My Stock Trading Tips

Have you ever been on a spinning circular ride, the kind that starts out slow and then builds up speed. You try to get into the center and hold on as long as you can. Eventually, the ride is going so fast, that everyone gets spun off. Luckily the ride is set on the ground with padding all around. This helps to cushion your fall.

Stock option trading is somewhat similar to that ride. Due to the time decay, eventually everyone gets spun off of the ride. The problem is that often there is no padding to cushion your fall. All stock options have an expiration date. This is always the third Friday of the expiration month. All riders either have to roll their options over or get off at this time.

It is important when you begin to trade in options that you have an exit strategy in place. If you do not, you stand a good chance of losing your money. Trading in options is simply too emotional and you will let your heart take over your head. You just think that if you ride it a little longer, you will be able to make more money. The problem is that the ride always comes to an end and you may not have enough time to make the amount of money your emotions tell you that you should be making.

The first thing you should remember with trading in options is the time decay. Just as the ride accelerates in speed so does the option price decay as the expiration date gets closer. This time decay enters enormous speeds the last two weeks before the expiration. If you have not already gotten off the ride before the last two weeks, then you should seriously consider getting out then.

Having a stop loss in place is an important strategy. If the stock price goes down 20 to 30 percent, then your stop loss will help you to avoid losing more money. You can then count your lucky stars that you did not lose more money than that. If you do get out, do not look back. It is best to go forward to the next opportunity. One rule of thumb is that if you have seven losses in a roll, then you should probably think of quitting trading in options.

Another thing you should determine ahead of time is how long you expect to be involved with this stock option. As I said, the last two weeks are the killer so you should probably plan on being out by then. Therefore, a one month option may not work the best. This only gives you a few weeks to make your money from the investment. Having an idea of how long you will be in the trade will help you to take your lumps or profits and move on.

A few other exit strategies consist of closing out and rolling. If you own a call and the stock price is in the money, then closing out merely involves taking your profits. If you own a put and the stock price is below your strike price then closing out involves purchasing the stock to cover your put. Out of the money trades also involve the same strategy, but are not so happy.

Rolling your stock involves the process of closing out of your current position and opening up with a different term or strike price. With rolling you can either roll vertically, within the same month, or horizontally, across the months. Rolling involves taking the losses for the current position and hoping to make it up with gains on the new position. It does cost additional funds to roll to another position. Unless you really feel strongly about the underlying security, rolling may not be the best strategy.

Being smart with your trading strategy will help you to make money with your stock option trading. Having a well established exit strategy at the time of your entry to the trade will help you to not have to fret about your decision of what to do.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Over the years, analysts have been searching for the holy grail of stock market investing. They feel that if they can find the solution as to when to buy and sell, there will be a guaranteed ability to make money with their investment strategy. This is not entirely wrong. The stock market has shown to move in trends over the years. The emergence of the internet and the ability to track almost real time data has enhanced the analysis of trends. As the famous saying goes, “Don’t bet against the trend”.

One of these trends that have been discovered is known as the Coppock curve. This curve was first published in 1962 in Barrons by Edwin Coppock. It is a technical analytic calculation that will supposedly determine when the market is bullish and when it is bearish. It is set to recognize major bottoms and tops within the stock market. The stock market typically has rounding tops and sharp bottoms, so the Coppock curve may be a viable calculation for the astute investor.

The math goes like this:

1. calculate the percentage gained or lost by the Dow for the past 11 months.
2. calculate the percentage gained or lost by the Dow for the past 14 months.
3. calculate the average of these two figures.
4. calculate a 10 month weighted average by multiplying this months average by 10, last months by 9, the previous month by 8, etc. and summing them. Then divide the sum by 55.

The value obtained in the above calculation is the Coppock value for this month. You can then plot the results on a graph to obtain the Coppock curve. The way the curve works is as follows:

When the curve line is below the zero point (in the negative) and then moves upward, it is a buy signal. If the curve line is above the zero point (in the positive) and makes a move downward, then it is a sell indicator. The chart below indicates how this works based on historical data. The upper panel is the Dow Jones index over the past years. The lower panel is the Coppock curve line. You can see the buy points highlighted in green and the sell points highlighted in pink.

Chart 1: DJIA and its Coppock signals

The Coppock curve is based on a monthly signal. Therefore you need to wait an entire month before you can obtain a reading. This delay may be a problem in a volatile market. I have not tested it, but I wonder if a two week reading would give a more timely reading. It has probably been tested before but bears (no pun intended) looking at. I also wonder what the reading would be for the S&P 500 instead of the Dow Jones index.
Another point is to watch for false signals. This may be possible Comparing the Coppock curve to other momentum indicators and other trending analysis may be helpful to obtain a confirming answer to the buy/sell question.
In one analysis of the Coppock curve indicator as compared to the buy and hold strategy, it was determined that except for the past couple of years, the Coppock curve beat the buy and hold strategy. This has not been the case since 2007 due to the volatile market conditions. Both strategies have basically been moving together during this time period.
The Coppock curve is one more step in the search for the Holy Grail of what the stock market may do. It is certainly a trending line that bears looking into and doing additional analysis on.
All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

The option Greeks are important things to know if you wish to trade in options. Options are priced based on interest, time and risk. All of these factors serve to determine what price a trader is willing to pay for the right to purchase a stock option. If you think about it, it actually makes sense. If there is a greater risk associated with the stock, then you would expect to have to pay more for the option. If there is a long or short time before the expiration date, then you would have different pricing options. A long time before expiration allows the stock price to make significant changes either up or down.

There are five different Greek symbols representing the different option pricing factors. These Greek symbols are the Delta which is a representation of the option’s sensitivity to changes in the stock price. The Gamma is a measure of the delta’s sensitivity to changes in the price of the stock. Vega measures the volatility of the stock. Theta measures the sensitivity to time decay. The last Greek is Rho which measures the sensitivity to changes in the risk free interest rates.

The option Greeks allow option traders to calculate potential changes in the option’s pricing. This knowledge allows them to hedge their portfolio or to construct positions with specific strategies. Having a knowledge of how these Greeks work will allow the trader to make projections of what direction the option’s pricing will take. They can then make a better determination to go long or short in their trading strategy.

The option Greeks also allow the trader to be able to remove specific risk factors from their portfolio. They are also a measurement of how much risk the portfolio is exposed to, and where that risk lies. Having a proper understanding of the Greeks is essential to achieving success with your option trading.

The Delta of a call will range from 0 to 1.00 and the delta of a put will range from -0 to -1.00. A positive delta indicates that the value of the option will rise if the stock price rises. A negative delta indicates that the value of the option will fall if the price of the stock rises and rise if the price falls. The closer an option’s delta is to 1.00 or -1.00, the more the option price will respond with changes in the stock price.

Gamma is actually an estimate of how stable your delta is. A large gamma means that the delta can start to change dramatically for even a small movement in the stock price. A graph of the gamma will look like a hill with the top being close to ATM (at the money) and going lower as the options are ITM (in the money) or OTM (out of the money).

Theta is an estimate of how much the theoretical value of the option will decrease as each day passes. This is if there is no movement in the stock price or volatility. Theta measures how much the value of the option reduces as time passes. Theta is also highest at ATM and lowest for OTM and ITM. You can think of theta as the power to have the price of the option move if the stock prices moves big. However, the longer the stock price does not move big, the more theta will hurt your position.

Each of the Greeks depend on the other Greeks remaining stable and unchanged. If there is also movement in the other Greeks, then there an multiplied effect on the option price. Studying more about the Greeks and how they impact the stock option pricing is important for the serious stock option trader.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Market capitalization is the calculation of the value of a companies stock. It is calculated by multiplying the outstanding shares by the price of the stock. Small cap stocks are generally those stocks with a market capitalization of between 50 million and 500 million dollars. Small cap stock investment is considered a very worthwhile type of investment by many analysts. This is because the small cap companies are considered the type of companies which will be able to move on a moments notice and take advantage of growth opportunities when presented.

There are different studies which indicate that small cap stocks do outperform large cap stocks. However, this must be taken with a grain of salt. At times, large cap stocks do actually outperform small cap stocks. This generally happens when the stock market is coming out of a recession and investors are looking for value stocks. They are a bit worried about what the market is going to do, so they are looking for solid investments that pay dividends. Small cap stocks also do well in periods of high inflation.

While small cap stocks may be out of favor at certain times of the stock market cycle, they may actually be a good investment due to this under appreciation. Buying before others buy is the best time to get the stock cheap. I once heard that the best way to make money on your investments is to get there before anyone else does. This is known as the contrarian viewpoint.

One of the problems with small cap stock investment is the transaction costs. Because the stocks have a low value, the transactions costs will force the investment cost up. The spread between the bid-ask is one of the ways that the transaction costs are higher. Percentage wise, this spread causes the buyer to spend more than he would with a large cap stock. The illiquidity of the small cap stocks will also force the price higher. The volume percentage is simply not there for small cap stocks.

The way to combat this higher cost is to invest for a longer period of time. If you have a longer investment horizon, the cost is spread over that period of time and you are able to make money on your investment. You will also be able to obtain higher returns as the invested company re-invests their profits and obtains a larger growth pattern. In one study which was completed, it was determined that if you invested in small cap stocks and held the investment for at least five years, you definitely beat the large cap stocks.

Another strategy to make money with small cap stocks is to diversify. Small cap stocks tend to be concentrated in a smaller number of sectors. So you need to spread your investment over a larger quantity of stocks to reduce the amount of risk associated with the investment. Another strategy is to make sure you perform the proper amount of due diligence. If you were looking to purchase a company, you would spend the time to dig all through their financial records to determine if they were worth the investment. Why wouldn’t you do the same with your stock purchases?

Buying stocks online is one of the methods you can use if you have decided to invest in the stock market. You have been talking to your friend about the stock market, or you have become concerned about the low rates of return you have been getting from your money market funds. You are trying to decide if you should invest in the stock market, but the current uncertainty concerns you. You are aware that you need to do something to increase the amount of return that you are getting on your investment since inflation is eroding away your portfolio.

If you are thinking of investing in the stock market, then the first thing you should consider is if the money you are investing is going to be needed for something in the short term i.e. less than 3 to 5 years. If this is the case, then you should probably not get involved with the stock market with that money. The stock market does have swings upward and downward, and you would hate to be caught in a situation where you needed the money with the stock market in a bearish situation.

If you want to be successful in buying stocks online, then you should be willing to do some research. Many people do lose money in the stock market because they do not use a systematic approach to their investment strategy. They merely grab a tip from a friend that sounds good and go for it. I am under the impression that when you obtain a sure fire tip that is a guarantee, then you should short sell that stock. This means that you sell the stock which you do not own. Then you buy it back later after the stock has gone down. I am not advocating this approach. I am just trying to make a point. Sure fire tips are not for the beginner.

There are some articles on this website that discuss how to get involved in trading stocks, and what the stock market is. Some good articles for the beginner are under the category, Basic Education. I would suggest you review some of those articles for additional information. I do not want to re-hash this information in this article.

When you choose to buy stocks online, the first step is to find an online brokerage firm. There are many good ones available. These online brokerage firms can be located by searching on the internet. Some of the best ones are E*Trade, thinkorswim, and Charles Schwab.

Many of the online brokerage firms have stock training courses that are available for you. They also offer virtual trading opportunities for you to practice with virtual money. You are given a certain amount of trading money and you are able to put in practice the ideas you have learned without having to suffer from losing your own money. This is a good idea for the beginner. There are also forums where you can bounce ideas off of other investors.

One additional tip for you is to set reasonable expectations of the amount of money you think you will make. Those investors who swing for the fence usually strike out. I know because I have done it. Being willing to take a slow, methodical process to your investment strategy may be the best approach for you. After all, if you are just beginning to invest in the stock market the best strategy is merely to obtain a better return than you will obtain from money market returns. The other thing you should be aware of is the stock market does go down. However, it also goes up. If you are risk adverse, there are different investing strategies for you. Many of them are also listed on this site, or you can talk to a broker or financial advisor about what may be best for you.

Is volatility really good for online brokers? This question has come up recently as the online brokerage firms discuss what has happened to their volume during the up and downs of the second quarter of 2010. Many investors have opted to get out of their investments rather than watch them go down again like they did in 2008. I know I watched some of my investments decrease by one/half during this period. My investment portfolio did eventually come back in 2009. However, many investors do not have the stomach to watch that happen again. There has been a lot of talk about double dip recession.

The online brokers do have something to say about the outlook of the stock market, and how it relates to their business. Charles Schwab feels that the “worst of the environmental pressure on our revenues is now behind us”. On the other hand TD Ameritrade has cut its fiscal-year earnings forecast due to low intraday volatility and low interest rates. E*Trade indicated that its May volume did increase but was down from where it was the previous year.

There does not seem to be a consensus opinion on where the stock market is going to go. Those investors who feel that the market will turn around may be choosing to invest in online brokerages. This is due to the reward of low commissions and trading costs. If the stock market is going to have volatility, then it would be best to have low trading costs so that the profits from the swings is not eaten up by investment costs. The swing profit may still be there, but could be small. It is possible to make money on the volatility of stock prices if you are able to time it correctly, and you keep your costs down.

The volatility may actually be good for online brokerage firms. Wells Fargo in their analysis of the second half of 2010 feels that the stock market will trade in a range, and that we are in for a bumpy ride. The savvy investor still may be able to make money on their investment strategy if they choose wisely. This may include investing in gold, options or a properly timed swing trading strategy.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

In order to maximize your investment profit margins, it is important that you do everything possible to increase your revenue and decrease your costs. Using various tips to buy stocks online is one solution to increasing your investment profit margins.

Buying stocks online involves finding the correct online brokers. There are many different online brokers. Some are more trustworthy than others. You definitely want to find those brokerages which not only have reduced trading costs but also contain the little extra’s that are becoming more prevalent in today’s world.

The smart investors are demanding more from their online brokers. During 2009, they reduced the number of equity transactions but at the same time demanded more products and services. Online brokerages responded to these demands by offering more bonds, options, foreign exchange, commodities, mutual funds and exchange traded funds (etf). They not only offered these increased trading opportunities, they also added social networking to their site. Many of the online brokerages now offer investor forums which allow investors to bounce ideas off of each other and to learn from each others mistakes and successes.

The top five online brokerages include the smart money 2009 online broker, ETrade. ETrade offers the opportunity to trade for sixty days for free and many other investing tools. thinkorswim was rated #1 in 2010 by Barron’s. This broker was rated tops for frequent traders and option traders. TradeKing offers fantastic customer service and very competitive trade commissions. Scottrade was rated #1 in customer loyalty in 2009 by Brand keys. Zecco has become known for offering free stock trades and has become very competitive in its pricing.

One of the things you need to watch for if you are going to use an online brokerage service is the hidden fees. A service may offer low trading commissions but then turn around and charge you for using their tools, retirement advice, investment forums, etc. Be sure to shop around and be willing to ask questions of what additional charges may be part of the package. These brokerages want your business and will back off on the charges if you insist on it. Be willing to assert your independence. Competition is fierce among the online brokerages so use that competition to your best interests.

The other thing you need to watch for with online brokerages is the kind of advice you get. Nothing beats doing your own analysis and checking on what they tell you. After all it is your money and you need to watch how it is invested.

I do not own stock or have any interests in these online brokerages. If you do choose to use an online broker service, you do so at your own risks.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

It is amazing how moving average crossovers (MAC) seem to indicate trends in the stock market. One of the problems with MAC is that it inherently contains a lag factor. By the time you realize that the 20 day average is curving upward, you have missed out on a great opportunity to invest your money. I recently observed this when looking at the historical trending of the S&P 500 for the period of June 21, 2010 to July 12, 2010. On June 21st, the stock market crossed over the 20 day average line on its way down to a new low that had not been seen for some time. On July 6th, it begin a climb upward. Around July 10th, it re-crossed the 20 day average line. During that time it went from 1030 to 1075. That timeframe represented a missed opportunity.

One way around this problem is to trade with multiple moving averages. You will probably want to choose a long-term (50 day) and a short term (20 day) moving average. You should then watch for when these averages begin to move toward each other and crossover. Another good thing to watch for is when the stock price crosses over a moving average line. This is similar to what recently happened with the S&P 500 stock price. This is especially important when the moving average line encounters a support or a resistance point. If the case happens where the average tends to bounce off one of these support or resistance points, it can turn into a strong trend-reversal signal.

One of these crossovers is known as the Golden Cross. This occurs when the 50 day average crosses over the 200 day average. This can represent a major shift from the Bears to the Bulls. The Death Cross is when the 50 day falls across the 200 day average. This is an indication of a bearish sentiment. Moving averages do not work during sideways stock movement. They will do nothing more than give false signals. Moving averages will converge to a single flat line during dead, no price change markets. You will need to watch this scenario and not use them during this action.

Theodore Wong, a professor with Stanford, provided some empirical support for the MAC. In his paper he indicated that an investor should go long if the S&P 500 price is above the 200 day average and sell if it falls below the line. He studied trends dating back to 1871 to develop his theory. One of the underlying basis for Mr. Wong’s theory is the Rational Belief Equilibrium (RBE) which was also developed at Stanford University by Mordecai Kurz. RBE represents a significant advance in the study of asset market behavior. RBE can be used to explain why the stock market tends to move in cycles. The key ingredient in RBE is investors ignorance about the future.

Rather than making the assumption that investors behavior is always right, Mr. Kurz takes the position that investors often make mistakes. In Mr. Kurz’s model, market prices are flat-out wrong from time to time. There are significant world events such as 9/11/2001 or 12/7/1941 which will change the way investors look at the stock market and investing. No one can predict these events, so they cause ripples in the stock market.

RBE helps to explain why cycles occur, because it is a descriptive theory of how markets work that will justify a prescription of what we should do as investors. According to RBE, cycles will emerge whenever the mistakes that investors make become correlated. Bull and bear markets reveal themselves in the form of serial correlation. When conditions in an asset market today can influence likely conditions in the market tomorrow, then knowing something about recent conditions in the market can provide predictive value of what may happen next. Horace “Woody” Brock put it this way. “If it is cold in Kearney, Nebraska today, I can predict with accuracy it might be cold tomorrow. This phenomenon is known as Winter.” Bull and bear markets do have seasons and if an investor is astute enough to decipher them, they stand to be able to make money from their investments.

I would suggest you read the paper which can be found at http://www.capitaladv.com/media/pdfs/Advisor_Perspectives_Article_Sept_2009.pdf. There are also other papers which have been written on RBE. It makes for a fascinating read on stock market cycles and why they behave the way the do.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

The current sentiment of the media seems to be nothing but doom and gloom. Many of them are worrying about a double dip recession. They feel that we are just beginning to come out of the recession and are still on the precipice. They feel that any slight push or draft will force us back over the edge, into the deep dark hole of another recession. The stock market and its managers seem to be feeding off of this sentiment.

A true contrarian loves this time of negative sentiment. They are actually optimists at heart who see buying opportunities around every negative corner. Jeff Sommer is the author of The Art of Contrarian Trading. This is a blog devoted to contrarian thinking. In his latest article dated July 6, 2010 he discusses the buying opportunity provided by the current media attack.

Mr. Sommers indicates that one article in The Economist shows a shark cutting through the water on its cover page. The caption talks about the hidden danger in today’s market. Mr. Sommer says that the stock markets 15 percent drop in May, 2010 reinforces the reluctance of the average investor to ‘get back into the water’. He goes on to say that this reluctance is a truly great buying chance for the contrarian investor. If they are not already fully invested in the stock market, and making money, they should certainly do so now. His feeling is that the stock market is merely positioning itself for a sustained climb upward.

There are many articles which support this theory by Mr. Sommers. The author of an article on the Equity Clock states that the markets have been oversold and he feels that they are due for a bounce. He does feel however, that this bounce may be short term leading up to the earnings release period.

This attitude can probably be traced to last quarter’s positive earnings release. If the reporting companies can continue to sustain the growth begun in previous quarters, then I feel you will see the private sentiment to begin to improve. Then the market will continue its upward climb to very profitable heights.

Mr. Sommers also indicated that the option trading is pointing to a bullish sentiment. Initial suggestions indicate a buying signal. His advice is to remain defensive in high quality dividend paying stocks.

So I would suggest that your ought to consider yourself as a contrarian. The best time to buy is when everyone else is selling. This is indicated in Its A Wonderful Life when Mr. Potter tries to buy up the town during the great depression. He certainly saw a buying opportunity when it presented itself.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Diversification of your investments is the process of spreading your investment over many different asset classes. You diversify your investments so as to reduce your risk. A number of statements are attributed to Warren Buffet concerning diversification. Some that I especially like are “Risk comes from not knowing what you are doing”. Another one that I like is “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.” These statements are very true. If you are savvy enough to find a boatload of winning stock investments, it does not matter how correlated they are. They are all winners and all will make you money.

However, for those of us who are still learning how to determine winning investment strategies, and merely wish to beat the inflation monster, then diversification is the answer. Diversification is the process of placing your investments in those asset classes that will allow you to make the most money with the least amount of risk. If one class goes up, and another one goes down, you still stand to make money. There is also an interesting thing that happens with the measure of risk. Taking on the correct type of risk actually decreases your overall risk.

There are statements that say that you can get into riskier investments if you are younger. They discuss how time will smooth out your mistakes. This may be true, however I have recently read another interesting idea about this. This author stated that with the time value of money, you cannot afford to take on any more risk than you will be rewarded for. Even if you are in your twenties, if you miss out on opportunities for growth, the time value of money will cause you to never be able to make up the amount of money you would have gotten with a better investment strategy.

There are also two different styles of diversification. One style states that you should find the optimum investment portfolio. You should use diversification software to obtain this portfolio. Another states that you should merely go with your own technical and financial analysis. Finding a grouping of assets that have good solid fundamentals that have a good cycle pattern will also serve to provide a diversification strategy. You can finesse both styles as time goes by and you determine what is working. I am not saying either style is right or wrong. What you need to do is work with what works for you and your education level.

With any diversification strategy, you need to watch out for the grocery line scenario. Or as another author, Murphy, put it “The other line always moves faster”. Have you ever jumped out of one line, just to find that the line you jumped from begin to move? If you have determined a good mix of investments, then you should be very careful before jumping out of them. Maybe the only person you will make rich is your stock broker. Do a massive amount of homework and thinking before acting. Maybe by waiting for a period of time, you will find that it worked out best to wait.

I have recently found an interesting site that will help you with your diversification strategy. This site is found at http://www.macroaxis.com. This site has the capability of helping you to determine the best possible mix of assets to invest in. I would suggest you use a stock screener to determine assets to run through the site. It is setup to help you determine the amount of risk involved with your mix. It also has the capability to give you suggestions of stocks to invest in based on your aversion to risk. Maybe you should check it out. I am not associated with this site and will not benefit if you use it. I merely offer it as a suggestion.

One rule of thumb with your diversification strategy. Do not over diversify. Eight stocks to invest in is plenty. Warren Buffet also said “If you understand business, you don’t need to own very many of them. If you have a harem of 40 women, you never get to know any of them very well”.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.