By learning about the beliefs that guide our trading, carefully defining a set of effective trading rules, and closely adhering to them, we can avoid costly pitfalls and achieve more consistent results.
Humans, you and I, have been programmed. This programming began in infancy and continues throughout life. However, the most powerful programming takes place in those early years between 0 and 5. This programming equates to beliefs, values, and stories you tell yourself about how life is and came to be.
These stories have been constructed much like a script to a play, and that play is your life and the scripts to that play are your stories. These stories or scripts can also be termed rules that form the foundation of your behavior.
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“Price is what you pay; value is what you get.”– Warren Buffett paraphrasing Benjamin Graham
Fundamental analysis is the foundation of investing. While technical analysis uses statistics to predict a stock’s price movements, fundamental analysis uses financial statements to determine a fair value for the stock. Many investors use fundamental analysis to determine what stock to buy and technical analysis to determine when to buy and sell the stock, while others exclusively use one or the other.
In this article, we’ll take a look at fundamental analysis in order to understand the language and concepts behind it.
Qualitative Analysis
Fundamental analysis may be largely focused on financial statements, where things like price-earnings...
Every successful trader learns to manage risk so they can avoid large losses like those that have crippled many Wall Street firms. In this article, we'll show how traders manage risk, identify the lessons we can learn from JPMorgan, and detail a way that technicians can duplicate the value at risk (VAR) metric that many large firms use to help add insight to their potential losses.
In what has become a fairly regular event and taking a past example from a few years ago, a Wall Street firm announced in May 2012 a multibillion-dollar trading loss. JPMorgan told analysts and investors in early May that year that a hedge trade they had made would lead to a loss of at least $2 billion. CEO Jamie Dimon said that the firm "screwed up" and a...
Traders and investors in the equity markets have been enjoying watching as prices have been breaking to all-time highs.
Of course the big question in everyone’s mind is where will this bull run end and is there anything I can do to protect my capital when it does? While no one can predict exactly where this price movement will reverse since there is no supply level above to signal this, there are some tools that traders can use to identify when the bullish pressure has subsided and therefore marked the time for profit taking in your portfolio.
Source: Sharekhan - TradeTiger
One of the most common methods is to use a moving average on your chart. The average summarizes the past trend and momentum and when prices start breaking down...
Whether you're a seasoned trader or new to the forex market, the myths about forex trading are always swirling around you. These myths can potentially affect anyone, no matter how long they have been trading. By knowing some of the major myths, traders can avoid unnecessary frustrations. While there are potentially many trading myths, we'll look at 10 that come up often and affect every stage of development – from why people get involved in forex to developing strategies.
1) Get Rich Quick
Advertising has rapidly expanded the retail market in forex. This has brought many people into the arena who are on a quest to get rich quick (or with little effort). This, unfortunately is very rare indeed. Trading takes patience and there is no...
What Is an Index Fund?
An index fund is a type of mutual fund or exchange-traded fund (ETF) that holds all (or a representative sample) of the securities in a specific index, with the goal of matching the performance of that benchmark as closely as possible. The S&P 500 is perhaps the most well-known index, but there are indexes—and index funds—for nearly every market and investment strategy you can think of. You can buy index funds through your brokerage account or directly from an index-fund provider, such as BlackRock or Vanguard.
When you buy an index fund, you get a diversified selection of securities in one easy, low-cost investment. Some index funds provide exposure to thousands of securities in a single fund, which helps lower...
All stocks incur some risks that are generic in nature regardless of its sector and business specific activity.
Commodity Price Risk
Commodity price risk is simply the risk of a swing in commodity prices affecting the business. Companies that sell commodities benefit when prices go up, but suffer when they drop. Companies that use commodities as inputs see the opposite effect. However, even companies that have nothing to do with commodities, face commodities risk. As commodity prices climb, consumers tend to rein in spending, and this affects the whole economy, including the service economy.
Headline Risk
Headline risk is the risk that stories in the media will hurt a company's business. With the endless torrent of news washing over...
The most important financial center in the world? A fabled place of silver spoons and golden parachutes? A hub of cut-throat capitalism? Or all of the above. Wall Street is many things to many people, and the perception of what it really is depends on who you ask. Although people’s views of Wall Street may differ widely, what is beyond dispute is its enduring impact not just on the American economy, but on the global one.
What Is Wall Street Anyway?
Wall Street physically takes up only a few blocks that amount to less than a mile in the borough of Manhattan in New York City; however, its clout extends worldwide. The term “Wall Street” was initially used to refer to the select group of large independent brokerage firms that dominated...
What I love most about trading is that it exercises the brain and the will. It involves ongoing analysis and problem solving, and it requires the steady development of performance-based skills. I'm sure serious players of chess and poker enjoy similar benefits. Talk to any successful athlete and you'll find someone who has cultivated themselves, not just their bodies.
There are times, however, when trading becomes a vehicle for destroying mind and soul. You won't hear brokerage firms, trading publications, or seminar producers talking much about this problem, because their common aim is to keep the public trading and buying trading-related products. But, as someone who has worked with many independent traders and traders at firms, I've...
Equities Swing & Position Trading Are Stop-Loss Orders Good When Trading Exchange Traded Funds (ETFs)?
ETF Stop Loss Equals Big Risk
This equation might seem backward at first. Suppose that you use a stop-loss market order on an ETF and that ETF temporarily trades at a steep discount to its net asset value (NAV). What’s going to happen? Your position is going to be sold when the ETF is offering a discount. You could use a stop-loss limit order and that way, your sale isn't triggered at the bottom. However, that’s still not going to be a good trade. You could also attempt to implement an arbitrage strategy, but this is complicated and would require liquidity, speed, and plenty of capital. There are also other order types that you can try, but they probably won't help much either.
Most ETFs Track an Index.
Let’s use SPDR S&P Retail ETF...
The World Trade Organization (WTO) was established on January 1, 1995. The aim was to enhance global trade and economic openness, but it has been a source of controversy ever since. The WTO therefore sits as a force for trade during a time when globalization has led many to favor protectionism instead. While many economists believe that free markets and open trade raises all ships, many others point to evidence that unregulated free trade can be harmful to some smaller or developing nations, or to smaller or developing industries within nations.
Politics and Trade
The birth of the WTO was more of a continuation than a truly new creation. Its predecessor, the General Agreement on Tariffs and Trade (GATT), shared its lineage with Bretton...
Part 1 – The Survival Based Biases that Are Robbing Your Potential
After a considerable amount of time searching, traders come to the realization that the real trading edge is the mind you bring into the moment of performance under pressure. Until your mind is right, no amount of theoretical edge is going to deliver the potential for consistent profitability. Just look at the health of your trading account for confirmation. It will tell you the truth if you are willing to listen. And that preparedness does not come naturally. The brain that your mind emerges from is built for survival in the short term, wants control over outcome, and is thrown into a state of confusion (which leads to fear and aggression) when forced to experience...
Selecting good stocks isn't easy. The sheer volume of companies makes zeroing in on a good stock difficult and the volumes of data on the internet don't make things any easier. In fact, it's hard to sort out the useful information from all the worthless data. Fortunately, a stock screener can help you focus on the stocks that meet your standards and suit your strategy.
Stocks screeners are effective filters when you have a specific idea of the kinds of companies in which you are looking to invest. There are thousands of stocks listed on exchanges in the United States alone; it's just not feasible to track all of them on your own. A stock screener limits exposure to only those stocks that meet your unique parameters.
How Stock...
Some traders and investors denounce technical analysis (TA) as a superficial study of charts and patterns without any concrete, conclusive or profitable results. Others believe it is a sort of “Holy Grail” that once mastered will unleash sizable profits. These opposing viewpoints have led to misconceptions about technical analysis and how it is used.
Some misconceptions about technical analysis are based on education and training. For example, a trader trained in using only fundamentals may not trust technical analysis at all. But that doesn't mean someone who is trained in technical analysis can't use it profitably. Other myths are based on experience. For example, the incorrect use of technical indicators often leads to losses. That...
Consider the following advice:
* Trade what you see;
* Trade the plan, and plan the trade;
* Don't let emotions interfere with trading;
* Don't overthink trades; go with your feel for the market.
All of these are reasonable in themselves, but they also contradict one another. Should you shut off your emotions or go with your feel for the market? Should you stick with your trading plans or get in/out of the market when you see an unexpected development?
If you read my previous posts, you can see that the reason for the contradictions is that the advice pertains to different time frames. The very short-term trader--the scalper or market maker--can't afford to overthink trades. He or she also can't afford the luxury...
Acquiring additional knowledge is not always beneficial when trading financial markets because some information can make us more ardent in our views and opinions, so we make bold predictions that turn out wrong. And incorrect predictions can be costly when real money is on the line, especially when we take positions against the prevailing price movement and in anticipation of a quick and sharp change in price direction, but then the reversal never happens.
Investors, especially short-term traders, are usually better off waiting for the movement in price to confirm a trend or reversal rather than try to predict what is going to happen next. Section two of this article looks at some ways we can rework our thinking to gain a better edge...
You've probably heard the terms spread or bid and ask spread before, but you may not know what they mean or how they relate to the stock market. The bid-ask spread can affect the price at which a purchase or sale is made - and an investor's overall portfolio return. What this means is that if you want to dabble in the equities markets, you need to become familiar with this concept.
Supply and Demand
Investors must first understand the concept of supply and demand before learning the ins and outs of the spread. Supply refers to the volume or abundance of a particular item in the marketplace, such as the supply of stock for sale. Demand refers to an individual's willingness to pay a particular price for an item or stock.
Example - How...
The 50-day moving average marks a line in the sand for traders holding positions through inevitable drawdowns. The strategy we employ when price nears this inflection point often decides whether we walk away with a well-earned profit or a frustrating loss. Considering the consequences, it makes sense to improve our understanding about this price level, as well as finding new ways to manage risk when it comes into play.
Formula
The most common formula takes the last 50 price bars and divides by the total. This yields the 50-day simple moving average (SMA) used by technicians for many decades. The calculation has been tweaked in many ways over the years as market players try to build a better mousetrap. The 50-day exponential moving...
The average person experiences the value of currency as fairly stable from day to day. The price of a cup of coffee every morning is around $1.50, the fixed-interest car payment and mortgage are the same every month, and for a salaried worker, even the paychecks are identical. The fact that the value of currency is constantly fluctuating in relation to other currencies only seems to matter for most people when planning a foreign trip or making an internet purchase from a foreign website. This limited view, however, is mistaken.
The indirect impact of exchange rates and their fluctuations extends much more broadly and deeper in ways that affect several of the most important aspects of our economic lives—like how long it takes to get a...
Every foreign exchange trader will use Fibonacci retracements at some point in their trading career. Some will use it just some of the time, while others will apply it regularly. But no matter how often you use this tool, what's most important is you use it correctly every time.
Improperly applying technical analysis methods will lead to disastrous results, such as bad entry points and mounting losses on currency positions. Here we'll examine how not to apply Fibonacci retracements to the foreign exchange markets. Get to know these common mistakes and chances are you'll be able to avoid making them and suffering the consequences in your trading.
Don't Mix Reference Points
When fitting Fibonacci retracements to price action, it's...
Starting out in the trading game? Looking for the best technical indicators to follow the action is important. It affects how you’ll interpret trends - both on positions and in the broad averages - as well as the type of opportunities that pop up in your nightly research. Choose wisely and you’ve built a solid foundation for success in speculation. Choose poorly and predators will be lining up, ready to pick your pocket at every turn.
Most novices follow the herd when building their first trading screens, grabbing a stack of canned indicators and stuffing as many as possible under the price bars of their favorite securities. This "more is better" approach short circuits signal production because it looks at the market from too many...
When traders and investors look to profit in the markets, they often look to stocks that they believe will grow rapidly in price. However, there is another group of stocks that can not only offer growth potential, but a steady stream of income in almost any market condition. This group is dividend paying stocks. Let’s examine what a dividend is, how it can benefit you financially, and how to choose the correct securities for your portfolio. Additionally, we can explore methods for protecting these investments in market turndowns.
What are Dividend Stocks?
A dividend is nothing more than a share of the profits of a company. When you purchase shares of stock, you are buying a piece of ownership in that company. Through the company’s...
Elliott and Gann have become household names among the worldwide trading community. These pioneers of technical analysis developed some of the most widely used techniques in the field. But how did Ralph Nelson Elliott and W.D. Gann come up with these techniques, and how did they become so successful? Truth be told, it's not as difficult as it sounds! This article takes you through the process of building your own custom indicator, which you can use to gain an edge over the competition.
Background
Recall that the theory behind technical analysis states that financial charts take all things into account – that is, all fundamental and environmental factors. The theory goes on to state that these charts display elements of psychology that...
Although many traders know how to use volume in their technical analysis of stocks, interpreting volume in the context of the futures market may require additional understanding because considerably less research has been conducted on the volume of futures than that of stocks. Here we take a general look at some of the things you should know when looking at volume in the futures market.
Volume Reports and Liquidity
The volume of each futures contract (where individual contracts specify standard delivery months) is widely reported along with the total volume of the market, or the aggregate volume of all individual contracts. These volume figures are reported one day after the trading day in question, but estimates are regularly posted...
Successful investors and traders alike usually have a rule-based strategy that provides them with a financial advantage or edge. A combination of institutional supply and demand, fundamental and technical analysis are typical components. Another analysis we can add to the recipe is investor mood, commonly called sentiment. In other words, do market participants feel bullish, bearish or neutral about the future?
While each region and country has a unique economy, given the volume of international trade, those individual economies are part of a larger global economy. The U.S. economy is the largest in the world but, more importantly for this analysis, it is also the last market traded on the daily clock. This allows U.S. investors a...
Buy and sell cycles reveal hidden intentions of the market's biggest players, as they engage in macro strategies that affect price direction. Investors and traders can identify these cycles through technical tools that measure the persistence of the push behind these cycles and can use these measurements to predict when such cycles will flip over from buy to sell and vice versa. These natural rhythms show their greatest power in major indexes and futures contracts that guide thousands of underlying equities, bonds and forex crosses.
The S&P-500, Nasdaq-100 and Russell-2000 serve this purpose for a broad basket of equities, grinding through easily observed cycles that tell participants how aggressive or defensive they need to be as they...
Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.
The defined sets of instructions are based on timing, price, quantity, or any mathematical model. Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities.
Algorithmic Trading in Practice
Suppose a trader follows these simple trade criteria:
Buy 50 shares of a stock when its 50-day moving average goes above the 200-day...
I’m sure that most of you have at least a cursory understanding of mindfulness meditation if not an actual practice in the ancient art. That’s because mindfulness meditation is enjoying, along with other forms of meditation, somewhat of a resurgence. Many scholars, academics, trainers, teachers and traders just like you swear by mindfulness as one of the most powerful and dramatic exercises that one can practice.
Mindful meditation is associated with the ability to overcome difficulties associated with maintaining focus and as well increasing cognitive processing, pattern recognition and a list of other skillsets that are made better by giving the brain the down-time it needs to recalibrate, reset and reboot. So, mindfulness could be...
Elliott Wave Theory was developed by Ralph Nelson in the 1920s. Nelson found that financial markets have movement characteristics that repeat over and over again. These movements are called waves and Elliott Wave Theory is a broad and complex topic, taking practitioners years to master. Despite its complexity, there are elements of Elliott Wave that can be incorporated immediately and may help improve analytical skills and trade timing.
Impulsive and Corrective Waves
Source: www.tradingview.com
Prices move in impulsive and corrective waves. Knowing which wave is likely underway, and what recent waves were, helps forecast what the price is likely to do next.
An impulse wave is a large price move and has associated trends. An...
It was a tough trade to manage. It bounced around in its range, went against him, flitted with his stop a couple of times, then went sideways on him for a while. Unnerving. Though stressed Tom maintained his composure just enough to stay in the trade. Finally, it broke into the black. That is when the urgency to take his profits now struck. After all that uncertainty, he wanted to lock in a profitable trade. Tom took the money. He felt the relief as he sighed – whew! Then, after all that trouble, the trade gained some momentum and hit his target in a few minutes. Tom felt cheated now. He left a good bit of money on the table, again. Why didn’t he just follow his rules – it would have been a good money maker. But now, all he...