceed to successfully execute your plan. Once your plan has been developed, trade according to the plan you developed. Create a Plan, Plan to Trade, Trade to the Plan.

Why Do I Need A Trading Plan?

“Every successful Professional Trader has a successful trading plan. Without one, you will lose before you even get started. You’ve heard the horror stories of beginning traders getting wiped out soon after making the move to trade professionally. In fact, only about 10% of those who start day trading the stock market are still around after three months.” Taken from “Trading Every Day with the right focus”

What Do I Include In A Trading Plan?

Here is the information that I put in my plans:

• Mission statement
• Goals that I want to reach (needs updated periodically)
• Rewards — How am I going to reward myself when the goals have been reached
• My trading styles
• My trading strategies
• My risk tolerance — How much am I going to place on a place? How much of my portfolio am I going to risk with all my trades?
• Emergency contacts — You should have at least have your brokers phone numbers here
• Anything else that you deem important

Where Can I Get Examples Of A Trading Plan

There are many examples of these plans on the web. Just search for them. There are also some trading planners for sale. Here you enter your plan information and they prepare the plan for you. I have looked at some of them, but not purchased. From appearances they looked OK but I felt I could just create my own using Word.

If you don’t have a plan you should start preparing one as it will help you in organizing your trading habits. One of the key ingredients of a trading plan is discipline. To make a plan work for you, you must have the discipline to follow it.

By: Chuck Ainsworth

Trading Emini Futures – The Failure to Cut Losses Short Revisited

admin — Sun, 09 May 2010 16:52:29 +0000

Emini futures, or simply eminis, are smaller-sized contracts of “full-grown” futures contracts that have been around for decades. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes or home based offices.

Futures offer much greater leverage than stocks or bonds, and practically only trading currencies on the Forex can provide even better leverage. While this leverage can be also very risky in the hands of unskilled traders, this somehow has not prevented wannabe traders from flocking to emini futures or Forex.

Trading eminis is not easy, although it can be mastered given enough time and dedication. The basic trading rules apply here just as in trading stocks or bonds, but due to this enormous leverage following these rules is even more important than in stocks or else it’s very easy to end up blowing one’s trading account in no time.

One of such rules insists that you “let your profits run”. Another urges you to “cut your losses short.” Both make a lot of sense and when combined, they give rise to much more intelligent trading.

Let us discuss the latter here as it seems to be of even more importance than the former. This is so because ignoring this rule is a sure path to ending up with a totally depleted account relatively quickly when trading emini futures.

Yet, this rule is often violated despite the grave consequences that doing so entails. Why is it so, one can wonder. Let us address this issue here as that is not always done in an exhaustive, comprehensive manner.

There is no doubt that trader’s ego is involved in this process. Most humans, traders being no exception, do not like to admit that they have made a mistake, so they would rather wait for things to somehow get worked out in their favor while they adjust their stop-loss and keep going deeper into the red zone. This is often no more than wishful thinking that masquerades as eternal hope. Yes, it is true that to be a good trader one has to be an optimist, but one also has to be a realist and being self-disciplined. Violating basic rules of trading is hardly a sign of solid self-discipline.

But there is also another reason why overriding this rule often takes place. At the core here seems to be the lack of confidence in one’s trading methods. This is what also can make the trader to hold to his losing position because he does not believe that he will be able to get a better trading opportunity. Had he believed a much better opportunity is likely to present itself while he is stuck with his loser, he would have cut it much faster.

The moral from the last observation is this: if you are considering trading emini futures or any other market, for that matter, you want to make sure you have a good solid strategy that you trust as this can only help you to cut your losses short.

By: Waldemar Puszkarz

Emini Trading – Is Trading Emini Futures For You?

admin — Wed, 28 Apr 2010 23:18:32 +0000

No, it’s not.

Now, that would be a short answer and as you see I can be quite succinct. And even though I meant this half in jest, it is the correct answer for most people out there. Simply because most people will not succeed at trading emini futures. Or even stocks, for that matter.

The reason is rather simple too: this is a very competitive business and only the most competitive will succeed. Which rules out about 90% of the human population. Yes, let’s be painfully honest here: some people are not even computer savvy enough to start this business. You don’t have to know how to program in C++ or C# or any other higher programming language, although this may prove very useful indeed, to be able to launch a successful trading career, but since your tool is a computer, you need to be able to use it well. Computer dummies should not apply.

But let’s assume that you are no stranger to computers and so this should not be a problem. So far so good then. But that was actually the smallest obstacle to overcome on your way to become a successful emini trader. There are much bigger ahead.

Do you have the mental aptitude to succeed in this business? The market is merciful and there is no room for any office politics to work things out. You are either right or wrong. There is no other way. No amount of persuasion will convince Mr. Market to give you back what you just lost. You have to fight constantly and be prepared to lose and be humiliated more often than other mortals. If you can take it, and most cannot, you are one step closer to your success as an emini trader.

Now you only need a good strategy. One that could make money and that would suit your trading personality. Finding such a strategy can be an elaborate process. Once this step is completed, though, you still need to see if it makes money in real trading. Sometimes, and probably more often than not, many wannabe traders end their careers right here. So close to the success. Practically one step away from it. This is so because they do not find their strategy good enough. And that’s how the trek to the Holy Grail starts. The journey to the land where only perfect strategies live.

The legend about this land is not unlike the legend about the Atlantis. Mesmerizing, but still only a legend. Such a land does not exist, but the belief in it is so strong that many a wannabe trader ends up searching for it forever instead of trading. There are no perfect strategies. And the sooner one realizes this, the better. Stick to what is good enough. Stick to what works even if it is far from what you would like to be using. Simply master it as well as possible and you will be on your way to solid profits.

Yet, despite all these obstacles, I do strongly believe that everyone can succeed at trading eminis. Everyone who really wants to, that is. Which still excludes 90 % of humans, but it can include you. As long as you really want it badly enough.

By: Waldemar Puszkarz

Trading Stocks – Simple Uses of Moving Averages For Trading Stocks

admin — Sun, 18 Apr 2010 23:16:22 +0000

Trading stocks can be a profitable occupation provided you have mastered it first. The convenience of trading stocks or other markets, for that matter, has never been greater. These days it takes literally a click or two to place a trade from the comfort of your home office. Or even from your cell phone. It takes another click or two to close your position. The growing number of online brokerages and the continuing progress in the Internet technology make trading stocks, bonds, futures or Forex a snap, not to mention that this also gives rise to lower and lower commissions and other fees as well.

Still, if you are a beginner you may find the whole thing a bit intimidating. You may be overwhelmed by the always growing number of trading ideas, strategies, methods, systems, each one seeming to be better than the other. Or by the always evolving technology: stock screeners, stock charts, stock trading services, and all that jazz.

How do you start? Where do you start? You begin to feel confused if not frustrated.

That’s understandable. The beginnings can be, and usually are, challenging. But it’s easy to handle this if you simplify things. Simple things are not necessarily worse than complex ones, so before you decide to embark on using the top notch trading technology, I suggest that you explore some really simple options, some basic yet solid elements that has been around for a very long time and are here to stay.

Moving averages are among such things. There are a few kinds of those, such as simple, exponential, weighted, and a few other types, but the difference between them is not what we are after here. In many cases, we will do just fine with the most basic of them: the simple moving averages.

So how can we use moving averages?

One way is to determine the trend. Take two moving averages of distinctly different periods. Say, 100 days and 50 days. To determine if the trend is up or down in a given market, just check if the 50 period average is above or below the 100 period average. In the latter case, the trend would be down. In the former one, it would be up. You can also use a longer period average, say 200 days, to find even stronger trending stocks in the broad market using exactly the same approach.

If you add one more moving average to the mix, you can create a simple trading system. This average should have the shortest period of all. Say, 20 days. We will use the other two moving averages to determine the trend and the new moving average to trigger the entry in our system. Namely, when this average crosses the 50 period moving average on the way up, we would open our position in the market. We will liquidate it when, for instance, the stock price closes below the main moving average, the one with the period of 100 or 200 days depending on how strong trending a stock you want to choose. Other exit strategies can be considered as well, but it is certainly a good idea to let the profits run and so too tight a stop-loss may not be advisable. Too generous one is not good either, though.

By: Waldemar Puszkarz

Trading Stocks – Should You Trade Stocks on Margin

admin — Sat, 10 Apr 2010 06:14:26 +0000

So you have this great stock trading idea and have just found a stock that you believe would make you tons of money if you applied this idea to it. You have some cash in your account, but not enough to really make a killing with this idea of yours. Is there a good and quick way to get some more funds to capitalize on your brilliant idea?

Well, it turns out that there is such a way. Just ask your broker to lend you some money. This can be done totally over the counter, it’s absolutely legal, has been in use for many decades, and virtually everyone can take advantage of it. No special application is needed for this, either. You simply use more funds than you have in your account and keep on living your life as if nothing really happened. This sort of stock trading when the broker’s money is used in addition to your own funds is called trading on margin.

You need to have a margin account for this, though, which is pretty much the same as the ordinary stock trading account, but it’s just called a margin account as it comes with the privilage of borrowing money from your brokerage. And you need to apply for it first. In fact, if you don’t have a regular stock trading account yet and plan on opening it, I suggest you simply open a margin account to make your life easier in future. Because if you ever decide that it’s a good idea to put some of your broker’s money to work for you, you will find this account just handy. You can do in this account everything you could do in a regular trading account, plus more. And this more includes not only trading stocks on margin, but also trading stock options. In fact, you cannot trade options in a regular stock trading account. A margin account is necessary for that.

Now, you can borrow against the cash or the securities you hold in your account, treating them simply as a collateral. Ordinarily, you can borrow up to the amount that is the combined value of cash plus the securities you have in your account. In some cases, if you qualify for a day trading stock account, you can use 3 times the amount of cash and securities you have in your account. In the first case, if you have only $5,000 you can borrow another $5,000. In the other case, you could extend your purchasing power by an extra $15,000, so your leverage would be 4 times what your cash (and securities) could offer you.

Sounds great, doesn’t it? Well, yes, at least at first. But when you realize that you could be losing your money 2 or even 4 times faster had the market refused to cooperate, you may as well change your mind.

The thing is that while using margin to boost your stock trading profits is not a bad idea, an excessive leverage is definitely a bad idea, so if you ever decide to choose this path, you may want to tread lightly here and limit your margin exposure to not more than 50% of your account cash value.

Trading stocks on margin is not for the faint of heart. It requires you to have strong nerves, good trading discipline and a solid trading method. Without these elements, you don’t even think about using your broker’s money.

Before you ever use margin, make sure that you have traded without it for a while and you are experienced enough to handle an additional risk of potentially losing not only your money but also the broker’s. Well, the latter will usually not happen for if the brokers money were at risk, your position would be liquidated and you might also receive a margin call asking you to pay for what you own your broker. Just as I said: tread carefully here.

By: Waldemar Puszkarz

Trading Stocks – The Latest Bold Stock Trading Scam

admin — Fri, 09 Apr 2010 09:45:33 +0000

It has recently been revealed that a few so-called clever individuals scammed quite a few other individuals in a stock scam operation. It was a high tech operation involving hackers and the people affected by it had apparently no clue of what was going on for quite a while. At least 60 people, probably more, were victimized, their brokerage accounts having been broken into and their funds having been used for trading by the perpetrators.

The leader of the group of hackers, a 35 year old man, is from India. He was sentenced to two years in prison by a U.S. judge for starting the whole scheme. He pleaded guilty and agreed to pay a restitution and to cooperate. He worked with two other perpetrators who have also been indicted in the overseas conspiracy to defraud U.S. investors.

It is not known how exactly this scam was conducted, but here is one plausible scenario.

1. Suppose that Joe Doe owns an account at Ameritrade or at some other online broker.

2. Suppose that the hackers get Joe Doe’s account information along with the same information of 59 other people just like him.

3. Suppose that the hackers purchase 100,000 shares of company ABC at 2 cents a share using their own funds, which would cost them only $2000 plus commission and could likely push the price of the stock to 4 cents a share and alert many penny stock fortune seekers that there is action in the stock. They might now join the perpetrators and unwittingly inflate the price of the stock even more, to, say, 5 cents a share.

4. Suppose that the hackers use their 60 infiltrated accounts to purchase 5000 shares in each of them, now at 5 cents a share. The owners of hacked accounts are not likely to notice this quickly as it’s only a $250 transaction and it’s unlikely to be flagged as unusual.

5. Suppose that this sudden coordinated purchase of 300,000 shares at 5 cents a share pushes their price to 10 cents a share, which is quite likely considering others pumping this stock at this point as well.

6. Suppose that the hackers sell their original 100,000 shares, purchased at 2 cents each, for 10 cents each. Notice that as a result of this operation, they would have gotten $10,000 on the initial investment of $2000 minus commissions that are not particularly significant, being probably only a few hundred dollars that would mostly come from the compromised accounts, anyway.

7. Now, since a lot of shares would have been sold, and there was really no fundamental reason for this hypothetical penny stock to rise, its price is likely to drop back to 2-3 cents a share.

8. The whole operation can be repeated again until the owners of the hacked accounts eventually figure out that something wrong is going on here.

But by then they might have lost a grand or two. Eventually though, hackers usually get caught for sooner or later, greed leads to the downfall of such operations. Had those hackers stopped after one or two pump and dump schemes like that, they might have escaped the long arm of justice. Perhaps… Fortunately, this was not the case.

By: Waldemar Puszkarz

Emini Trading – The Allure Of Day Trading Chatrooms

admin — Fri, 02 Apr 2010 06:15:05 +0000

Many people dream about becoming day traders. Many have tried to make money this way trading individual stocks or emini futures. Most have failed or will fail. The success rate among day traders is a mediocre 5-10%, but then again, the success rate among upstart businesses is hardly any better if at all.

Launching a daytrading career is as risky as starting a new business. It’s hard work, many challenges and frustrations to overcome and a lot of perseverance. That is, if you want to succeed.

When the things get tough and the clear progress is yet to be seen, it’s quite tempting to look for shortcuts, for someone who would shorten your learning curve, for a mentor of sorts.

And it’s very easy to find it. There are plenty of mentors out there, running Internet day trading chatrooms for a fee that hardly ever is commensurate with the benefits gained, not to mention, profits made by participating in their chatrooms.

This should not come as a surprise. The majority of such rooms are run by people who never made it as day traders yet were shrewd enough to capitalize on their “expert” advice by offering it to others instead of perpetuating the misery of putting it to use in their own accounts.

Some of such experts would like you to believe that they trade dozens of emini contracts in their own accounts, yet never allow the public at large to examine their trading records in a comprehensive manner. Sure, from time to time, on a really good day, they post their results for others to view (and admire), but that is not enough to know if they really are consistently profitable as day traders.

And if they are not, why would you want to learn from them? What they truly excel at is selling their services and not making money applying what they preach to their own accounts.

Mastering day trading takes time and effort just as does mastering brain surgery. But if you wanted to master the latter would you rather choose as your mentor an experienced brain surgeon or a guy selling tools for brain surgeons?

There is only one way to separate true day trading experts from bogus ones. By insisting that they take trades they call in the chatroom and prove it by disclosing their trading records. It does not matter how many contracts they trade. One is enough and already too many for most of them.

How many such experts can you find out there? When it comes to day trading emini futures, I know of only one. Out of dozens of such operators that I have seen online over the last few years. (I may reveal his name on my site in due time.) Think about it next next time you decide to seek help from one of them.

By: Waldemar Puszkarz