Online Stock, Forex Trading Blogs | Stock, Forex Market Strategies Blog: July 2007

Stock Market Weekly Advice July 30

The Week Ahead: Despite a strong GDP report showing a resilient and flexible economy, selling capped a wild week in the stock market. Tighter credit and a slower housing market are seen as big concerns going forward. Reports to watch include the construction spending numbers for June, consumer confidence figures for July, and the 2nd quarter employment cost index on Tuesday. With crude oil approaching new highs, watch the inventory report Wednesday and the ISM Manufacturing Survey. June factory orders are out on Thursday and the July jobs report on Friday.

Stocks to Watch: Earnings from companies in significant industries will be closely watched this week. They include reports Monday from telecommunications giant Verizon (VZ), and the financial service firm of HSBC Holdings (HBC). Tuesday brings quarterly results from auto giant General Motors (GM) and the mass media company of CBS Corporation (CBS). Wednesday's slate includes Time Warner (TWX), Disney (DIS), and Starbucks (SBUX). Thursday watch earnings from NYSE Euronext (NYX), Viacom (VIA), and (AIG). Finally, Friday a report from the consumer brands company of Procter and Gamble (PG).

Special Note: It would appear that economists may have underestimated the housing problems associated with sub-prime lending practices as this may only be the tip of the iceberg in terms of over leverage in all markets. Tighter lending standards will impact most industries and therefore the economy as a whole negatively. If the DOW breaks the 13150 level, this would be the first signal that the spiraling parabolic rise on the monthly chart has ended, and the much anticipated 10%+ correction has begun. Caution is advised. Use rallies to raise cash.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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NobleTrading Direct Access Trading

email: info@nobletrading.com
phone: 877.872.3311
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Common Mistakes that DAT Traders Make

Winning in today’s financial markets is a hard task, especially for novice traders. Direct access trading of DAT can tremendously magnify a trader’s abilities; but it can also magnify his or her weaknesses. Below are some common mistakes that DAT traders make.

Trading without right preparation or right strategy.
Trading with under-capitalized accounts.
Trading inadequate or more than adequate number of stocks or other products.
Trading the products at the extremes.
Using highly complex tools and strategies.
Investing more money to losing positions.
Avoiding of stop losses and limit orders.
Looking for a pre-determined market condition to enter or exit a trade.
Predicting the market direction without analysis or with little analysis.
Trading with emotion.
Blindly following other traders.
Blindly depending on computer-generated statistics and conclusions.
Not considering transfer fees and other charges involved in trading.
Rapidly changing strategies by adapting to the NEW HOT strategies.
Trading heavily on margins.
Trading with extreme caution –being the last one to enter or exit.

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Black-Scholes Options Pricing Model

Black-Scholes model or Black-Scholes-Merton model was formulated in 1973 by Black, Scholes and Merton. The theory became widely popular and is some extend responsible for the current popularity of the derivates. Black-Scholes model and its variations are still widely used by options traders.

The underlying assumption of the Black-Scholes option price is that the price volatility of the underlying instruments follow a pattern and can be predictable. Thus by incorporating this volatility (implied volatility) value with time to options’ expiration, options’ strike price and time value of money, one can figure out the options price variation. Traders can also calculate the possible volatility if the options price is known. The results are expressed as Options Greeks consisting of Vega, Delta and Theta.

The Black-Scholes options pricing model does not consider the arbitrage of underlying instruments, the taxes and fees involved in trading and earnings from the underlying equity. The model also assumes that the equity is traded often and there is short-selling of it. Although the Black-Scholes model is formulated for European type of options, its variations are available for American type. The main variations of this theory include ARCH, GARCH, N-GRCH, etc

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Day Orders and GTC Orders

Good for Day Orders, popularly known as Day orders are unspecified orders which expires within the order entered day, unless executed. These orders usually have price points closer to the current market price. Day orders entered after the trading hour will remain open for the next trading day. They are better for traders trading with short-term goals.

Good Till Cancelled or GTC orders specified orders which remain open until they are cancelled by the trader or executed by the broker. Most brokers keep these orders open for 60 days unless executed. GTC orders typically have price points much higher than that of order entered day. The broker executes the order when the price reaches the specified point. The execution fee may differ for GTC orders, as their may be separate commissions for fulfilling a big order by several days; but there is usually no commission change for executing an order by multiple transactions in the same day.

GTC orders are available for stocks and options. They hold many advantages over day orders, as order execution for better prices, longer execution period, flexibility in canceling an order based on trading trends for a number of days, etc. But many traders won’t remember they have entered a GTC order couple of days after the entering day. The traders also have to fulfill some requirements of their brokers, and the corporate actions on the stocks may affect the order executions.

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GARP Stock Investing Strategy

GARP or Growth At a Reasonable Price is a hybrid stock market investing strategy which combines the merit of two most popular investing strategies named Growth Investing and Value Investing. The investors following GARP investing strategy looks for growth company stocks which are to some extent undervalued.

GARP stock investing strategy requires high degree of customization of trading platforms. GARP stock investors performs both growth and value analysis of each stock individually and concentrates those on middle region by avoiding extremes. The major areas of technical analysis include intrinsic worth, P/E ratio, book value, and assent to liability ratio. The typical growth rate for a GARP stock is between 10% and 20%, above and below percentages holds great risks.

GARP stock investing strategy holds both advantages of growth and value investing. But often it was noticed that the earnings of GARP investors differ considerably from that of strict growth or value investors. GARP investors face little challenges compared to growth investors in bearish markets. The major factor deciding the success of a GARP investor is his ability to make decisions, as GARP investors hardly get any support.

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Elliot Wave Theory

Elliot Wave theory is one of the oldest and widely followed theories regarding the stock market trend. It was developed by R N Elliot in late 1920s. The theory has its root in the traders’ mind – “the continuous bullish trend force tempt to sell the products they holding and the continuous bearing trend attract them to buy more insruments.”

According to Elliot Wave Theory, the stock market trends occurs in cycles which can be represented in waves. These upward and downward trends follow a peculiar wave pattern, which can be represented by a Fibonacci series (1, 3, 5, 8, 13, 21, 34……..). A cycle of trend includes 5 + 3 waves. The five waves are towards the main trend and 3 waves are the corrective waves.

There are different categories of waves according to the cycles. They are Grand Supercyle, Supercycle, cycle, primary cycle, intermediate cycle, minor cycle, minute cycle, minuette cycle and sub-minuette cycle, arranged as per size. For maximum profit traders can buy stocks in the beginning of an upward trend and can sell them at the end of the cycle. This theory of trading was predominant in 1970s, and are followed quite widely today.

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Pit Trading Vs Electronic Trading

Pit trading and electronic trading are the two major methods of trading used by traders trading financial products. Pit trading also known as floor trading is the trading of stocks or futures manually in the exchange floor, known as Pit. It was the main type of trading until late 1990s. But the introduction of electronic trading of stock and futures have certainly lowered the popularity of pit trading and now more and more pit traders are moving to electronic type.

Electronic or online trading of stock and futures holds much more advantages than pit trading as,

No need of extensive physical strain.
Faster order entry and execution.
Ability to trade a number of exchanges.
Choice of order routing destination.
Ability to trade multiple products simultaneously.
Instant market data as charts and instant news.
Access to advanced trading programs integrated with powerful analyzing tools.
Speedy access to account details.
Even broker independent trades.

But still floor trading is practiced quiet extensively and in some markets like S&P, the pit trading volume is much larger than the electronic trading volume. Some exchanges and investment firms are looking to build much larger trading floors. Today, electronic pit trading is also available in some markets.

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Why Demo Trading Performance Better Than Actual One

Perhaps the most common question that novice traders ask themselves is “Why my demo trading performance is better than the actual one, even when I am trading with the same trading system and strategy?”

The most common cause for this is the change of your mind, not the system. With a demo trading account you are risk free, you can place orders of your wish, and can experiment a lot with your strategies. You will be much relaxed as not a penny from your pocket is at risk. But in actual trading atmosphere you will be so much timid. Most novice traders will be in defensive mood to track and protect every possible loss to your invested money, rather than tracking possible profiting possibilities. More over, he or she may be over careful in placing your orders and choosing order sizes.

The standard demo account size of $50,000 or so allows traders to manage their risks easily, which is not so possible with actual accounts – usually with lesser size. For most traders paper trading of instruments is like playing a computer game where they plays with their brain. But with actual money, the hormones take control over your trading. Novice trades often want to get out off trades, like a reflex action, when ever they sniff a bearish trend. Often in pressure they follow faulty analyses and calculations. In actual market condition, the greatest difference between an experienced trader and a novice trader is the “control over emotions”.

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Stochastic Oscillator Momentum Indicator

Stochastic oscillator is one another most followed technical momentum indicator by traders trading almost all financial instruments like stock, futures and forex currencies. Stochastic oscillator was developed in late 1950s by George C Lane. It is one of the powerful tools to generate the market divergence signals.

A Stochastic oscillator includes two values as %K and %D each having its value somewhere from 0 to 100. The values are calculated using

%K = 100 x (Closing Price – Lowest Price for N period) / (Highest Price for N period – Lowest Price for N period)

%D = 3-Period Moving Average of %K (That is simply %D is the smoothed form of %K)

Usually the period used is 14 days. The results are plotted as two lines and the alerts are usually generated when %K line crosses that of %D. If the value of %K is above, then the market is considered as overbought; and if the value of %K is below 20, is considered as oversold. A positive divergence is usually confirmed with the second break above 20 and the negative divergence is with second cross below 80.

For more convenience, two types of Stochastic oscillators are used as Stochastic fast and stochastic slow. The %K and %D values of Stochastic fast is determined by the above value. The %K value of the Stochastic slow the %D value of Stochastic fast, and the %D value of Stochastic slow is the 3-period moving average of Slow %K.

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More Trading Tips for Online Traders

We have already discussed many tips useful for traders trading stocks, options, futures and forex. Here are some more.

Trade only those you know – you must know some thing about the company, industry etc.
Always keep your eyes open – many times great opportunities are discovered outside the market and trading system. From media, friends, family members, etc.
Do some extensive research – Research all those opportunities you find around. Always look on fundamental values like PEG ratio, percentage of sale, competitors, industry performance, cash position, debt-to-equity ratio etc.
Never be predetermined – Starting trades with a predetermined mind, with our analysis, can wipeout you from the market.
Be strict to your style of trading – if you are an investor, and is pretty sure about direction of movement the stock or other investment you earned, never panic about the daily or weakly market fluctuations.
Never try to over-diversify – diversification of portfolio is always an important step. But over-diversification means lesser time to mange your capital.
Always have some back-up open – The volatility, which make the financial markets tradable does not distinguish expert’s and novice’s assets. It is you who have to manage your money.

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Market Opening and Closing Prices

By definition the opening and closing prices are the first and the last traded price for a particular financial instrument respectively. When combined with previous day prices, they are good indicators of market trends. Today they are available from virtually all media and are widely used by both highly active and less active traders to find out trading opportunities.

But today pre and post market trading services are available, which enable traders to trade before and after regular trading hours (9.30am to 4pm) respectively. Some media take the first and last trades in these trading hours as opening and closing price, while others take the first and last trades in the regular trading hours as opening and closing price. Thus you may find two different opening or closing price for same instrument in the same market.

One another situation is in forex market, where the market is open 24 hours and continuously 5 days a week (Sunday 5pm to Friday 4pm EST). So the actual forex market opening and closing prices are the first traded price of Sunday and the closing price is the last traded price of Friday. But the daily opening and closing price we found around came on a local or regional (North America, Europe and Asia) basis. For North American region the opening price is the first traded price after the opening of the New York market at 8am EST, and closing price is the last price before the closing of NY market at 3pm EST.

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Stock Market Trader Newsletter

The Week Ahead: In contrast to the nations chain store sales report, the government reported June retail sales had the biggest drop in 2 years with higher gas prices getting the blame. Despite this, the DOW pushed toward the psychologically important 14,000 level. Watch the June PPI and industrial production numbers on Tuesday, the June CPI and housing starts on Wednesday, Fed chairman Bernanke's semi-annual congressional testimony on Wednesday and Thursday, and June's leading economic indicators on Friday.

Stocks to Watch: Baker Hughes (BHI), an oil service company, traded sharply lower as it sees 2nd quarter earnings below estimates do to poor results from its Canadian operations. Shaw Group (SGR), a maker of pipes etc., received an upgrade from Citigroup with a price target of $70 because of a huge 3rd quarter backlog. Radio Shack (RSH) broke below its 50 day moving average after being downgraded to a sell rating. Smithfield Foods (SFD) is in talks to sell pork to China as its stock moves up from an area of consolidation.

Special Note: As the DOW completes its parabolic rise from the 2002 lows, investor sentiment is reaching levels that correspond to market highs. For instance, the Investors Intelligence percentage of bullish advisors recently hit multi-month highs near 60% while the American Association of Individual Investors has bullishness nearing 50%. Combine these figures with high complacency levels as measured by the VIX Index and an environment of high risk emerges for equities. Diversify holdings across many sectors.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

To view all of NobleTrading's historical newsletters, click here.
Click here to open an account.
NobleTrading Direct Access Trading

email: info@nobletrading.com
phone: 877.872.3311
web: http://www.nobletrading.com

Bollinger Bands for Technical Analysis

Bollinger bands are one of the most widely used technical analysis tools by all types of traders trading stock, bonds, forex currencies etc. It was developed by John Bollinger. Bollinger bands consist of three bands. One middle band showing the simple/exponential moving average and two standard deviation bands plotted above and below the simple moving average band.

The volatility in the price of the financial instrument can be easily noticed by the widening of the bands – As the volatility increases, the width between middle and side bands increases. The moving in of upper band towards the middle band informs that the market is becoming more over-brought (time to sell instruments), and the moving in of lower band towards middle band informs that the market is becoming more oversold (time to buy instruments). Bollinger bands also give the information about support and resistance levels.

There are many advantages of using Bollinger bands for technical analysis. They include easiness to view and analyze, dynamic price adaptation to the price changes and volatility changes, excellent tool for trend traders and faders, and easiness to employee with other types of technical analysis tools.

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Options Vs Futures - The Hot Dispute

Both options and futures were invented to limit or to avoid the trading loss because of market volatility some where in future. Both are fairly similar in their set up except in exercising methods. Options and futures are traded extensively today, are available for almost all financial instruments, and contribute largely for the stability of markets.

According to most experts, Options really have some added advantages over futures. The option holder is fully free in exercising the option. The maximum loss is a fixed one, the initial premium. Options can be exercised at any time before the expiration date. The trader can implement multiple trading strategies to ensure profit from even a worthless option. They can be traded for both long-term and short-term profits and the trades needn’t to have much knowledge of the underlying instrument. More over options are available for a variety of instruments including futures.

But futures trading include unlimited risk as the delivery of underlying instrument is an obligation on expiration date. With futures the trader does not have much trading options. But futures are still traded in large amounts because they present excellent opportunities to earn underlying instrument once the market direction is predictable. They are very good for traders having very good knowledge of underlying commodities and for those traders who does not want to twist their mind in complex strategies.

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Monday, July 30, 2007

Stock Market Weekly Advice July 30

Common Mistakes that DAT Traders Make

Friday, July 27, 2007

Black-Scholes Options Pricing Model

Thursday, July 26, 2007

Day Orders and GTC Orders

GARP Stock Investing Strategy

Wednesday, July 25, 2007

Elliot Wave Theory

Monday, July 23, 2007

Pit Trading Vs Electronic Trading

Why Demo Trading Performance Better Than Actual One

Friday, July 20, 2007

Stochastic Oscillator Momentum Indicator

Thursday, July 19, 2007

More Trading Tips for Online Traders

Wednesday, July 18, 2007

Market Opening and Closing Prices

Tuesday, July 17, 2007

Stock Market Trader Newsletter

Monday, July 16, 2007

Bollinger Bands for Technical Analysis

Saturday, July 14, 2007

Options Vs Futures - The Hot Dispute

Thursday, July 12, 2007