Trading Stocks

Trading Systems

blake — Sat, 24 Apr 2010 18:41:26 +0000

Wouldn’t it be great if you could find someone who spent all day watching each and every stock, listed or not, or option contact, and who knew precisely what the history of that security’s trading history has been, and who understands the current state and momentum of the market?

Wouldn’t it be great if that person’s sole purpose in life was to apply that knowledge to find buying opportunities and alert you to selling windows, with the assurance that their decisions had absolutely no emotion attached whatsoever? That it was all mathematics, algorithms on steroids?

Chances are that person doesn’t exist, and if she/he does, he’s already making seven figures for Goldman Sachs.

The Soul of The Machine

But what if you could find a machine to do that work? More likely, a piece of software that chews algorithmic sequences like candy and spits out trades that, chances are, will make you money each and every time?

Well, if you take out “each and every time” from that criteria, you’re in luck. Because those programs are out there. It’s just that you can’t afford them.

Yes, they’re expensive, hard to use and, because the stock market does find itself influenced by emotion and human weakness, not completely 100 percent reliable.

These programs – also known as algo trading, black box trading or robo trading – use all available data about the market and specific stocks to actually make buy and sell decisions. They are used by pension funds, mutual funds and other large institutional entities, often with portfolios on a scale that challenges any human minds to manage them.

The Machines are Taking Over

If you think this is just a small, sci-fi oriented corner of the market, think again. In 2006, for example, it’s been estimated that a third of all trades on US and UK markets were, in fact, executed by these automated trading systems, and before human eyes saw a single piece of data. And the trend says this percentage will increase.

The implications to individual investors include confirming the suspicion that the market is beyond anyone’s control. These programs are entirely data-based, without regard to the market forecasts of the companies whose symbols are attached to the stock certificate. This human factor is what trips up these programs on occasion, influencing buy and sell pressures that may translate to data, but only after the news hits the airwaves.

What About Us Little Guys?

Some vendors claim to have systems that individuals can use, as well. And while they may be based on the same algorithms and theories, they can’t compete with the massive systems employed by institutions.

Compete is the key work, there. Because the first trades in – those perpetrated by machines – are the least likely to be influenced by ensuing market momentum. This clouds the cause-and-effect nature of the markets, and thus, the ability of the individual to be first in line when a stock begins to move.

Which is why human intuition will never be programmed out the trading experience. Because if you can predict what the machines will do, you’ll be able to navigate in their waters.

When someone invents a program that can do that, all of us will be standing in line.

Technical Analysis Software

blake — Fri, 23 Apr 2010 17:35:36 +0000

The stock market is a data-intensive landscape. Everything is represented via numbers, and every number is constantly in motion. Which means, software comes into play. Especially technical analysis software.

The analysis of those numbers comprise the sum total of all stock research, even when the intangibles of a company don’t seem to be numerical in nature, like the quality of their products. In the end, even those soft variables translate to numbers by way of forecasts of data such as revenue, profits and the need for capitalization.

This research comes in two flavors: fundamental and technical.

Fundamental analysis is where those soft issues are found, amidst a sea of hard numerical data. Fundamental analysis is the study of a company’s health, the trending of their financial strength as represented by profits, margins, expenses, trending, and net capitalization, all of it in context to forecasts.

The result is a picture of how the company stands to fare, both in context to the market, and in comparison to its competition, going forward. The results of this analysis bear directly on investor supply and demand, which is the determinant of stock price levels and movement.

But fundamental analysis comprises only half of the research game.

The other half is called technical analysis.

Technical analysis looks at the historical trading ranges of a stock, putting it in context to the market in general. Baring outside influences (which usually come from the fundamental side, i.e., profit forecasts are slashed), a stock trades within a given range, establishing upper and lower boundaries.

All things being even, when investors sell off a stock the price drops accordingly. There comes a level – again, barring news that supports a downward trend – at which investors will regard the lower price as a buying opportunity, thus bringing fresh buy-side demand back into the market. This, in turn, stabilizes and then strengthens the stock, propelling it back up into the trading range.

The reverse also true.

When the price reaches a certain level, investors will take their profits by selling, thus establishing the upper end of a trading range. This puts sell-side pressure on the stock, sending it back down into it’s trading range.

When a stock violates these upper and lower limits, it’s known as a “breakout” stock, the price then being less subject to prediction based on a lack of data. This is new territory, and there’s nothing to say that investors will stop buying at a given level. Or in reverse, stop selling it off. Sooner or later the same factors that determine the former upper and lower trading limits kick in – investors smell a buying or selling opportunity and begin to buy or sell into the prevailing momentum.

None of this has much at all to do with the company whose name is on the stock certificate.

There are software programs that track this price performance data, and in great detail. They analyze demand and supply volumes, including backlogged bids and offers, juxtaposed against established trading ranges based on historical data for that stock. When the limits are approached, the software flags this stock as a buy or sell opportunity, allowing the human operator to determine if a breakout is likely based on any relevant news.

These programs are available either as a service bought via subscription, or you can buy them yourself, though they are quite expensive. They are a valuable tool for short term investors and traders, while longer term investors pay much less attention to trading ranges.

For them fundamental analysis is much more relevant, because today’s trading ranges have little relevance to the stock years down the road.

Unless they are planning on buying in or selling soon. In that case, everybody loves a bargain, and technical analysis software is a tool that can help you find one.

Stock Analysis Software

blake — Thu, 22 Apr 2010 17:32:36 +0000

The financial markets are a number-driven arena. The health and status of a company and its stock is represented by numbers, which are constantly in motion.

Software programs track it all, and it stock analysis software upon which many investors rely.

The Two Flavors of Stock Research

There are two realms of analsysis, and thus, two types of stock analysis software. Both are basically screening devices, designed to identify stocks based on carefully established criteria.

Fundamental analysis looks a company’s financial health, including profits, margins, expenses, trending, and net capitalization, all of it in context to forecasts. The results help drive investor demand, which in turn is the primary influence on stock prices levels.

Technical analysis analyzes historical trading ranges in context to the market. Baring relevant news, a stock price remains within a range, one with upper and lower limits that history proves to be valid.

If investors sell a stock the price drops. Sooner or later investors will see the stock as a buy opportunity, which stabilizes the stock, sending it back into the trading range. The same is true, only in reverse, on the selling side.

The role of stock analysis software.

When a stock violates its trading limits on either side, it’s called a “breakout” stock. Performance is then harder to predict because of a lack of data. Literally, this is new territory, and no ranges yet exist.

At some point the very factors that created the old trading limits come to bear, as investors sense a buying or selling opportunity and begin to buy or sell against the current trend, thus stopping the breakout while establishing a new range.

Very little of this has much at all to do with the company whose name is on the stock certificate. The exception is when the breakout represents the markets response to some news, such as a forecast being exceeded or disappointing results, or even a change in management.

The are programs that track this price performance data in great detail is called stock analysis software.

These programs analyze buying and selling volumes, watching for stock that approach established trading ranges. There are also programs that compare the fundamental data between companies, such as price-earning ratio, both for current and projected profit levels.

Now even the little guy can compete.

Such programs come an online service, or you can purchase them yourself. They are a valuable tool for short term investors and traders, while longer term investors pay much less attention to trading ranges.

All of this used to be the exclusive province of a stockbroker. But with today’s online services and the power of the software that drives it, even the smallest investor can perform all kinds of analysis from their home office, all with the help of stock analysis software.

Learn to Day Trade

blake — Wed, 21 Apr 2010 17:25:37 +0000

Never have three words been so well-advised, especially when you put the first in italics: learn to day trade. Because if you dive in without having done your homework, somebody out there will eat your account balance for lunch.

And if that sounds like day trading is an us-versus-them proposition, a competition, that’s precisely what it is. Because for every purchase you make there’s a seller, and for every sale you make there’s a buyer. Not only do those guys believe they know more than you do, chances are they have done their homework, too.

The New Era of Day Trading

The hey-day of day trading in the late 1990s is long gone. Pretty much everyone lost their hat, not so much to smarter investors than to greed, ignorance and the context of crashing market. Knowing when you get out, even knowing when to go short, is essential in day trading, and with five years of easy money warping the collective minds of day traders who had little or no experience, the greed factor was at an all-time high.

Not only did investors take a bath, but brokerage houses with extended margin lines took a hit, too. In order to prevent a recurrence of this fiasco, the federal suits did two things to slow and monitor the day trading arena.

New Quotes, New Spreads

First, they changed stock quotes for percentages to absolutely dollars and cents. What once was quoted at 7 3/8ths is now quoted at 7.38, or 7.37. And that’s the point here – there are now one-cent increments to deal with. Spreads used to be a minimum of 1/16th, or 6.25 cents, enough for a trader leveraging a little volume to actually make money on a wash trade (buy at the bid, sell at the ask).

But now, with a one cent spread, that’s virtually impossible, and not a remotely attractive proposition given the risk. The effect was to slow the day traders down, and it worked. Now a stock needs to actually move in either direction and by a factor a five to 10 cents or more, before it’ll get a day trader’s attention.

Under Penalty of Law

The other thing that has changed is the regulatory landscape. Day traders who trade frequently – at least four trades in a single day over a five day period – are called “pattern day traders,” and are subject to tougher margin limits and trading thresholds.

No longer can someone sit in their kitchen on a laptop and fritter away the family fortune. Because now, thanks to these new rules, you must maintain a $25,000 equity balance in a margin account, for which you must first qualify with the broker. And if you don’t, your account is frozen until the balance is restored, in addition to a five day waiting period.

Learning to day trade is easy. There are online classes, books and even live workshops everywhere. It’s advisable to actually practice day trading using dummy accounts until one understands the pace, mechanics and vocabulary.

But rest assured, when there’s real money on the line, your judgment will be challenged. Because if there’s one thing that hasn’t changed since the late 90s, it’s the role of fear, ignorance and greed in the outcome of a trader’s day.

Day Trading Tips

blake — Tue, 20 Apr 2010 17:22:09 +0000

The contextual meaning of the phrase day trading tips has two dimensions. One makes a lot of sense. The other is crap shoot.

On one hand, day trading tips include advice about the process-oriented methodology and tools involved in the actual practice of day trading online. Such advice could include everything from… don’t trade with a hangover or when you are not emotionally focused… to, make sure your computer RAM is sufficient to handle the data flow requirements of the software you buy to support your online real-time data feed and the need for upload speed for entering trades.

The other is an entire marketplace full of products – software, news feeds, online mentors, newsletters and bulletins – that actually tap you on the shoulder with “buy-now” and “sell this now” recommendations. These sources claim to use utilized models and real time market monitoring systems that trigger buy and sell points and define trading ranges within those “hot” trading moments.

Where the Two Contexts Overlap

For the latter to work, you need to have all the best efforts of the first realm – hardcore technical and process-oriented advice – in place. For example, to respond to the real-time tips provided by your system or mentoring source, you need to be able to respond quickly, clearly, efficiently, be error-free, and able to sense when you’ve hesitated too long.

Hard to do with a hangover.

No Buy/Sell Ideas Here

So if you’ve arrived here via a search engine hoping to find the next hot options trade or commodities strategy, keep looking, they’re all over the internet. But not here. Because such recommendations have a lifespan of mere seconds, and the focus of active markets can shift from day to day. If you do see an online posting recommending a buy or sell trade on a specific security, either research it immediately and, better, ignore it. Because it’s probably yesterday’s new.

The biggest tip you will ever hear is this: knowledge is power in the day trading game. Use the available systems and tools to increase your market visibility and ability to respond, which is the power required to succeed.

But even then, you’ll need more than a $4000 piece of software and a hard drive the size of a garbage truck. Just like an athlete must be steeped in the subtleties of a sport and then emerge themselves in the game, sometimes for years, before they begin to develop a sense about it, so too much day traders seek to hone their sense of where the market will go and which securities have already made their move.

Because, again, just as with sports, there’s someone across from you seeking your defeat. In this case it’s another day trader, who represents the market as a whole, and it’s you against them.

Small Cap Stocks

blake — Mon, 19 Apr 2010 01:54:17 +0000

You’ve heard the terms before – small cap companies, large cap companies, companies that have virtually no cap, also known as start-ups.

While such terminology doesn’t challenge those who work in the markets on a daily basis, they can be confusing to the rest of us. Because the definitions between various levels of capitalization – that’s what cap means – have evolved. What once were small cap firms are now very much in the large cap category, without anything but their numbers having changed.

Capitalization, Defined

First, let’s define the term capitalization. It’s simply the aggregate worth of a company in the marketplace – the number of shares outstanding multiplied by the price per share. This can and often does differ from the book value of a company, which is the value of the company’s assets on the books divided by the number of shares outstanding.

Think of a house on the open market – it’s worth what someone will pay for it, rather than what someone has invested in it. Sometimes it’s not fair or even reasonable – there have been companies valued at billions of dollars of capitalization that hadn’t even put out a product yet – but it is what it is, and we’re stuck with it as a standard of valuation.

And for the most part, because the markets are for the most part a pure and effective means of valuation, it’s a useful tool for investors.

Small Cap, Defined

Today the category of “small cap” companies includes those whose total capitalization is between 300 million and two billion dollars. And while that seems like a lot, it’s relatively small in comparison to Blue Chip firms (like General Motors and IBM) that are valued at over ten billion dollars, and there are literally hundreds of them out there.

Why delineate at all? Because there are mutual funds that define themselves by the type of companies they invest in, and small cap companies can represent a unique growth opportunity in the market place.

Small cap companies are established, they aren’t start-up enterprises, which means they’re well beyond the initial risk period that comes with the launch of a new venture. And yet, they haven’t yet matured to the point where their markets are saturated or their products have stiff competition, creating an upside limited only by their ability to navigate their niche and continue to innovate and serve their customers.

Astute investors often focus on a specific category or niche, and small caps, while not without risk, present a significant upside opportunity for those who can weather the inevitable storms of growth.

Investment Mutual Funds

blake — Sun, 18 Apr 2010 01:46:32 +0000

The hallmark of any solid investment portfolio is diversification – the spreading of risk through the holding of a variety of different instruments that present varying levels of exposure to risk, and in different industry sectors.

One of the ways to accomplish this is by acquiring investment mutual funds.

Small portfolios that hold only one or two securities usually aren’t concerned with diversification. But it doesn’t take much for any investment professional to recommend that, rather than putting all your eggs into one or two baskets, you accumulate smaller amounts of a greater number of securities.

Spreading the Risk

The rationale is solid and obvious – if one investment in a portfolioi goes south, or if an entire sector (type of investment, or stocks in a given industry) grows weak, the overall effect of the downward pressure on the portfolio will be minimal, or at least spread over the entire value of it.

And if the entire market is going up, chances are most of the securities in the account will do likewise.

One certainly could create diversification simply by researching and choosing stocks from different arenas, and with different levels of risk. But this presents certain challenges, because you’d need to manage the portfolio through various stages of the market, including dividend and reinvestment issues, and the more stocks you hold the more time-intensive that can be.

Or, you could invest in a single mutual fund, or even a few of them, to accomplish precisely the same objectives.

Mutual Funds Defined

A mutual fund is a professionally-managed portfolio of securities (usually stocks, but there are funds comprised of bonds and mixtures of other instruments) that align toward specific goals, such as appreciation or income generation through dividends. The fund may hold dozens of different securities (fund managers are constantly buying and selling stocks within the portfolio in an effort to optimize performance), but you only track one price – the aggregated price per share of the fund itself.

In other words, one share of fund XYZ would buy you fractions of shares in dozens of other companies, all managed by someone who knows what they’re doing. And, who collects an annual fee (usually one half to three quarters of a percent, sometimes more), to do so.

The advantage is precisely the same as if you’d have diversified your own portfolio – if one of the stocks goes south, the entire fund only feels a bump because the others remain relatively stable. Of course, in the case of overall market trends in tumultuous economic times, the entire fund will flow in the general direction of the market.

The ability to outperform the market is the criteria by which you should select a mutual fund, among other variables. Diversification is the common threat among mutual funds, but from there they spread in many directions in terms of objectives, composition and the nature of their management.

Like any investment, it’s buyer beware, as always. But there’s a reason mutual funds are the most common form of stock market participation – they’re easy, and they’re diversified.

Closed End Mutual Funds

blake — Fri, 16 Apr 2010 01:42:11 +0000

Mutual funds are the most prominent form of investing for individuals, and for good reason. They allow smaller investors diversify – to spread risk – across a wide range of securities, often aligning with specific industries or by objective.

The Nature of Mutual Funds

Most mutual funds are open-ended – meaning their managers have the latitude to buy and sell securities as they please, increasing or shrinking the number of stocks owned in an effort to optimize performance. This means that on any given day the per share value of the fund depends on the composition of the funds and their value in the market, combined with idle cash on hand (un-invested funds), rather than the supply of and demand for the fund itself.

In other words, the price per share of an open-ended mutual fund is a function of mathematics – it’s simply the aggregate total value of the fund divided by the number of active shares held. The per share price, then, is a function of the market value of the stocks, not of the fund itself as a discreet security.

The Opposite of Open-ended

But there is another type of mutual fund that is valued on a completely different basis. These are known as closed end mutual funds.

These funds have a fixed composition of stocks in their portfolio, and the quantity of each share doesn’t change. Nor are there cash balances that managers can manipulate – cash generated through dividends are invested according to inflexible standards.

With closed-end funds, new money doesn’t ever come into the fund, while open-ended funds can grow infinitely depending on the amount of new investor money that flows into it. Once a closed-end fund begins trading, that’s it, the size of the capital within the fund will change only by virtue of the stocks themselves going up in value.

The Dow Jones Industrial average, for example, if aggregated into a mutual fund, and if once a certain amount of capital has been reached became a closed-end mutual fund, would be an example of this type of investment. The value would be comprised solely by the performance of the Dow Jones Industrial Average, based on the daily fluctuations of the market (such a fund does exist, by the way).

Closed end funds are traded just like individual stocks. They are, in fact, simply a static (unchanging) block of stocks with a certain performance record, and just like company profits, that track record becomes the criteria by which investors either buy or sell the security.

Price Drivers in Closed End Funds

If the fund outperforms the market, the price will go up because investors will demand more of it. And vice versa. The specific value of the stocks within the fund aren’t the issue that defines value, market supply and demand is.

With open-ended funds this can’t happen, the value is simply a formula that divides total aggregate value by the number of active shares. If may indeed go up in value, but not necessarily if the number of new shares outpace the increasing value of the stocks, resulting in a static or even lower price per share.

As always, factors or risk tolerance and individual objectives drive the selection of mutual funds, both open and closed end. The data is readily available, and should be carefully analyzed before any investment decision is made.

Dollar Cost Averaging

blake — Fri, 16 Apr 2010 01:38:40 +0000

What goes up in the stock market usually comes down. At least on occasion. And often only for a little while. Which means, when you buy in, you may or may not have hit the low, which is the sweet spot of taking a position in a stock.

When you miss that mark, when the stock sinks beneath your original buy-in point, and if you continue to believe in the stock going forward, then dollar cost averaging is a strategy you should consider.

Making Dollar Cost Averaging Work For You

The key to successful dollar cost averaging is an on-going belief in the stock itself.

Because with this strategy you’ll be buying more of it, and you’ll be doing it into a lower market. If the value loss that creates this opportunity sours you on the company, a better strategy is to either sell now and take your lumps or simply hold on for the long run.

But savvy investors know there will always be price swings, and reasonable dips in stock prices come with the territory. So if you still like the stock, you can bring your overall cost-per-share – the average cost of the aggregated amount of stock you hold in a given company – buy purchasing even more of it.

The Numbers Don’t Lie

Let’s run some numbers and see how this works. Let’s say you buy 100 shares of XYZ at $20 per share. Then, two weeks later the price sinks to $16. You still like the stock, so now you’ll buy 100 more shares at the lower price.

You now own 200 shares at a total investment of $3600. That’s a cost-per-share of $18. By this measure half your shares are underwater by $2, and the other half is up $2. In the aggregate, you’re no longer down the $4 per share you were with the first 100 shares, you’re only down $2 per share overall.

Which means, the stock only needs to rebound two points, from $16 to $18, for you to be dead even on your investment. Whereas, had you stuck with the first 100 shares only, the stock would have had to rebound $4 per share to $20 for that to happen.

Of course, like anything in the market, this upside opportunity comes with some measure of risk, because there’s a chance the stock won’t rebound at all, or soon enough. Which means, you’ve just thrown good money after bad.

If you dollar cost average over time, and if your stock do indeed rebound, you can seize the inherent opportunity of natural market swings to lower your coast basis across all your holdings in a given security

And if you’re right, in the long run your ROI will thank you for it.

Stock Picks

blake — Thu, 15 Apr 2010 01:21:33 +0000

The clear objective of selecting stocks is to choose winners. But the process of getting there gets complicated, and fast. Your stock picks on a given day might seem easy and obvious, but there are always many variables to consider.

Stock picks depend on the specific goals and objectives of the investor. Short term investors use different criteria than long term investors, with completely different realms and processes of analysis applied.

In either case, though, the key is in understanding your needs and risk tolerance before you even consider making stock picks.

Because all stocks present some degree of risk, and a wide variance in upside potential and relationship to the market itself.

Risk vs. Liquidity

Another thing to consider when picking stocks is liquidity, or your ability to turn your stocks back into cash if and when necessary.

When trading in listed stocks this isn’t really a consideration, since you know exactly how and when you can get your hands on your money via a sale. But if you’re dealing with unlisted securities bought directly from a non-traded company, selling your stock may not be quite that simple.

The Two Forms of Stock Analysis

One form of criteria to assist in picking stocks is called fundamental analysis, which looks closely at the state of the underlying company. Financial strength, profitability, capitalization, and future outlook in light of specific products and positioning with those niches are all fair game to determine the viability of an investment using this method.

Another way to evaluate a stock is called technical analysis. This approach considers the performance of the stock itself over time, looking at trends in certain market conditions that illustrate trading patterns and parameters.

Investor First, Stock Picks Second

Once the investor understand what they are trying to achieve, and the level of risk they are willing assume to get there, the next step is to engage in both fundamental and technical analysis, as well as consulting trusted advisors who know how to interpret this data and have a feel for the market itself, to narrow the field of choices, from which specific stock picks will be made.

But, no matter how much homework goes into the process, there are no sure things in the stock market. This is why, even more than the stocks themselves, the wise investor understands their needs and tolerances first and foremost.

From there, stock picking takes place from an enlightened perspective, matching needs and parameters with the history and inherent potential of specific stocks on an informed basis.