Monday, June 23, 2008

Benefits of trading ETFs

ETFs are securities that are composed of many different stocks. Each stock in an ETF has something in common with the other stocks. For example their might be an oil ETF that has nothing but oil drilling stocks.

These are often nice trending and can have many benefits over regular stocks. I have listed a few here.

1. They give somewhat of diversification within one group. That allows you to bet on the group as a whole rater then a given stock. One way this might help you would be if you are bullish on say restaurants in general. If you invest in an individual company it may go down from bad earnings or sudden surprises, even if the industry as a whole goes up. In this case buying an EFT can be a great way to get what the majority of the group is doing.

2. You do not get big company surprises. There are times when a stock will have a sudden surprise. This could be something like a government inspection. Surprises like that can give a big shook to an individual stock. ETFs are less affected by a surprise because they are composed of many different stocks.

3. They are also less affected by company earnings announcements. Earnings announcements can have a big effect on a stock either up or down. Trying to trade during this time can be a very dangerous thing. No one knows exactly what the earnings will say and even if you did you don’t know how it would affect the markets. That is why it is best to trade something like an ETF during this time.

4. They often have great trends that could be trending better than regular stocks. I have seen them outperform the majority of stocks at times even if they are diversified.

For more information on ETFs visit

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Sunday, June 22, 2008

Figuring out your trading strategy

It is very important to be able to figure out your own trading strategy. That is because not everyone trades the same way. There are many different trading strategies out there for many different trading types. Every new trader should try to find a strategy that fits them well and practice it until they get good at it.

But many new traders do not do this. They either try to trade every strategy at once or they do not have a strategy at all. I would say the majority of unsuccessful traders are those who have no consistency in their trading.

These traders will hear a hot tip from a friend about a company that is going to skyrocket and they will buy it. They will also buy big name companies that have crashed because they have to go up; they are after all huge companies. Then they will buy the flavor of the month because it is in the news.

Traders who invest in without a consistent plan are doomed to fail. Even if they find something that works they will not know what it is because they are going to the next new trade that is sure to make them rich. That is what keeps them from ever making any real money in the stock market.

What someone who wants to trade in the stock market should do is find one or two strategies that match them. Maybe they really like the idea of trend trading or option selling. In that case they should develop their own system to make it work and focus on making that work before they move onto the next trading strategy.

They should have specific buy and sell signals that they use every time they place a similar trade. That makes it easier to know if you can make money with that strategy because it is more consistent. After all if you keep doing the same thing then you are bound to come up with the same results.

To see a list of different trading strategies visit

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Saturday, June 21, 2008

Coming back after a bad trade

Coming back after a bad trade is very important to anyone looking to succeed in the stock market. If you quit every time you lose money then it will be hard for you to make any money trading.

Every trading strategy has wins and losses. That is a simple fact that you have to get used to. If there was a strategy that had no losses in it everyone would be trading it and the markets would probably go bankrupt.

What the average new trader will do is develop a strategy through paper trading and backtesting. Then they start trading with actual money with great hope. Then they make their first trade and it was a loss.

They scratch their head, but get over it after all their strategy has many losses as well as wins. They decide to let it go. Then they place another trade. This one is a loss too. Now they are in panic. They can’t believe it lost twice in a row.

It is perfectly normal to lose twice in a row but they lost money. That is the big different thing between paper trading and actual trading. If you lose fake money you tend to keep at it until your account is positive. If you lose actual money you feel like you do not want to trade ever again.

Stopping trading when you are down can have major negative effects on you. It can make you feel like you cannot make money in the markets. And if you do stop you will often see great profits go right pass you.

Some of the biggest profits you will ever have are the profits you would have taken after you had several losses in a row. You might even finish a month like that positive based on that one trade. You never know for sure what is around the corner.

For more information on what to do during bad trades visit

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Thursday, June 19, 2008

Be cautious with earnings

Every now and then a company announces its earnings. During this time there can be many surprises. Earnings may change people’s opinion of the stock.

When earning is being announced it is a considered to be a very dangerous time. Because of all the uncertainty you do not know what a given stock will do.

They can cause huge jumps up and down. A stock can be trading at $60 before earnings and $50 after they are announced. Such huge swings can hurt a trader who is long on that position. Every trader needs to have a plan for what they will do during this time.

Some traders will choose to trade the earnings. They will try to predict direction the stock will move. This can be dangerous in a few ways. First of all you do not know exactly what a given stock is going to announce.

Also you do not know how the people will react to what is announced. Stocks can crash to good news or rally to bad news it happens all the time. That is why trading earnings can be much like a gamble.

Other longer term traders may choose just to hold their positions through it. They can justify that by saying that stocks do not always move big during earnings. They can also say that strong stocks have strong earnings. This means that a stock which keeps going up is more likely to get a bust from their earnings announcement then a crash.

Perhaps the safest thing you can choose to do is not to trade a stock that is announcing their earnings. That is not to say that you cannot trade during this time there will always be opportunities in the market. But sticking away from trades that can be so unpredictable can be a positive thing.

For more information on trading during earnings visit

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Wednesday, June 18, 2008

The leaps advantages

Leaps have many advantages over other strategies in the stock market. This is because they give the buyer both high leverage and a long term approach to the market.

Leaps like options give the owner the right to buy a given stock on or before a given date. But unlike options however the date at which it expires is farther out. Instead of an option contract which might give you a couple months before it expires, a leap will give you a year or two before it expires.

This has a few great advantages. First of all the stock does not always do what you want to do right away. That does not necessarily mean that you change your posture on the stock. If you had a leap you could hold onto it longer without having to worry about expiration.

Another reason is that if a stock is strong it may pull back now and then. However, if it is really a great buy it is likely go head up in a longer term time frame.

Of course you do pay more to buy a leap then you would for a call option. But you pay for time. That extra money makes the investment gives you more time than a call would.

They have advantage over stocks as well. That is because they have much greater leverage then a stock does. For instance say you buy a $40 leap for $8 that is two years out. The stock is trading at $35.

After two years that same stock is trading at $60. If you would have bought the stock you would have made 71.42%. But if you would have bought the leap it would be worth at least $20. That would have given you a gain of at least 150%.

There is a big difference between the return the stock could give you and the returns a leap could give you.

To learn more about leaps visit

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Backtesting to Build a System

Backtesting can be a very helpful way to get a stock market system made. It has been used effectively by traders for years.

So, what is backtesting? Well, it is simply using the past performance of certain stocks in order to see if your system will work in their future stock movements. If you were back testing a system you would be following your system rules in past stock movements and see where it gets you.

The idea of this is that history repeats itself. If your system worked in the past movements then it will probably work in the future. That does seem to make some sense after all.

It is considered to be very valuable, but it also does have its flaws. Even though it could tell you your system works it will not show you how it works in different market postures. It could be that it works very well during a bulls market but very poorly during a bears market. It could also be the opposite working well during bears markets but poorly during bulls markets.

Or it might leave you unprepared for such surprises like new events or bigger market news. It is for those reasons that many market professionals will tell you the famous quote “past performance does not guarantee future results”.

Because of that this should always be coupled with paper trading. Backtesting will give you a general idea of how your system worked in the past. Paper trading will help you determine how your system is working in the present market. It will also help you decide the best way to trade your system. What rules as far as risk management, or such, do you need to make your strategy work the best? Those are very important things to figure out.

For more information on back testing visit

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Tuesday, June 17, 2008

Protecting yourself from the downside

Protecting your money from the downside is very important. This is especially true when the markets are volatile and you do not know what they are going to do.

The reason for spending a lot of energy protecting your capitol is important is simple. As a trader you need money to make money. Your investment is very important. If you lose all of your money during a rough time you will have no money left to make a profit when the markets turn favorable.

Now that we have talked about why you should protect yourself from losses when the markets start acting up let us talk about how you can do that. The most widely used strategy for big corporations during this time is called a protective put strategy.

This strategy protects us from downward movements while at the same time allows us to keep any profits that we might get in the stock. The strategy involves buying a put on a stock that you already own.

A put gives the buyer the right to sell a stock at a given strike price on or before a given date. In other words if you own a stock that is trading at $96 and want to protect from the downside you can buy the $95 put for say $4.

Now you have the right to be able to sell that stock at $95 if you need to. So even if the stock crashes to $30 you can still sell it at $95. Many traders see protective puts as an insurance policy. You pay money to the insurance company and if your house burns down you can get compensation for it.

That is similar to how this works. Of course all puts eventually expire and should be used only when you are worried about the market. It would not make sense to pay $4 every month or two on a $96 stock to protect it from the downside.

For more information about protective puts visit

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using options for quick gains

Options can be used to make quick profits on in the stock market. This is speculation that can be both profitable and dangerous.

Basically options give you the right to buy or sell a given stock at a set price on or before a given day. For this right you pay a premium that is much smaller than the price of the actual stock. That gives you a great advantage if the stock goes up. A 10% increase in a stock could mean an increase of several hundred percent in the option.

So, you can see how it can be quite profitable. The thing you should worry about is that it is also much more dangerous than regular stocks. That is because you can lose one hundred percent of your investment when you buy an option. In addition you only have a limited time for the stock to move in order for you to make a profit.

Because this uses so much speculation you can expect to be wrong more then you are right. But that can be said for any time you try to make quick money in the market. That is not necessarily a bad thing.

The general rule for this type of trade is to only take trades with at least a 2/1 risk to reward. That means for every 1 you risk on a trade you have a reward of 2. With this type of trading you can be wrong 2/3 of the time and still make money.

The other thing you need to have is a risk management system. If you are trying to make quick profits you will be wrong a lot. You cannot lose all your money when you are wrong. If you do you will not make money when you are right because you have no more money left.

Most professional traders will not risk more than 2% of their account in any one trade. This way you can have a lot of consecutive losses in a row and still have money left to trade with when a profitable trade comes along.

To learn more about options visit

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Monday, June 16, 2008

Exiting losing trades fast

Exiting Losing trades early is one of the most important parts of trading. Even though it is so important it is often overlooked by many.

Most traders enter a trade expecting to win. They expect that the stock will do exactly what they want. The big problem with that is that sometimes the stock does not do what you want it to do. That is why you should have a limit on how much money you are willing to lose on the trade before you get out.

Setting a stop sounds easy buy it is often hard to follow especially for a new trader. That is why you do not only need a specific stop but you also need to have the discipline to follow that stop.

New traders will enter a trade if it goes for them they are happy, but if it turns against them they will not get out when they need to. They hold onto the stock saying that it is a long term investment when it started as a short term trade.

They watch the stock plummet and hope that in the long run it will pay off. By holding a bad trade for such a long time they are disobeying one of the most fundamental rules in trading. Cut your losses short and let your winners ride.

Now that I got all the things that you shouldn’t do out of the way let us talk about some of the stuff that will help you.

1. Set a specific stop. Before you enter a trade you should have two plans. One that tells you what to do if you are right and one to tell you what to do if you are wrong.

2. Back test and paper trade that strategy so you can see if it works or does not. Try to develop your own trading strategy.

3. Have the confidence to follow your rules exactly, not getting out early or holding on too long.

For more information on trading in the stock market visit

Double tops

The double top pattern is a reversal pattern that is used to help predict the tops of a market. It normally appears after a long bullish trend.

During an uptrend the given stock is continuously forming higher highs and higher lows. During a double top pattern the stock hits a higher high and pulls back significantly. The stock hits a bottom and rallies. This time however the stock is unable to make a higher high.

The fact that the stock did not make a higher high is a sign that the uptrend is starting to weaken. However it does not mean that the uptrend will end yet. From here the stock falls down and breaks below support. This support is the bottom that was formed during the last pullback. It also is accompanied with high volume.

Because the stock now failed to make a higher high and broke thru support on high volume this gives off a bearish signal. It signals that the uptrend has most likely stopped and a downtrend will take its place.

According to the pattern the target is equal to the difference between the two tops and support. This is how far the stock is expected to go. Of course the stock could go down much further if bearish pressure continues.

Anyone who is trading the pattern should be warned that this is not a one hundred percent accurate pattern. There are a few false signals just like every other indicator. If the stock breaks back above support then it was most likely a false signal. That means the stock probably will not go down.

Most professional traders will have a stop 3% above the support level. This is to give the stock some room. It could break above that level and immediately head back down below it.

To see an example of a double top pattern visit

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Sunday, June 15, 2008

Why use a paper trading account?

Paper trading is trading with a fake account. You can place trades just like a normal account but the wins and losses you experience in a paper trading account does not hurt or help you financially. This is something all traders should use before putting any real money into the market.

I know a lot of you might write off paper trading as useless, after all why you would want to put your time and energy into something that doesn’t help you. That is not so, it is one of the most important parts of trading. There are a few reasons why it is beneficial to use this method before you trade.

The first reason someone should paper trade first is so they get a feel for the market. It is important that you actually learn how the market likes to move before you put money in. You must be comfortable enough so that you will not panic if the market has a pullback.

The second reason why you should paper trade first is so you can figure out if you can actually make money with your system. If you make money that is great you can use what you’ve learned for your actual account.

If you are not making money it is better that you found out on paper then with your real money. I do not believe anyone would rather lose $1000 real dollars over $10,000 fake dollars.

The third reason is that it helps you to test new systems. Maybe you want to develop a new system for trading every now and then. In this case you would want to test it out by paper trading before you use your actual money.

For more information on paper trading visit

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Using oscillators

Oscillators are indicators that you can put on your chart. These indicators use mathematical formulas to try and find the best time to buy and sell a given security.
Some traders will use them as primary indicators. When their indicators tell them to buy they buy. When they tell them to sell they sell.
The problem with that is that all indicators have several false signals as well as good signals. If you were trading one of them by themselves you would come up with several wins and losses.
That is why it is best to use them as secondary indicators after price. For example if a stock is in an uptrend then a buy signal will have a much greater chance of being right then if it wasn’t up trending. The same can be said for a downtrend. If a stock is down trending then a shorting signal will be much more reliable then a buy signal.
You may also choose to combine an oscillator with a price signal such as a bounce off of support or a break above resistance. Combining an indicator with a price signal can help to weed out bad signals and give you a higher rate of success.
Another thing you can consider doing to weed out false signals is combine different indicators on your chart. If you have two different indicators that you need to see buy signals from in order to buy can give you more accurate buy signals.
In this case if one indicator says buy but the other does not, you should not buy. But if one says get out of a trade and the other says stay in you may choose to exit it. Using more the 1 indicator can give you a system that produces strong buy signals and weeds out bad trades.
A word of caution however, many traders will try to combine too many indicators at one time. Using a ton of different indicators can actually work against you and make it harder for you to trade.

For more information on oscillators visit

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Sunday, June 8, 2008

Dangers of naked puts

Naked puts can be extremely dangerous strategies that can make one lose all of their money in the market in a very short time. However there is a way to turn this dangerous strategy to a less dangerous but still profitable situation.

First let me show you what a naked put option is. A put option gives the buyer the right to sell a given stock at a given price on or before a given date. It also gives the seller the obligation to buy the stock at the given price on or before the given date.

When you open a naked put position you sell a put and keep the premium. As long as the stock stays above the strike price you would not have to buy the stock. You would walk away with the profits.

For example if a stock is trading at $86 you could sell the $80 put for say $1. As long as the stock stays above $80 you would profit from that trade. The reason this trade is dangerous is the possible loss you could encounter is very high.

If this stock plummets you could lose up to $80 trying to make $1. Now I know that the odds of the stock going from $80 to $0 in a short time frame are unlikely, but it is still a possibility. The stock might go to $70, or $60. Your maximum loss is huge.

This is why if you sell puts it is safer to do so with a bull put spread. With a bull put spread you not only sell a put but you also buy a lower put for security. An example would be selling the $80 put for $1 and buying the $75 put for $.4. Now your max gain is only $.60 but you cannot lose more than $4.4. This is because you can buy the stock for $75 if you need to.

I will admit that I used to love selling naked puts on stocks. It was a great way to pull out extra money from the markets with the spare money I had. In fact in bull markets I would not care what my risk to reward was. The naked puts seemed to be profitable almost every time.

The stock that made me change my mind on this subject was Well Care health plans (WCG). Some of you might remember what happened with it. It was a strong company in an uptrend. I decided to either sell a naked put on it or a bull put spread. Luckily I choose the spread.

The stock started to go up and it looked as if I would profit. One day out of nowhere it was announced that the top managers in the company where being investigated for fraud. The stock fell from $114 to $42 overnight.

Because I had a bull put spread I only lost a little over $4 on it. But it got me thinking. What if I sold a naked put on the stock, I had a possible profit of only $1.15. Because it fell so fast in 1 day I would have lost $72.

I decided not to trade naked puts again on individual companies. Buying the extra protection and turning the trade into a spread can help you when big surprises like that occur.

To see an example of a bull put spread visit

To learn more about trading in the stock market visit

Saturday, June 7, 2008

Profiting from big moves

Anytime stocks make big moves there is an opportunity to make money. In fact if the stock moves far enough in a short period of time you do not need to even know which way the given stock will go in order to profit.

The straddle is a great way to do that. Let us look at an example of how it works. Say you find a volatile stock. You believe that this stock is going to move big one way or another. Maybe it is consolidating and will break out either up or down. Maybe there is a news event coming out. Whatever the reason you are predicting a big move.

The only problem is that you do not know which way the stock will move. That is where this spread comes in. But in order to understand how it works you need to understand what calls and puts are.

A call gives the purchaser the right to buy a given stock at a given price. For this you right you pay a premium and profit if the stock goes up. A put option gives the buyer the right to sell a given stock at a given price. You also pay a premium for this right but profit if the stock goes down.

So, if you are expecting a big move but do not know which way it will go you can profit by buying both the call and the put. If the stock goes up the Put you bought will lose money, but the call will make money. If it goes down the call will lose money but the put will make money.

This isn’t a miracle system. There is still a way you can lose money. If the stock goes up it has to go up high enough so that the call makes more money than the put loses, vice versa. A small or no move will probably end in a loss. A big move will probably end in a big gain.

For more information on strangles visit

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Thursday, June 5, 2008

Diversifying your portfolio

Diversifying your portfolio can be a very effective way to trade in the stock market. It can help you spread your money over many different opportunities that can help increase your chances of success. It will also help with risk management. By not having all of your account into 1 trade you will be less affected if that trade does not turn out the way you want it to.

The thing that most people do not think about with diversification is diversifying with both long and short positions. Many traders hate bears, and sideways markets. They are a strict bull. But in order for them to be well diversified as traders they should have at least some sort of bearish trades going on even while they have bullish trades.

The reason behind this is that you are protected from surprises in the market. If the market crashes your Bullish positions will probably get crushed but your bearish positions will be doing wonderfully and hopefully more than make up for the losses you took on the long side.

If the market’s rally the same thing is true. You can make tons of money on the long side while your short positions are getting hurt. This helps you make money no matter which way the markets may be heading.

This strategy is especially important during sideways markets. In these environments stocks can head up 100 points one day and crash 200 the next. If you were diversified between long and short positions you can make money no matter what happens in the market.

Another thing you should look at is trading more towards the side of the market. In other words if the markets are extremely bullish you should probably have more bullish trades then bearish open. If they are bearish you should have more bearish trades’ then bullish open.
Of course you still have to develop long and short trading systems that work. If your short term trades are not working now then they probably will not work if you do diversify.

For more information on trading in the stock market visit

Monday, June 2, 2008

Making money in a sideways market

The markets are said to be trending sideways most of the time. During this time they can be quite volatile. It is for that reason that many traders have come to loath them. However some traders actually prefer sideways trending markets over trending markets.

There are a number of ways to take advantage of this type of market. One of these ways is through the use of a trading strategy called an iron condor. During an iron condor you do not care if the stock goes up or down. In fact you want the stock to stay within its normal price range.

That is because it is actually made up of 2 different spreads the bull put and bear call.

A bull put spread makes it possible to make money as long as the stock stays above a certain level. A bear call spread makes it possible to make money as long as a stock stays below a certain level. Together they make an iron condor spread. This can be profitable as long as a stock stays within a given area.

For example say a stock has been bouncing between $100 and $120 for months. Some traders who are trying to trade a direction have been having a hard time. You however see this as an opportunity.

With this strategy you can make the $90/$95 bull put and the $130/$125 bear call spread. That gives you $1 profit as long as it stays between $95 and $125. You would also have to risk a maximum of $4 if the stock breaks out of its trend.

Because they have a terrible risk to reward ratio you want to be right a lot more then you are wrong. The good news about that is that iron condors are already high probability trades. They do not ask for the stock to do any that it already does.

To see an example of an iron condor spread visit

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