Today we’ll be discussing the differences between investing with stocks and options. Let’s first tackle the less complex investing vehicle, stocks. Most of the world already knows, but in case you don’t, stocks are directional trading vehicles. If we are long the stock, then we make money when the prices of the asset rises, and we lose capital as the underlying asset drops in price. We can also sell a stock short in which the profit comes when the stock falls. In any case when investing with stocks, the direction is what matters. We don’t need to worry about market volatility or time.
Options, however, involve these other two dimensions just mentioned, plus the dimension of price as well. So options are actually three-dimensional trading vehicles based on price, time and volatility. To compare stock and options in a practical sense, let’s consider this scenario:
Let’s say that AAPL moved up 20% in one year. The stock holders would have made 20% in return for holding on to the stock all year long. Now, if an option trader was holding a Call contract all year, he may have just lost his investment.
So why did the option trader lose money if the stock went up? Well, it’s quite simple really. The option trader lost the time value of his options. Each option has time premium factored into the option price, and if the move doesn’t happen fast, then the option trader will most likely lose money if he is simply buying Calls. Also, the volatility will most likely drop on the asset as the price rises, and this will also cause the price of the option to fall.
So, hopefully you can see that in order to trade options, we really need to be educated. Entry level option traders usually buy Calls and Puts, and they don’t understand why they lose money when the underlying asset goes the direction they are hoping. Remember, when trading options, you are not trading a single dimension; you are really trading a 3 dimensional asset. Finally, the exciting thing about options is that once you understand them, they allow you to be very flexible, creative and can be traded in any type of market.
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Tags: Finance, investing, investing with options, option trading, options, stock market, Stock Options
There are simple as well as complex candlestick patterns. There are single stick, two stick as well as three stick candlestick patterns. Harami is a two stick candlestick pattern. Two stick patterns take two days to form on daily charts. A Harami is formed whent the first day candle is longer than the second day candle. Harami can be bullish as well as bearish!
A bullish Harami is formed in a downtrend when the first day candle is very bearish. But on the second day, the bulls come into play and beat the bears out of the market by taking the prices higher. However, the bulls are not completely successful and the second day is still lower than the first day open and the first day high is not crossed. But this is an important signal that bulls are now active and trying to take hold of the market. This means that the downtrend will be soon over and an uptrend is about to start.
On the second day when the Harami is formed, the bears are still slightly ahead of the bulls at the start of trading. The open is higher than the close of the last day. However, the bulls close the day higher than the open.
Bulls and bears are always fighting with each other for the control of the market. When a bullish Harami is formed what this means is that the bulls are still cautious about their success and fear that the bears might return to take the prices lower again. However, when this does not happen, it gives confidence to the bulls encouraging more buying in the market and the reversal of the trend.
What this means is that you need to confirm it with the price action on the following day. Now, like most of the candlestick patterns, a Harami can fail. Always place the stop loss first when you trade. When you spot a Harami, place the stop loss near the open of the second day.
Harami pattern has got few variations. On of them is the Bullish Harami Cross Pattern. The first day in case of a Bullish Harami Cross is a bearish candle. The signal day or the second day is a Bullish Doji with an open higher than the close of the first day and the close lower than the open of the first day. Now,a Bullish Harami Cross is not formed very frequently. But when it does form, it means an sudden trend reversal. So you should act immediatetly when you spot it.
The bearish Harami Pattern is the other way around. The first day candle is bullish but the second day candle is bearish with the open lower than the close of the first day and the close higher than the open of the first day. But this means is that bears have taken over the market and soon a new downtrend is going to develop.
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Tags: banking, day trading, ETFs, forex, investing, money, mutual funds, options, personal finance, retirement, small business, stock market, Stock Options, stocks, trading
Inverted Hammer Candlestick Pattern is a trend reversal pattern. This pattern can be bullish as well as bearish and occurs rarely or what you can say not frequently.
The first day is a usual bearish candle in the downtrend. On the second day or what you call the signal day you find the inverted hammer something quite rare as the price action required to produce such a pattern seldom takes place.
An inverted hammer has a very small body at the bottom with a long wick at the top. As the high is way above the body, most of the trading took place near the small area close to the low. This low serves as the support for the upcoming days.
Now, you should wait for the confirmation the following day in order to trade this bullish inverted hammer pattern. If the open of the next day after the appearance of the inverted hammer pattern is higher than the low of the previous day, the inverted hammer pattern is a true pattern and you can trade it by putting the stop at the same level of the open of the day.
Now, let’s talk about an uptrend. Identifying an Inverted Hammer in an uptrend is almost similar to a downtrend. When an inverted hammer is formed in an uptrend, it means that the uptrend is about to reverse itself into a downtrend. On the first day, you will find the usual bullish candle signalling that the bulls are in control of the market. This is followed by a gap opening and more buying.
But soon the bears start to take control of the market and push the prices down. The close of the day is equal to or close to the low of the day. When you idenfity a bearish inverted hammer pattern, you can safely go short by putting a stop near the open of the signal day or the day when inverted hammer was formed.
However, as an aggressive trader, you can place the stop at the high of the inverted hammer formed on the second or the signal day. Always follow the rules. Place the stops and wait for the market to move further. If the market moves in the direction anticipated, you can make a nice profit. If not and the candlestick pattern is not confirmed by the subsequent price action, the stop loss order will take you out of action at a very small loss. Sometimes, the price action can retrace itself but stick with the rules, this is what disciplined traders do!
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Tags: banking, day trading, ETFs, forex, investing, money, mutual funds, options, personal finance, retirement, small business, stock market, Stock Options, stocks, trading
As a trader, you are always looking for short term profit. While as an investor, you are willing to invest long term in a company or a security to make capital gain. In trading, you are always looking for making profit from the volatility in the market. Day trading has a short term time horizon of only one day. A day trader opens a trade and closes that trade in the same day to make a quick profit. Day traders need quick reflexes as well as a keen observation of the market volatility. Many people day trade successfully. However, on the other hand hand, many people have a long term time horizon of many months to years. They have a long term financial goal and this matches with their investment style.
Now a company’s stock may have a good long term prospects supported by strong fundamentals. But the stock may stay still for a long time before it catches the attention of the media and the investing public before it’s price get’s bid up. So an investor might have to wait for a long time before realizing a return on his or her investment. Many investors can learn a few tricks from day traders that can help them make a quick profit in a matter of days orn weeks instead of months or years.
Many investors when they fall in love with their investments on the long run forget this cardinal rule of trading that you have to cut your losses. Market least care who you are and how long you have been in it.There is a general problem with so many investors. They fall in love with their investment after doing so much research and committing so much time for the position to work. Now, day traders are always hit and run types. They have developed an innate sense of discipline among themselves that teaches them when to commit money to a trade and when to cut and run.
However, if too many investors start practicing momentum investing, it sometimes leads to bubbles like the tech bubble that happened at the end of 1990s. Now, when doing momentum investing, you need to also do some fundamental research behind the company. As most of the momentum investing done during the dot com bubble was on hearsay without being supported by any strong fundamentals!
When a security goes up in price with a strong demand underneath it, it said to have price momentum behind it! Now, as a long term investor, you should look for securities having momentum behind them just to avoid getting stuck with securities for months before they start moving. It pays to be patient. But it works even better when the money that you invested works for you while you wait.
Now most serious momentum investors are infact swing traders who hold positions for a few weeks or a few months. Most of them employ some sort of momentum indicators to help them identify when it is good time to buy a stock. Some of the indicators that can be used is the Relative Strength Index (RSI), Moving Average Convergence and Divergence (MACD) and the Stochastic Index.
Now, when doing momentum investing, you need to also do some fundamental research behind the company. As most of the momentum investing done during the dot com bubble was on hearsay without being supported by any strong fundamentals! However, if too many investors start practicing momentum investing, it sometimes leads to bubbles like the tech bubble that happened at the end of 1990s.
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Tags: bonds, credit, currency trading, day trading, ETFs, forex, futures, home business, money, mutual funds, options, real estate, retirement, stock market, Stock Options, stocks, trading, wealth building
A trading system might consist of a few indicators and a number of rules that tell when to enter the trade and when to exit the trade. Trading system is considered to be proven and tested if there is some date that supports its performance under live market trading conditions. However, it might not be possible to test a trading system quickly under live trading conditions. To overcome such problems, backtesting has been developed. Backtesting is done with the use of a software.
How to do backtesting? Using a backtesting software makes it very simple and easy. Backtesting uses historical data to test the performance of the trading system under the past market conditions.
Backtesting results are no guarantee that the trading system will perform well under live market conditions. Things that worked in the past might not work now. Similarly something that didn’t work in the past, may work now! You never know!There are many problems with historical data. There is no slippage in backtesting. Slippage is one of the most important problem that a trader faces while trading live. The other problem that the backtest ignores is the widening of spreads under volatile market conditions.
In other words, no two trades work out in exact the same way twice. SO you have to be careful when looking at the back testing results and take it with a pinch of salt. However, there are still some advantages of back testing a trading system.
Back testing can also spot you certain general characteristics of the market like the seasonal trends and market tendencies. Back testing can give you a feel how a particular market behaves under certain conditions.
On the other hand, you might not find much seasonal trends in the currencies and bond market. Some though talk of the January Effect but this effect is not that pronounced now a days. In case of stocks, stock prices tend to rise at the end of each month and the first few days of each new month as institutional investors tend to put new money to work during that time frame.
Backtesting can help you figure out how long a trend might last in a particular market. For example, US Dollar Index trendlines might last for months to years. In other markets too backtesting can help you figure out important trends that lasts for last times.
But to tell you the truth, backtesting can only give you a rough guess about the performance of the trading system under live trading conditions. There is no substitute for live trading results!
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Tags: credit, currency trading, day trading, debt, forex, futures, home business, money, mutual funds, options, real estate, retirement, stock market, Stock Options, stocks, trading, wealth building
For investors considering oil stocks, there are a host of potential investment possibilities. In fact, the recent rise in global oil demand has resulted in higher oil prices which in turn has spurred the growth in alternative energy solutions. This growth has lead to new investment opportunities, as well. Overall, the energy sector can be divided into three segments. These are the E&P, or exploration and production, companies, oil services companies, and alternatives.
The rise in energy demand and interested in energy investing has resulted in these companies having the highest market capitalization globally. For instance, some of the largest oil conglomerates are among the biggest companies in the world who also happen to be partially owned and run by their residing governments. The largest oil producing company in the world is in Saudi Arabia, called Saudi Aramco.
Within the energy sector, additional divisions can be made depending on the service provided. In this regard, there are separate companies for equipment providers, drillers, pipelines, and even refiners. In conjunction, they combine to form the upstream and downstream aspects of the oil process. Sometimes energy investors include utilities within the discussion, as well.
The recent excitement within the energy space has been associated with the advent of renewable and alternative energy companies. The high price of oil has enabled other energy solutions to become cost effective. As a result, there have been a number of companies that have floated shares or have filed to do so. Some of these solutions are centered on solar, wind, and even hydro generated energy technologies.
Separate from the whole cost benefit analysis, there are companies focused on the environmental benefits of lower fossil fuel based emissions. In fact, many governments are in the process of imposing mandatory ceilings on the amount of carbon emissions generated by any single company. As a result, a whole new marketplace of carbon credit trading has emerged. Consequently, there have been companies founded to facilitate this process either via software technology or hardware monitoring systems.
In summary, the price of oil continues to drive the investing in energy stocks. As oil prices rise, many oil related stocks rise, as well. Since oil prices are controlled by supply and demand imbalances, any global event or growth will require additional settlements. In addition, the finite amount of energy resources mandates that energy investing is likely to remain exciting.
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Tags: Finance, investing, stock market, Stock Picks
Day trading, as the name suggests, means trading-buying and selling-the stocks on the same trading day. The trading positions, usually though not always, are closed before the market closes for the trading day. Day trading isn’t the same as after- hours trading where the trading activity continues even after the regular marketing hours when the stock market closes.
Sellers and buyers who take part in day trading are called day traders. Though day trading evokes the image of a hectic trading activity in course of the trading day, it might not be so in actual practice. You will make one or two trades, say twelve, in course of a trading day, or, you may limit yourself to only 1 trade.
You will, in a few cases, just purchase a stock on one day and sell it on the next day, if you suspect that selling it on the same day wouldn’t prove lucrative. There isn’t any legal restriction like that you must finish off your trading activity the same day. You’ll, at the most, have to pay some differential on brokerage if you carry your trade to the next day. In standard practice, traders typically have a tendency to close their trading positions by the end of the same trading day. In any case your trading frequency depends completely on your trading strategy for that particular day, or, your general trading style and outlook.
Day trading is an investment method that does online daily stock trading with a comparatively short investment. Those who do day trading often buy and sell instruments during the same market day and, as a general rule, do not hold stocks overnite. Many day traders make many trades every market day hoping to capture profits that pop up from tiny intraday price fluctuations.
Day trading relatively holds the stock for only the day. After the exchange closes, a trader has no stock in his hands. Swing trading holds a stock for at least one or two days, waiting out for the best price before junking it back to the market. Day trading is much more stressed and requires guts and an ardent business sense. When you get good at day trading, you can earn up to $50,000 from your primary investment.
You need an investment equal to buy one thousand stocks. That’s roughly around $20,000. Because the probabilities are tiny that you are going to find a marketable stock with a price of under $20, this is enough to get your day trading underway. However , you may remember that this is a 100% risk capital so don’t be concerned too much if you lose this amount very early.
Makes certain that the internet site you give your hard-won cash to, to coach you day trading, is not simply an article list. That’s not a replacement for a correct course in day trading and is probably not something you need to be paying too much for.
To maximise the advantage of an internet course, it should offer you multimedia audio or video clips as well as downloadable activities and charts to continue and consolidate your learning.
home study courses in day trading are also available in book form. They’re simple t peruse at your leisure and you can scan before you purchase, so you know precisely what you’re getting. But books don’t have the multi-sensory approach that a good internet site will have, with audio and visual streaming. It works for some people though. Many are written by professionals in the field.
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Tags: day trading, Finance, forex, stock market, Stock Picks
