Archive for May, 2010


The Basics of Trading Currency

Filed Under: Forex by Bill — Comments Off
May 31, 2010

Understanding the basics of trading currency is the only way to do business with foreign money. It’s really that simple. It’s like joining a triathlon without knowing how to swim. Swim or sink – that’s business.

If you want to discover how to trade Forex, then take these points to heart. You must understand the basics of trading currency before you even begin to trade.

Learn From Others

Instead of relying on trial and error, listen to stories about the mistakes committed by others, and learn from. You save on financial loss by avoiding their situations, and at the same time, you save yourself time from on-the-job-loss experiences.

Have A Good Network

It pays to have friends in the currency trade business.  You have an advantage of being around experts or even just finding out news and stories about world events. Create good contact to get the information you need, when you need it most. This will work for your benefit tremendously.

Try To Always Have The Advantage of Time

Of course, the longer the timeframe you buy the rights to, the more expensive it becomes, but when you think about the possible returns because of the additional time, you might very well come out the winner. With the turbulent times, buying rights can hold possible losses at bay especially if you are part of a business that uses foreign currency.

Buy At Or Buy In The Money

This means knowing what the trend is and keeping track of it. Most often a trend will go forward and not reverse, unless something drastic happens. Thus, if you buy close to the money, then even if there is a correction in the trend, you have the advantage.

Don’t Be Greedy

There’s nothing wrong  with wanting to make as much money as you can. After all, this is a business transaction. However, if you veer away from your objective because someone entices you with more money, then that comes very close to greed. Situations like these almost always end up tragically.

Never Do Business Without A Budget

If you are planning to start trading currency, you need to have extra cash. This is a fund that you can afford to play around with, and not have it affect your life or lifestyle if you lose it. In other word, don’t bet with money you need for daily expenses.

Furthermore, have a budget, and stick to it. Plan your finances well. Have strict rules on managing your budget.

Learn The Business

Even if you have the money to spend on experts to do managed Forex trading for you, you need to know the business as well. Otherwise, these experts could be tempted to rob you blind.

Tags: , , ,
Permalink

Advice for Beginners on How to Trade Stocks

Filed Under: Stock Trading Systems by Bill — Comments Off
May 29, 2010

One of the best pieces of general advice I can give to beginners who want to learn how to trade stocks is to pay about $15 for any of the William J. O’Neil’s books on trading, particularly The Successful Investor, published in 2004 by McGraw-Hill. It would be money well spent from the trading stake.

The second piece of general advice is to follow the 5 basic trading rules that help to limit risk and maximize gain

The third piece of advice is to learn how to read stock charts

William J. O’Neil, author and entrepreneur
The O’Neil books support and explain the above-mentioned basic trading rules and how to read stock charts and the importance of being able to do so. Here I will just briefly add enough to introduce all of those specific topics and will assume that, if you seriously want to learn how to trade stocks, you will be obtaining copies of those easy to read informative best selling books.

William J. O’Neil is a multi talented entrepreneur who is the publisher of the Investor’s Business Daily, a business newspaper covering all matters relating to stocks and trading. He is also a best selling author on the subject of investing in the stock market, and is the creator of an investment strategy called CANSLIM. He is a successful trader in his own right and there’s probably more but that is enough to show the depth of his knowledge and success in his field.

The 5 basic rules for those learning how to trade stocks
There are, of course, many other rules to manage risk and provide general guidelines in how to operate in the stock market, buying and selling stocks.

These are the rules that should be followed by the beginning stock trader and to ignore them will almost certainly result in unnecessary losses to the investment stake. Those experienced traders who are successful have their own perhaps modified versions of these rules and they also use other methods of protecting their downside by hedging and other more sophisticated routines. But first things first.

The 5 rules are, in no particular order of importance:

1.    Do not trade against the trend
2.    Do not buy into a falling market or average down
3.    Cut your losses
4.    Let your profits run
5.    Use the stop loss and the trailing stop to accomplish rules 3 and 4.

The Stop Loss and the Trailing Stop
A stop loss and a trailing stop are separate instructions to a stockbroker from the owner of a stock that, when activated, initiate the sale of the stock by way of a market order pegged at a target price specified in the original stop order.

1. The stop loss is used to specify the downside limit a stock can fall in price and if it should fall to that point, the stock is to be sold at the best prevailing market price obtainable through an at the market sell order. The stop price can be nominated in dollars below a given price, usually the purchase price, or it can be set at a percentage below the given price of purchase price. Typically it is set to sell if a stock falls by 8 to 10 percent. To hold on to a stock falling in price is to invite significant losses. When stocks start to fall in price, buyers become fewer, with less demand and an added supply the stock will probably continue to fall even more.

2. The trailing stop provides a way to capture an upside profit if a stock begins to fall in price after having reached a higher price, as all stocks do eventually.
It is designated as trailing because the stop price, whether a dollar amount or a percentage, moves up in unison with the rising stock price and is only activated if the stock price falls back by the specified stop amount. The higher the stock price ascends, the higher will be the stop price trigger point.

Stock Charts
To put it in simple terms, stock charts provide a graphic visual form of the trading activities of stocks and stock indexes over prior periods of time up to the present. Repeating chart patterns of stock activity that can serve as indicators of future actions can be easily be discerned when they begin to again repeat themselves. There are many different chart patterns and indicators that tell many different stories from which predictions can be made based on the way patterns developed in the past. They then become an aid in making  buying or selling decisions and the timing of when those decisions can be acted upon. Chart interpretation is a valuable skill that can verify, or otherwise, trading decisions that ultimately lead to improved performance.

There is much for the beginning trader to become familiar with, to understand, and to learn about the processes involved in trading stocks.

Permalink

Is Short Selling Good or Bad for the Stock Market?

Filed Under: Stock Trading Systems by Bill — Comments Off
May 19, 2010

Betting on the stock market to go down is generally considered evil because you’re hoping for the average investor to lose money.  Some investor activist groups actually want to ban the use of short selling in the stock market to protect long term investments while traders and institutional investment houses use it as part of their daily tools. 

As we learn stock market history we find that the market moves in cycles.  These cycles occur naturally in all kinds of economic measurements generally because of peoples’ behavior.  When the market is in a very low point we appreciate investors rushing in to correct the bubble and return prices to reasonable levels.  We try to take advantage of those lows ourselves if we have the money.  Thus, the famous “Buy low, sell high” mantra of every new investor.  However, the market needs the same correction when there is a bubble.  We’ve felt the pains of bubbles popping from the dot com bubble of the late 1990’s that wiped out our retirement accounts, to the real estate bubble of this decade which has many of us tied up with too much mortgage and not enough house.  When the prices get too high the average person who has no choice, but to accept what is available to him or her right now gets hurt.  If instead we allow short selling the bubbles can be deflated earlier.  People who recognize that the stock market is priced too high can “invest” against the market which will drive prices back down.  This price check in the upward direction will keep the stock prices climbing at a steady, but realistic rate.  Currently many retirement accounts don’t allow short selling so we are forced to buy stocks when they are at high prices or sit on cash.  We need the professionals (and the market as a whole in my opinion) to keep these prices in line so you can have more confidence that the price you pay in your 401k is reasonable not 50% over priced. 

The last huge advantage given to all of us by short sellers is market liquidity.  When we want to buy shares in a stock we need someone sell them to us.  Many people buy and hold their shares so their stocks just aren’t available on the market.  Short selling “borrows” other peoples’ shares that they are holding and sells them with the contractual agreement to buy some shares back later to give back.  This puts those idle shares back into the trading volume which means you’ll get to buy a stock at a price closer to the market price with less price jumping.   

The financial markets depend on free trade.  Short selling does not hinder your ability to purchase shares at a market value or sell them at a market value.  While regulations are needed to ensure that the market isn’t being manipulated most of the manipulation doesn’t happen in the price of stocks, but in the marketing to average investors or the use of their investment money.  Restricting pricing functions of the downside reduces downward price pressures creating unrealistic high returns which will eventually create a bigger crash on the last people holding the bag which is almost always those who don’t learn stock market techniques for themselves.

Workarounds have begun to find ways into the market.  New trading instruments in the form of electronic traded funds have popped up which are a proxy for both shorting sectors and using leverage while only trading a standard equity.  These are great for regular people to get access to these professional tools, however, untrained investors can be misguided by them or not fully understand their risks.  If we opened up the standard tools for normal use with open education these proxies wouldn’t be required or regulated.

Tags: , ,
Permalink

Investigations into High Frequency Trading

Filed Under: Day Trading by Bill — Comments Off
May 17, 2010

It is not surprising to hear that the Committee of European Securities Regulators (known as CESR) is now looking into the high frequency trading practices that are becoming more and more common as banks and trading firms with big budgets adopt new technology.

CESR is the European counterpart to the SEC (Securities and Exchange Commission) in the United States, with its headquarters in Paris, France. It is CESR’s responsibility to watch over the financial markets and investigate any trading activities that may create a negative impact on equality, liquidity and efficiency of the market as a whole.

High frequency trading (HFT), which is mostly spearheaded by proprietary trading firms using ultra-fast computers located in close proximity to the exchanges, involves trading  in and out of stocks at high speed, often involving hundreds, or even thousands of transactions per second. The investigation has also been prompted by the high percentages that high frequency traders command of the overall market. HFT actually accounts for up to 70% of the activity in the US and 50% in the European equity markets, according to websites like the High Frequency Trading Review. It is no wonder that high frequency trading has drawn the attention of the CESR and the SEC.

The main concern of the regulators is with regard to fair trading practices. HFT is expensive, which means that only those firms with big budgets can afford to engage in the practice. And if these firms have an unfair advantage in that they can see, and trade on, prices ahead of traditional long-only investment firms, that could constitute front-running, which is illegal. But the big Wall Street firms that have the money to invest in high-frequency trading also have clout with government officials through lobbying, giving them support to control markets.

It makes perfect sense that the CESR and SEC would want to look a little deeper into this activity. It is however a very sensitive issue which will more than likely be a debate going into the future. The outcome of this situation will no doubt be attention-grabbing.

Tags: , ,
Permalink