Tuesday, May 27, 2008

3 major trend to watch

You always hear big experienced traders to tell you not to go against the trend. If a stock is trending up you should not short, and if it is trending down you should not be buying. Going a bit further there are 3 major trends you should consider when buying or shorting a stock.

The first major trend to watch is the overall market. That is because stocks tends to react based on what the market is doing. During a bears market you may find great bargains but there is not as much buying pressure as there is in a bulls market. This can hurt the stocks ability to go up, no matter how great of a company they are.

The same is true in a bulls market. Shorting does not work as great when the major indexes are in big up trends.

The second trend to watch is the industry groups. It is said that as much as 50% of the movement a stock does is based on its industry group. With that considered it is no wounded why checking the trend of a stocks industry group is very important. Think about it is oil is going up most of the companies who drill for oil are going to be going up too.

The last important trend to be aware of is the individual stock itself. Ultimately it is the individual company that we trade. Because of that being sure that you are trading on the right side of the stock is the most important one of the three.
It is best to trade when all three of these trends are on your side. An up trending stock in an up trending industry group in a bulls market is more likely to head up then if just the stock was in an uptrend.

For more information on stock trends visit http://www.stocks-simplified.com/stock_trend.html

For more information about trading stocks visit http://www.stocks-simplified.com

Monday, May 26, 2008

Selling puts to get into strong stocks

Selling puts can be a very effective way to get into a strong stock, while getting some cash flow on the side.

For those of you who don’t know a put option gives the buyer of the option to right, not the obligation, to buy a stock at a given price on or before a given day. It also gives the seller the obligation, not the right, to sell the stock at a given price on or before a given day.

Puts have been sold as a way of building income for years. A put seller may sell a put with a strike price below the price of the stock. As long as the price of the stock stayed above that price then they would make money.

This type of investing is dangerous. If the stock goes from $54 to $30 and you sold a strike price at $50, you would have to buy this $30 stock at $50, owe.

That is why it is better to sell puts as a way of getting into a stock. If you find a stock that meets all of your criteria and would like to buy it consider selling a naked put instead. If the stock is trading at $54 and you sell a $60 put for $10 you just made $10. Just remember not to get into more shares by selling the put then you would have bought.

Also, as long as the stock stays below $60 you are likely to get into this stock. You will have effectively gotten paid to enter a stock position you were already going to enter.

If the market crashes and the stock goes down to $30, you still get into a stock that you wanted to get into. You lost money by selling the put, but you would have also lost money by just buying the stock.

If the stock moves higher than $60 by the time the put expires then you will not get called into the stock. That may not be a bad thing. You would still walk away with $10 profit. If you still want to get into the stock you can choose to just either buy the stock or try to sell the naked put again.

For more information on naked puts visit http://www.stocks-simplified.com/naked_puts.html

For more information on trading in the stock market visit http://www.stocks-simplified.com

Wednesday, May 21, 2008

Reviewing your trades

Reviewing your trades consistently is a must if you want to be a great trader. It will not hurt you to take ten minutes a day to see how your portfolio has been doing.

The first thing you will probably look at is how much money you made or lost. While this is an important part it should not affect your decisions.

You should not decide to get out of a trade because you have made money and are afraid it might turn against you. This can lead to getting out of profitable stocks too soon, which is a very bad thing.

You should also not get upset if you are losing money and just get out because you had a bad day in the market.

What you should look at when you are reviewing your trades is where your trades are now? Have they hit your stop or target? Do you need to set your stop up? What should you do to follow your trading rules? Remember successful traders trade their systems.

Another thing you should be looking at is you can improve. Maybe you will find your system works well as it is. But maybe you will find it works even better when a certain oscillator coincides with your current rules. If that’s the case think about testing that system out with the oscillator.

Clearly reviewing your portfolio can be a big help, but how often should you do it? Well an average trader trades stock on day by day bases. If you trade like this you should check your portfolio daily.

But this is not true for all traders. You can always set your chart so that every week or month will be counted as 1 candlestick as opposed to every 1 day. In this case you should check your trades after every 1 candlestick.

For more information on how to trade in the stock market visit http://www.stocks-simplified.com

Monday, May 19, 2008

Buying long term calls

Buying calls can be a great way to leverage your money in the stock market. When applied with technical analysis and fundamental analysis there is no limit to how much they can produce.

Because calls give you so much leverage swing traders will use them to generate themselves huge gains or losses over a few days. In fact calls are becoming known for giving ways to make quick money.

Little people realize that they can also give off great returns after months of holding them. In fact your gain can be even greater because stocks can move further in a couple months then they can in a couple days.

There are a few reasons why long term calls can work better then short term calls

1. You are less affected by day to day movements. You might buy a short term call on a stock with good fundamentals in a solid uptrend expecting a quick upward movement. But if the stock pulls back even further, you may lose all or most of your option value.

If you had a long call you could afford for the stock to move back a little. With long term calls day by day actions do not affect you as much. You are just looking for stocks that will go up after a few months.

2. They lead to steadier appreciation. Swing trading with options can lead to fast 100% gains overnight, they can also lead to fast 50% losses overnight. Buying options many months out is likely not to lead to such drastic price fluctuations.

Steadily gaining a 100% return on your option after a month or two can help your account grow just as fast as trying to make quick large returns.

3. Timing is less important. Even though timing is very big no matter what options you are buying it is not as important to get in at the exact bottom of the pullback. And sell at the top of the pull back. You can afford to be off a little.

Buying long term calls can help to accelerate your gains in the market. Of course they have the power to work both ways. If you are losing money in the market call options are likely to lose you money faster.

This makes it incredibly important to practice trading with calls to develop your own rules prior to actually trading with them. If they interest you make sure you actually can use them to make money first.

For more information on calls visit http://www.stocks-simplified.com

For more information on trading visit http://www.stocks-simplified.com

Saturday, May 17, 2008

Selling calls on long term stocks

Selling calls on long term stocks can produce great income. The strategy works great for stocks that you are long term bullish on.

When you sell a call on a stock you already own you are making a covered call. You would get the premium of the call option. In exchange you will have to sell the stock at the calls strike price if that price is met or exceeded.

In other words you are limiting your potential gain from the stock for some quick cash. This is why if you like a stock for the long run you may only want to sell calls with a strike price that will probably not get you called out of your stock.

The best time to sell a call in this case would be when your stock is pulling back. If your stock pulls back down at resistance or breaks support then you could decide to sell a call above those lines. The money you make on the call option could help you feel better about staying in the stock during a pull back.

The worst time to sell a call if you are long term geared would be during extremely bulls markets. If your stock is making huge gains, then you do not want to be selling calls. This would limit your gain to the upside.

If you do end up selling a call on a stock you own and the stock moves up past the strike price of the call then you have two options. You can choose to do nothing. In this case you will have to sell the stock at the strike price of the option.

That may not always be a bad thing. If you were in the stock for a couple years then that price might be far more then you originally paid for it. You may decide you can find better investments out there and would be happy selling this stock.

If you still like this stock and want to hold onto it you can choose to buy the call option back. Because the stock went up your call option would be more expensive then what you sold it for. In this case you would lose a little on the option in order to keep your stock.

In general, selling calls will produce a great gain on stocks that you are holding. Unlike dividends which might pay off 4-5% in a year covered calls can pay off 4-5% in a month.

For more information on how make covered calls visit http://www.stocks-simplified.com/covered_calls.html

For more information on how to trade in the stock market visit http://www.stocks-simplified.com

Wednesday, May 14, 2008

Dangers of selling naked calls

Many people start selling naked calls in the stock market before they fully analysis the risk that it involves. This is a big mistake.

To understand what a naked call is you should first understand what a call is. When you buy a call what you actually do is buy the right to buy a given stock at a given price on or before a given date. For this you would pay a fee.

When you sell a naked call you are trying to capitalize on that fee they pay. You can actually sell a call even if you do not have that stock to offer. So say you sell the $45 call on a stock that is trading at $41 for $3.

You would make $3 initially. But you are obligated, until the option expires, to buy the stock at whatever price it is trading for and sell it for $45. If the stock does not go above $45 you walk away with $3.That sounds pretty good doesn’t it? As long as this stock does not go up 10% in the near future you can still make money.

What some people fail to realize is that your max loss is infinite. If the stock goes up to $46 you have to buy it at $46 and sell it at $45. You lose $1 here, not bad considering you made $3. But what If the stock goes up to $80 or $90, or higher? That can seriously hurt you, and maybe bankrupt you if you sold enough shares.

Because there is no limit to how high a stock can go you are risking an infinite amount of money to make $3. That is not exactly a great idea.

There is a great way to lessen your loss, however. This is done by turning the naked call trade into a bear call spread. Let us look at the example above. We sold the $45 put for $3. This time we also bought the $50 put for $1.5.

Now we lessened our gain to $1.5, but also lessened our loss. If the stock goes up to $80 it doesn’t matter. We can buy it at $50 and sell it at $45 giving us a $5 loss instead of a $35 loss. Much better.

To find out more information on how to trade the stock market visit http://www.stocks-simplified.com

Tuesday, May 13, 2008

Paper trading to build confidence

Paper trading can be a great way for a new trader to build confidence in his trading system. It is something all traders, new and experienced should be involved in.

There are many reasons why a beginning trader should start with a paper trading account before moving onto an account with real money.

1. Protecting yourself from losses. When you are just starting out it is inevitable that you will experience losses. As with anything when you have no experience in trading you will make mistakes.

It is perfectly normal, even professionals make mistakes now and then, you can’t avoid them we are only human after all. You do not want these mistakes to actually affect your money.

2. Testing new systems. If you want to be a great trader you must have working systems that tell you when to get in and out of a trade. The best way to make sure your system is working is to actually trade it.

But you also do not want to test that system in your actual account before you know if it works. This is another reason that everyone needs to paper trade.

3. The third reason is extremely important to beginning traders. You must build your confidence. If you have no confidence that your system will work you will not follow it closely. You may take profits too early and hold onto bad trades longer hoping they will turn around. This goes against one of the most important rules, keep losses short and let winners ride.

Paper trading is the best way to build confidence. If you start making winning trades over and over again you will start to believe in yourself and your system.

So, how long should you paper trade before you get to the good stuff? The general rule is not to start putting real money into the market until you have had 2 profitable months in your paper trading account. But it really comes down to you. How long will it take you to feel confident enough to get into the market?

For more information on trading in the stock market visit http://www.stocks-simplified.com

Monday, May 12, 2008

Keeping long and short positions

Many people overlook the importance of keeping a balance between long and short positions in their trading account at the same time.

This strategy can be very important for a few reasons. First of all, the markets can have big swings from time to time. It is not uncommon for the stock market to have a series of bullish days and all of a sudden have a giant 1 day pull back or reversal.

This makes it hard for anyone to know exactly what will happen in the markets in the future, even professionals. By having both long and short positions open at the same time you are less affected by the sudden surprises of the market.

This way a pullback will not completely destroy your account. While you may lose money on your bullish position you could gain money on your bearish positions.

This strategy can be even more important to option buyers. If your portfolio consist of nothing but calls and the market pulls back huge in 1 day you could lose half your account that day. If you had a few puts they could be doubling that same day, making up for some of your losses or even making you a profit.

Now in most cases, you probably do not want to diversify your portfolio 1 to 1. That’s 1 bullish trade for every 1 bearish trade. This is because the market does have larger swings. There are bulls markets and bears markets.

If the market is consistently going up every day be more bullish. Maybe have 80% of your account in bullish positions and only 20% in bearish. On the other hand if the markets are going down you may want to have more bearish trades then bullish.

But keeping your portfolio mixed can be a great way to help you from experiencing sudden large loses here and there.

For more information on how to trade in the stock market visit http://www.stocks-simplified.com

Sunday, May 11, 2008

Long term charts

Many people overlook the fact that they can use long term charts to help them produce long term gains in the stock market. This can be a valuable part of your portfolio.

Most traders look at a 1 year chart with 1 day candlesticks. They use this to help them determine the best spots to get in and out of a trade. Few will ever use longer term charts that span over years with a month or a week as a candlestick.

Even though these charts may lessen your chance of pulling out quick money there are some benefits to trading this way.

1. You are right more often. As opposed to a swing trader who may only be right 33% of the time trading on day to day charts a long term trader may be right the majority of the time by using a long term chart.
In fact any trading type will likely win more often and stay in trades longer by using a long term chart.

2. Because long term charts let you stay into the trade for months or years you will be able to get income from dividends. These dividends can be re-invested and help your portfolio grow faster.

3. There is no need to check these trades daily. Because you are using larger time periods for these trades you may only want to check these trades once a week, or once a month. This can cut down on your stress levels.

4. You can still leverage your money. Whereas short term traders may use options to get leverage if a stock is moving fast 1 way or the other a long term trader may use longer term options called leaps. These give you to benefits of options but with 1 or 2 years of time before they expire.

For more information on how to trade in the stock market visit http://www.stocks-simplified.com

Thursday, May 8, 2008

Changing with a changing market

It is always a good idea to change your strategy based on what the market is doing. This is true no matter how much experience you have in the market.

Bob is the average trader that learned this lesson the hard way. He came into the market during one of the biggest bulls markets ever. He also decided to trade call options because of their huge growth possibilities. After a couple months of paper trading he perfected his system.

Bob now opened an account with $10,000 to trade this new system. Over the course of 2 years he turned this $10,000 into $90,000. Everything is going great, the money is rolling in every month and he feel like the world’s best trader.

Then the market crashes. When the market changes his bullish calls buying system no longer works. He was reluctant to change because his system that worked in the past has to work now. But because things are different now he fails to make money.

In fact after 1 year Bob has lost $70,000 trading. He is discouraged that his perfect system failed and pulls his money out thinking if he does he can at least say he came out ahead.

The mistake that Bob made was in thinking that because his system worked in a bulls market it would work in a bears market. It took him losing $70,000 of his previous profit to figure out that wasn’t so.

What he should have done was sit on the sidelines and paper trade when the markets changed. If his system still worked on paper maybe he could try betting some real money too. Because his system didn’t work he could have tried to develop a bearish system.

That is a common mistake all traders have. The market is always changing and you should be too. It is better to be a cautious trader then a trader who lost all their money.

For more information on how to make money in the stock market visit http://www.stocks-simplified.com

Tuesday, May 6, 2008

Trading stocks for long term growth

When people think of long term they think of investing. Buying shares of companies that will one day be huge. They rarely ever think about trading. Even though trading can offer a better long term solution then investing in many cases.

Let me clarify what trading is. Unlike investing trading is attempting to time the market. Enter, make a profit or loss, and exit. It is really that simple. The idea is that with the right system you can still make a profit on average, month after month.

Many traders will only be in a trade to a few days, maybe a month. So, how can trading help you make long term profit? You have to reinvest your profits. Instead of spending the money you make if you reinvest your profits back into the stock market you can let your money grow at an exponential rate.

This method can be many times over greater than investing. That is because it deals with compound interest over short periods, not years. Let us compare the two.
You have $10,000 and want to let it grow for 10 years. You have two options. You can invest it or trade it.

If you invest it and pull out 20% a year, after 10 years you would have $61,917. You have made a good sum of money. Not enough to live off of, but a decent amount.

If you chose to trade it however and pulled out just 5% a month, after 10 years you would have $3,489,119. That could make you a millionaire many times over. This is all due to compound interest which is what trading is built off of.

For more information on trading the stock market visit http://www.stocks-simplified.com

Monday, May 5, 2008

What are trend continuation patterns?

What are trend continuation patterns? They are pattern that form in trending stocks. These patterns indicate that the trend will most likely go higher.

Not only do they indicate that a stock will head higher, but they will actually have a target at which stock should hit if it break out.

Alright now I know what you are thinking. These patterns that form in stocks, do they really work? Can it really be that easy? The answer is, yes. Trend continuations patterns are right the majority of the time.

I’m not saying that they will produce a profit all the time. But most of the time they will. There are 2 major reasons for that. One people are already buying stocks that are in an uptrend and selling stocks that are in a downtrend. Trend continuation patterns just tell you when to get into a trending stock.

The second reason for this is these patterns are already widely spread. If you see these patterns form chances are that hundreds of thousand, possibly millions of traders also see it. Most of these traders will probably buy or sell into it.
Now before you go out and buy into every one of these patterns that form you must remember it is important to keep your risk small. Some patterns may not succeed.

In fact you could lose money on a trade like this.
That is why you have to use not only targets, but also stop losses. These patterns will signal a buy when the stock breaks out of the formation. If they go back into the formation it signals that the trend will probably fail.

By setting a stop to get you out of a stock if it reenters the pattern you can greatly decrease your risk in the trade, while still keeping the potential to make a good profit.

For more information on what to look for with trend continuations visit http://www.stocks-simplified.com/chart_patterns.html

For more information on how to trade in the stock market visit http://www.stocks-simplified.com

Sunday, May 4, 2008

Trend Reversal patterns

Trend reversal patterns can be very helpful when trading in the stock market. They can help you get into stocks near the bottom, or the top.

So, what is a trend reversal pattern? They are simply patterns that are seen time and time again at the end of a trend. There are a number of different ones, Double bottom, head and shoulders, ect. But they tell you the same thing.

Every reversal pattern is said to have a target for which to shoot for. Most of these patterns will hit their target most, but not all of the time. In fact there are three different thing that can happen when one of these patterns form.

The stock could actually be at a bottom. It could start heading up and make a nice uptrend. This is the one that most people want happen.

Another thing that can happen is the stock heads up once it breaks out. Then it goes and hits its target. Once it hits its target however the stock may actually crash. People see the stock as overvalued and a selloff occurs.

The third thing that can happen is the pattern can just fail. The stock doesn’t go up and actually breaks down lower.

All this uncertainty is why trend reversal trades need to cut their losses short and let their winners ride. For instance stock XYZ is trading at $59 and has broke out of resistance of a bottom pattern you may want to set a stop below resistance.

If the stock goes back below the resistance of $57 it probably means the stock will fall. However it has a target of $70. In this case it may be wise to put a stop at $56. That way if you lose you lose $3. If you win you win $11.

For more information on trend reversal patterns visit http://www.stocks-simplified.com/chart_patterns.html

For more information on trading the stock market visit http://www.stocks-simplified.com

Saturday, May 3, 2008

Diagonal spread, long term growth plus monthly cash flow

A Diagonal spread is an excellent way to pull out monthly income from the stock market while also making long term profit. It is a more leveraged strategy then simple doing a covered call and produces greater income then Dividends.

A diagonal spread has to do with leaps. What are leaps? A leap, like an option, will give you the right to buy a given stock at a given price on or before a given date.

The only difference is that a leap will give you more time for a stock to make its move. In fact some leaps are two years away. This can give you leverage in the long term perspective.

Let us look at how you can use a Diagonal spread using a leap. Stock XYZ is trading at $50. We believe stock XYZ will be trading considerable higher in 1 year. So we buy the $45 Leap (call) 2 years out for $14. We also do not think the stock will go up to $60 this month so we sell the $60 call for $1. This brings us an instant $1 profit. If the stock stays below $60 you get to keep your $1 and your long term Leap.

Of course it the stock goes to $60 or higher you have to buy it and sell it at $60. Because you own the leap however you can buy it at $45 and sell it at $60 and make $15.

Well say you took the trade. Every month you sold a call option but never got called out. By the end of the year the stock is at $70 and your leap is worth $37. You also sold $9 in calls that year. In total you made a 228% return on your money.

Compare that with a 60% you would have made if you bought the stock. A diagonal spread can be a great way to make continuous monthly income and long term growth for your portfolio. Of course you still need to have rules in set for managing risk and finding good stocks. But mastering this technique can be quite profitable.

For more information on trading in the stock market visit http://www.stocks-simplified.com

Thursday, May 1, 2008

Stock Market Tips

Now a day’s everyone wants to make it big in the stock market. Trading can be a rewarding task when you get the hang of it. That is why I have put together this list of stock market tips.

1. Cut your losses short. It is very important to cut your losses short in the stock market. Capitol preservation is a very important key to remember. Think about it if you lost all your capitol when you were right you will not have any capitol to make money with when you are right.

2. Don’t trade against the industry group. It is said that 50% of what a stock does is based on its industry group. If the steel industry group is going up then stocks in that group are likely to go up to. There will be stocks in that group that go down, but it is best to stay away from these.

3. Develop your own system. This is perhaps the most important part of investing. You must develop your own system of strict rules that tell you when to buy and when to sell. These rules should be simple enough for you to be able to follow them effortlessly.

4. Don’t trade against the trend. Bottom fishing and top picking are the most dangerous ways to trade. The risk that you would face with picking tops and bottoms far outweigh the rewards. It is better to buy a stock that is heading up then to short it.

5. Keep your emotions in check. If you cannot control your emotions when trading you will lose money. Some traders get in and out of trades because they are scared, as opposed to when there system tells them too. This will only hurt them.

For more information on how to trade the stock market visit http://www.stocks-simplified.com