Trading for a Living Blog

There is a difference between trading and investing. Trading is always short term while investing is long term. The time horizon in trading can be as short as a few minutes to a few days to a few weeks. Whereas in investing, the time horizon can be months to years. Many people day trade or swing trade stocks, currencies, futures, options, ETFs, commodities or other markets. In day trading, a trader opens a position and closes it in the same day making a quick profit. In swing trading, a trader tries to ride a trend in the market as long as it lasts. On the other hand, an investor is least pushed about the short term swings in the market. He or she has a long term time horizon like a few months to even a few years. This long time horizon matches their investment and financial goals!

Investors in theory can wait for a long time to see their stock pick to play out. A company’s stock may be ridiculously cheap. But it may stay like that for a long time before it catches everyone else’s attention and the price is bid up. It might be good for investors to learn a few tricks from traders especially day trading that can help them make a few quick bucks.

Successful day trading requires an innate sense of discipline. Successful day trading requires the sense when to commit money to a trade and when to cut the losses and run. However, if you are an investor who has never day traded, you might have done so much research and committed so much time waiting for a position to work out that you might forget the cardinal rule of traders: The market doesn’t know you are in it.

When, there is momentum behind a security, it means that it’s price will continue to icnrease as long as it has got momentum. This way by investing in stocks having momentum behind them, you avoid the risk of getting stuck in stocks that might not move for months and months.

One of the tricks that you can learn from day traders is momentum investing. In momentum investing, you look for securities that are expected to go up in prices accompanied by the underlying momentum. When investing, you try to buy low and sell high. In momentum investing, you buy high and sell even higher!

Now most serious momentum investors are infact swing traders who hold positions for a few weeks or a few months. Most of them employ some sort of momentum indicators to help them identify when it is good time to buy a stock. Some of the indicators that can be used is the Relative Strength Index (RSI), Moving Average Convergence and Divergence (MACD) and the Stochastic Index.

Momentum investing can also lead to bubbles like that happened in the dot com bubble in the last few years of 1990s. It is always a good idea to do some fundamental research on the companies before doing momentum investing.

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You must have traded ETFs. No, then let me first introduce you to ETFs. ETF is the short acronym for Exchange Traded Funds. ETF are a basket of stocks or other assets that have been designed to closely track a stock index, a market index, sector index or any other index. Now trading stock indexes is what many trader do. You can trade stock indexes with options. However, trading ETF Options can be a more profitable venture for you!

The most important difference is that Index Options are cash settled on expiry while the ETF Options are settled with the underlying instruments that is shares of that ETF. Since with an ETF Options, you can also own the underlying security, you can use various combination strategies.

Stocks have dividends that are paid out periodically to the stock holders. Dividends are an important part of the return that a stock gives over a certain period of time. Now when you are trading index options or ETF options both of them get affected by the dividend payments on the underlying stocks. You need to take this fact into account when calculating the values of puts and calls with an Options Calculator otherwise your investment returns may not be what you have been anticipating.

Now, ETF Options are more flexible than the Index Options as you can use the underlying ETF as well in your options strategies. If you have already traded stock options, ETF options should not be difficult for you. You can hedge your ETF position with an option on the ETF.

Now when trading ETF Options, you can use the famous Protective Put Strategy by combining long ETF with a long put. This way you can hedge against the downside risk with a small increased cost to the ETF. A Protective Put will limit the downside risk to the put strike price.

Similarly, you can use a Covered Call on ETF. A Covered Call is formed by taking combining long ETF with a short call on that ETF. The short call will give you some income in the shape of a premium and reduce the cost of the position. This will also slightly reduce the risk of the position. But on the other hand, a covered call will limit the upside profit potential. Your max profit now will only be limited to the call strike price.

Now, you can also use a Collared Position as well by combining a long ETF with a long put and a short call. This combination limits the downside risk to the put strike price with a slight increase in the cost of the ETF. This net increase in cost by taking a long put is offset with the premium brought in by the short call. On the other hand, the limited but high risk is turned into limited risk only.

Whatever options strategies you use with the ETF, you should first paper trade those strategies and instruments. This is an inexpensive way of test these strategies and can be a good lesson in unexpected risk of either of these securities.

An important fact that you need to know is that not all ETFs have options written on them. This should not surprise you as there are many stocks that don’t have options written on them. Another important fact that you should know is that ETF Options are always American Style. American Style options can be excercised anytime before expiry. You can even trade LEAP Options on ETFs. LEAP Options are long term options having expiry of more than nine months to less than two and a half years.

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A short ETF returns the inverse of the index it is linked to. For example, the ProShares Short Dow 30 ETF (DOG) will return the inverse of the Dow Jones Industrial Average (DJIA) on daily basis. If the DJIA falls by 2%, DOG rises by 2% and if the DJIA rises by 2%, DOG will fall by 2%.

ETFs are the most popular investing tool these days. They are a hybrid between the stocks and mutual funds. They give you the benefits of mutual funds without the high loads. They trade like stocks. During the past few years, the number of Short ETFs has risen dramatically. Short ETFs not only cover the major stock indices like the S&P 500 or the DJIA but also different sectors like the energy, utilities or technology. You will even find Inverse ETFs on currencies now. Short ETFs are also known as Inverse ETFs or Bear ETFs.

Most of the ETFs are designed around some market index. ETF shares trade like ordinary stock shares. You can buy them. You can sell them unlike the mutual funds that can only be sold at the end of the day. The ProShares UltraShort Dow 30 ETF (DXD) rises 2% when the DJIA falls by 1%. So you can even find leverage short ETFs. A leveraged short ETF gives the trader leverage without the use of margins.

So short ETFs move in exact opposite direction to the index on which they are based. Short ETFs give you an excellent opportunity to profit from the volatility in the market and the major indices. Over the years, short ETFs have risen in popularity with the investors and hedge funds.

Short ETFs are a great product as they have created new opportunities for traders. A trader had to actually short sell stocks to take advantage of a market drop before the introduction of short ETFs.

Traders are not allowed to sell short stocks or ETFs in their retirement accounts. In the past if the market was dropping, the trader had to go against the trend and buy or else move into cash or fixed income. Short and leveraged ETFs provide traders with new opportunities.

ETFs also provide you with the opportunity to take advantage of the global market swings. China is one example that garners a lot of attention. The Shanghai Index in China rose 100% in 2007. In the first quarter of 2008, the Shanghai Index was down 35%.

The ProShares family of ETFs introduced the Ultrashort FTSE/Xinhua China 25 ETF (FXP). Now if you want to trade the fall of Chinese stocks, you can trade FXP ETF. In the past, traders who wanted to benefit from the fall of Chinese stocks could only short Chinese stocks that were traded in US Stock Exchanges.

As a long term investor you can take advantage of short ETFs to hedge your portfolio position. Assume you have a portfolio of $100,000 composed of 75% stocks and 25% money market fixed income.

The forecast of the market for the next six months is not good. But you are reluctant to sell your stocks due to tax reasons. Suppose the market falls by 10%. Your stock portfolio falls by 7.5% assuming the same ratio between the market and your portfolio.

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Thinking about going into online trading of commodity futures? If so then I am sure you are aware there is a lot of risk involved. Let’s have a look at the risk and how we can reduce it to a minimum.

With commodities trading, in comparison to stocks and shares, there is a positive factor. There will never be a time when your investment is totally worthless. For example – gold, natural gas, corn will all have some financial value. It may well drop at times but it will never be worthless. Stocks and shares however can be worthless. Bankruptcy has hit many a company in the past’ months.

Keep your wits about you and do not get carried away with your successes. Do not either have the mentality of making up your losses as soon as possible. If you do then you end up gambling and this is not what commodity trading should be about.

Many commodity traders, particularly those that are fairly new to the business, try to utilize too much leverage. As an example of this lets take 100 ounces of gold as a contract with a value of $1000 an ounce. Total value is $100,000. The margin (deposit) will probably be around 10% of the value of the contract, thus $10,000.

Let us take an example to illustrate things, shall we. Let us presume that we invest in 100 ounces of gold which is selling at $1000 an ounce. The value of the gold would therefore be $100,000. The margin or good will deposit we have to make is $10,000 towards the $100,000 worth of gold – a total of around 10% is normal.

If things do go well then great, life is good and all is well, but chances are that if you continue to trade in this way – which is to some extent a gamble – you will lose out in the mid to long term.

With online trading there is a large advantage over what was previously available because of the speed of update to market fluctions. Login to your trading account at any time of day you like and you are updated to the second, or at least to the minute, regardless of the country your investments are made in.

Trading online commodity futures does provide for advantages over the old way because keeping up to date with the market is simple and very fast. Its perhaps even easier now for the inexperienced trader to feel safe due to this online flexibility and speed of action and thus become over exposed in the first place. Leverage being offered by the broker is a great thing but only when used wisely so be sure to do things in moderation.

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You must be thinking that short selling is counter intuitive. It’s not! Short selling is a way to profit from a falling market. In nutshell in short selling stocks, an investor who is short selling is borrowing stocks from the brokers and selling them to another buyer. At some point, the investor has to buy back the stock ideally at a lower price to make profit and return it to the broker. The sale money goes to the account of the investor.

Suppose you feel that the stock ABC is overvalued at $60 and at some point in the near future the market will make a correction. You are using the RSI technical indicator that is giving a crossover sell signal. All signs are pointing towards at least a small pullback.

You place an order to short 1000 shares of ABC stock at $60. 1000 shares of stock ABC are sold at $60 and $60,000 is placed in your account. Over the next week, you are jittery as the stock ABC instead of going down climbs to $65.

Stock prices can go up as well as down. Technical indicators can give you a likely direction of the market but they are never 100% right. Did you cater for the situation when the stock price rises instead of falling? However, you have catered for this eventuality by placing a stop loss at 10% of your account. This comes out to be $6,000. So the stop loss is not triggered and you are still in the market hoping for the price to stop going up.

Before entering a trade, you must always decide a loss level that you are comfortable with if the trade goes against you. You are prepared to lose $6,000 in anticipation of a stock price tumble as your technical indicators are giving you the sell signals. If the price goes up to $66, your stop loss will be triggered and you will be out of the market.

Suddenly on the release of a disappointing earnings report, the stock price tumbles 20% in one day. Now most earnings mishaps last a few days. So you wait and don’t cover your short position for the next few days.

Market hates sudden surprises. Anything that is already known to the market is already included in the price of the stock. So this negative earnings report was a sudden surprise. You decide to cover your short position, stock ABC price falls to $45. You need to buy back the 100 shares of ABC that were sold short earlier at the market price of $45 in order to close your position.

You pay $45,000 to buy back 1000 shares of stock ABC and return them to your broker. So your net profit in this case is $60,000-$45,000= $15,000. With this simple example, you should be able to understand the mechanics of short selling stocks.

Short selling and long buying are the exact opposites of each other. Assume that you had bought the stocks for $45 per share and sold them at $60 per share, the same profit would have been made. In reality, you paid $45 per share to buy ABC stocks and sold them at $60 per share giving you a profit of $15 per share.

The goal is to sell it at a higher price but in the case of short selling stocks, selling takes place first instead of buying when you short a stock. The goal of buying a stock is to sell it at a higher price in the future. Do you want to try short selling now?

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You need to develop your own forex trading system overtime. Using someone else’s trading system won’t help if you really want to become a successful trader. At one point in your trading career that might come soon rather than later, you would want to switch over to a mechanical trading system. Using a mechanical trading system not only helps traders to make decisions and increase profits but it also provides great psychological comfort to the traders.

You will find most of the trader using a trading system approach to trading. Some of them may use a discrete trading system while others prefer a mechanical trading system. You will realize the necessity of switching over to the system trade in order to lower the psychological pressure experienced when making every market transaction.

The mechanical trading system set of rules may be translated into a computer program for automated trading. However, the mechanical trading system lacks fundamental analysis capacity.

The trading system then generates trading signals that can be used by traders having access to the trading system. The creator of such a mechanical trading system then becomes just another user of the trading system monitoring the computer generated signals.

These trading systems may be taken as grey and black boxes. Their prices might vary from a few hundred dollars to hundred of thousands of dollars. Many traders over their trading careers develop their own trading systems. Besides the traders using their own trading systems, there are now many actively developed trading systems for sale as computer programs.

One way is to develop these forex trading systems and use the trading signals generated by them in your trading. The most significant thing about these programs is that the traders should be able to accomplish transactions in accordance with the signals generated by the trading system. The other solution is to completely automate these forex trading systems. Sometimes theses trading systems are developed for big banks and corporations.

Majority of the successful individual traders use self developed mechanical trading systems. However, it is very difficult for a mechanical trading system to cope with different market conditions.

Change of market behavior leads to negative results from a previously effective trading system which obviously would require replacement. For example, many trading systems that are satisfactory in trending conditions become highly ineffective in nontrending environment.

Many trading systems now depend on complex mathematical formula which is not understandable by the trader if the trader is not the author of the trading system. The most common disadvantage of these trading systems is the negative balance between he profitable and unprofitable trades.

Obviously the trading system can only be profitable in the long run if the ratio of the profitable trades is higher than the non-profitable trades. In other words the average profit of each profitable transaction is greater than the average loss of each unprofitable transaction.

Making correction in any mechanical trading system in the process of the trade is almost impossible. The trader must accurately and unconditionally follow the trading system without making any attempt to adjust it to the market conditions.

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British Pound is known to be a stable currency. Great Britain is a strong economy. But, Great Britain was finding it difficult to stay within the tight exchange rate band set by the European Monetary Union (EMU) in the early’90s. One person who made history with options was George Soros who is famously known as the man who broke the Bank of England.

George Soros had this intuition that the Bank of England would be forced to devalue British Pound. So he bought call options on German Marks and put options on British Pound. He made a bet of $10 Billion by leveraging all the assets in his hedge fund.

Within a few days, Bank of England was brought to its knees as it was unable to sustain the immense selling pressure on the British Pound. Bank of England was forced to devalue British Pound in view of the speculative attack on the British Pound.

In a matter of a few days, George Soros made a cool $1 Billion profit on his bet. Can you make such a bet? Maybe not but this one example show the immense power options have if used correctly. Options are risky; there should be no doubt about it.

Most people who trade options lose money, plain and simple. Options give you the right to buy or sell an underlying security like stocks, futures, commodities or currencies at a price before a certain date. This price is known as the Strike Price. This date is known as the Expiry Date. However, in European Style options you can only buy or sell on the expiry date not before that.

Trading options without training is risky. You need to learn the Options Greeks. One of the important things that you need to learn while trading options is the importance of time factor. Time factor is very important when valuing an option. Further out the options contract is from expiration, you will have to pay a higher premium. As the options contract approaches the expiration date and if it is out of money, it loses its value very fast.

LEAP stands for long term equity anticipation. Have your heard about the LEAP options? So what are LEAP options? It basically means that the option is much like the regular option except that the timeframe to expire is greater than 1 year. LEAP options are basically long term options. Leap options can help you profit over the long haul. You can use LEAP options in options strategies like the covered calls, straddles, spreads and so on.

LEAP options can be incredibly profitable if used correctly. However, LEAP options are risky because the option writer usually demands a hefty premium for taking on the long term risk. The buyer of the LEAP options has the right to exercise the option prior to expiration should the price of the underlying stock move in the money. Long timeframe means that the possibility of the LEAP options moving in the money is always high hence a high LEAP options premium.

See, closer the out of money option is to expiration, faster its value drops. What this means is that the buyer of the options loses the premium that was paid for getting the right to buy or sell the underlying security. LEAP options can be a great trading vehicle for swing traders as they mitigate some of the time decay that is inherent in short term options.

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Many beginning investors get confused when they realize that it is possible to make money when the stock falls in price. In practice, shorting a stock is as easy as buying stocks once you get hang of it. When the market is falling, investors sell short a stock with the goal of profiting from the fall in the price of that stock.

Short selling is confusing for new traders. It shouldn’t be. It is simple. The difference between the selling price and the buying price in case the price goes down is your profit. You borrow a stock from your broker and sell it with the intention of buying it back at a lower price in the near term future and returning it to your broker when you short a stock.

With short selling a stock, you make profit when the price of a stock goes down. You are anticipating further fall in the price of the stock when you short a stock. However, if the price of the stock instead of going down starts to go up, you get a loss. It all depends how well your prediction about the stock price was. If you can predict the direction of the stock price very well, you can become a great trader.

Many people are afraid of short selling stocks. They are right to some extent. Theoretically a stock price can go up and up making your loss as big as infinity. In such a scenario, your loss can be infinite. So shorting a stock without proper risk and money management is not wise. However, before that happens most probably you will receive a margin call from your broker that leads to a forced sale before your losses reach unmanageable proportions.

In the stock market crash of 2008, many financial companies went bankrupt due to the short selling of their shares by the speculators. Some people are against the strategy of shorting stocks. A temporary ban was put on shorting for sometime during that period.

However, the goal of short selling is not to drive the price of a stock to zero and put the company out of business. In swing trading, we are simply looking to profit from the ups and downs of stock prices. When the price of a stock goes down, short selling is the best swing trading strategy.

Stock prices are highly susceptible to negative news. Negative news like poor earning, credit rating downgrade or a poor product launch can bring down a stock price in a matter of minutes and wipe out the steady gains made in months. One reason why swing traders love short selling is due to the velocity of the moves! Stock prices plunge when negative news is released.

Short selling is an integral part of options writing. Short selling is also used in portfolio risk management. Shot selling can be a good hedging strategy for long term investors too. So if you a long term investor, you can lessen the impact of the sharp price drop on your portfolio by using a short selling hedging strategy. Swing traders always look for big winners and this brings them to the short side of the market. When the price of a stock starts to fall, chances are it will fall more before the market stabilizes and the price starts to rise again.

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Many hedge funds and other entities that manage money through forex trading use some form of autotrading in their daily activities. Autotrading is common in the currency trading.

Big institutions always had proprietary autotrading systems developed by their inhouse programming teams. These autotrading programs also known as Expert Advisors or Forex Robots were expensive costing like thousands of dollars and only wealthy individuals or big institutions like hedge funds could afford them.

However, the recent advancement in computer programming has made it possible for professional forex traders to team up with a software expert to develop their own autotrading systems. Many private individual traders have also begun to adopt autotrading to execute their thoroughly backtested and highly optimized forex trading strategies.

Metatrader platform makes it real easy to program such type of Expert Advisors. The price of these Expert Advisors has also come down to around a few hundreds that can be easily purchased by ordinary investors like you and me.

So what is autotrading? You must have heard or read a lot about the benefits or advantages of autotrading. Recent advancements in computer programming has led to the development of trading platforms that allow an API ( Application Programming Interface) which connects the trader’s system to the dealer’s trade execution structure through the trading platform.

APIs requires programming skills on the part of either the trader or a programmer hired by the trader. But once all of the trading rules and criteria are determined by the trader, programming an API can be relatively straight forward for anyone with programming experience. After the specific trading rules and criteria are determined, the trading strategy is backtested with positive results.

The development of an autotrading system depends more on your trading skills as compared to your programming skills. When this occurs not only trades entered when predetermined technical criteria is met but trade exits in the form of stop loss and take profit rules can also be programmed into the API. Autotrading is almost as simple as flipping a switch to begin the trading process.

This creates an entirely self contained autotrading system. So autotrading can actually execute real trades on current real time market prices. When a predetermined signal emerges, the software actually places a trade automatically. However, before an autotrading system is put on live trading, it is thoroughly backtested and forward tested to make sure the likely success of the autotrading system.

In fact, if the trader has optimized and perfected this type of black and white trading strategy that runs devoid of human judgment, autotrading is perhaps the best way to achieve it. Any nondiscretionary technical trading strategy that has clear cut, unambiguous rules is a good candidate for autotrading. Autotrading effectively eliminates all human biases, errors and emotions in the trading process.

The best two forex autotrading systems are FAPT and Ivy Bot. There are a number of successful autotrading systems now available in the market for the ordinary retail investors.

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A new column is only added when a reversal in an existing column exceeds the reversal threshold. The most common amount of reversal threshold is three boxes or three points.

The reversal amount in pips is 30 pips if the box size is set at 10 pips and the reversal amount is set at three boxes. So in case of a rising X column, price would need to turn back by at least 30 pips before a new O column would be added.

These two variables make the point and figure chart so effective at representing only the most major market moves disregarding all minor fluctuations known as noise. The significance of these two variables, the box size and the reversal threshold should be clearly understood.

The point and figure charts are excellent indicators of both trend and support/resistance. Since point and figure charts outline support and resistance so well, one of the best trading strategies in most common use with the point and figure charts is breakout trading.

A double top is a potential bearish reversal signal in bar and candlestick charts. Now you must understand that there is a notable distinction between the bar and candlestick charts and the point and figure charts in the interpretation of double and triple tops and bottoms.

Are you familiar with the chart patterns like the double and triple tops and bottoms? They are taken as important reversal signals in the trend. However, a double top is a resistance point where traders should be looking for a bullish break to the upside on the point and figure charts. The same difference holds for the double bottoms as well as triple tops and bottoms.

Charts patterns like triangles are prevalent as well. Like the horizontal support and resistances levels on these charts, the main method of trading trendlines and pattern on the point and figure charts is through breakouts. Point and figure charts also have their own versions of diagonal trend lines which are drawn at 45 degrees.

Point and figure charts give a very clear view of the market movements. Price action is the most important aspect of technical trading. The point and figure charts focus exclusively on the price action.

Point and figure charts had originated in the’th century. Point and figure charts are still popular with traders today as an increasingly relevant analytical tool for forex traders. It is because of this clarity in viewing and interpreting the price movements that the point and figure charts have withstood the test of time.

Point and figure trading depends on the trendlines, support/resistance and breakouts. Point and figure charts excel at representing clear evidence of such important technical characteristics as trend, support/resistance and breakout without the extraneous elements to clutter the picture.

Other data that is readily available on the bar and candlestick charts like time, period opens/closes are generally excluded on the point and figure charts. This leaves only the uncluttered purity of price action. Some may characterize point and figure trading as based upon pure price action.

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