Category: Day Trading (page 1 of 2)

April 24, 2021 / 0 Comments

Introduction to Trends, Support and Resistance

Many traders use only technical analysis as their tool kit for trading, no reading of company news, what the company does, no looking at the economy or any other factors. Just what has happened in the past with relation to the price and volume (the amount bought and sold), with a view of predicting the future.
I personally don’t believe in using only technical analysis as I don’t feel you can predict how a company’s share price will perform based solely on a few technical indicators and complex formulas. That said there are a handful of techniques I do use in order to identify trends, support and resistance.
Trends look at the overall direction a share price is moving in. Support is where the price of a share should / could / maybe will have difficulty falling through. The price could bounce or be prevented from falling further. Resistance is the exact opposite to support and it’s where a share price could face difficulty pushing through or getting past. These three can be an important factor when making a decision on when to buy or sell shares because you may not, for example want to buy a share when it is near a perceived resistance level as you may be concerned that the price will not increase much further. You may however want to buy near levels of support in the hope that the support holds and helps to propel the share price higher. I for one want to buy a share when it’s trend is going up rather than down!

Types of Support / Resistance
The are two ways in which support or resistance levels can be estimated.
Historical – these types you gauge by looking at things like previous price highs and lows. Predictive – these are levels of support or resistance that are estimated based on technical indicators, some of which we will take a look at below. Historical Support
As you can see in the example below, CELLO has been supported by the 83p price in 2014 on three occasions in the last year. On the third occasion it dipped slightly under 83p but as you can see it did in fact bounce up almost straight away. In my opinion the nature of support is that the more times it’s tested, the more likely it is to break but when the lows are not quite as low as the previous lows, it can be seen as a good time to potentially buy.

Example 1 – Historical Support. Graph source: ADVFN

If a support level does break it can then flip to become a new resistance level where the price struggles to break through again.
Historical Resistance
Conversely to historical support, is historical resistance. This can form when a share price has hit a level and fallen back again. It’s possible that this level becomes resistance for any future tests. The example below shows how the FTSE 100 has faced resistance in the 6900 area for the last 3 years.

Example 2 – Historical Resistance. Graph source: ADVFN

Predictive Support and Resistance
As I’ve already mentioned, there are a multitude of techniques, theories and formulas which look to predict future price action based on historical price and volume. I use a few techniques but only a tiny subset of what is out there. Mainly because they don’t all correlate with each other, some I have no idea how to use and if it’s so complicated that I can’t understand it, I’m not going to be able to meaningfully use it!
In the blog I will gradually cover all the techniques I use and others that I have come across which seem sensible but for now I will stick to a couple of simple, easier to understand techniques to get started with.
Trend Lines
The easiest predictive technical analysis to understand (for me anyway) are trendlines. They are not only the simplest for me but also my favourite. I love buying into a stock when there is a seemingly obvious upward trend. This can of course change and sometimes if you’re unlucky, it can as soon as you decide to buy but I feel like my chances are better if it is already trending upwards.
Take a look at the National Grid (NG.) Example 3 below. It doesn’t take much science or expertise to see that between 2010 and 2014 the company share price has pretty much gone in one direction. If you were to decide you wanted to buy into National Grid, one of the techniques you could use to time an entry would be by looking at support and resistance trendlines. Ideally you won’t want to buy near the top of what’s known as the channel, as the price has more potential to bounce down from this towards support. It’s around support you where you’d ideally want to buy in. The way you use trend lines is to extend them into the future to see where future support and resistance may lie.

Example 3 – Trend Lines. Graph Source: ADVFN

You’ll note that this is certainly not an exact science and history isn’t always going to repeat itself.
Tips when using trend lines:
Look at more than one time frame and make it appropriate for your style of trading/investing – in Example 1 the 5 year trend shows one trend but it’s possible for there to be trends in different time frames. For example if you’re a day trader you’re not going to be interested in a trend line for 5 years, or maybe not even 1 year or 6 months. You’ll be looking at trends for 1 minute, 5 mins up to 1 hour. These intra-daily trends are going to be very different to any monthly or yearly ones. The steeper the trend line, the less likely it is to hold true for very long for both support and resistance. A trend requires at least 2 points, but the more points which hit a trend, the more validity it holds. The trend line doesn’t need to hit all points, you may get the odd spike up or down out of the trend due to short term volatility but that doesn’t necessarily invalidate the trend. Don’t try and look for trends where none exist – generally it should be fairly obvious if there is a trend, so don’t try and look for something that isn’t there. Avoid buying near the top of the channel. Consider buying near the bottom of a rising channel. Remember a trend isn’t likely to last forever and some may only last a matter of minutes or days (depending on what timeframe you are looking at).Well that about covers the basics of trends, in my next technical analysis post I’ll cover the basics of Moving Averages, which are a little more complex but still fairly easy to understand.

April 17, 2021 / 0 Comments

Growing the Trading Account without Following the Rules

A lot of newbie traders have not enough money when they first start trading and all of them have at least heard about the money management. A part of them understand that the money management is important, but they think that it doesn’t concern them. Some traders don’t put enough money in their trading accounts because they don’t want to risk more than a certain amount. Other traders may understand that all the building parts of the trading are important, but still can’t manage to follow all the trading rules. They say that they will grow the trading account and then they will follow all the trading rules.

I’ll grow my trading account and then I’ll follow all the trading rules

I used to think this way because I was afraid of losing the money I worked hard for. I was thinking that it would be easier for me to risk the money made by trading.

It happened to me in the first year of my trading career, when I believed everything that I was reading in the trading books. I found two trading methods in a book I was reading, one of them was a news trading method. I believed that this method was very good and I even believed that risking 10% of the trading account was a good money management for that system. So I said that would build the trading account, using that method, and later I would use the other method for trading and making money. After a couple of consecutive loses I was down 40% of my account. I didn’t have the confidence to continue trading that method. I learned the lesson; I learned that I should never trust the method just because it’s described in a book. I learned that I should test a method before starting to trade real money. I also understood that I should risk less per trade. But I continued to search for holy grails that would give me only winning trades.

Buying a lot of cheap goods

When we are in a shop we may easily buy different things that don’t cost much. We may not need all that goods, but just because they don’t cost much we buy them. So we end up buying a lot of things because when we think about the single piece it doesn’t affect our budget so much, but if we sum all the amounts we realize that we’ve spent a lot.

The same thing happens when trading. Let’s assume that our profit target is $100, but we see only $50 potential profit we think that this time we will take only $50, because we are afraid to take a loss and we prefer a sure profit instead. This may be fine if it’s our last trade in our trading career, because as we don’t know where the price will go we can decide to take profits. It may also be fine if we do it once, because $50 will not make the difference. But if we continue to do it systematically we can discover that this is the cause of our failure as traders. You can read more about this in the article Exiting a trade is as important as entering it.

Preserving the trading capital

Successful traders suggest first to concentrate on preserving the trading capital while gaining experience and then to concentrate on making money. I agree with them. But this affirmation shouldn’t be misinterpreted.

This year it happened to me again to want to grow the trading account, before starting trading it with more trading methods. This time I tested the strategy, but when I was in a trade I closed it prematurely. My profit target was $100 but as soon as I was seeing $50-60 of profit I closed the trade. I was saying that I was doing this for growing the account size. How can we preserve capital, while gaining experience? Personally I was using this excuse to exit the trades prematurely.

This time I remained profitable, but my profit would be bigger if I closed the trades at the targets and not led by emotion.

Giving up an addiction

I think you’ve heard a lot of times phrases like. “This is my last cigarette”, “Today I’m eating the cake, but I’ll start a diet tomorrow” and of course “I’ll build my account and then I will follow my trading rules”. It’s time to start growing your trading account. You can do it only by following your trading plan. If you don’t follow it, why do you have one?

Solutions

To preserve capital, don’t enter the trade if it doesn’t meet your criteria or if you are not sure about the chart formation. But once filled, follow trade management rules, don’t close it prematurely and don’t give it more room.

If you realize that you are not able to follow your rules on a series of trades, try to change them. Test how the method behaves with the trade managing rules that you are able to follow. If you are happy with the result you may trade that way. Otherwise, if you will see that not following the rules leads to losing money, you will be motivated to start following your trade management rules.

Define the rules for growing your trading account and use the rules that are compatible with it. Try scalping instead of trailing stop. This way you can have minor drawdowns. You have to test the trading system and see what works best for you based on the money you have in your trading account.

April 10, 2021 / 0 Comments

Choosing the Right Time Frame to Trade

One of the main problems of a beginner trader is the lack of money. The problem they should face is choosing the right timeframe for trading. But as you know the markets change. Sometimes when the volatility changes you have to adapt the trading strategy or to change the timeframe you are trading on.

Vulnerabilities of using fixed stop loss and take profit

I think the most vulnerable trading method is using the fixed stop and profit target. Assuming a trader feels comfortable risking a certain amount of money on a certain timeframe. When the volatility increases the trader should decrease the timeframe or he should change the trade management or stop trading for a while.

Lower timeframe doesn’t necessarily mean more money

There are different opinions about the lower timeframes. Some traders affirm that the intraday movement is just a noise. Other traders affirm that intraday moves can be exploited to generate more profit. The charts look the same as on bigger timeframes. I always had the opinion that trading the lower timeframes you can make more money, because you can find more opportunities. But when you trade the one minute chart you may realize that the price is moving too fast and you can’t manage to take all the signals that a trading system generates. Unfortunately, most of the times, you will not be able to enter the trades that move fast in your direction. Keep in mind this when testing the trading system.

Lower timeframe doesn’t necessarily mean better opportunities

Some traders think that on the lower timeframes they can make more money, because there are more opportunities. It’s obvious that the same system will give more trading opportunities on the 1 minute chart than on the hourly or daily chart. But when you test a method on two different timeframes you may realize that on the lower timeframe there will be more losing trades, because you may find more choppy situations. You will have to use more filters to achieve better results.

Lower timeframe doesn’t necessarily mean lower risk

Lots of traders choose to trade lower timeframes because they think that on the lower timeframes there is lower risk involved. This is true partially. The trade will require a lower risk in terms of money but if you make more trades and if it happens that all of them are losing trades. You will have a bigger lose. For example if your risk on the daily chart is $1000, but the risk on the 10 minutes chart is only $250 you may think that it’s better for your account to trade on the 10 minutes chart. If you will have 4 consecutive losers you will lose exactly the amount you would have lost if you traded the daily chart, plus the commissions. Take into consideration that in this example I assumed that you traded one contract on the daily and on the 10 minutes chart. If you risked the same amount in percentage, so the risked amount per trade was $1000, than four consecutive losers would give you a $4000 lose. I’m not encouraging you to risk more per trade and trade the daily charts. You can use the micro account if you trade FOREX, you can reduce the number of shares if you trade stocks or you can find a filter for your setups. This way you’ll increase the percentage of winning trades and you will make fewer trades, so instead of doing five trades a day you may do only five a month, this way you will reduce the risk and will improve your results.

A profitable trading system on a daily chart isn’t necessarily profitable on intraday charts

Lots of traders fail because they simply try to apply on lower timeframes the rules they find in trading books, that where meant for the daily or weekly charts. Most likely they will not work on the lower timeframes, especially if the method is based on some indicator and not on the price action. But newbie traders will try to trade using that rules without even testing them. Someone do it to reduce the risk, others because they believe that they will make more money, others because they are not patient and they want more action. Just because the chart looks the same, it doesn’t necessarily mean that the system will give you the same number of winning trades. So it’s a wise thing first to test your trading method before using it on other timeframes.

The spread and commissions

On the lower timeframes there may not be enough volatility for you to make money if you take in consideration the commissions or the spread. The movement looks the same, but the amount of pips is very different. Choose the optimum exit strategy.

Conclusions

In my opinion, a valid reason to trade the intraday charts is if you can’t afford to risk the amount required on the bigger timeframe. This can be dealt with easily by using a micro account FOREX broker. You should trade on the timeframe that best fits your temperament and is compatible with you risk tolerance.

April 3, 2021 / 0 Comments

2 Major Tips for Day Traders

Day trading with the stock market is an extremely exciting and profitable business venture. When you take up day trading it is important that you treat it just like you would treat your day job. This means you will want to put time and effort into your day trading ventures. If you are smart and computer savvy, day trading has the potential to make you lots of money. When day trading you will want to follow some key tips in order to ensure that you will turn over a profit almost immediately.
The very first thing you will want to do is develop a system of trading and stick with that system. The best of the best will have one, maybe two at the most, techniques that they use all the time. Those who want to do everything generally do not make much money and are more likely to make more mistakes than the average person who trades. By sticking to a system that works verses listening to tips, is a good way to day trade because it will give you stability. It is like playing a game of roulette. The best idea is to pick a color/number/area and stick with it. You are bound to win at one point or another and hopefully you will be winning more than you will be losing.

The next thing you do not want to do is let fear overtake your common sense, while over confidence can be dangerous, so can fear. Fear causes people to freeze and not take opportunities at the optimum levels. You need to be willing to risk losing money in order to make money. The greater the risk the greater the reward, just do not let the risk be too, too high. When people risk too much they leave unhappy. The key is to find a balance. Ask yourself what you are comfortable losing. Another good thing to do is as soon as you start grossing money, deduct your original investment and only invest with your “winnings” or “earnings” from the stock market. That way if you lose, you aren’t really losing hard earned money.
As you day trade you will become better and better at it. It will actually be quite easy to earn money from day trading, you just need to stick to a working system, and don’t become overly fearful. Caution is always a good thing, but like most everything, it is only good in moderation. Hopefully with these awesome two tips you too can be on your way to becoming an extremely successful day trader.

March 28, 2021 / 0 Comments

The Basics of Trading Plans

Why Have a Plan?

Why outline a plan? Because your plan will help determine your trading style, strategy and philosophy; i.e., the more ambitious the plan, the more aggressive the trading style should be. In this case aggressive trading does not mean a greater number of trades, but generally implies more risk, usually in the form of larger commitment of capital invested in a higher number of stocks; in which case you may need to start with four or five thousand dollars rather than $2,500.

By writing down in outline form what you want to achieve and in what time frame, along with your long and short-term objectives and goals, you will be able to see and refer back to what it was you wanted to accomplish in the first place. Trading the stock market is fifty percent planning, twenty five percent execution, and one hundred percent psychology. You need to determine what you think you will get from buying and selling stock in terms of satisfaction, prestige and compensation, then put it down on paper. If you go into the market not sure of what you want out of it, you will almost certainly not put into it, what you need to get what you want out of it.

Your plan should cover your style (Trend follower, fundamentalist, Chartist, Cramer-ite or combination) and the philosophy or technique you will use (Swing-trader, mid-term trader), along with detailed risk management techniques as well as entry and exit criteria and whatever trading rules you adopt from your software choice. (i.e., using on-line modified strategies, I will swing-trade low dollar stocks using Jim Cramer’s criteria on the major markets and…) Post your plan in plain view at your trade station; read it every time you start trading or when doing research. As you grow into your trading style you can modify or change the plan to fit what you are doing as long as what you are doing is showing a profit. If you do not show a profit within the first few months you need to stop, review, redo your plan, and start again.

LRT has a trading plan outline and full trading plan available for sale at the LRT store.

Decide on a style

Your MO

A trading style is simply determining what type of trading to favor:

• Day traders – are out of the market at the end of each trading day

• Short-term traders – hold positions open for two to five days but not over a weekend • Swing traders – hold positions open for a few days to a few weeks

• Mid term traders – hold positions open for up to six months

Day Trading requires more money to open an account, $25,000 or more, and we do not recommend day trading for beginners. All other traders should let profits determine the length of time to keep a position open. Some first time traders set a 25 to 35 percent profit goal to close the trade. Others simply adjust stops to prevent giving back more than 5 percent of the unrealized profits. Still others just let it ride as long as each week shows a profit. We think first time traders should have well-defined entry and exit points. Focus on how you will determine your trading style and profit taking strategy.

Favoring a particular trading style does not prevent you from changing to another style of trading from time to time. At some point you may find that you are doing all four styles of trading; in all likelihood you will probably not stick to just one style of trading. Successful trading is about going where the profits are. We recommend starting as a short term or swing trader because it gives you time to develop your trading skills and learn risk and money management techniques based on your skill and account size. As you start to make money and your account grows you can take on a little more risk. Whatever style you decide on, remember, it‟s not about how quick you can make big profits, but how often you make a profit. Be realistic. Set your profit targets at obtainable levels and concentrate on risk control and money management. This is trading, not investing. Let your profits run and cut your losses quickly.

Trading Rules -Knowing what you want – and what it takes to get it

Whether you are a working person getting up each day taking care of a family or going out and earning a pay check; you have developed a credible work ethic on your own; regardless of what type of work you do or at what level you are. If you keep a household together or a business together you have demonstrated the ability and self-control to do whatever you set your mind to. Most of us have jobs we more or less like or can tolerate until we find something else that is better, either within the company we are currently working for or by moving on to another company. We do this because we have to; we have made commitments to ourselves, our families and to a lifestyle. Sometimes we‟re not sure what we really want to do, so we go on doing what it is we do because we haven’t set any personal goals for ourselves. Change is easiest when done in little steps, the first step is deciding to change, and the next step is to focus in on the closest point of the change you want to make. Learning to trade stock and profit from it, will change your life, not because of the money you can make and the freedom it can give you; but because of the self-confidence and sense of control over your own fate that comes with being able to do it.

Taking the first step toward becoming a trader requires learning another way to make money, one that can lead to an alternative way to live your life. One of your first goals would be to learn the basic methodology of trading: Protect Your Capital. Using risk and money management to control your losses, along with developing a reliable profit making strategy, and understanding the cycles and trends of the overall stock market as well as the different sectors and business groups will put you on the path to successful financial change. Your first objective may be to find a source of information and data that provides you with what you need to accomplish your goal. A second goal could be to develop a consistent system of picking stocks that eliminates subjectivity and delivers a high percentage of profitable trades. Your next objective in support of your second goal may be to identify straightforward entry points which allow you to make quick, confident buy decisions that constitute a totally objective method of entering trades.

A third goal along these same lines might be to formulate a profit ladder that provides predetermined exit points that allow you to maximize profits and protect against large losses should the market move in the wrong direction. The underlying objective here would be to establish predetermined profit percentages to place stop orders and trailing stops to meet your goal. The above goals and objectives cover the basic principles and techniques of profiteering and give a broad look at the methods and techniques to be disclosed in later chapters.

In every endeavor there are always rules. Trading rules are merely discipline in print; they are what we call self-governing-success. A set of simple and practical trading rules can make your trading experience a lot less costly. You should establish a set of rules that matches your trading style. Here are some rules for first time traders to consider:

• Don’t Over-trade

• Never put more than 2% of your total capital into one position

• Only buy a stock that meets all of your qualifying criteria

• Never use Market Orders

• Trade With the Trend

• Always check for recent insider trading on stocks you are about to buy

• Take Windfall Profits when you get them

• Always use stop orders and/or trailing stops

• Know the type of trade you are in (Short term, Swing, etc. etc.)

• Never give back more than 15% of your profits

• Never let a profit turn into a loss

Rules are refined, developed, and done away with as a trader’s goals, objectives, discipline and money management techniques develop. Each trader must continually be aware of the risk of trading and abide by their rules religiously; write them down and hang them on your trade station so you can see them every time you trade. Each of your strategies should have its own set of rules that support you goals and objectives.

If you have a strategy with an objective that is based on a percent gain/loss (exit after 100% profit or 10% loss) and you have a rule that says never give back more than 15 percent of your earned profit, and your position starts to decline after making 70% you should know at exactly what dollar value you will be exiting this trade and adjust your downside stop to protect your profit.

Rules should be developed in support of a strategy. Knowing the mathematical expectation, expected return and Profit to Loss Ratio of all of your real-time strategies is a key part to developing rules that you can live with. Too many rules clutter the trading process, too few rules increase risk.

Record Keeping

In the trading business it is hard to find the right combination of strategy, timing and execution that gives you the results you want. When it happens you need to be able to repeat what you did as soon as you can. If you keep a checklist of your trades it will make it very easy to repeat a winning process. We have found that keeping track of the strategy source, the strategy criteria, number of stocks found, sectors and industries are things that should always be recorded. Also, your checklist should include all of the qualifying requirements and conditions for the stock selection process.

Online brokers provide all the transaction records and tax data for you. However, we have found that stock splits, symbol changes and prior year cost basis may not always be easy to recover from your on-line account, so we recommend you make it a habit to print change data as it happens and keep a hard copy on file as a back-up.

Research notes that lead to a winning strategy or any one of a dozen other factors that contribute to the development of a particular stock strategy that turns out to be a big winner, can be used again and again if kept until conditions change on the position or the portfolio or stocks that the research or strategy produced. Once you are an established trader and have committed to memory all of your winning strategies and techniques, you may not want to save all your notes, but we can‟t tell you the number of times we wished we had saved our research notes and checklist to reconfirm a winning concept and strategy.

Record keeping isn’t going to change what happens to the initial trading process, but you’ll be surprised how it can change subsequent trading for the better and how much time it will save in the long run.

If you are ready to begin trading, go to “Getting Started“.

July 24, 2018 / 0 Comments

Learn to Trade: Margin Trading

To be a margin trader means to use funds you lend from a broker. This way, you trade assets with borrowed funds. The asset in question then becomes the collateral for that loan that you took from your broker.

This has great potential to significantly increase the profit. However, it is also quite possible for it to cause incredible losses. Creating a financial leverage is a well known two-edged sword in the world of finances.

Due to the high-risk nature of this line of trading, it is only possible by use of margin accounts. But, let’s take it slow and go one step at a time.

What is Margin Trading?

In very general terms a margin is a border, an edge of something. However, in the financial world, the word margin has a slightly different meaning. Namely, the margin, in this case, is related to the collateral we have mentioned previously. The margin is used to cover the credit risk the margin trader poses for the lender. Essentially, it is the sum of money that you would have to ensure from your funds. The margin can vary greatly, which usually depends on the resource in question. For an example, a margin for currency futures is usually quite low. In fact, it would rarely get over 6 percent of the total value of the contract. However, if stocks were in question they would require quite a bit more. To be a bit more precise, you would usually have to cover at least 30 percent of the value and up to one half of it. One should bear in mind that the margin requirement will always follow the stock and how volatile it is. The more volatile the stock in question is, the higher the requirement will be.

Margin Accounts

Since margin traders accept the risk that comes with it, they must use a special type of an account. These margin accounts are quite different from the usual cash accounts. Margin accounts are usually offered by brokerages to create a possibility for the investor to borrow funds which he can then use to purchase securities. They always expect the investor to put down a certain amount before borrowing the rest. This is usually 50%. The broker will, of course, charge for the service in question and the securities are a collateral. The main difference between a margin account and a cash account is that you cannot short sell with cash accounts. Also, certain instruments can only be traded in them. For an example, futures and commodities.

The Risks of Margin Trading

Margin trading is definitely one of the riskier businesses out there. For that reason, there are multiple entities monitoring it and governing it. The Federal Reserve Board, Financial Industry Regulatory Authority, and even self-regulatory organizations (for an example – stock exchanges) as well as every single brokerage company.

For example, the New York Stock Exchange follows the margin debt sum. And, as of the 11/2017, the debt was almost 560 billion dollars. Of course, this does not come as a surprise. After all, almost every single equity index was at an all-time high or near it. It is relatively common to see margin debt follow market peaks. However, those who follow the movement of the market over longer periods are worried. They can compel investors to sell their assets to cover their margin calls which worsens the drop of stock prices. This pressure can cause complete market crashes.

Consensus: Leave it to the pros

We can all agree that this form of trading is definitely not something you would recommend to a beginner. It is a smart choice to leave it to traders with experience and those who are familiar with the risks. Even if the leverage can significantly increase your gains. If you do not have the experience one needs for a margin trader, you should stick to long-term investments.

April 18, 2018 / 0 Comments

The Inherent Risks of Trading on Margin

The main risks that come with margin trading are these.

1.Rate risk and interest charges

Every margin account has a rather high-interest rate. Over time, the interest cost on your margin debt can add up. This occurrence can make your gains on margined securities significantly smaller, as it can erode them. Another thing that’s important to know is the fact that interest rates on margin debt aren’t fixed. These can fluctuate during the period when you (the investor) have margin debt. In this environment where the interest rate is rising, margin loan interest rates will go even higher. In the end, this will add to the interest burden for every investor that’s engaged in margin trading. That’s why you need to pay close attention to interest rates if you don’t want them to “eat” your gains.

2. Amplified losses risk

Margin trade can increase gains, but unfortunately, it can also increase losses. We’ll explain how is it can happen to lose over 100% of what you initially invested during margin trading.
So, for instance, you invest $10,000 without a margin and buy 100 stocks at $100 each. If shares fall to $50 after six months, your stocks will be worth $50 dollars each, and your share sale proceeds will be $5,000. This way, you only lose 50% of your initial investment. Not great, but you’re not in the red yet.
On the other hand, if you made a margin investment of $10,000 on those same $100 stocks, and bought 200 shares, you’ll lose a lot more. If shares fall to $50 after six months, your share sale proceeds will be $10,000, the interest on margin loan that’s 8.5% will amount to $425. In the end, you won’t just lose your entire investment. You will be in debt to your brokerage for another $425, or another 4.25%.
Even worse, if the security you bought takes a plunge and drops to zero instead of 50, the loss comes to $20,425. Your investment return would be minus two hundred and four percent. In the worst case scenario like this, you wouldn’t just lose your entire investment; you would also have to repay your $10,000 margin loan as well as the interest that’s $425.
If you owe to your broker, you need to repay it in full, as this debt binds you just like a debt to a bank or any other institution.

3. Margin call

If you bought stock on margin, and it suddenly has a sharp plunge (or if you were short selling, if that stock suddenly peaks in price), you’ll have to meet the margin call. This is the point where you’ll have two choices. Either to provide a lot of money or some marginable security at a very short notice. That’s why you need to have a backup at all times.

4. Forced selling

If you are unable to meet the margin call, your brokerage is able and it will sell those margined stocks without notifying you. If the market’s plunging, a forced liquidation like this might mean that your position will be sold at most unfavorable moment possible. This can generate a serious loss. Even worse, if those margined stocks eventually recover, all of this would’ve been for nothing. Unnecessary whipsawing.

5. Additional vigilance while monitoring an account or a portfolio

If you want to get into margin trading, it requires additional vigilance while you monitor the margin portfolio or account. This will ensure that your margin doesn’t fall under a certain level. When the market is especially volatile, doing this will be incredibly stressful.

October 24, 2017 / 0 Comments

Some of the Most Common Mistakes New Day Traders Make

Trading in the stock market is great way to earn a lot of money really fast. With the development of technology, individuals can now break away from the stock market floor to trade from their home computers in their PJs. However, although the concept seems easy enough, it isn’t. One such trading technique that is often coined is day trading. This is pretty much what it sounds like: trading in the space of one day.

When you’re day trading, you are opening and closing trades within minutes of each other in order to score a profit. The process is very high risk bu

t, if mastered, can make you a lot money very fast. Many beginners go into the day trading game with little knowledge about what to expect and what they need to analyze. This results in some enormous failures and there are hundreds of them. If you want to learn how to become a day trader, you will need to start by avoiding common mistakes.

Make sure you don’t make the mistakes that every beginner makes and take some friendly advice from the professionals. If you know what mistakes are commonly made, you can aim to avoid them. This is what this article was made for. Here, we will discuss some of the most common mistakes beginner day traders make, so hopefully you can avoid them.

Never Planning Ahead

This is a huge one that beginners always forget. When they jump into day trading they don’t make a plan or form a strategy and this leads to great losses. Beginners will not fully understand a stock when they position themselves and do not have a strategy for entering and closing. When you enter a trade you need to have a strict goal and price you want. Never go in blind and understand what you want from the stock.

In addition to not planning, when a beginner does plan, they never stick to it. They let emotions and tensions to cloud their rules and strategy. If you see a stock starting to go up, don’t gamble, close when you said you were going to close otherwise you could lose everything.

Trading too much in One Day

When you first start it may be tempting to sit at the computer all day and trade, trade, trade. Some go into the game believing that the goal is to never stop trading if you want a chance at profiting. This is the wrong mindset to have with day trading and, in some cases, you can even take a few days off from the computer if you’re doing it right. It is also good to not get stuck with one strategy or stock. If something worked last time, it might not work again. So mix things up. Stock-trader-looking-at-monitors

Riding Solo

Among all these mistakes, one of the biggest is trying to teach yourself everything and figure out the strategies by yourself. You may hear that self-education is the best way to learn but you will need some guidance when it comes to day trading. This is because the risk factor is so great you can’t afford to make mistakes. Join a chatroom and talk to some of the professionals about their experience. They might be able to share some insight into their stock picks.

Conclusion

So there you have it, three of the biggest mistakes new day traders make. Although there are only three points each one is detailed enough to learn from. To sum up: plan ahead and stick to your plan, don’t go trade-crazy and mix up your strategies and, finally, join a community and learn from the guys already profiting. With time, you will become an excellent day trader.

July 26, 2017 / 1 Comment

How to Read a Stock Chart Like a Pro

Every time you tune into some TV channel specializing about the stock market, you must be overwhelmed by the amount of raw data they are showing to the viewers. The success in stock market depends on how well you can interpret and analyze the data, i.e. the stock charts. A stock chart tells all about the stock market. There are various types of charts such as candlestick charts, support and resistance, trend lines, OHL (open-high-low-close), point and figure and others which are viewable in different frames. One common thing about all charts is that the charts are either daily, weekly or monthly and always shows a pattern. Analysing stock market data

Stock Chart Types

Although there are different types of stock charts available, most charts display price and volume of stocks. Candlestick charts are one of the most common patterns used by Japanese people and became popular worldwide. Candlestick charts are used when you have a dataset that contains low, open, high or close values for each time period. The candlestick charts look like box either filled or hollow. Many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of the price action of a stock. From the candlestick charts, a trader can easily get the relationship between the open and close value and the high and low value of a stock for a particular time frame. The open and close are considered the most vital information in the candlestick chart. As a general information, a hollow candlestick indicates buying pressure and filled candlestick indicates selling pressure of a stock.

Support and Resistance

In the stock market, support and resistance are two important values in the stock chart. Someone wants to invest in the stock market must understand the meaning of these two values thoroughly. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. When the price declines towards the support level, the stock value goes very low. As a result, the buyer wants to buy more stock, but the seller is less inclined to sell. As the price reaches the support value, it is believed that demand will overcome supply and prevent the price from falling below support. Resistance is exactly opposite to the support. Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. As the stock price rises towards resistance value, the seller wants to sell stocks, but the buyer is less inclined to but due to high price. As the price reaches resistance value, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Trend Lines

Out of all the technical jargons in the stock market, the trend line is the hottest topic among technical analyst and traders. A trend line is a chart that gives a quick understanding of the market from the uptrend and downtrend of the stock values. Trend line charts are the most important for a newcomer or a veteran in the stock market.

June 20, 2017 / 0 Comments

Stock Market Futures: Everything You Need to Know

Want to know what are stock market futures? Here is everything you need to know about them. Stock futures are trade contracts that give you the necessary power required to buy or sell stocks at the agreed fixed price by a specific date in the future. When you accept the contract, you are required to uphold all the terms of the agreement. The contracts have consistent specifications like the method of payment, tick size, price per unit quotation, expiry date and market lot. stock-market

Stock Futures math

Futures Price = (Spot Price + Carrying Charge)
The stock futures price is usually higher than the spot price. Futures price is a price for which a commodity can be sold or bought for delivery in future. The spot price is the present-day market price at which a commodity can be sold or bought for immediate delivery and payment. Carrying Charge or Cost of Carry is the storing cost of a physical commodity like metals or grains over a period of time or until the futures contract matures less all the expected dividends within the contract period. stock-market-bids
Example:
The spot Price of ABC = 2000 and Interest Rate = 8% p.a.
So, the Futures Price contract for 1 month =2000 + 2000*0.08*30/365 = 2000 + 13.15= 2013.15

Meet the Players

1. Hedgers

Hedgers can be exporters, importers, manufacturers, and farmers. The main aim is to buy and sell futures in a bid to secure future price of a commodity to be sold later in the cash market. Those holding the contract for a short time will want to get as high prices as possible while for long term holders it is vice versa. Usually, almost all the risks associated with price volatility are reduced. Hedging sometimes can be used to lock the price margins between the price of raw materials and that of the finished product.

2. Speculators

The other market players’ main aim is to benefit from the risks associated with the futures market. Speculators profit from the price changes that hedgers try to protect. When hedgers are trying to reduce risk the speculators are trying to increase it in order to maximize their bottom line. If the hedger is anticipating a future decline in prices then he or she would be selling to the speculator such a contract at a low price. Also, the speculators enter the market for the sake of profits only through selling and buying futures but not owning the commodity.

Characteristics of Stock Market Futures

Contract size – it is also referred to as a lot. What this means is that one contract can have many shares and the number of shares included is the size of the contract. When buying and selling futures, a single share is not usually traded. For example, if a contract has 300 shares, the selling and buying will involve the whole bunch.
Expiry – there are three types of maturities associated with stock futures. They include near month contracts (1 month), middle month contracts (2 months) and far month contracts (3 months). All maturities expire on their particular contract months (last Thursday of the contract month) and they are traded simultaneously. All stock futures contracts are for future transactions. So, the contract duration determines how far in the future it will be settled.
Leverage – this is having control of commodities worth more than your capital. With just a small amount of cash, you have the green light to enter into a stock futures contract worth more than what to can afford, at the moment, to pay. A small shift in prices can mean a huge loss or profit.
Pricing and limits – the stock futures market price quotations are done in the same way as in cash market, that is, per unit, cents or dollars. However, there are restrictions on the price movements for a futures contract. So, there is an upper and a lower price boundary set per day that heavily relies on the previous day closing.

Conclusion

Lastly, the profits and losses are determined by the prices between the closing price and the opening price of the futures. For example, if an investor buys “Y” futures at $530 each in November, he or she may sell the same futures at $550 each in the same month. In that case, the investor would bag a profit of $20 per future. But if he or she sells the same futures at $505, then he or she would make a $25 loss per future.
References
http://money.howstuffworks.com/personal-finance/financial-planning/stock-future.htm
http://www.bseindia.com/markets/Derivatives/DeriReports/FAQsStockFutures.aspx?expandable=5
https://www.kotaksecurities.com/ksweb/Research/Investment-Knowledge-Bank/what-are-futures-contracts
http://www.investinganswers.com/financial-dictionary/optionsderivatives/futures-1002
http://www.sharemarketschool.com/futures-understanding-the-basic-terms/
https://www.thebalance.com/what-are-futures-definition-and-examples-1031172