Stock Market, Forex Currency and Futures Blog, Trading / Investing Strategies

Trading ETF Futures Contracts

2008-07-18T05:33:00.000-07:00

Exchange Traded Funds (ETFs) are regarded as the most successful trading instruments introduced in the last two decades. They are traded just like stocks, are tax efficient, are less expensive, and are a good way of diversifying portfolio. Chicago Mercantile Exchange (CME) has also introduced standardized futures contracts on ETF in 1997. CME offers electronic trading of 3 different ETF futures contracts.

S&P 500 Depository Receipts (SPY) futures: Futures contract worth 100 SPY shares which track large-cap stocks.
Nasdaq 100 Index Trading Stock (QQQQ) futures: Futures contract worth 200 QQQQ shares which track top 100 non-financial stocks of Nasdaq.
iShares Russel 2000 index fund futures: Futures contracts worth 200 iShares Russel 2000 index which track small-cap stocks.

There are many advantages of trading ETF futures over ETF shares. ETF futures are standardized contracts with specific expiration or settlement dates and traders have option to cash settle or to own underlying ETF shares. With ETF futures it is easy to go short with out actually burrowing shares, they lower capital requirements, can be daily settled and are easy to leverage. Two other great futures advantages include diversification of portfolio and hedging against portfolio risk.

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Fibonacci Cluster Technical Indicator

2008-07-17T06:00:00.000-07:00

Fibonacci cluster is an advanced Fibonacci technical indicator used extensively by traders of all kinds to find support and resistance levels and to predict trend reversals. Fibonacci clusters are easy to interpret and are easy to use in conjunction with other technical analysis tools.

Fibonacci cluster is a collection of a number of Fibonacci retracement lines represented in different shades. Different trading systems use different methods of representing them; the most popular method of representing Fibonacci cluster is in a side bar of a price chart. The more the number of retracement lines meets in a price level, the darker will be the shade of Fibonacci cluster corresponding to the price, and the strong the support/resistance level is.

Traders can also create Fibonacci clusters manually by drawing new Fibonacci retracement lines over and over a volume/price graph (better if you use different colors each time). The more the numbers of lines at a price level the more the chance of being it a support/resistance level. It is advised to always use Fibonacci clusters in conjunction with other technical indicators and Fibonacci techniques, where clusters can be used to identify a support or resistance level and some other indicator to confirm it.

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Fighting the Tape and Painting the Tape

2008-07-16T05:19:00.001-07:00

Both fighting the tape and painting the tape are trading practices to be avoided. Fighting the tap is a trading practice where traders act against the ticker tap. That is they buy when stock prices are falling (bearish market) and sell when stock prices are rising (bullish market).

In opinion of experts fighting the tape is a deadly sin which can destroy a trader’s future. Major reasons for fighting the tape are over-optimism, over-confidence, greed, fear of loss, unavailability of inadequate data, using of wrong tools for technical analysis, and wrong interpretation of news and info.

Painting the Tape is an illegal trading practice where some traders manipulate stock price to profit from it. They buy and sell stocks in high volumes and high prices. On ticker tape report this scenario creates a feeling on other (unsuspecting) traders that the stock is good to trade or invest. As a result the stock price moves to even higher levels and the original traders profit from this. At some time later, when traders realize the stock is an over-valued, price drop considerably resulting in heavy loss to traders holding them. The increased use of automated trading systems to generate buy and sell signals by traders also helps painting the tape traders considerably. Technical analysis and rightly interpreting info are measures of avoiding painting the tape stocks.

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Forex Mini Accounts and Trading Risks

2008-07-15T05:54:00.001-07:00

Mini forex trading accounts are an excellent option for beginner traders to get familiar with forex market. Mini accounts (contract size 10,000) are typically 10% of standard accounts (contract size 100,000), and also require low minimum deposits to open the account.

Mini forex trading accounts are excellent tools to decrease trading risks. For a mini trading account a 10 pip loss (For example: a decrease of EUR/USD from 1.5689 to 1.5679) can result in that is 1% of the trading account. For a standard trading account the same 10 pip loss can result in a loss of $100 (100,000 x 0.0010), which will be equal to 10% of a mini account. Also remember the usage of leverage can magnify this loss; and also profit if currency moves in opposite way. Many expert traders advice to keep the maximum loss per trade to below 3% of total portfolio; which can be easier to achieve by mini accounts than standard accounts.

Mini forex accounts provide more flexibility than standard accounts. Mini trades can trade fractions of standard accounts (contact sizes of 20,000, 30,000, 50,000, etc) or you can trade 10 minis to equalize a standard lot. This gives the trader to adjust his contract size according to his trading account size and also helps in effectively utilizing leverages. When trading lesser lots, mini accounts allow traders to place wide stop losses.

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Weekly Stock Market Information Letter, July 14, 2008

2008-07-14T06:20:00.000-07:00

The Week Ahead: Stocks fell for the sixth straight week while bond yields rose as Fannie Mae and Freddie Mac's stock price collapsed losing almost half there value. This has cast a cloud over the specter of a market turnaround, but Fed chairman Bernanke begins his Capital Hill testimony on Tuesday which could ease investor fears. Also look for the PPI and business inventory reports. Wednesday, the CPI, industrial production, and the FOMC Minutes release from last months policy meeting will be in focus. Thursday brings the housing starts number.

Stocks to Watch: Shares of URS Corp. (URS) jumped significantly based on a pending contract to build a nuclear complex in the United Kingdom. Jacobs Engineering (JEC) was added to Goldman Sachs "buy list" after saying it recently became oversold. Webster Financial (WBS) boosted its 2nd quarter loss provision to $25 million from $10-15 million as its stock touched a new all time low. Teva Pharmaceutical shares were off on a threat of generic competition from rival company Momenta.

Special Note: The Dow Industrials and S&P 500 appear to be readying to test or breach their 2006 lows of 10683 and 1219 respectively. If broken would open the door to more selling pressure. Similar to what happened with the Bear Stearns rescue at the March lows, a resolution to the crisis surrounding the government sponsored entities of Fannie Mae and Freddie Mac could be the event that marks another turning point for stock markets here and around the world.

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

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Managed Futures Trading Accounts

2008-07-11T05:20:00.000-07:00

Managed futures accounts are futures trading accounts which are managed by professional money managers on behalf of their customers. These money managers are known as Commodity Trading Advisors (CTAs), who are registered under Commodity Futures Trading Commission (CFTC). They buy and sell futures contracts in a discretionary or predefined basis.

There are a wide range of managed futures trading programs offered by CTAs. Some programs concentrate only on one or two futures contract types – like metals (gold & silver), equity futures (S&P & Dow futures), grains (wheat & soybeans) or soft futures (cotton & sugar). Other programs concentrate on trading a mixture of futures types. Some CTAs are trend followers, some are market neutral traders (or option writers), while some others are long-term traders. Fees that CTAs charge for managing accounts can also vary considerably; usually includes management fee and performance incentives.

Managed futures trading accounts are considered as a good investment option because of a variety of reasons. They are an easy way of diversifying portfolio.
They are good hedging tools against portfolio risk.
They are professionally managed, and do not require any investing/trading knowledge from clients.
These accounts can be opened with relatively low capital investment.

Things to consider when choosing a CTA for Managed futures trading include their futures trading plan, types of futures they are trading, drawdowns, past performance, fees involved, annualized rate of return and risk adjusted return.

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Fibonacci Extensions Technical Indicator

2008-07-10T05:58:00.000-07:00

Fibonacci extensions are an advanced Fibonacci application, which are widely used by traders and investors. They help traders in figuring out the future support and resistance levels of a trend beyond 100% retracement level.

Fibonacci extensions are horizontal lines plotted on key Fibonacci ratios beyond 100 (these ratios are derived by adding standard Fibonacci ratio to 100; eg: 138.2%, 150%, 161.8%, 231.8%, 261.8%, 361.8%, 423.6% etc.). Most popular of these ratios are 161.8% and 261.8%.

Fibonacci extensions can be applied to both downtrend and uptrend. Many traders close their positions when prices touch Fibonacci extension levels. For an uptrend beyond previous swing high, extension level of 161.8% is predicted as the future resistance level and 100% level is taken as support. Similarly for a downtrend beyond previous swing low, Fibonacci extension of 161.8% is predicted as support level and 100% as resistance level. But if the trend is significantly strong, then the prices can easily cross 161.8% level, then the next extension level (usually 261.8) is taken as resistance (for uptrend) or support (for downtrend).

Many modern trading systems allow traders to plot Fibonacci extensions. When employing these tools it is advised to use in combination with other technical analysis tools to find out strength of trends and target prices.

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Tirone Levels Technical Indicator

2008-07-09T05:47:00.001-07:00

Tirone levels are a series of horizontal lines plotted on trading charts to predict possible support and resistance levels, developed by John Tirone. They are very much similar to Fibonacci retracements and Quadrant lines. Tirone levels are used mainly by short-term traders, especially day traders; they are also useful for long-term trading.

Tirone levels are calculated based on lowest low and highest high values for a given period of time. There are two different methods of calculating Tirone levels, Midpoint method and Mean method.

In midpoint method, the center line (mid point) is calculated by subtracting highest high (HH) value from lowest low (LL) and dividing the result by 2. Top line is drawn at 1/3 difference from HH to LL, and bottom line is drawn at 2/3 difference from HH to LL.

In mean method, there are 5 asymmetric lines. They are calculated as follow,

Adjusted mean (AM) = (HH + LL + Recent closing price) /3.
Extreme high = AM + (HH - LL).
Regular high = 2AM – LL
Regular low = 2AM – HH
Extreme low = AM – (HH - LL)

Interpreting Tirone levels is easy, the upper level is the immediate possible resistance and lower level is the possible support. For better accuracy, it is advisable to use Tirone levels in conjunction with other technical indicators.

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Forex Opportunities in Emerging Market Currencies

2008-07-08T06:55:00.000-07:00

The economic advancements in many Asian, Latin American and European countries now offer good trading/investing opportunities to investors across the world. Studies have shown that many emerging market funds outperformed others. This emerging market economic growth also offers forex traders an opportunity to profit from trading corresponding currencies.

Although emerging market currencies (like Hong Kong Dollar, South African Rand, Singapore Dollar, Malaysian Ringgit and Mexican Peso) are far less traded than G7 currencies, they possess good risk to reward ratio. They offer a good chance to diversify forex portfolio and to make use of economic developments and news happening in these part of world. Many forex traders now prefer a forex portfolio mainly including Euro and US Dollar, and some emerging market currencies.

The downside of trading emerging market currencies include less liquidity, high volatility due to political and economic crisis, less floating currencies because of central bank policies, etc. One thing to remember is that many emerging market currencies are actively traded in other trading hours than of G7 currencies; so the trader may need to adjust his time according to different currencies he trading. Also remember, most of these currencies posses high amount of risk and the trader must enter a trade after proper fundamental and technical analysis.

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Stock Info Week Newsletter, July 7, 2008

2008-07-07T07:01:00.000-07:00

The Week Ahead: Job losses are now in there 6th straight monthly decline. European banks raised there interest rates. Oil eclipsed $145 a barrel, and the DOW officially reached bear market territory. Earnings season kicks off this week starting with Alcoa (AA) on Tuesday. Pending home sales and wholesale inventories will also be released. Same store sales numbers are due Thursday while the University of Michigan's Consumer Confidence report comes out on Friday. Watch for General Electric's (GE) earnings at weeks end as well.

Stocks to Watch: AmeriGroup (AGP) bounced from an oversold level after it renewed a contract with the state of Tennessee for healthcare services which also included an approved rate increase. Church & Dwight (CHD) which makes the Arm and Hammer baking soda received a brokerage downgrade because rising material costs are hurting the company's growth and profit margins. Acme Packet (APKT) dropped 40% after warning that 2nd Q earnings would fall short of estimates. Medical device maker TranS1 (TSON) cut 2nd Q revenue targets.

Special Note: Stock Markets around the world continue a pattern of inter-market bullish divergences where some are hitting new 52 week lows while other markets hold above there March lows. Regardless of this phenomenon, most stock indices here in the U.S. remain at or near oversold conditions. A relief rally could unfold at any time. The question should be at what level will this potential rally start and will it be sharp and brief or a gradual incline?

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

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Support and Resistance Levels

2008-07-03T03:42:00.000-07:00

Support and resistance levels are the most widely used technical analysis tools by all kinds of traders. Support is a price level at or below the current trading level which act as a barrier for downward price movement of the stock. Resistance is a price level at or above the current trading level which act as barrier for upward price movement of stock.

Support and resistance level can be formed because of a variety of reasons.

Support level is created when there are many traders willing to buy stock at a price, and resistance level is created when there are many traders willing to sell stock at a price.
At round price levels, like $50 or $60, there can be more number of traders willing to buy or sell, thus making these levels support or resistance for that stock.
When market is on a move, stock prices dropping below certain level tempt traders to buy that stock, creating a support level. And similarly stock prices rising above certain level tempt traders to sell off stocks, creating a resistance level.
Widespread use of Fibonacci techniques by traders, for predicting support and resistance levels, caused automatic formation of support and resistance levels as traders increasingly buy/sell stocks at these levels.
Use of other technical analysis tools like Moving Averages, RSI and Stochastic also can contribute to support and resistance level formation.

The number of times a stock price have touched a support or resistance level can indicate the strength of that level. The strength increases in an order Single (s) – touched ones, Double (D) touched twice, Triple (T) – touched thrice, and more than triple (T+).

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Three-Factor Model of Portfolio Management

2008-07-02T05:49:00.000-07:00

Three-Factor Model is an extension of Capital Asset Pricing Model (CAPM) used to determine the return and risk associated with a portfolio management. It was developed by Eugene Fama and Kenneth French in 1993. Complicated than CAPM, the Three-factor model is more accurate as it explains more than 90% of portfolio returns (compared to around 80% of CAPM).

When determining returns, Three-Factor Model considers two more factors other than market risk (beta). They are size (market capitalization) and value (book/market ratio) factor. The reason for this is the fact that value stocks and small cap stocks regularly outperform markets and large value stocks. As per the model small value stocks usually have highest-risks and highest-returns. Although not resolved correctly, the possible reasons for the out performance of this small cap and value stocks are (1) because of the excess risks these stock carries and (2) because of mispricing demanding later price adjustments.

Studies have shown that mutual funds and portfolios which follow three-factor model outperform most others. This led to the enhanced adoption of this model by more and more funds. Many investors also adds custom factors (eg: credit risk) to the model for enhanced performances. One thing to remember is the high volatility associated with small caps and value stocks; investor must carefully diversify the portfolio to attain more than average risk with desired risk level.

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Capital Asset Pricing Model (CAPM)

2008-07-01T05:56:00.000-07:00

Capital Asset Pricing Model or CAPM is an investment model widely used by investors to determine return and risk associated with an investment or portfolio. CAPM is also used to determine whether a security is over-valued or under-valued. The general idea is if the investor takes any risk there must be sufficient return from it, called risk premium. The formula of CAPM is

R = Rf + beta x (Rm - Rf)

Where R is the expected return (also known as Cost of Capital), Rf is the rate of risk-free investments (or time value of money), beta is the beta value (risk associated) of the security or index, and Rm is the expected return from market. Investors following Capital asset pricing model invest in securities, if the expected return (R) equals or exceeds required return. Fore example if the risk-free ratio is 4%, the beta value of security is 3% and expected return from market is 10%, then expected return will be 4+3(10-4) = 22%.

The greatest advantage of Capital asset pricing model is the idea that risk-return relation of every portfolio can be optimized to attain lowest risk for a specific level of return. Many investors following CAPM prefer to invest in low-cost index funds rather than on stocks. CAPM necessitates diversification of portfolio.

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Stock Market Trading Newsletter, June 30, 2008

2008-06-30T06:24:00.000-07:00

The Week Ahead: The slowing economy and high oil prices are impacting companies hard especially General Motors whose stock hit a 53 year low. Its long term debt rating is now six notches below investment grade and may have to cut its dividend or raise cash. With that said, the auto sales report for June comes out Tuesday along with construction spending numbers and the ISM Manufacturing Index. Factories orders are due Wednesday, but Thursday's employment report ahead of a long holiday weekend is the one to watch.

Stocks to Watch: Anheuser Busch (BUD) unveiled a new growth strategy after rejecting InBev NV's hostile takeover bid of $65 a share, but can the stock maintain is current high price level? The weak economy has impacted apparel makers Christopher and Banks (CBK) and American Eagle Outfitters (AEO) both hitting 52 week lows as the former has a cautious outlook and the latter was downgraded. Office furniture maker Steel Case (SCS) is also weak as domestic sales dropped 9%. Finally, Vestin Realty Mortgage II (VTRB) suspends its dividend due to a gloomy real estate market.

Special Note: The Dow Industrials recent break below its January 2000 high now has the most broadly watched average in negative territory for the past 8 1/2 years. The other two (Nasdaq and S&P 500) have been and still are substantially negative over the same time frame. Another significant message the Dow may be sending is the break below the long term trend line connecting the 1982 low and the 2002/2003 lows and its subsequent failure to push back through this line twice at the two peaks in May of this year. Upside resistance now appears to be between 12,000 and 12,500 on any ensuing rallies.

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

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Long-Short Stock Investing Strategy

2008-06-27T04:40:00.000-07:00

Long-short or long/short is a stock investing strategy followed by many hedge funds, portfolio managers and individual investors. The strategy was introduced in late 1980s. Long-short stock investing includes buying (taking long position) stocks which are assumed to perform high and selling (taking short position) stocks which are assumed to perform low, than early ones. Theoretically this is a risk-free investing strategy, as long as both positions are of same size.

With long-short investing strategy, irrespective of the market performance, the investor/fund will benefit as long as the stocks which he purchased outperform the stocks he sold. Although investors can buy any stock (doing well) and sell any stock, many follow a ‘paired trade’ model to limit risks. Often the pair involves same/related industry stocks. In this way investors can limit the risk to only their selection of stocks rather than industry/market performance.

In practice long-short investing strategy is a high-risk strategy, as a great amount of risk is associated with stock selection and short selling. Many funds and portfolio manages follow complex rules and strategies to evaluate individual stocks and companies, and to find good opportunities. Long-short strategy is favorable only to portfolios which are actively managed and frequently/seasonally readjusted.

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Fibonacci Time Zones Technical Indicator

2008-06-26T05:50:00.000-07:00

Fibonacci time zones are one other extensively used technical indicator based on Fibonacci numbers. These are used to forecast timings of major price changes. Fibonacci time zones are a series of vertical lines placed at increasing intervals according to Fibonacci numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, etc). They are useful for both upward and downward trends.

Fibonacci time zones favor long-term traders more because of the easy to plot lines and interpret them. First line is usually a day where there is a major move. Successive lines are placed on subsequent days correspond to Fibonacci numbers (1st, 2nd, 3rd, 5th,…days). Many swing traders also use Fibonacci time zones with shorted base time intervals based on hours rather than days. A modern approach is to find a base interval (time between 2 tops or bottoms) and then multiplying it with the Fibonacci golden ratio (1.618) to plot the lines.

Although hard to explain, Fibonacci time zones possess a high degree of predicting power (around 70%). Often these are time zones of trend reversals or large price changes in trend direction. Many forex and stock traders use these time zones to enter or exit trades. Remember there can also be major price changes between Fibonacci time zones. Many traders plot multiple time zones on same graph to overcome this issue.

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What is Beta Value of Stocks?

2008-06-25T05:37:00.000-07:00

Beta value is a measure of a stock’s volatility with respect to market volatility. It is a popular indicator used by many traders and investors to facilitate their trades. The market volatility is taken as 1, and beta values of a stock are calculated as a measure of how much the stock price moved from this market volatility.

Beta value of a stock can take one of the following forms.

Negative Beta – This is a rarity, and means the stock is moving just reverse to the market.
Zero (0) Beta – This means the value of the stock stays same irrespective of market movement. Again a rarity.
Beta between 0 and 1 – This means the stock price swing less compared to market movements. Many blue chip company stocks and high-liquidity stocks have beta less than one. In a long-term prospective these stocks fall under low-risk low-profit category.
Beta of 1 – This means the stock price moves in the same relation with the market. This can be the case with many index-related products.
Beta greater than 1 – This means the stock price swings more compared to market movements. Many growing companies and technology companies have beta greater than one. Most of these stocks fall under high-return high-risk category. Also remember, beta at very high levels probably indicates high price volatility because of low-liquidity.

Beta value of stocks is important for traders following Capital Asset Pricing Model (CAPM). Many value investors ignore beta value. Beta values are based on past performances, may not accurate to predict the future, and market volatility and time period of beta are important factors to consider before making a trading decision.

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Hedging Arbitrage and Netting Arbitrage

2008-06-24T06:01:00.000-07:00

Both hedging and netting arbitrage are arbitrage strategies practiced exclusively by forex traders. Both are risk-free arbitrage practices, but are practiced less common because of the scarcity of (difficulty of finding) arbitrage opportunities.

Hedging arbitrage involves profiting from difference between roll over interest rates (SWAP) between two forex brokers. Here the forex trader simultaneously opens two currency positions for opposite currency pairs. Generally currency pairs with high SWAPS (like GPB/JPY) are selected. Trader opens a position for GPB/JPY at a broker who pays high roll over interest and a reverse position (JPY/GPB) at a broker who does not charge any interest rate. This way he will get profited everyday if the scenario stays same.

Netting arbitrage involves profiting from difference between cross currency pairs at different markets. But this scenario is a rarely and traders need advanced systems to find them. Here the forex trader opens three currency positions simultaneously including 3 different currencies. For example he buys one lot of EUR/USD at 1.5414, sells one lot of EUR/GBP at 0.789.7 and simultaneously sells 0.7897 lots of GPB/USD at 1.9525, profiting $48.125.

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Stock Market Newsletter, June 23, 2008

2008-06-23T05:51:00.000-07:00

The Week Ahead: Stock markets continue to be under pressure as oil surges and a spike up in commodity prices pinches consumer budgets. Now a possible military showdown between Israel and Iran could be looming. The Case Shiller Index for home prices and consumer confidence numbers are due out on Tuesday. The FOMC's decision on interest rates comes Wednesday in addition to the durable goods and new home sales numbers. The 1st Q final GDP is due Thursday while personal income and spending numbers are released Friday.

Stocks to Watch: Many regional banks were downgraded by Merrill Lynch including Wachovia Bank (WB), but some banks rallied when SunTrust Banks (STI) said its dividend would not be cut despite increased second quarter charge-offs. Western Union (WU) raised its long term growth target and boosted its stock buyback by $1 billion. Tenneco (TEN) shares dropped due to the slumping U.S. auto market, but may be reaching oversold levels. A major brokerage started coverage on Intrepid Potash (IPI), a relatively new fertilizer stock.

Special Note: An interesting technical formation on the Dow Industrials chart shows its lowest weekly close of the year as the DJIA attempts a retest of its January and March lows. A look at the other two major indexes in comparison indicates the DOW leading the charge down as the S&P 500 and especially the technology driven Nasdaq are not nearly as close to their respective lows for the year. A potential positive divergence could be setting up if the Dow breaks to new lows without confirmation by the other two.

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

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Insured Asset Allocation Strategy

2008-06-20T05:39:00.000-07:00

Insured asset allocation strategy is a fairly active portfolio management strategy which is ideal for investors with low-risk tolerance but who need active portfolio management. In insured asset allocation strategy investor establish a base portfolio value (often somewhere between 75% and 100% of total capital invested). Total portfolio value is not allowed to drop below this base value.

When the total portfolio value is above the base value, then the investor practices active portfolio management strategies, such as investing in high-profit high-risk instruments like equities to maximize the portfolio growth. But when the total portfolio value drops to approach baseline he/she moves to a passive mode by investing in low/no risk instruments and selling off risky instruments. Many times, when portfolio value approaches base value, it involves total changing of investment strategy by the investor.

There are two major approaches available for insured asset allocation, formula approach and portfolio insurance approach. In formula approach the investor buys more and more low/no risk assets when the portfolio is dropping to the base level. In portfolio insurance approach the investor use futures contracts and put options to insure the base capital. Insured asset allocation strategy is advantageous for investors who want to ensure a minimum standard of living after retirement and who want keep a minimum capital in hand.

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Fibonacci Retracement Technical Indicator

2008-06-19T07:10:00.000-07:00

Fibonacci retracement is a charting technique based on Fibonacci ratios. It is widely used by traders of all types to find support and resistant levels, to find entry and exit points and to place stop losses. Fibonacci retracements come handy when prices of financial instruments retrace after noticeable up-trends. These retracements offer opportunities for traders to buy stocks/currencies/futures at low prices.

Fibonacci retracement technical indicator consists of horizontal lines plotted on trading charts. These lines are created as follows.

First a trend line is created connecting two extreme points (highest and lowest points of a trend).
Then retracement lines are plotted horizontally crossing the trend line at key Fibonacci levels (23.6%, 38.2%, 50%, 61.8% and 100%).

For a retracement trend these Fibonacci retracement lines is the most possible support level. The three key Fibonacci levels (38.2%, 50% and 61.8%) are considered most important levels. For the upward trend, this may occur after the retracement, these lines act as the resistant levels.

Most modern trading systems use Fibonacci retracements as a major technical indicator. Fibonacci retracements are also used in other indicators like Gartley patterns, Tirone levels and Elliot wave theory.

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Important Market Factors that affect Day Trading

2008-06-18T05:42:00.000-07:00

Day trading includes quick response to changing market conditions. A day trader must look at various market factors to find a trading opportunity or to close a trade with minimum/no loss. Here are some factors which affect markets and stocks on a daily basis.

Oversea market performances: The opening hour of American stock exchanges are heavily influenced by the market performances of Asian and European markets, which have already/almost ended their trading day.
Overseas economic news and data: News regarding overseas individuals, policies, companies, industries and economies can affect stock prices at any time.
First hour rush: The first hour of a trading day is often noticeable for higher trading volume as most individual and institutional traders try to react to news.
Futures data and prices: Price changes of futures contracts, especially index futures, can be an indicator of stock market changes. Also futures trading starts before stock market trading.
Company/economic reports, and analyst reports and ratings: These are the main factors which determine market/stock performances after the morning hour.
Mid-day volume decrease: Often at afternoon, because of scarcity of new news, the trading volume decreases and stock prices decline.
Position closing at afternoon: Many traders, especially day traders, start liquidating their open positions from afternoon in order to avoid/limit over night risks. This is more prominent in Friday afternoon.

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What is Take Profit Order?

2008-06-17T06:47:00.000-07:00

Take profit orders or T/P are orders just reverse of stop-loss orders. These orders are practiced by forex traders to close positions when a profit level is reached. Take profit orders includes a take-profit point, which is specified as the number of pips or exchange rate from the current trading price point. When take-profit point is reached the trade is closed locking the profit from the trade.

Take profit orders are practiced by traders when they are sure about market/price direction to a certain price level, but unsure beyond that price level. They also come handy when the trader is trading extensively on margin, and when the forex trader lacks time to monitor the trade. Some forex traders place take profit orders for fixed pips change for a currency pair, while others increase or decrease their pips range according to fundamental and technical analyzes.

For example, if a trader buys $1000 worth Yen when USD/JPY is at 104.668, which is 104,688 Yen and places a take profit order at 105.50, then if the USD/JPY touches 105.50, the order is executed for 105,500 Yen, with a profit of 812 Yen or $7.6969.

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What is Dynamic Asset Allocation Strategy?

2008-06-16T10:28:00.000-07:00

Dynamic asset allocation is a highly active portfolio management strategy, which involves constant/frequent adjustment of investments with respect to market and instrument performances. Unlike strategic and tactical asset allocation strategies, dynamic asset allocation does not include any fixed investment ratio among investments.

Investors following dynamic asset allocation only look for more profitable instruments with respect to current market direction and performance. They diversify their investments on different financial instruments like equities, derivatives, mutual funds, index funds, fixed income securities, money market funds, etc. They constantly buy instruments which are rising and sell instruments which are losing. Investors and Traders following dynamic asset allocation strategy use fundamental and technical analysis tools to evaluate, confirm and predict trends of markets and instruments.

Advantages of dynamic asset allocation include (1) increased returns as more investments are done in rising instruments, (2) Reduced downside risk as investments are avoid on declining markets, (3) better exploitation of changing economic scenarios, and (4) benefit of diversification of investments. Disadvantages include (1) The need of active management of portfolio, (2) chance of loss because of wrong market interpretation and wrong investing decisions, and (3) high risk when compared to strategic and tactical methods.

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Wash Sale Rule for Traders

2008-06-13T05:16:00.000-07:00

Wash sale rule or 30-day wash-sale rule is a tax rule imposed by Internal Revenue Service (IRS) on traders and investors. As per the rule a trader/investor can’t claim tax reduction for the loss of a trade if he purchases back the same instrument (replacement instrument) with in a wash sale period. Wash sale period includes 61 calendar days – 30 days before the sale date and 30 days after the sale date.

Wash sale rule mostly seriously affects traders and investors who trade stocks of a limited chosen companies and day traders who buy and sell different stocks in large numbers. Apart from prevention of tax deduction, wash sale rule has two other consequences.

Basis adjustment – Trader’s disallowed loss is added to the basis of replacement instrument. This preserves the benefit of disallowed loss on future sale of replacement instrument.
Holding period – Trader’s holding period for the replacement instrument includes the holding period of sold instrument. This prevents traders from altering long-term loss to short-term one.

Wash sale rule do not applies to financial instruments like futures and currencies. Many traders adopt different of strategies to minimize the effect of wash sale rule; as (1) calendaring the sales and purchase dates with minimum trading days involved, (2) buying replacement stock only after confirming the stock price is at bottom level, and (3) buying some other stock which has great correlation with original stock and then replacing that with original stock after completion of wash sale period.

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