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.

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?

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.

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.

Asset allocation is the process of working to be patient and still make money with your investment strategy. Warren Buffet said “The stock market serves as a relocation center at which money is moved from the active to the patient”. In the movie “Cars”, Lightning McQeen had to learn how to be a little patient and how to make his speed work for him. Doc taught him this with the lesson of how to drive in dirt. This is similar to what needs to be done with an asset allocation approach. The investor will want to purchase stock in a number of different growing companies that will diversify his investment. This will serve to provide a controlled speedy return with minimal risk.

There have been many different articles and debate on asset allocation. There are many different mixes that can be considered with this investment style. The most common one is the equity/bond mix. However, there is also the domestic/international equity mix, the nominal/inflation-adjusted mix of bonds, or what mix of indexed funds or market capitalization weights should be used. The proper mix of efficient tax free funds is also a consideration.

There are asset allocation calculators available that will help you to determine an optimum mix of asset investments to have both high returns and a minimal amount of risk. Warren Buffet also is reported to have said, “Risk comes from not knowing what you are doing.” It may be a good idea to talk to a stock broker, or to use the asset allocation calculators to arrive at what makes sense for you with your goals and risk aversion.

One of the problems with the asset allocation calculators is that they are using previous statistical data. It may be that things have changed with the stocks dynamics. This may cause a false reading on your optimum asset allocation. There are some theories that asset allocation using old data is a waste of time. I do not feel that this is the case. I think that a person can use what feels right for them, and determine an investment mix that works for them. This investment mix can be tweaked over time. Whatever mix an investor arrives at, it should definitely be rebalanced on an annual basis to maintain the original mix. Rebalancing is the process of selling the stocks that have done well and purchasing additional quantities of stocks that have lagged. This strategy serves to allow the investor to make money by buying low and selling high.

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 stock market has certainly had an up and down tendency during the year 2010. I have written some articles about this volatility in the year 2010. With both “finding dividend paying stocks” and the article “predicting stock market returns” I talked about what to do to make profits with the current situation. I also wrote about doing the opposite with “contrarian investing”.

I wanted to discuss further dividend paying stocks. It seems that this selection is even more important with the current situation in June, 2010. We have certainly had a rocky road with our investment strategy. One sector that a person should look into would be the utility stocks. They, like many other sectors, are currently beat up. Yet even with this, they are a good value due to the amount of dividends they pay.

In the June, 2010 edition of Utility Forecaster, the author Roger Conrad discussed his feelings on utility mutual funds. It is his feeling that the managers are doing nothing more than churning their stock holdings to try and make it to the top of the heap. They do not stick around long enough to collect the dividends and they also rack up enormous fees. He feels that an investor can do better if they just trek out on their own. They can do their own research and determine those companies which are the most stable and have a long-term history of paying dividends. Even with this he does have some recommendations on some Utility ETF’s. You can find his article at.. [updating]

There are many different utility and telephone companies which have consistently paid high dividends. One of these companies I found is “CEL” which is actually a wireless telecom company in Israel. Since 2007 they have paid 12 percent dividends. This is not a bad return and with the increase in stock price as a boot, how can you go wrong. The company seems to have some risk since it is based in Israel, and one never knows what is going to happen there. However, the point is that there are other utility and telecom companies which provide these high dividends.

It would be my suggestion that you use a screen filter to find oversold, dividend paying stocks which have a consistent history of paying their dividends. You do need to be careful when selecting your dividend paying stocks. There was a recent article in the Wall Street Journal which discussed dividend paying companies which decided that they would discontinue the paying of dividends due to cash flow problems. You will never actually know if a company is going to experience this problem, but if you look for at least five to ten years of dividend paying history and a good solid company with a believable financial record, then the chances are better than most that they will continue to pay dividends.

One investing strategy with options is to purchase a straddle. A straddle is when an investor buys both a call and a put for the same strike price and the same expiration date. The idea is that the investor does not have a comfort zone on which direction the market will go, either bull or bear. By purchasing a straddle he plays both ends. Whether or not the stock price goes up or down, he will still win. The problem becomes the cost to purchase the straddle. The investor does not want to make an incorrect decision and have the stock price remain stable. Then he would not win with either direction.

One solution to this problem is to do stock trading using the directional movement index (DMI) and options. The DMI is actually an index that tracks the movement of the stock price. It has a positive and a negative trend to the index. If the positive line is dominant then the stock price is going up. If the negative line is dominant then the stock price is going down. When they cross then the stock price trend is due for a shift. The average of the two is known as the average directional motion index (ADX).

The ADX will fluctuate between 0 and 100 but it usually does not go above 60. If the readings are below 20 then it is an indication of a weak trend. If it goes above 40 then it indicates a strong directional trend. What that means is if you find a stock with a reading above 40 then the trend is strong. This can be either an upward or downward trend. You cannot tell by the ADX which trend is dominant but you can tell by looking at both the positive and negative trend lines and the stock price.

What you are looking for with the purchase of a straddle is a weak, non-existent trend that is poised to move into a directional breakout. What you want to look for is the ADX being below 20 and watch for it to begin to move above 20. You may also watch the ADX for when the trend is beginning to end and then you will want to get out of your straddle. This would be of course when it is above 40 and starting to trend downward.

With the current volatile market conditions, the straddle option is a great way to make money with your investment strategy. Combining both option trading and the DMI is an awesome method to reduce your risk in making trades.

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.

Investing in Penny stocks may be a very lucrative adventure for the wise investor. However, for the unwise sucker, it may be the worst nightmare. There are many different sources to obtain penny stock advice from. Many are not worth the money that you spend on their advice even if it is free. Knowing what advice to accept and which to run from takes a well trained eye. If you have not had at least one year of investing experience, I would suggest that you not attempt to invest in penny stocks. There are many other opportunities for you to make money while investing.

You should rarely accept advice from penny stock newsletter, websites and never from unsolicited e-mails. I remember the advice given to me when I was young. Don’t believe everything you read and only half of what you see. That is certainly good advice for obtaining penny stock advice. So how do you determine which is good advice?

Some pieces of advice in relation to reviewing penny stock advice is as follows:

If you happen to come across penny stock advice on the internet, then you should consider the source of where it is coming from. Take the time to do your own research to determine what is legitimate. Always trade from the legitimate stock exchanges such as NASDAQ or NYSE. You should stay away from over the counter or pink slips. These are the most risky form of investment. You have better things to do with your money.

Take the time to research the opportunities that are presented to you. There is stock picking advice on this website that you can review or you can review stock picking advice from other sources. Your stock broker is a good source. Verify any claims that are put forth. Many sites will put up their winners as evidence of their legitimacy. I have reviewed some I came across and their was no merit to their claims.

Always be skeptical. If it appears too good to be true, then it probably is. Always watch out for high pressure sales pitches. Whenever someone you do not know gives you a “hot tip” then you should ask yourself “why me?” What makes me so special that I was given this hot tip. Don’t fall for the “must act now” line. If you need to act now to take advantage of an opportunity, then it would be better to sit back and watch. There have been many times that I wish I had done that.

I am not saying that you may not make money with penny stocks, I am just saying that you should be careful. It has been said that a penny stock can go from $.05 to $.10 easier than a stock can go from $25.00 to $50.00. However, this is not true. A non-penny stock has so much more going for it. It has a legitimate product, Institutions, insiders and volume. It also probably has years of good financial results to back up its claims.

If you were asked if you thought investors always acted rational in their investment styles, what would be your answer? Many different theories have been given concerning the stock market and if it is actually an efficient market. If investors acted rationally all the time, then you would think that the market does act efficiently all the time. The interesting thing is that investors do not act rational all the time.

In 2001, Dalbar, a financial-services company, released a study they had completed on investor behavior. They found that in the 17 year period that included data up to December, 2000 investors actually did worse than the S&P 500. The average investor only made a 5.32% return on their money during this period while the S&P 500 increased by over 16%. This would indicate that it would be better to invest in a S&P 500 index fund and leave the decision making out of the mix.

Research was done as to why the average investor did not do well in their stock trading strategy. Several different reasons were found to be the cause.

Emotions played a major factor in how an investor did on their investment returns. This was given the name “investor regret”. If an investor purchased a stock and it went down, they were unwilling to let it go. They were unwilling to admit that they had made a mistake. They did not realize that they could go further if they would only admit their mistake and move on to a winning investment. The flip side of this is when an investor does not act on their research and does not buy a stock and then watches that stock soar. This can be hard on the nerves.

“Mental Accounting” is the process of placing different events into different compartments. This mental accounting affects our behavior in relation to our investments. If an investor has watched an investment go up $200.00 and it is now only up by $100.00, that investor will not sell the stock. They just can not walk away from that $100.00 even though it was never theirs.

Anchoring is where the investor pins their expectations on historical prices. They expect that the market will continue to go in the direction it is moving and refuse to acknowledge anything different. They anchor their belief on past performances. Stock markets do have ups and downs and they do not always act as either a bull or bear market. The trick is to be willing to admit that a shift has occurred.

If you can avoid the above mistakes in your trading strategy, you will be more prepared to make money with your investments.