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Stock Trading: How Old Do You Have To Be?

2015-04-09T14:45:00.000-07:00

In every state in the United States, there is a minimum age to buy and sell securities like buy stocks, Exchange Traded Funds (ETFs), bonds, etc. This is due to two reasons.

Reasons Why Minors Aren't Allowed to Trade Stocks

The first reason is because states and brokers alike agree that children and minors generally aren’t capable of making good decisions involving securities and trading assets.

The second reason is liability exposure. Brokers do not want to be responsible for the (probably poor) financial decisions minors can make through their systems, so they rightfully keep people who aren’t of age from trading.

Minimum Age For Trading Stocks in the USA

What is this minimum age for stock trading in the United States? It depends on the state. If you live in California, the District of Columbia, Kentucky, Louisiana, Maine, Michigan, Nevada, New Jersey, South Dakota, Oklahoma, or Virginia, you can’t trade stocks until you reach the age of 18. For every other state, you have to be at least 21 years of age – and brokerages do verify the identity and age of each person attempting to open an account.

How Can Minors Get Around the Minimum Age Requirement?

You can, however, get what is called a custodial account. This is an account that has the assets in the minor’s name, but the minor’s parents or legal guardians actually administer the account. The only people allowed to place orders for that account are those who are at least 18 years of age (or 21, depending on the state).

For more information see How Old Do You Have To Be To Buy Stocks?

What is Cash Flow Coverage Ratio (CFCR)?

2015-03-20T20:51:00.004-07:00

The cash flow coverage ratio is an indicator of the ability of a company to pay interest and principal amounts when they become due. This ratio tells the number of times the financial obligations of a company are covered by its earnings. A ratio equal to one or more than one means that the company is in good financial health and it can meet its financial obligations through the cash generated by operating activities. A ratio of less than one is an indicator of bankruptcy of the company within two years if it fails to improve its financial position.

To calculate the cash coverage ratio, take the earnings before interest and taxes (EBIT) from the income statement, add back to it all non-cash expenses included in EBIT (such as depreciation and amortization), and divide by the interest expense. The formula is:

Earnings Before Interest and Taxes + Non-Cash Expenses
Interest Expense

Variations:A more conservative cash flow figure calculation in the numerator would use a company's free cash flow (operating cash flow minus the amount of cash used for capital expenditures).

A more conservative total debt figure would include, in addition to short-term borrowings, current portion of long-term debt, long-term debt, redeemable preferred stock and two-thirds of the principal of non-cancel-able operating leases.

What is Equity Multiplier?

2015-03-20T20:44:00.003-07:00

Equity multiplier is a financial leverage ratio which is calculated by dividing total assets by the shareholders equity. It tells about assets in dollar per dollar of equity. The higher the ratio the lower the financial leverage and the lower the ratio the higher the financial leverage.

The formula for equity multiplier is total assets divided by stockholder's equity. Equity multiplier is a financial leverage ratio that evaluates a company's use of debt to purchase assets.

Equity multiplier is an important input in the DuPont return on equity analysis. DuPont return on equity analysis breaks up ROE into net profit margin, asset turnover and financial leverage (represented by equity multiplier as shown below:

ROE Under DuPont Analysis =	Net Income	×	Sales	×	Total Assets	=	Net Income
	Sales		Total Assets		Total Equity		Total Equity

The equity multiplier is a ratio used to analyze a company's debt and equity financing strategy. A higher ratio means that more assets were funding by debt than by equity. In other words, investors funded fewer assets than by creditors.

When a firm's assets are primarily funded by debt, the firm is considered to be highly leveraged and more risky for investors and creditors. This also means that current investors actually own less of the company assets than current creditors.

Lower multiplier ratios are always considered more conservative and more favorable than higher ratios because companies with lower ratios are less dependent on debt financing and don't have high debt servicing costs.

What is Asset Coverage Ratio?

2015-03-20T20:40:00.002-07:00

Asset coverage ratio measures the ability of a company to cover its debt obligations with its assets. The ratio tells how much of the assets of a company will be required to cover its outstanding debts. The asset coverage ratio gives a snapshot of the financial position of a company by measuring its tangible and monetary assets against its financial obligations. This ratio allows the investors to reasonably predict the future earnings of the company and to asses the risk of insolvency.

Calculation (formula)

The asset coverage ratio is calculated in three steps:

Step 1: The current liabilities are added up and short term debt obligations are subtracted from this sum.
Step 2: The book value of tangible and monetary assets of a company is calculated by subtracting the value of intangible assets (such as goodwill) from the book value of total assets. The figure calculated in Step 1 is subtracted from this figure.
Step 3: The resulting figure of Step 2 is divided by the total outstanding debt of the company.

All of these three steps can be expressed in the following formula for asset coverage ratio.

Asset Coverage Ratio = ((Total Assets – Intangible Assets) – (Current Liabilities – Short-term Debt)) / Total Debt Obligations

Usually a minimum level of asset coverage ratio is defined in the covenants so that a company does not overextend its debts beyond a certain limit. The company would not be tempted to take too much loans; therefore chances of its insolvency are less. As a rule of thumb, industrial and publicly held companies should maintain an asset coverage ratio of 2 and utilities companies should maintain an asset coverage ratio of 1.5.

When calculating the asset coverage ratio, investors should exercise caution with respect to asset value. Using the book value of assets may result in an inaccurate asset coverage ratio if the actual liquidation value of assets is significantly less. As a rule of thumb, utilities should have an asset coverage ratio of at least 1.5, and industrial companies should have a ratio of at least 2.

Candlestick Charting and Reversal Patterns - The Doji

2012-08-27T18:05:00.001-07:00

By B.M. Davis

Candlestick charting is more popular than ever before, with a legion of new traders and investors being introduced to the concept by some of today's hottest investment gurus. Once mastered, candlesticks can provide unique visual cues that make reading price action easier and also help the trader in identifying turning points in a trend as it occurs, before a new price trend starts. Reversal patterns in western analysis often take many periods to form but the vast majority of candlesticks formations take only one to three time periods, and give traders more of a real time picture of market sentiment.
Many traders still don't know the major reversal patterns used in candlestick analysis and there is much misunderstanding concerning the practice. This article series will try to explain the different major candles, patterns and also when these signals are valid. We will start with the major candles and then graduate to the major reversal patterns. This is the first article in this series and we will be discussing the doji candle.
The Doji
Doji's are powerful reversal indicating candlesticks and are formed when the security opens and closes at the same level, implying indecision in the stock price. Depending on the location and length of the shadows (lines above and below the open and close), Doji's can be categorized into the following formations: doji, long legged-doji, dragonfly doji and gravestone doji.
As previously mentioned, the standard doji consists of a candle that closes and opens at the same price level. Doji's become more significant when seen after an extended rally of long bodied candles (bullish or bearish) and are confirmed with an engulfing candle. A long legged-doji is formed when the stock opens at a level, trades in a considerable trading range only to close at the same level as it opened. Long legged-doji's become more powerful when proceeded by small candles, as a sudden burst of volatility in a relatively nonvolatile stock; can imply a trend change is coming. Dragonfly Doji's are doji's that opened at the high of a session, had a considerable intraday decline, then find support to rally back to close at the same level as the open. Dragonfly Doji's are often seen after a moderate decline, and are bottom reversal indicators when confirmed with a bullish engulfing. Gravestone Doji's are the opposite of the Dragonfly Doji and are top reversal indicators when confirmed with bearish engulfing candle pattern. As the name implies, gravestone doji's look like a gravestone, and could signal impending end of a trend for a stock.
While the doji is one of the most powerful candles, it's best to wait until the next candle for confirmation before considering a trade. The doji by itself can mean a brief resting period or beginning of a price consolidation rather than a full blown trend reversal.

B.M. Davis is an active trader, trading coach and the publisher of Candlestick Trading For Maximum Profits. If you would like more information about candlestick trading or charting please visit http://www.candlestickcourse.com

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See also: Gravestone Doji's and trend reversals.

Few Types About Doji

2012-08-27T17:59:00.002-07:00

By Sebastian Litrell

There are two kinds of standard Doji Stars: Evening Star and Morning Star.
An Evening Star is at above after the long candlestick body during an uptrend market; while for the Morning Star, it is at below after the long candlestick body during a downtrend market.

Doji Star:

A Doji star is likely a sign to show that the current trend is going to change to another opposite trend. So, it is considered as a reversal sign indicates the current trend is likely to be end. The Doji Morning Star somehow is a sign of lowest bottom while a Doji Evening Star is a sign of the highest top.

A trader should have waited for the chart pattern to be completed before he or she takes the next move. The chart's pattern only can be considered as a complete chart when a candlestick body occurs after the short Doji. Although Doji is a reversal sign, but it could not stands well on its own. The candlestick body occurs after the short Doji would help much in determine the market trend. When there is a red body occurs after the Doji, it indicates the trend is in downtrend and if the candlestick body after the Doji is green, then it shows that the bulls is taking over the control. So, there should be a gap before the candlestick body turns up.

A Doji is known as an 'abandoned baby' or 'island' as it is isolated from the main flow candlestick body patterns.

Double Doji

This formation is formed by two similar Doji that appears one after another. It can be considered as a common phenomena and it is more useful if compare with single Doji as double Doji show us more about the indecision market. So, with this double Doji, it can be strongly sure that there would be a breakout for the current trend.

Dragonfly Doji

A 'Dragonfly' Doji has a long lower shadow and a very tiny candlestick body (sometimes it does not have a candlestick body). It is formed when the open, close and high prices are at the same level. This formation is rarely to be found. The current market first opened at a high price, then dropped during the trading session (because selling is more than buying), and then finally closed at the same high level with the opened price (indicates the bulls have the strength to force the prices up again). This formation is a bullish signs which normally found at the bottom of a downtrend market.

Gravestone Doji

As we can assume from the name, a 'Gravestone' Doji is a threatening sign for traders. The 'Gravestone' Doji has a long upward shadow and a very tiny candlestick body (sometimes it does not have). It is formed when the open, close and lows price are at the same level. During the trading session, the price did go up but return back to the opening level at the close. So, this 'Gravestone' Doji is a bearish sign. It is threatening the traders especially it occurs at the uptrend.

For more reading, Go Learn Forex Trading

Litrell Sebastian
Professional Forex Trader -
Learn Forex Trading

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The Evening Star doji candlestick pattern is fully described at StockMarketStudent.com

Why Most Forex Traders Use Technical Analysis

2012-04-04T17:06:00.002-07:00

Why Most Forex Traders Use Technical Analysis

By Pauline Go

Fundamental analysis has been popular among forex traders for such a long time. However, the necessity for a bulk of information prompted several forex traders to quit using fundamental analysis and to resort to technical analysis.

In general, technical analysis revolves around its three underlying principles. First, the actual price movements and the market action are more important than their underlying causes. Next, patterns will emerge in the market that can identify the potential trend of the price of the currency. Last, the previous and future reactions of people can also shape the movement of the currency and the changes that may take place in human psychology from time to time are minimal.

These principles of this technical analysis have not received positive acceptance from the loyalists of fundamental analysis. These traditionalists would still prefer the old school perspective that an analysis of the movement of the market should focus on the factors that can influence such movement and on the actual influence itself. For those on the side of the contemporary approach of technical analysis, such information may not be necessary at all times. A technical analysis may already be sufficient to ensure the success of trading.

In using this type of analysis, you need to gather historical price data and enter these data into a computer. After feeding the data collected, the computer will then develop a graphical format of describing the patterns existing in the data. Looking for price data would not be a problem at all because the supply is abundant in the foreign exchange market. This graphical representation developed by the computer can already identify the current and future movements of the currency. How the currency is expected to move in the future can already be predicted through a comparison of its present and past movements.

The forex technical analysis theory uses five different categories. These categories are taken into consideration in developing forex charts. The five categories are indicators, number theory, waves, gaps and trends. Indicators, also known as oscillators, refer to the Relative Strength Index (RSI), Stochastic oscillator, and Moving Average Convergence Divergence (MACD). RSI measures the ratio of up-moves to down-moves, while Stochastic oscillator indicates if the
condition has been overbought or oversold. MACD plots two lines of momentum to signify the likelihood of a change in the trend.

The number theory encompasses Fibonacci and Gann numbers. The Fibonacci number sequence follows a pattern of adding the first two numbers to get the third, while Gann numbers use angles and lines in charts. Waves refer to the wave theory popularized by Elliot, which uses repetitive wave patterns in developing market analysis. Gaps are high-low or open-closing
and indicators of an absence of any trading. Trends indicate the direction that the prices are most likely to take. The two most commonly used tools of technical analysis are the Coppock
Curve and the Directional Movement Indicator (DMI).

Technical analysis has become increasingly popular with the advent of technology and computers. Aside from that, through this analysis, several markets can be studied and evaluated simultaneously by experienced analysts.

Pauline Go is an online leading expert in the finance industry. She also offers top quality articles like : Old Currency Value, Currency Exchange Rates

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Visit stockmarketstudent.com for information on Coppock Curve, Directional Movement Indicator and many other technical analysis indicators.

Anticipating Shifts in Investor Sentiment Using the Put Call Ratio

2012-01-02T20:16:00.001-08:00

by David P James

It is commonly believed that the equity markets are motivated by investor mood. You can regularly hear Wall Street analysts cite trader mood and sentiment as the main factor powering the markets. Some traders, therefore, examine charts and ratios in an effort to predict future shifts in investor sentiment.

Probably the most widely used barometer utilized to evaluate trader mood is the Put Call Ratio. The Ratio uses exchange volume of options contracts as a measurement for trader mood. An options contract provides the owner the choice, but not the requirement, to purchase or sell a stipulated quantity of shares at a fixed price level and defined time frame.

An investor who is expecting a stock to slide may invest in put contracts (the legal right to sell at a later date) whilst a trader who is expecting the stock to go up may invest in call contracts (the legal right to buy at a later date).

The most popular way of computing the put call ratio employs the trading activity of calls and puts. It's determined by dividing the quantity of puts exchanged by the amount of calls. For example, if 30,000 puts had been exchanged throughout a trading session but just 15,000 calls, the put call ratio would be 2.

Whilst utilizing trading volume to determine the put call ratio is the most common technique, some investors choose to use the actual dollar amount traded or the quantity of "open interest" for a stock. Open Interest describes the total quantity of contracts that have not yet been closed or expired. The Open Interest Put Call Ratio divides the total quantity of put contracts outstanding by the total quantity of call contracts. For instance, if there were 150,000 puts in the marketplace and 200,000 calls, the Open Interest Put Call Ratio would equal 0.75.

The ratio is usually fairly volatile day-to-day, which makes it tough to identify general trends. Because of this, most investors will look at weekly data or compute a moving average in order to smooth out the variances, therefore exposing longer-term trends and extreme situations.

The put call ratio is frequently utilized as a contrarian signal. If the ratio is very high, i.e. there's a lot of investors expecting a drop in prices, contrarian investors will seek out an opportunity to buy the stock. On the other hand, whenever the ratio is very low and many investors are forecasting a rally, they'll consider selling the market.

It ought to be noted that the put call ratio is frequently utilized in conjunction with additional sentiment indicators rather than as a stand-alone method. Additional sentiment indicators include the Volatility Index (VIX) as well as the Advance Decline Ratio.

To learn more about the Put Call Ratio and to get the day's most interesting stocks, visit http://www.PutCallRatio.net.

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For more information on Put/Call Ratio, Advance Decline Ratio and VIX visit Stock Market Student.com

Trend Trading Using Advance Decline Index

2012-01-02T20:06:00.001-08:00

By Dan Pipitone

Trading the trends is one of the most followed stock trading strategies. Long traders buy stocks at the start of an uptrend and sell them when the trend diminishes. Similarly short traders take short positions at the start of a downtrend and close there positions when the trend ends. Sounds like a very good strategy! But the problem is "how can we know a trend is starting or ending" and "is the trend has enough strength to bring prices to new highs or lows". A simple but effective tool to solve this problem is the "Advance - Decline Index or A-D Index"

Advance - Decline index measures the strength of a market movement. It is one of the most widely used trend analyzing tools by short-term and long-term traders trading all types of financial instruments - stocks, bonds, currencies, futures, etc. AD index is defined as the 'difference between total number of bullish or advancing stocks and total number of bearish or declining stocks'. The value can be a positive or negative integer. But with this single value analyzing trend strengths is difficult. So traders plot this value on a chart as an 'Advanced-Decline line', connecting points of each time periods. One point of the line can be derived from a simple formula.

A-D point = A-D value of the period + A-D value of previous period.

The period can be of any time frame; day traders can use short time periods like 15 or 30 minutes or 1 hour, other traders can use daily, weekly or monthly periods. Most trading systems today have AD index as a standard indicator.

Interpreting advance-decline indicator is easy.

1. Market up and AD down - Strong uptrend.

2. Market up and AD up - Weak uptrend.

3. Market down and AD down - Strong downtrend.

4. Market down and AD up - Weak downtrend.

The major advantages of AD indicator are its simplicity and scalability. It can indicate trend weakening and possible trend changes. But AD index cannot be used as a main tool to predict trend reversals. Traders should use other indicators like volume indicators, Fibonacci tools together with AD index to predict trend changes.

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For more information on technical analysis topics such as Advance Decline Index and Advance Decline Line please visit StockMarketStudent.com

Top Ten Systematic Trading Methods

2012-01-02T20:00:00.001-08:00

By Michael R Bryant

Systematic trading methods are the basis for trading systems and automated trading strategies. They consist of technical indicators or other mathematical methods that are used to generate objective buy and sell signals in the financial markets. Some of the most popular methods have been in use since before the advent of computers, while other methods are more recent. This article lists ten of the most popular systematic methods found in trading systems.

Moving average crossovers. Trading systems based on the crossover of two moving averages of different lengths is perhaps the most common systematic trading method. This method also includes triple moving average crossovers, as well as the moving average convergence divergence (MACD) indicator, which is the difference between two exponential moving averages. The moving averages themselves can be calculated in a variety of ways, such as simple, exponential, weighted, etc.

Channel breakouts. In this method, a price channel is defined by the highest high and lowest low over some past number of bars. A trade is signaled when the market breaks out above or below the channel. This is also known as a Donchian channel, which traditionally uses a look-back length of 20 days. The famed "turtle" system was purportedly based on channel breakouts.

Volatility breakouts. These are similar in some respects to channel breakouts except that instead of using the highest high and lowest low, the breakout is based on the so-called volatility. Volatility is typically represented by the average true range (ATR), which is essentially an average of the bars' ranges, adjusted for opening gaps, over some past number of bars. The ATR is added to or subtracted from the current bar's price to determine the breakout price.

Support/resistance. This method is based on the idea that if the market is below a resistance level, it will have difficulty crossing above that price, whereas if it's above a support level, it will have difficulty falling below that price. It's considered significant when the market breaks through a support or resistance level. Also, when the market breaks through a resistance level, that price becomes the new support level. Likewise, when the market drops through a support level, that price becomes the new resistance level. The support and resistance levels are typically based on recent, significant prices, such as recent highs and lows or reversal points.

Oscillators and cycles. Oscillators are technical indicators that move within a set range, such as zero to 100, and represent the extent to which the market is overbought or oversold. Typical oscillators include stochastics, Williams %R, Rate of Change (ROC), and the Relative Strength Indicator (RSI). Oscillators also reveal the cyclical nature of the markets. More direct methods of cycle analysis are also possible, such as calculating the dominant cycle length. The cycle length can be used as an input to other indicators or as part of a price prediction method.

Price patterns. A price pattern can be as simple as a higher closing price or as complicated as a head-and-shoulders pattern. Numerous books have been written on the use of price patterns in trading. The topic of Japanese candle sticks is essentially a way of categorizing different price patterns and linking them to market behavior.

Price envelopes. In this method, bands are constructed above and below the market such that the market normally stays within the bands. Bollinger bands, which calculate the width of the envelope from the standard deviation of price, are probably the most commonly used type of price envelope. Trading signals are typically generated when the market touches or passes through either the upper or lower band.

Time-of-day/day-of-week. Time-based trading methods, based either on the time of day or the day of week, are quite common. A well known trading system for the S&P 500 futures bought on the open on Mondays and exited on the close. It took advantage of a tendency the market had at that time to trade up on Mondays. Other systematic approaches restrict trades to certain times of day that tend to favor certain patterns, such as trends, reversals, or high liquidity.

Volume. Many systematic trading methods are based solely on prices (open, high, low and close). However, volume is one of the basic components of market data. As such, methods based on volume, while less common than price-based methods, are worthy of note. Oftentimes, traders use volume to confirm or validate a market move. Some of the most common systematic methods based on volume are the volume-based indicators, such as on-balance volume (OBV), the accumulation/distribution line, and the Chaiken oscillator.

Forecasting. Market forecasting uses mathematical methods to predict the price of the market at some time in the future. Forecasting is qualitatively different than the methods listed above, which are designed to identify tradable market tendencies or patterns. In contrast, a trading system based on forecasting might, for example, buy the market today if the forecast is for the market to be higher a week from today.

Please keep in mind that this list is based on popularity, which is not necessarily the same as profitability. Successful trading systems often employ a combination of methods and often in unconventional ways. Also, it's possible that other, less popular methods may be more profitable in some cases.

About the Author:

Michael Bryant has a PhD degree in mechanical engineering with a minor in computer science and has been trading and studying the financial markets since 1994. To learn how to build profitable trading strategies for almost any market and time frame, please visit Adaptrade Software (http://www.adaptrade.com/Builder/).

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For more information on technical indicators such as Accumulation Distribution Line and Chaikin Oscillator visit the StockMarketStudent Encyclopedia.

Day Trading Forex With Technical Indicators

2012-01-02T19:43:00.001-08:00

By Paul Bryan

Day trading technical indicators are the representation of mathematical formulae a day trader can use to decide when to do the trading. Forex day trading involves buying and selling of various currencies with the goal of making a profit from the difference between the buying price and the selling price within a day.

The day traders employ different strategies like short term scalping where positions are only held for a few seconds or minutes or longer term swing and position trading, when they hold the position for the whole trading day. For their trades they follow one or more day trading technical indicators or develop a strategy based on a combination of many such indicators.

A day trading technical indicator is a series of data points that can be derived by applying a formula to the price data. Price data includes any combination of the open, high, low, or close over a period of time.

Some technical indicators may use only the closing prices while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced, which in turn creates the indicator.

The list of day trading technical indicators is practically endless. There are Absolute Breadth Index, Bollinger Bands, Bull/Bear Ratio, Candlestick Charts, indicators based on Dow Theory or Elliot Wave Theory, Envelopes, Fibonacci Levels, MACD, Moving Averages, TRIX, Weighted Close, and many more. All these can be used as a day trading technical indicators with slight or no modifications.

For example, the absolute breadth index or ABI is a market momentum indicator which shows the activity, volatility, and change taking place in the market without paying attention to the direction of the prices. High readings implicate active markets. As a day trading technical indicator, it can predict future direction if combined with other indicators.

Bollinger Bands on the other hand are a kind of moving average envelope. It exist at standard deviation levels above and below the moving average and generally stay within the upper and lower bands. As a day trading technical indicators, it predicts the future market movements. Fibonacci numbers with 4 theories - arcs, fans, retracements, and time zones, which highlight reversals in trends.

Day trading technical indicators has three functions-to alert, to confirm and to predict. So a trader can never miss a trading opportunity or run into loss if he or she can use the indicators judiciously.

The best approach will be to develop a strategy based on more than one indicator. Learning how to use these indicators is more of an art than a science. Through careful study and analysis, a day trading technical indicator can be developed over time, but they can never be full proof.

To find out more about trading Forex more accurately visit Day Trading Technical Indicators

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Why Above the Market Orders Don't Work Investing in Stocks

2012-01-02T19:37:00.001-08:00

The above the market orders happen when you place an order with your broker, with the intention of buying a stock as it is going up, usually through a resistance line that an investor has chosen. Some investors believe in technical analysis and they look at resistance, which is the point where a stock stats leveling out after moving up or down. At the supposed resistance level, it is believed that many times the stock will break its fall or uptrend and start going up or down until it meets resistance again. If an investor places an order like this, he or she can try to catch the upward trend of a security or investment supposedly after resistance is met and the trend starts upward. In an above the market order, you want the stock to be going UP breaking through some level before a buy order is placed and hopeful profit will be made.

Comments:

I don't think that this strategy works very well because it's based on technical analysis which doesn't always work. Warren Buffet himself said that he realized technical analysis didn't work when he could turn the charts upside down and get the same answers for his investing. It's assuming that when a stock meets resistance - or any investment that it will then turn around and keep going up. I think this is very unsound because many times instead of going up it will just fall down again. Experts have never been able to find any pattern in the stock market, and trying to rely on resistance for consistent returns is foolish for the stated reasons.

Many times however some investors simply can't resist the temptation of using technical tools like this to buy stocks because their friends, family, or supposed experts tell them it is a good idea. If you have to use this type of analysis for your stocks, than make sure that you cut your losses SMALL. If they stock does go down at least the losses can remain small if you use a stop limit order, however if you hold onto the security for more than one day market makers can make the price LARGELY lower than what you bought it for proving this philosophy foolish.

Investing With The Bad Economy And High Current Unemployment Rates

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For further information on above the market visit Stock Market Student Encyclopedia.

Klinger Oscillator and Percentage Volume Oscillator

2012-01-02T18:13:00.002-08:00

In the world of technical analysis there are an endless variety of technical indicators. In fact, there are so many indicators that it is often difficult to distinguish between one and another. Many are variations of the same theme using the same input parameters and producing similar results.

Before developing a trading strategy it is important to wade through the raft of available technical indicators and determine what they actually do, then choose those that are unique, combine well with other indicators and most importantly, provide a trading advantage.

As an example, if a trader is intent on using Chaikin Money Flow then it probably doesn't make any sense to also choose the Klinger Volume Oscillator as part of the same stock trading strategy. Both of these indicators are based on accumulation and distribution of shares and both use price and volume as inputs.

Another example would be to select both the Stochastics Oscillator and Relative Strength Index (RSI) for use as overbought/oversold indicators. Both indicators deal with short-term price extremes and capitalize on a tendency for mean reversion.

One easy way to avoid overlap of functionality is to first determine the most important input parameters, then choose one technical indicator for each parameter. One could arguably say that the two most significant trading factors are the security's price and volume (in that order). Price is an obvious choice but stock volume is often ignored. Volume is important because it provides a clue to whether the security is in demand, or alternatively whether the stock is being dumped. With both directions of price movement, the greater the volume the more significant the price action is.

Selection of a price-only trading signal is a relatively easy thing to do. For example, a trader could use an RSI, Stochastics, Simple or Exponential Moving Average (EMA), or a multitude of others. However, it is not so easy to find a volume-only technical indicator. There are plenty of combined price/volume indicators such as the Klinger Oscillator and Chaikin Money Flow, both mentioned above. But they do not provide the price-independence that is being sought for the second indicator.

There is one volume-only indicator called the Percentage Volume Oscillator (PVO). There may be others out there but they are likely based on a similar formula. The PVO is calculated by subtracting the fast EMA from the slow EMA of volume as a percentage. Increasing volume is detected when the Percentage Volume Oscillator fluctuates around the zero line with increasing oscillator values. Decreasing volume is determined when the PVO fluctuates around the zero line with decreasing oscillator values.

An important use of the Percentage Volume Oscillator is when a stock breakout occurs. Such breakouts do not always succeed and instead of reaching new highs they often drop back to less lofty heights. You can generally judge the quality of the breakout based on the PVO. If a stock breaks out on significantly higher volume then the breakout will likely succeed. Conversely if the volume is below average then the stock price will probably fall back after a few days.

Steve Auger is a freelance writer and the administrator of the website stockmarketstudent.com. Stock Market Student includes an encyclopedia of stock market terminology, providing additional information on the technical indicators Percentage Volume Oscillator and Klinger Oscillator.

What Are ETFs (Exchange-Traded Funds)?

2011-12-29T20:13:00.000-08:00

By Nicholas Swezey

Exchange-Traded Funds, or ETFs, are basically like mutual funds that trade on stock exchanges, with a few important differences. This gives them many of the benefits of stocks while removing some of the disadvantages that mutual funds have.

Purpose of ETFs
Have you ever wanted to trade shares of an index like the Dow Jones Industrial Average or the S&P 500? Well, you can't do that directly but you can do it indirectly through ETFs. The managers who run ETFs usually invest in the same stocks or futures that make up an index or commodity in an effort to make the ETF's value per share track a certain index or commodity up and down. This allows anyone with access to stock trading the ability to easily trade indexes or commodities indirectly.

Example: SPY - SPDR Trust Series I:
One of the most popular ETFs, its goal is to track the price and performance of the S&P 500 index. It will not be the same price as the index but its chart should have the same shape as the index, within one or two percent most of the time.

Example: QQQQ - PowerShares QQQ Trust, Series 1:
The goal of this fund is to track the Nasdaq-100 index by issuing and redeeming shares of all the stocks that make up the index.

Example: EEM - iShares MSCI Emerging Markets Index Fund:
This ETF seeks to track the price and performance of the MSCI Emerging Markets index, which tracks performance of international stocks. This fund is actually non-diversified, which means it is not as safe as other funds because it is focused on a specific sector.

Example: USO - United States Oil Fund LP:
This commodity ETF attempts to track the price and performance of oil prices, West Texas Intermediate light, sweet crude oil, to be exact. This is accomplished by continually trading futures contracts for oil, natural gas, and several other things. It is also non-diversified but a very convenient way to make trades based on oil prices.

Benefits of ETFs
The main benefits of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.

What are ETFs
ETFs are somewhat complicated to explain, but they are funds that can be structured in a few different ways. They are usually passively managed, which means the managers do not have to constantly decide which investments need to be bought and sold in order to increase the value of the fund. Instead, the managers simply have to make sure the fund tracks a certain index or commodity as closely as possible, which can be as simple as owning the stocks that make up an index and adjust the shares accordingly so that the price follows the index's chart.

Where to Find Them
Many financial websites, including brokerages, offer a free stock screener, along with an ETF screener. Yahoo! Finance has a good one that lets you view a list of the best performers in several different categories.

Nicholas Swezey is the creator of the free stock game at http://www.HowTheMarketWorks.com

Article Source: http://EzineArticles.com/?expert=Nicholas_Swezey

Note: An original use of an ETFscreen for leveraged ETFs is provided at StockMarketStudent.com.

Stocks Volume As a Trading Indicator

2011-12-29T19:57:00.001-08:00

By William Braddford

Introduction

Stocks volume is an often ignored metric in a stocks performance. You might say aren't we only concerned with the price of a stock and its movement? Yes our final concern is price but we want to find indicators of how a price is going to change before it does. Volume is such an indicator. A stock's trading volume is the amount of stock traded or changed hands during the specified period of time. Generally we refer to daily or weekly trading volume. Now the price of a stock is just like the price of anything else we pay money for in that its value is determined by supply and demand. This is how volume gives us indicators of coming price changes, it tells us the levels of supply or demand for a particular stock. Read on and I will explain exactly how that happens

Stocks and Supply and Demand

Highly successful investor William J. O'Neil noted that "stocks never go up in price by accident - their must be a large buying demand. When demand for something increases and supply remains constant the price increases. Conversely when the supply of something increases and the demand remains constant its price decreases. This is the law of supply and demand and it is a fundamental economic concept. A stock since it is paid for in cash in a free market functions according to this law. When there are more buyers than sellers demand increases and the price eventually increases as well. When there are more sellers than buyers the supply increases and the price eventually decreases. This is just like the housing market. When less are buying houses for whatever reason the cost of houses goes down. What we are going to do is find ways of using the trading volume of a stock to measure its supply and demand levels. Let's talk about how we can do that.

Evaluating Supply and Demand

The first thing to look for is whether a stock has more buyers or sellers. IN investing terms if a stock has more buyers we say it is being accumulated and if it has more sellers we say is being distributed. To measure whether a stock is being accumulated or distributed we look at the daily trading volume closing price. If the stock closes at a higher price than the previous day on larger volume it's a signal of accumulation. If it closes at a lower price on higher volume it's a sign of distribution. With both directions the greater the volume more significant the action is. This is why low volume selling doesn't necessarily mean you need to sell a because it is being distributed. However if you have multiple days for closing down in price on above average volume you stock may be getting ready to turn or already has.

A rough gauge of accumulation and distribution can be arrived at by looking at a daily stock chart for the stock in question. Count the days where the stock closes up in price on above average trading volume and compare that to the number of days it closes down in price on above average trading volume. This gives you a general indication of whether it is being accumulated or distributed. If you subscribe to a financial paper you may have access to more detailed metrics for accumulation and distribution. Investors Business Daily has an accumulation/distribution rating does a similar count but in much greater detail and it gives A to D scale telling you to what degree a stock is being accumulated or distributed. This can be a big time saver in determining a stocks supply and demand.

Strength of a Breakout

Stock breakouts do not always succeed and instead of blasting to new highs they can't seem to make it past a point and drop back down. This may happen over the course of one day or it may take multiple days. You can judge the quality of the breakout based on the volume level on the day or days in breaks out. If a stock breaks out on 50% or more above average volume your its likely a breakout that will succeed. Conversely if it's significantly below average the stock may bounce back after a few days. What is happening is there is a fast increases in demand and a shortage of sellers. Keep in mind that when buying off of a breakout you want to buy when the stock is emerging from a properly formed chart base or area of price consolidation.

Price consolidation

To identify stocks that are getting ready to breakout you want to look for areas of price consolidation. This is a time during which large buyers (institutional buyers) are gradually building their positions in a stock. This takes a few days to a few weeks. During this time there will be multiple days of high volume trading where the stock closes up in price but not with a significant price advance. This is also referred to as tight trading. Once the institutional buyers have a good position they will start making large buys to trigger others to buy the stock on the obvious advance. The increases demand will shoot the price up but the institutional buyers will hold there position thus not adding to the supply. This is not the only way breakouts happen but it is an example of a common one. This brings us to the next question of why do these large institutions have such a sway on the price of a stock?

Institutional Buying

By far the biggest source of accumulation and distribution is large institutions such as mutual funds and pension funds. William J. O'Neil points out how significant the buying power of institutions is. "If a single fund has $ 1 billion in assets and wants just a 2% new position in a stock, they must buy $20 million worth of it. That's 500,000 shares of a stock selling at $40 per share! Funds are just like elephants jumping into a bathtub. They are simply so big the water rises and splashed all over the place." This means that you want to be buying stocks which institutions are buying to benefit from the momentum they carry. When they trade their will be massive adjustments to the supply and demand of a stock.

We talked about earlier how when an institution wants a position in a stock it does not do it all at once. It builds up over the course of a few days or weeks to try and buy into it without increasing the price significantly. This gradual buy will show up as accumulation on the stock charts. Even in small amounts institutional buying is hard to hide. For more intermediate trades you want to identify these areas of accumulation so you can buy into stocks before they breakout. However accumulation is also beneficial when holding a stock for a longer period of time. Institutions don't turnover their portfolios as often as individual investors do. This means that a stock that institutions are buying is more likely to have sustained result and stability than one without it.

One way to spot to accumulation over a longer term is to see what better performing institutions already own or have purchase recently. Institutions are required by the SEC to disclose their purchases. You can view these purchases in the ownership section on financial sites like Google finance. If you read Investors Business Daily or another financial paper you have access to a sponsorship rating which does this research for you. They may also tell you the percentage change in ownership of a stock over the past few quarters. This gives you an indication if more funds are buying in or selling out. William O'Neil says that "if none of the better performing funds has bought a particular stock, I would stay away."

How to Track Volume

The value of a stock's or an index's trading volume is not meaningful unless we compare it to the previous periods to see it's change over time. The Wall Street Journal and other financial papers list a stocks trading volume for the day. This works but it can be cumbersome to mentally track a stocks trading volume over a period of time. Investors Business Daily's stock tables have a helpful feature which is listing the stocks daily trading volume as a percentage of its 50 day average volume. Using this you can quickly glance through the stock tables and see which stocks are being accumulated.

Stock tables scan a lot of stocks for erratic changes in volume but they don't help you track a stocks volume changes or seeing past movements. The best way to do this is by using stock charts. Charts show you price and volume action over time in intervals of days or weeks and make it easier to identify accumulation, distribution and areas of price consolidation. Charts are available at free financial sites like Google and yahoo finance.

Conclusion
That is a good introduction on using trading volume as an stock indicator. To successfully utilize this in your investments I would recommend reading Investors Business Daily(IBD). IBD is an great way to get professional level data and research and not have to spend hours of your time or a significant amount of money to get it. A determined person could probably pay for the cost of an annual subscription in just a few weeks of trading with it. If you are interested in subscribing click through this link for discount of up to 80% off the price of the print edition.
If your interested in an opportunity to learn from great investors check out Investors Quotes Daily. They send out a daily quote from successful investors such as Warren Buffett, Peter Lynch and William J. O'Neil. Sometimes it's one of their investing strategies and other times a piece of sage wisdom. It's a great way to get a daily does of what it takes to be a great investor.

Article Source: http://EzineArticles.com/?expert=William_Braddford

Note: An interesting technical analysis based stock volume indicator is the Klinger Oscillator, calculated as the difference between a fast Exponential Moving Average (EMA) and a slow EMA. The Klinger Oscillator is also known as the Klinger Volume Oscillator.

E-Mini Trading: Channel Trading, Bollinger Bands, and Reversion to the Mean Theory

2011-12-13T19:56:00.001-08:00

By David S. Adams

As I mentioned in earlier articles, I am an enthusiastic channel trader, which flies in the face of what most e-mini traders consider prudent trading. Most e-mini traders avoid trading in channels because they can be unpredictable and unprofitable. Reversion to the Mean Theory

has certainly had its abuse over the years by purveyors of stocks and bonds. It is not uncommon for unscrupulous stockbrokers to tell a potential client that a stock is overpriced because it is trading over its yearly mean price. There is no correlation between eminent price movement in a
stock and its distance from the mean price. This use of the Reversion to the Mean Theory is a misrepresentation of how stock prices fluctuate.

On the other hand, the theory holds great value for trading in the short term, especially when used in conjunction with Bollinger bands. I generally set by Bollinger bands at 2 standard deviations from the mean and use a setting of 10 time periods. There are other settings, which may be 14 or 18, that give satisfactory results under unusual market conditions; but I find 10 to be the most dependable setting for my personal e-mini trading.John Bollinger, in his article, "Bollinger Bands-The Basic Rules," states that closes outside the Bollinger bands are continuation signals not reversal signals. In nearly all cases, closes outside the Bollinger bands tend to be continuation patterns, with certain exceptions.In reasonably symmetrical continuation channels the Bollinger bands tend to define the highs and lows of the channel. As a quick aside, symmetrical continuation channels refer to

channels where the price action is ricocheting off the top line of the Bollinger band and moving in a direct line, with little retracement, to the mean line or the bottom Bollinger
band line. These channels are a delight to trade as they are usually very low volume formations and occur during the stand down period (from 11 AM CST to 12:30 PM CST with some daily
variations). During the stand down period the market is often dominated by smaller traders. This is especially true on the YM e-mini contract. In a typical trade, the smaller traders
will try to push the price action outside the Bollinger band and typically fail. It is at this time that I fade the failed breakout back into the channel.

With very few exceptions, the price action in the above-described scenario will revert to the mean average at the center of the Bollinger bands. I have used this technique for several years and can assure you that continuation channels seldom breakout or breakdown. A more likely scenario for this price action is a reversion to the mean centerline of the Bollinger bands or a move to the lower Bollinger band. (Or an exactly the opposite, depending on the direction of your trade.) The tendency for continuation patterns to revert to the mean defies many investment theorists judgment, but it is true, just the same.It is important to understand that this principle I have outlined works only in continuation channels and is a disastrous principle to implement in a trending market, or even a choppy market. Its sole use is in a flat continuation channel. It's also important to use a fairly tight stop should the market action choose to actually breakout or breakdown.In summary, I have described a unique scenario in e-mini trading where Bollinger bands and Reversion to the Mean Theory can be utilized to initiate frequent and profitable trades. It

takes some time and experience to learn as technique, but continuation channels tend to revert to the mean.

Real Live Trading Doesn't Lie. Spend 3 days with me, in my trading room, and see if you are one of the many that can profit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here.
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Note: other types of trading channels not mentioned in this article include linear regression channels such as Breakout Standard Regression Channel, Classic Standard Regression Channel and Raff Regression Channel.

McClellan Oscillator - NYSE Advancing Issues And Declining Issues

2011-12-13T17:02:00.001-08:00

By Tom Markelson

The McClellan Oscillator combines market breadth data to create an overbought/oversold oscillator. The McClellan Oscillator uses two moving averages of the market breadth calculation (Advancing Issues on the NYSE [New York Stock Exchange] - Declining Issues on the NYSE).

Advancing issues is defined as the number of stocks on the NYSE that made positive gains for the day. Likewise, the declining issues value is all stocks on the NYSE that had losses for the day.

Generally, overbought is defined as above 70 and oversold is defined as below -70. When the moving average of the Advancing Issues - Declining Issues is above zero, this generally is considered bullish. When the McClellan Oscillator is below zero, this is considered bearish. However, at the extremes, 70 and -70, the McClellan Oscillator could be used as an overbought and oversold indicator. Traders often look for a price correction downward when the McClellan oscillator is above 70 and look for a relief rally when the McClellan Oscillator is below -70.

The McClellan Oscillator is a great addition to a traders' technical analysis arsenal. Rather than relying on price data from one stock, the McClellan Oscillator helps a trader get the big market picture, whether it be bullish, bearish, or neutral.

Another popular market breadth indicator is the TRIN or Arms Index. This indicator combines advancing and declining issues with advancing and declining volume. See Arms Index (TRIN) for more details.

Remember, trading involves serious risk. Only trade with discretionary funds you can afford to lose. Past performance is not indicative of future performance.

Tom Markelson is a contributor to the website OnlineTradingConcepts.com and trades stocks, futures, and options.

A chart showing the McClellan Oscillator is located at the following link: McClellan Oscillator.

Article Source: http://EzineArticles.com/?expert=Tom_Markelson

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More information on McClellan Oscillator theory and Summation Index can be found at StockMarketStudent Encyclopedia.

Market Breadth - Top 5 Things You Should Know

2011-12-13T16:21:00.001-08:00

By Alexander Ache

Market breadth is defined as the number of advancing issues compared to the number of declining issues in a given market.

This gives traders and investors a unique view of the underlying strength or direction of a market move. For US equity markets, market breadth can be applied to any index,
exchange, or customized list of issues. For example you could apply market breadth indicators to a particular sector or industry that you are following. There are several methods for
measuring market breadth, of which the most common is the advance/decline line (A/D line). Other indicators make use of ratios, oscillators, moving averages, and momentum of the
breadth. Some methods also include new highs and lows and volume studies. Whatever method you choose, you must keep the following points in mind:

1. Pick Two or Three Indicators - There are many breadth indicators and variants, many of which are redundant. Pick at most two or three that you prefer and watch them daily. Avoid analysis paralysis and focus on learning only a few.

2. Price Is King - Regardless of which breadth indicator you use, it should always be confirmed with price movement of the underlying asset. Look for divergences of the
price and breadth to help signal possible opportunities.

3. Smooth Out Your Indicators - Don't get sucked into the noise that typically accompanies daily breadth signals. Utilize moving averages, point and figure charts, or even
weekly data to help draw out a valid signal.

4. Back-test - After you have found a breadth indicator you prefer, invest some time and effort into back-testing its performance. Manually back-testing is the recommended method so you can become more intimate with the indicator, identify gaps in your rules, and build overall
confidence.

5. Confirm Data Integrity - Not all data sources are accurate when it comes to basic information of advancers and decliners. Cross reference your data to make sure you are
getting an accurate feed.

Display your market breadth on a polo shirt. Visit http://www.BullandBearPolo.Com
which provides active traders and investors with professionally looking shirts embroidered with a tactful bull or bear logo to display daily market sentiment.

For free access to common market breadth charts and indicators, visit http://stockcharts.com/index.html.

Article Source: http://EzineArticles.com/?expert=Alexander_Ache

More information on Market Breadth theory and Market Breadth Indicators can be found at StockMarketStudent.

Main Stock Market Investing Myths

2011-12-12T21:14:00.001-08:00

By Van Beek

Stock Market Investing is a great way for anyone to make money without having the usual overheads and headaches of owning and running a business. However, one needs a certain amount of skill, business acumen, and a lot of proper information to make money with stocks and funds. Wrong information or misinformation is one of the reasons that people, especially newbies, lose money in the market. Here are the main stock market investing myths that people need to be wary of when they trade in the stock exchange.

1. Only rich people and stock brokers can make money in the market

The stock market is a place where anyone can make money as long as they know how. The Internet has leveled the playing field even more, by providing access to data and research tools that were previously available exclusively to brokers. Therefore, even ordinary folk with a tiny capital can start small and build their portfolio consistently to earn huge profits.

Individuals also have the freedom to aim for long-term gains, whereas stock brokers do not have that luxury. Most of their investments need to perform well even in the short-term. Therefore, individual investors are at a greater advantage when it comes to making money over the long-term.

2. What goes down must come up

Stocks are not physical objects and they are not obligated to obey the law of gravity. When a company performs well and as long as market conditions are conducive, a stock could keep increasing consistently. There is no reason whatsoever for it to come down when there is no other opposing force acting on it. When a stable company with great products or services is run by efficient managers, its stock prices can keep growing steadily. The overall market trend often prevents that however. And companies that are poorly managed and have a declining stock price, may go bankrupt and never recover.

3. Investing in the stock market is very similar to gambling

While people totally ignorant about the share market can be excused for having that opinion, investors and even novices in the market should never entertain that idea. Gambling is an activity where everything is left to chance, but investing in stocks is done by careful analysis of a company's performance, market forces, and several other factors that can influence the prices of stocks. Therefore, stock market investing is not a leap in the dark, but rather a careful strategy based on solid rules, analysis and a certain amount of intuition gained over years of experience.

There are a lot of other myths on stock market investing. Learning the truth can set everyone free and help them invest wisely and see consistent profits in the stock market.

To grow your savings with sure and simple stock market investing, visit the Stock Trend Investing website.

There you learn about a simple Trend Following approach and system that takes less than one hour a month of your time. At the site you can also sign up for a free long-term investing newsletter.

Article Source: http://EzineArticles.com/?expert=Van_Beek

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Understand the terms Appraisal Ratio, Non-systematic Risk and Alpha before embarking on the stock investing journey.

Stock Trading System Development

2011-12-12T21:07:00.001-08:00

Most people invest in the stock market but only a very few go to the effort of designing their own stock trading system. By "system", I mean a piece of software that automatically tells the trader when to buy and sell stocks. There are several advantages to mechanical stock trading systems. One of the big advantages is that it removes the emotion from the trading activities. Or should I say, a mechanical stock trading system should remove the emotion from trading.

In fact, most system traders tend to seek the highest possible return on capital without accounting for the emotions experienced when real money is on the line. As a result, many traders make fundamental mistakes including underdiversification, undercapitalization and overtrading.

One significant issue that novice system developers face is the assumption that live performance of a trading system will mimic system backtest performance. It is very unusual to achieve similar performance live as was achieved in simulation. A good rule of thumb is to expect 50% of the profit and 50% higher drawdown in live trading as opposed to backtest simulation.

Inevitably, a mechanically traded stock system will produce a fairly significant drawdown. This is where emotion comes into play. It is very easy to study a backtest simulation and come to the conclusion that you can tolerate a 25% drawdown. It is a completely different situation when you are down 25% with real money invested. In this situation traders typically begin to question whether their system still works. With enough stress the trader will liquidate his (or her) holdings. This is how traders end up buying high and selling low. It complete cycle is greed and fear. Greed comes into play because too much capital is put into the stock positions initially. Fear comes into play when the positions move against the stock holder. The root cause is typically deployment of too high a percentage of one's trading capital on non-diversified positions. This is often compounded by use of capital that one cannot afford to lose.

Before embarking on the design of your own personal trading system you should first assess your personality, lifestyle and financial means. There is no point in putting a great deal of effort into a trading system that is ultimately unsuitable for your life's situation.

Steve Auger is the author of the blog Stock Market Student. Always strive for the highest Alpha when developing a stock trading system.

Stock Liquidity

2011-12-12T20:59:00.000-08:00

When buying or selling shares in a company, most traders want to ensure they are doing so at a fair price. In many cases novice traders fail to get a fair price because they don't understand stock liquidity and a factor called slippage.

What is slippage?

Slippage is the difference between the last trade price and the price realized by the next order. Typically, slippage occurs when there is a significant imbalance between demand and supply. For example, if a stock trader wants to buy 10000 shares of a stock but the average daily volume shares traded for that stock is 5000 shares, then there will likely be a great deal of slippage in acquiring the stock. The act of buying the stock will drive up the share price because there are not enough willing sellers.

One method of preventing slippage is to use limit orders instead of market orders. But there is a downside to this. Quite often the stock trader does not acquire the best stocks with limit orders because the price moves up too fast. Or the trader will get filled on a miniscule number of shares and has to chase the stock by moving up the limit price to acquire more. Neither of these situations are desirable.

Stock Liquidity

When developing a stock trading system, it is good practice to determine the minimum stock liquidity for your needs. For example, if a stock trader starts with $100K trading capital and plans on holding 20 different stocks then he will typically be buying $5K worth of stock at a time. To avoid major slippage problems the stock trader will likely set certain minimum stock liquidity requirements to filter out low liquidity stocks.

Average Trading Volume

Many novice traders will filter out low liquidity stocks by examining the stock average trading volume over the previous 20 days. 20 days is generally not sufficient as a large volume spike on one or two days can skew the average trading volume. You can end up holding a stock with volume dying off rather quickly. So it is better to a longer averaging period such as 60 days.

Average Dollar-Volume

An issue with examining the average daily trading volume is that it is not necessarily the right factor to monitor. For example, For example, some stocks on publicly traded exchanges have extremely high valuation, $1000 or more. The stocks can be quite liquid and one share can easily be bought. So you can see that trading volume is actually irrelevant. What is important is average dollar-volume. In other words, concentrate on the $$$ turned on an average trading day, not the volume of stocks traded.

The minimum stock liquidity for stocks the trader is interested in buying should be based on trading capital and number of stocks held. For the case mentioned above the trader has $100K trading capital and wants to hold at least twenty stocks. On average each position will be $100,000 / 20 = $5,000. When you buy a stock, a good rule of thumb is to buy no more than 1% of the 60 day average daily dollar-volume. For this trading example, the minimum stock liquidity level should be a minimum $500,000 daily average traded for a particular stock.

Market Capitalization

Now the average dollar-volume is fine for acquiring a stock position but what about exiting? When a sell signal comes up the trader will have to sell regardless of the average dollar-volume. In preparation for selling a stock, consider using market capitalization as a filter before buying the stock. The idea is that if the market capitalization is too low then stock liquidity is likely a problem, even if the dollar-volume is high. This provides some buy side filtering for consideration of ultimately selling the stock.

Stock Price

The final parameter to consider is the current stock price. It is a good idea to avoid stocks trading under $3. There is too much speculation/manipulation for these stocks and they tend to be less liquid.

Conclusion

To avoid having excess slippage when entering trades, make sure you consider the stock liquidity (average dollar-volume), market capitalization and stock price. If you want to trade more than 1% of the stocks average dollar volume then consider breaking the trades into several different orders to manage slippage.

Steve O. Auger is the author of the blog Stock Market Student and Stock Market Encyclopedia.