Thanks for all the visitors, good trading,
|Simple Trading Ideas||
I really enjoyed posting here a couple of times a week over almost a year and a half. I intended to educate myself with my posts but in the meantime a realized that there were a lot of people around the globe who were interested in my writings. My main goal with this blog was to describe what the market was doing using mainly technical analysis. I almost always included a chart to visualize where things were going. I was using these observations in my own trades. Since I have been blogging here I refined my technical analysis and I developed techniques I feel very comfortable with. This blog also served as a journal for me although I didn't go into details about my personal trading. During the past few months I realized that I got distracted and I started to focus on what my audience would like instead of what I would benefit from the most. After all this about trading and making money. As a result I decided that I will take my future posts private. I will go into more detail specifically about my trades. These posts would be too personal to share. I will leave this post open to public so everybody can search it and I will probably search it too.
Thanks for all the visitors, good trading,
You should treat trading as a serious business. When you prepare yourself and when you trade you should be able to pay full attention. Anything which distracts you can affect your trades and your profit. Here is a list of what can turn against you in trading:
· Unorganized environment – You desk and computer should be well organized. Material and all the “noise” not related to trading should be eliminated. Don’t try to multitask.
· Physically not prepared – Even if you are not a day trader when you prepare yourself for a trade you should be able to focus for a longer period of time. If you are hungry, tired or sick you won’t able to do that.
· Mentally not prepared – You should have a clear and proved trading plan and stick to it. You can’t change it in the middle of trades. You should feel confident and comfortable with the knowledge you accumulated about trading.
· Emotionally not prepared – If you have strong emotions such as anger, sadness, and disappointment about trading then you are not prepared. The stock market doesn’t care about your feelings.
· Unable to execute a trading plan – If you can’t follow your trading plan and you hesitate when you enter or exit a position then you are not prepared.
· Not being patient – Patience is very critical. A stock could be a great candidate for trading but you have to wait out the right moment. Jumping into trades too early can end up in painful losses.
· Unable to filter out the news – You have to learn what news is important and what is just noise. The bulls and bears have always something to say and both of them can’t be right.
· Telling everybody about your trades – When you talk to your friends and sometimes strangers about your trades it’s hard to explain when you are wrong. The best thing to do is to keep it private.
It is important to at least mentally go thru important steps before entering a trade. It’s even better to write it down and make a sort of checklist. It will be your “pre-flight” checklist. Just like you wouldn’t jump into an airplane and take off you don’t enter a trading position without preparations. Here are some basic steps you want to consider:
Investors often create watch lists they are not happy with. Sometimes they randomly add stocks to the watch list to the point that the size of the watch list is not manageable. Others put an entire screening result to a watch list. Again there are too many stocks in the watch list.
To eliminate this problem we have to keep the watch list to a manageable size. Say, have no more than 20 stocks in one watch list. If we have more than 20 stocks on our list we would create several watch lists. Each watch list would belong to a different category. For example we would put stocks from different sectors to different watch list. Keep all your watch lists at the same place. If you have watch lists at different websites most likely you will forget about some of them.
Put the strongest stocks in your watch lists, stocks of the leading companies in that sector. Companies that have products which gives them advantage over the competition.
Once you have the stocks you are interested in, in your watch lists check them regularly, at least once a week. Many people forget to check their watch lists and when their check it it’s too late.
Keep your watch lists fresh. If you don’t like the stock anymore delete it and add new ones you like better. Your watch lists needs regular maintenance.
It’s nice to ride a trend for as long as you can without getting stopped out too often. Let’s look at the uptrend the US markets had which started last year in Mid-November. Were you able to stay in this uptrend from the beginning to the end?
When you trade you always want to set your stop-loss to limit your losses. Never trade without setting stop-losses. As the market moves up in an uptrend you want to adjust your stop-loss to increase your profit, this is also called trailing stop-loss. The trailing stop-loss stays below the price in an uptrend and above the price in a downtrend. Setting the stop-loss too close to the price, results in being stopped out too early and too frequently.
Volatility changes during an uptrend (or a downtrend) and from time to time prices can be quite volatile. Usually that’s when you get stopped out. So it makes sense to use a trailing stop-loss which gives a volatility-based buffer. This means that when volatility increases the distance between the price and the stop-loss increases.
That’s exactly what the Chandelier Exit does. The Chandelier Exit is usually calculated for 22 trading days which is a month. The calculation is as follows for an uptrend:
Chandelier Exit (long) = 22-day High - ATR(22) x 3
Chandelier Exit (short) = 22-day Low + ATR(22) x 3
for a downtrend.
ATR the Average True Range is used to calculate volatility. In the expressions above 3 is used as a multiplier but it can be changed. For more volatile securities you want to increase it and since downtrends are more volatiles you want to increase there too. The chart below shows SPY with too Chandelier lines, the blue is calculated with 3 and the red with 4 as a multiplier. As you can see 4 as a multiplier would have kept you in the trade longer since there were times when SPY was quite volatile.
Risk is part of our everyday life. You take a risk when you drive your car, fly an airplane, move away from your home, you gamble, start a business, buy a house or buy stocks or any other asset types.
By definition risk is the outcome which could be different what you expected. Think about a business where you can’t find customers, or a new home where your basement gets flooded every time there is heavy rain. When it comes to investment you can lose portion or all of your money. When we talk about risk we usually talk about negative outcome.
You have to learn how much risk you can take. It depends on your personality, your experience, your age, your responsibilities. Don’t take more risk than what you can handle. Not only you can lose all your money but it can ruin your health and your relationships. Some people hate to take any risk some people love to take risks (which could be dangerous too)
In the world of investing there are different types of risks. The main risks are classified as:
· Systematic Risk is when a large number of assets are affected. A major political event can trigger one. It’s harder to protect yourself from this class of risk.
· Unsystematic Risk when only a specific stock or a small number of stocks are affected. An earnings report, retail sales report, oil inventories can trigger one.
Other types or risks are Credit Risk, Country Risk, Foreign-Exchange Risk, Interest Rate Risk, Political Risk and Market Risk.
Risk is the reason why prices move, without risk it would be hard to make money with any investment.
We measure risk with volatility. The higher the volatility the bigger market moves are expected. You take a bigger risk when you buy assets with higher volatility. Volatility can be measured with standard deviation.
The higher the risk the higher the return could be but the losses could be bigger too. For example buying options is riskier than buying stocks or buying leveraged ETFs is riskier than buying unleveraged ETFs.
You can protect your portfolio from various risks with diversification but you can never completely eliminate it. Diversification means buying at least 10-12 different securities from different asset classes, such as stocks, options, bonds, gold, real estate, currency and keep some cash too.
There are several reasons many investors don’t like to get into option trading. One of them is the expiration. Unlike stocks options expire at a certain expiration date. It could be this month, next month, 6 month from now or even next year depending on the expiration date. Another reason is that you have to have some knowledge of the Greeks, the Delta, Theta, Gamma and Vega. The future price of the option not only depends on price of the underlying stock but also depends on these Greeks. Another reason is the fact that options a leveraged trading instrument and their price movements are much more volatile than that of the underlying stocks.
One way to keep option trading simple is to buy LEAPS or Long-Term Equity Anticipation Securities. These are options with expiration dates longer than a year. You can buy LEAPS today that will expire in 2014 or even 2015. Buying LEAPS are much cheaper than buying stocks. With Theta being nearly zero you don’t have to worry about time decay. If Delta is close to one in other words the LEAPS is deep in-the-money the option price will change just like the stock price. Sometimes you can even find LEAPS where the option price is not much higher than the price for an option with shorter term expiration.
Buying LEAPS is much safer than buying options with shorter expiration dates. The profit might be a little less but LEAPS are still leveraged instruments. For example you can buy LEAPS 60% cheaper than the stock and if the stock moves 10% you can make 30% profit.
The market had a nice run since mid-November. If you didn't miss it that's great, if you missed it don't worry this is not the last one. There will be other good entry points (but not very soon). Although the news is telling us that the market has reached its all time high but I don't think this is the right time to jump into long positions. Below there is a list why I think you should wait. In fact in you want to buy at the bottom of the next pullback this is the time to raise some cash.
"Virtual trading", "paper trading" or "simulated trading" all refer to a virtual account setup by a broker which can give you real life trading experience without losing your money. It doesn't matter how many years of trading experience you have there are benefits of virtual trading.
If you don't have any trading experience at all virtual trading is where you can learn and practice without the emotional stress of losing money. You can try various strategies and you can get familiar with the market. You can also learn how much "money" are you able to make. Virtual trading can help you to fine tune your trading style or establish one.
If you have some experience this is the place where you can test various trading strategies simultaneosly. Trading trends is relatively easy but if you want to learn how to trade market tops and bottoms or trading ranges virtual trading is where you should start.
Even in your virtual trading account you shouldn't gamble, treat it as if it was real money. Remeber what you learn there you want to apply in real life whit real money. If you take virtual trading seriously you will able to learn a lot about your risk tolerance and comfort zone. Once you have a solid foundation you can move on to trade with real money.
Technical indicators are trading tools which can be very uselful if they are used properly. Indicators use various mathematical calculations to visualize certain characteristics of past and current price movements and volume changes. There is a large number of indicators which makes it very difficult to decide which ones to use. Novice chartists often put too many indicators on their charts with often redundant information. This also makes it difficult to make a quick decision. Indicators can be grouped in for different groups: