Trading Position

Line Charts for Technical Analysis

2012-02-29T10:15:00.000-05:00

Technical analysts use three types of charts: line charts, bar charts and candle-stick charts. Line charts typically connect a stock's closing price into a single line, during a designated period of time. For example, look at the figure below.The daily line chart of a certain stock illustrates the daily closing prices of that issue from October 2011 to February 2012, drawn into a single line.

Line charts are handy for comparing stocks to other stocks or indexes. If you overlay a related index over your stock's chart - you can instantly measure the stock's strength as compared to the overall industry group where it resides, as indicated in a single, straightforward line.

Fundamental Analysis Versus Technical Analysis

2012-02-29T09:47:00.000-05:00

Fundamental analysis and technical analysis are the two major methods of examining a publicly traded company to determine the health of its stock. Fundamental analysis is like taking an "x-ray" of a company. It examines the internal financial fitness of an organization and tells us how strong it is. Fundamental analysts focus on supply and demand levels of the products and/or services the company produces.

They study company reports, profit and loss summaries, price-to-earnings (P/E) ratios (calculated by dividing the stock's price by its earnings-per-share figure), market share, sales and growth, and brokerage analyst's ratings. Those who buy and sell on the strength of a company's fundamentals generally buy a stock "for the long haul," and ignore the gymnastics performed by the market on any given day or week.

If fundamentals show us a company's internal financial strength, then a chart reveals that stock's personality (think: price volatility). Technical analysis is the study of time, price, and sentiment of a chosen equity (or market or index) as shown on charts. The price action draws patterns on those charts. And, because human behavior can be repetitive, the price patterns are many times repetitive. When technical analysts recognize one of those patterns starting to form, it gives them a set of probabilities on which to base the stock's next move.

When you utilize fundamental and technical analyses together, you've got an accurate picture of a company's financial fitness and personality profile.

Spin Offs: What it Means?

2012-02-27T10:25:00.000-05:00

Spin offs is usually referred to as an area of discarded corporate refuse. Spin offs can take many forms but the end result is usually the same. A corporation takes a subsidiary, division, or part of its business and separates it from the parent company by creating a new, independent, free-standing company. In most cases, shares of the new "spin off" company are distributed or sold to the parent company's existing shareholders.

There are plenty of reasons why a company might choose to unload or otherwise separate itself from the fortunes of the business to be spun off. There is really only one reason to pay attention when they do: you can make a pile of money investing in spin offs. The facts are overwhelming. Stocks of spin off companies, and even shares of the parent companies that do the spinning off, significantly and consistently out perform the market averages.

Spin off is defined in investopedia as the creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company. A spin off is a type of divestiture.

Two Reason Why Open Margin Account

2012-02-27T09:52:00.000-05:00

There are two reasons to open a margin account. First, as you become more experienced, the margin gives you extra buying power. Thus, you're "leveraging" your money, or making more money (we hope) than the interest on the loan costs you. Second, the only way you can sell stocks short is to open a margin account. In a volatile market, selling short can reap big profits.

If you're an old pro in the stock market, you may already have a margin account. If you're new to this game, your best strategy is to open a margin account, then immediately forget you have the extra buying power. One of the riskiest things you can do as new trader is max out your entire account, margin and all. Please understand - when a stock you are holding on margin falls, you lose twice as much money (your equity+margin equity) as you would if you were playing with just your own cash.

Margin Accounts:How they Work?

2012-02-27T09:43:00.001-05:00

When you open your (non-IRA) account, your broker will ask if you want to designate it a standard "Margin Account." The standard margin is called a "50 percent margin account." That means whatever amount in dollars you deposit into the account, your broker will match your deposit with a loan of equal value. So, if you open an account with $15,000, your broker will automatically loan you another $15,000. Suddenly, you have $30,000 at your fingertips.

However, like any bank, your broker charges interest on the loan. The rate is usually low, however, and no interest is charged unless you actually use the money. If you plan to make more than four round trips (open and close a position) during the space of five trading days, the SEC deems you a "pattern day trader." You'll need to open your equities trading account with a minimum of $25,000. And you must maintain that balance, or higher, throughout every trading day, no matter what.

Slippage: What it means?

2012-02-27T09:17:00.001-05:00

Slippage occurs when you put in your market order to buy or sell, and your order gets filled at a different price that the quote at that moment - higher if you're buying and lower if you're selling. A high degree of slippage can take place when you throw a market order to buy a stock that's "running" or rocketing up in price.

Slippage also chews into your profits when you place a market order to buy a "thinly traded" stock, which means a stock that trades on low volume (less than 10,000 to 300,000 shares per day). The market maker will see your lone order to buy at the market floating in, and he or she will "adjust" the price a bit to suit his or her needs. He or she will drool a little, then raise the price a fraction of a point, and fill your order.

The cure for slippage is to issue limit orders (your order will be filled at a specified price or not at all), or place your orders through a direct-access broker on a Level II order-entry screen.

Board Lot in Stock Trading

2011-10-08T08:58:00.001-04:00

Each stock may trade at different minimum lot sizes controlled by its price. This minimum lot size is called a Board Lot. For example, if a stock's board lot is 1,000 then that is the minimum amount of shares that can be bought and any mount above this should also be traded in scales of 1,000. Thus an order to buy a stock with a board lot of 1,000 will reject an order to buy 1,500 and 3,200; but will accept 1,000, 2,000, 5,000 and above as long as it is wholly divisible by 1,000 and not leave any partial lots.

Any amount of shares not wholly divisible by a minimum board lot is considered an Odd lot. Odd lots are traded at an Odd Lot board which are usually illiquidly traded and often at a discount to the stocks market price.

What Does Board Lot Mean?
A standardized number of shares defined by a stock exchange as a trading unit. In most cases, this means 100 shares. The purpose of a board lot is to avoid "odd lots" and to facilitate easier trading. It's more difficult for a broker to find a buyer for, say, 17 shares, than if everybody agrees to trade in 100 share lots.

Investopedia explains Board Lot
For example, a stock exchange might define one board lot as equaling 1,000 shares for stock priced under $1, and 100 shares for shares of more than $1. The thinking is that standardization increases liquidity thus lowering spreads and making the market more efficient for everybody.

Charts Used in Stock Trading Analysis

2011-10-08T08:33:00.001-04:00

Charts are the life-blood in stock trading especially in technical analysis. This is like the air that the traders breath everyday for them to survive.Not only for monitoring, charts also serves as a tool to predict the future behavior of a stock.

Many successful traders use charts as part of their processfor selecting which stocks to act upon, and when to execute and subsequently and a trade. There are three main types of charts:

A line chart is the most basic form of a chart. It also contains the least amount of information for traders. It will show only the closing prices for the given time period.

A bar chart will give quite a bit more information than a line chart. Aside from just showing closing prices, the bar chart also will show opening, high, and low prices for the given time period as well.

The candlestick charting method will give the trader the most amount of information. It includes all of the parts of a bar chart but alsohas the addition of the main trading range for the day. These charts are also color-coded; you can see with just a glance whethe prices rose or fell for the given day.

Market Cycle A Stock Trader Should be Familiar With

2011-10-08T08:18:00.001-04:00

A stock price never,not even in your wildest imagination, follow a straight path. If you see one, then you must be dreaming. Being familiar with the typical marke cycle is important for this determines your current position before you enter a stock.
There are four main parts of a market cycle:

Peak: When the economy is at its peak, it is performing at the highest level. Stock prices have been rising consistently and are at the highest point they could reach.
Downtrend: Stock prices begin coming down and the nation's gross domestic product beginsto suffer. Jobs might be lost as companies tighten their belts. After a few months of a downtrend, the economy is oficially said to be in a recession. The downtrend is when the short sellers should start to be excited. Stocks are tumbling down at this stage. The bottom of the market is still in the future.
Trough: The trough occurs when the economy hits a bottom. Short sellers, if they are lucky enough to recognize the trough, should cover their positions. If a trough occurs for a long period of time, a depression will develop. The generally agreed upon timeframe for declaring a depression is when a trough occurs for six moths or longer.
Uptrend: When the economy begins to recover, stock prices will begin slowly rising. It takes much longer, in the vast majority of cases, for stocks to recover their prices than it does for them to come crashing down.

Relative Strength Index (RSI)

2011-10-08T07:51:00.001-04:00

Relative strength index (RSI) is a technical indicator that measures recent gains and loses and shows how they affect a stock's current price. RSI is used by traders for the purpose of thestock's technical analysis.

The relative strength index (RSI) calculates a number between 0 and100. This number indicates buying and selling conditions; a high RSI indicates that the stock in question is overbought while a low RSI indicates that a stock is oversold. A high RSI in otherwise weak stocks is very strong indicator that a price is about to drop.RSI is determined by the following formula:

100 - (100/(1+Average of up closes or the day/Average of down closes for the day))

The industry average is between 70 and 80 when it comes to overbought conditions, Once the RSI levels out around 80, the RSI quickly begins dropping, creating an excellent opportunity for swing traders short sellers.

Momentum for Stocks

2011-10-08T07:34:00.001-04:00

A stock's momentum is a study of chage in price in light of how quickly that changes takes place. If there is a discrepancy between a stock's momentum and its price progression, this can equal trouble for the stock because a drop in price is likely at some point in the future.

However, these changes do not necessarily take place right away. Divergences between price and momentum on a chart can take place for quite a while before a reversal takes place, so momentum is more of a long term predictive tool. Momentum can also be a measure of a stock's integrity. The momentum will expose any overbpught or oversold conditions that the stock may be facing.

Momentum is measured by several different methods. The Moving Average Convergenc/Divergence (MACD) indicator is a widely used formula that can be used to measure a stock's momentum over the course of time. Althoug this indicator will sometimes predict price reversals, it oftentimes does not show a reversal until shortly after the fact. As a momentum oscillator, the MACD acts as a predictor for the ups and downs of a stock's price.

Two Percent Rule in Stock Trading

2011-10-06T08:35:00.001-04:00

In relation to our money management discussion, the 2percent rule will be a very helpful guide.However, the most difficult part is to follow this rule strictly as possible. For detailed understanding with this popular trading rule, read the definition provided by investopedia.

What Does 2% Rule Mean?

A trading practice where an investor should not concentrate more than 2% of available capital on a single trade. To follow the 2% rule an investor first calculates 2% of the available trading capital, called the capital at risk. Brokerage fees for buying and selling shares are then factored into the capital at risk, and this figure is divided by the current share price. The resulting figure is the total amount of shares that can be purchased. If market conditions change and result in the trader losing the total value of that trade the downside exposure is only 2%, since the value of the original trade was limited to 2% of the total amount of trading capital available.

Investopedia explains 2% Rule

The 2% rule is a restriction created by investors in order to stay within the boundaries of a trading system. For example, an investor with $100,000 will purchase no more than $2,000 - or 2% of the value of the account - of a particular investment. By knowing the upper limit that can be risked, the investor can work backwards to determine the total number of shares that can be purchased. The investor can also use stop-loss orders to limit downside risk.

Money Management in Stock Trading

2011-10-06T08:21:00.000-04:00

Like any business or like your personal financial life, proper money management is very important if you want to last longer in this profession or if you want to even prosper. An unmonitored expenses will eventually put you into bankruptcy.

Your money management techniques alone can ruin you. If you put all of your money into one poorly chosen stock, you will lose everything. Of course this is an extreme example but the point is proven: misallocation of your capital can spell certain disaster.

On the opposite side of the picture, good money management skills can help you to maximize your profits. By properly diversifying your portfolio you can minimize the effects of your bad stock choices and multiply the benefits of the good choices. No one will ever pick the right stocks 100 percent of the time, although this should not stop you from trying. This type of safety net is not only a good idea, it should be the centerpiece of your trading strategy. You will want to structure your trading so that your degree of risk is always minimized while your growth is maximized. Of course some traders are riskier than others, but there are always ways to reduce that degree of risk.

Here are some other money management do's and do not's to be aware of:

Do not chase your losses
Do pick a number you can stand to lose during a given month.
Do not subscribe to a set system.
Do handle each trade separately
Do take slippage into account.

Rules for Trading by Larry Levin

2011-10-06T07:57:00.000-04:00

This rules for trading doesn't necessarily mean that you follow it religiously. One's personal comfort and the risk that is willing to be given should be more important. This rules were taken from the book "Emotion-free Trading" by Larry Levin.

Always use a stop-order.
After 3 losing trades in one day, Stop Trading!
If I get 100 points+ profit in a trade, I will move my stop to break even.
Only use signal to get into the market, Don't just take a shot.
Use the Secret of Floor Traders Rules. They work!.
Do not trade on holiday type volume. Too slow bad opportunities. Go outside, watch a movie, whatever!
Always act with your best interest in mind.
Consistently trade on long side above value and the short side below value.
Always look for single ticks to help you execute your trades.
Relax with your trades. If it's not fun and enjoyable, it's not worth doing.
You don't have to trade everyday.
Waiting till the market shows you whether it is one-time framing or not is an excellent way to be patient waiting to find an opportunity to trade.

Stock Trading Strategy

2011-10-06T07:43:00.000-04:00

Going into a trade with no plan is like going to a war with no guns. Planning is an important factor that must not be forgotten. Art of war says that planning makes you win a war before even going to the battle. A war is no different from stock trading, your head will roll if you don't have any strategy.

You should not begin a trade without devising some sort of outline for your trade. This must be written outline so you will be able to hold yourself accountable down the road and stick to your guidelines. A written strategy should include the following:

Reason for entering the trade:Why does this trade look appealing to you? Why will this be a worthwhile venture?

Entry price : At what point are you willing to enter a trade?

Exit price: What price do you think the stock will bottom out at?

Time frame: How long do you think it will take a stock to find a bottom?

Profit: How much do you think you will make with this trade?

Stop-loss point: If your trade does not go as planned, at what price do you cut your losses?

It is only after all of this is taken into account that you should begin to trade. At that point, you can calculate how much capital you wish to risk. The appropriate safeguards can then be given to your broker. As mentioned oftentimes, you should not risk more than 1-2percent of your trading capital on any one trade.

Volume as Defined in Stock Trading

2011-10-06T07:26:00.000-04:00

Stock trading involves many terms that a starting stock needs to be familiar with. Differentiation between a price and a value is just one of those things. Another term that will be constantly encountered by a stock trader is the word "volume".

The volume of a stock is a term for the amount of shares traded over a given time period, usually one day. This gives traders a rough idea of a stock's volatility. Companies with large volumes usually see less fluctuation in their stock since small changes in trading volume will not affect the price as much. Disconnects between price and volume can spell future trouble for a stock's price. A decline in a stock's volume is sometimes a predecessor of price declines. When volume begins to drop it is often a signal of problems within the fundamentals of the stock.

When traders and investors begin to lose interest in a stock, it means that it is not being traded as much. Volume, in this respect,symbolizes the strength of the stock. Stock prices will go through their biggest periods of change when volume is at its highest. Remember, this can go both ways. If the volume of the stock starts to rise and price is dropping, this can be a signal that the stock's price is about to reverse and become bullish. Short sellers should avoid a bullish stock since this type of stock is either already rising pr about to rise in price. A stock's volume tends to be higher right at the opening of the trading day, and the again at the end of the day.

Volume is what drives price. A stock cannot go through a price change if there are no shares being bought or sold. In other words, without a catalyst, stock prices will remain stagnant.

Technical Analysis Redefined

2011-10-05T10:22:00.000-04:00

In support for the previous post discussing technical analysis, we have included a continuation or a support as what I have said earlier which will expand our knowledge in stock trading. It wouldn't be harmful if you read this anyway.

Technical analysis is the study of a stock's past market activity through the use of charts. Visually, this is a much easier aspect of stock trading to understand than a stock's fundamentals. A stock's price and its change over time are the main pieces of data used within technical analysis, but volume and volatility are also among the many other factors that are used to calculate the charts technical analysts use. Technical analysis relies on the premise that past prices and trends influence a stock's future actions.

Many short-term traders, especially short sellers, rely solely on technical analysis because it is great for detecting trends within a stock's movement patterns. This makes it a wonderful tool for day traders who wish to cash in on the slight ups and downs within a stock's price. However, technical analysis is only part of the puzzle. Fundamental analysis is just as important, especially for longer-term short selling, and a firm understanding of both will help you over the short and long term.

Market Capitalization of a Public Company

2011-10-05T10:05:00.000-04:00

Company stock traded in the stock market can be categorized whether it is small, medium or large-cap company through its market capitalization. How do we determine the level of the company's market capitalization? Two words... "read below".

Market capitalization is simply defined to be the relative size of a company. This is determined by the formula: Number of shares issued X Price per share. Investopedia.com categorizes the types of capitalization into six(6);

Mega cap
Big/Large cap
Mid cap
Small cap
Micro cap
Nano cap

Understanding the market cap is not just important if you're investing directly in stocks. It is also useful for mutual fund investors, as many funds will list the 'average' or 'median' market capitalization of its holdings. As the name suggests, this gives the middle ground of the fund's equity investments, letting investors know if the fund primarily invests in large-, mid- or small-cap stocks.

Debt/Equity Ratio

2011-10-05T09:49:00.000-04:00

Since we are talking about financial ratios used for fundamental analysis, let me include another financial ratio indicator which is the debt to equity ratio. Like our previous financial ratios discussed, we will also include the formula.

The debt/equity ratio is another indicator of a company's fiscal health. This is the equivalent of a credit report for a company and is measure of the company versus the capital being used. The debt/equity ratio is:

(Total Liabilities) / (Shareholder's equity)

One would think that the less debt a company has, the better. But a low debt/equity ratio is not necessarily a good thing. It can be an indicator that a company is not making the best use of its spending power. Just as credit report companies frown upon someone who does not use at least a portion of the credit available to them, companies can actually miss out on opportunities if they are not using the credit available to them in order to help with expansion efforts.

Return on Equity

2011-10-05T09:38:00.000-04:00

Besides ROA, another form of financial indicator used for fundamental analysis is the ROE or the return on equity. They may sound similar but they are really completely different. Like ROA, using ROE could also signify whether a company is bound for greatness or the other way around.

The return on equity (ROE) indicator proves to be much more useful to technical analysts who make their decisions by looking at stock prices, thanks to the fact that it takes a company's profitability from shareholders into account as well. This measurement is calculated with the following formula:

(Post-tax earnings) / (Shareholder Equity)

This formula calculates the amount of profit that a company generates with the profit that is acquired from the money invested by shareholders. A low ROE indicates that a company is not properly using their liquid assets and is therefore a good candidate for failure.

Return on Assets

2011-10-05T09:23:00.000-04:00

Today we discuss another way to measure the company's health. ROA or Return on Asset is used in stock trading's fundamental analysis. It may not necessarily say whether the company will do good but it is a good indicator nonetheless.

The return on assets (ROA) measurement is a calculation of a company's efficiency of use of tangible assets. The ROA does not show how the stock is performing in the stock market; rather it shows how well the company is performing for retail customers. It is calculated by the following formula:

(Net income + Interest expense) / (Total assets)

After tax earnings (your net income plus interest expense) divided by total assets gives the trader a look at how efficient a corporation is.As ROA increases, the company is financially sound. The opposite is also true; a falling ROA means that a company is not earning as much as it could be through customer-based revenue and, if it has not occured already, its stock may be about to drop. It is important that a company performs well in the stock market, but if the company does not fulfill customer needs, it is going to fail eventually.

Price/Earnings Ratio

2011-10-04T10:44:00.000-04:00

A popular fundamental analysis is the P/E Ratio or the Price/Earnings Ratio. This commonly used by typical stock traders in evaluating the performance of a certain company. Comparing the P/E of competing companies in the same industry means a reliable comparison can be created.

A close cousin to the EPS, the price/earnings(P/E) ratio determines how closely a stock's price follows its actual earnings per share.The higher the P/E ratio, the more investors and traders are anticipating that a stock's price will continue to rise. As the P/E ratio of a stock starts to fall, market prices will soon follow suit. Price-to-earnings is calculated by the following formula:

(Market price per share) / ( EPS )

As seen from above, the formula takes into account both the actual price of the stock and the estimated EPS. If a weighted average is used, time is also taken into account.

There are two main types of P/E ratios that are used by analysts. The trailing P/E will give you an idea of how the stock has performed over the past, whie the forward P/E is based off of future estimated earnings.

Earnings Per Share

2011-10-04T10:29:00.000-04:00

Fundamental analysis of a certain company can be measured by many available tools including the company's earnings per share. EPS can be very helpful especially on looking at a glance of the corporation's health and status. EPS interpretation requires in depth knowledge on how a trader could use this to his advantage.

The earnings per share is the most basic measurement of a company and tells how much the company in question's share value has gone up or down over a specified period of time. While it may not seem like an important factor, the length of time is essential so that a correct view can be taken of the company. Amounts of outstanding shares may vary from day to day, making it necessary to either take an average or a snapshot of sorts regarding the company's fiscal length. The EPS can also give traders an idea ofhow quickly the company's stock has increased or decreased over a period of time. EPS is calculated with the following equation:

EPS = (net income - dividends on preferred stock) / (number of outstanding shares)

Technical Analysis for Stock Trading

2011-10-04T09:43:00.000-04:00

Another tool that a stock trader may possess during this stock war is by knowing technical analysis. Unlike fundamental analysis, technical analysis does not rely much on the company's current situation. Although some may argue that they are related, some also believes that they are independent to each other.

Technical Analysis is defined as the practice of interpreting charts of a stock's past performance in order to predict future actions.

Technical analysis maintains that all information is reflected already in the stock price. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.

Investors can use any or all of the fundamental analysis(FA) or technical analysis(TA) but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies.

Fundamental Analysis for Stock Trading

2011-10-04T09:26:00.001-04:00

A soldier going to war needs his guns and ammos, likewise a stock trader requires may be not a physical weapon but a weapon more deadly and destructive;having the trading knowledge. Fundamental analysis is just one way of equipping yourself in this world war of stocks.

Fundamental analysis takes a holistic look at a company, taking into account such factors as financial reports, earnings per share, and new innovations within a company. Fundamental Analysis can be defined as the act of looking at a company's workings in order to determine whether the company is a good candidate to a open a position with.

Fundamental analysis serves as a measuring tool to determine whether it is worthwhile to stay in a certain company.

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis.

Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:

to conduct a company stock valuation and predict its probable price evolution,
to make a projection on its business performance,
to evaluate its management and make internal business decisions,
to calculate its credit risk.