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What is System Trading?

noreply@blogger.com (Daniel Pipitone) — Thu, 05 Nov 2009 13:32:00 +0000

System trading, also known as mechanical trading, automated trading, algorithmic trading and rule based trading, is one of the two popular trading methods; the other is discretionary trading. It is the trading practice where a trading system trades on behalf of a trader. The system makes all trading decisions with respect to the rules set by the trader and the info available at the time. System traders rely on the ability of the system to find trading opportunities and to execute trades.

Usually all the trading decisions like entry and exit points, stop-losses and position sizes are made by the system, but it is possible to override the decisions. Most trading systems come with standard trading rules, which need to be customized according to the traders' trading goals, risk tolerance and the securities/markets traded. As all trades are done automatically, traders can practice complicated trading strategies.

The first thing to note is that the system makes absolute trading decisions. A buy or sell process is triggered once all the requirements are met; and the system never trades until the minimum requirements are met.
System trading eliminates human emotions like fear and greed from influencing the trading.
As the decisions are made automatically, traders can conduct large-scale trades with complex strategies like arbitrage.
The strategy is better for short-term trading like intraday trading and swing trading; but not for long-term trading and investing.
The strategy is good for persons who want speed and accuracy in their trades; and who want to save time.
System trading is usually less flexible and adaptable than discretionary trading.
While system trading favors novice traders more than discretionary trading, the system still requires to be fine-tuned for making good profits with minimum risk/loss.

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Zig Zag Trading Indicator

noreply@blogger.com (Daniel Pipitone) — Thu, 05 Nov 2009 13:28:00 +0000

Zig Zag indicator is used by traders to reduce the "noise" in a trending security. It is very useful in finding price trends, finding support and resistance levels and in evaluating chart patterns like head and shoulders pattern, double tops and double bottoms. Actually Zig-Zag is not considered a true indicator, but as a filtering program to eliminate random price swings of a given period.

There is not an exact formula for zig zag indicator; it is a computer program which wipes out all price movements less than x percent or points. For example if you use a 5% filtering, all price movements of the stock less than 5% will be eliminated from the graph. Traders can also set the zig-zag amount in points. Thus the indicator helps the traders to better explore the market cycles and long-term chart patterns.

Zig zag trading indicator is widely used in Elliot wave analysis. The indicator is a lagging indicator and has zero predictive power. The last leg of the indicator is generated dynamically; it can change as the last leg is not set until the future price is already known. Traders should never use zig zag indicator for generating entry and exit points but for just understanding past price movements. The indicator can offer better results when used with other indicators and chart patterns.

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Bullish Concealing Baby Swallow

noreply@blogger.com (Daniel Pipitone) — Wed, 04 Nov 2009 13:35:00 +0000

Concealing baby swallow is a bullish trend-reversal candlestick pattern indicating the start of a new uptrend after a downtrend. It is a four candlestick pattern comprised of all bearish (black or colored) candlesticks. Bullish concealing baby swallow pattern is a highly reliable pattern, where trend reversal occurs because of the extreme bearishness of the trend.

The requirements of a bullish concealing baby swallow pattern include,

The market should be characterized by a significant downtrend.
The first two days are characterized by bearish marubozu candlesticks without any upper or lower shadows.
The third day is a bearish day opening below a gap and is characterized by an inverted hammer formation, the shadow of which trades into the body of the second day candlestick.
The fourth day is also a bearish marubozu day which opens a gap above the third candlestick and completely encloses the third day candlestick.

Bullish concealing baby swallow formation occurs when there is a strong bearish sentiment in the market. The bearish marubozu formations of the first two days indicate that the downtrend is strong. But the long upper shadow of the third day candlestick and gap above opening of the fourth day candlestick indicate that the trend is weakening. The fourth day also offers a perfect opportunity for shorts to cover their position. Once that's done, the trend is expected to reverse.

Bullish concealing baby swallow is a highly reliable formation; however, a bullish candlestick with a gap-up or a higher close on the next trading day is necessary for confirmation of the trend.

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What are BRIC ETFs?

noreply@blogger.com (Daniel Pipitone) — Tue, 03 Nov 2009 13:43:00 +0000

BRIC ETFs are exchange traded funds which invest in stocks associated with BRIC nations, which are Brazil, Russia, India and China. These are countries which are considered as the leaders of emerging economies because of steady and fast economic (GDP) growth in the past and are constantly exploring their high levels of natural/human resources. BRIC ETFs allow investors to passively benefit from this growth.

BRIC ETFs are excellent ways to diversify the investment portfolio. They are also believed to offer better returns than ETFs tracking NYSE and S&P; or American and European markets as a whole. Different BRIC ETFs may have different weightage for different countries; for example Claymore BRIC ETF (EEF) has the following allocation proportions - Brazil 46%, Russia 5%, India 13% and China 36%. Apart from tracking the securities traded in BRIC exchanges, many BRIC ETFs also track stocks of BRIC countries traded in American and European markets.

Many investors consider BRIC ETFs as an alternative way to profit when the dollar and US economy are weak. BRIC ETFs usually have higher expense ratios than traditional ETFs. They are also considered risky as the political climate of these nations can change drastically. The recent recession, which hit these economies too, has also raised some concerns over these economies. The decoupling theory of emerging markets, which stated these economies will grow independently, has also proved wrong so far.

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NobleTrading Weekly Stock Update

noreply@blogger.com (Daniel Pipitone) — Mon, 02 Nov 2009 14:53:00 +0000

The Week Ahead: Investors were spooked by a falling consumer confidence number while personal income and spending data showed the biggest drop in 10 months. The data continues to flow starting Monday with pending home sales and construction spending. Auto sales arrive Tuesday as the FOMC begins a two day meeting on interest rate policy. The FOMC decision will be announced Wednesday afternoon. Third quarter productivity and jobless claims data are announced Thursday which precedes Friday's all important Employment Report.

Stocks to Watch: Zale Corp. (ZLC) after showing a much larger Q4 loss versus a year ago is undergoing an SEC probe of their accounting practices. Manitowoc Company (MTW) beat earnings estimates for Q3 despite being substantially lower than last year, and Standard & Poors kept a strong buy on the stock. Stanley Inc. (SXE), an IT services firm beat Q2 estimates and year ago levels in their earnings report as the stock pushed back above a declining 200 day moving average. Microstrategy (MSTR) handily beat estimates for Q3 as the stock vaulted to an 18 month high.

Special Note: The S&P 500's decline in October halted seven straight up months as the broad based index tests its October low. Several indexes registered bearish outside down weeks including the Dow Transports, Russell 2000, and S&P 600 Small Cap Indexes where higher highs and lower lows were made than the previous week and closed lower. This candlestick bar pattern is quite often associated with major reversals in stocks and can be considered a precursor for a larger decline than the 9% drop in July despite a 65% rise since the March low in the S&P.

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What is October Effect?

noreply@blogger.com (Daniel Pipitone) — Fri, 30 Oct 2009 13:59:00 +0000

October effect is the belief that the market tends to decline in the month of October. Today this is considered only as a psychological expectation of traders rather than an actual phenomenon. Statistics over the years shows that October is just like any other month. An opposite phenomenon is observed in the month of January known as January Effect, which is more common and is related to tax paying.

The month of October makes many traders and investors nervous as many serious market declines occurred in the month of October. The 1907 panic, 1929 Wall Street crash which preceded the great depression, black Monday and crash of 1987 and the recent 2008 credit crisis occurred in October. Moreover, it is the month of the last earnings season of a year, so prices are expected to fluctuate in either direction.

Statistics of the last 30 years shows that on an average, October is not the worst month of the year, it is September. In the late 90s and early 2000, October was the most profitable month of the year. In 1946, 1957, 1960, 1966, 1974, 1987, 1990, 2001, and 2002 October was also the month which ended some of the major bear markets. One reason for this is, as the phenomenon is widely known and expected, traders are prepared to exploit any decline/sell-off.

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In Neck and On Neck Candlestick Patterns

noreply@blogger.com (Daniel Pipitone) — Thu, 29 Oct 2009 13:58:00 +0000

Both In Neck and On Neck are bearish trend continuation candlestick patterns indicating a continuation of an existing bearish trend, after a bullish day. Both are two candlestick formations, comprising a long bearish and (preferably) a short bullish candlestick.

The requirements of In Neck and On Neck candlestick patterns include:

The pattern should form in a significant downtrend.
The first day is a long bearish day comprising a long black or colored candlestick.
The second day is a bullish day where prices open a gap below the first day's closing.
For In Neck pattern: the second day candlestick closes at or just (barely) above the first day's closing. If the candlestick closes way above the first day's closing, it forms Bullish Piercing Line pattern, a reliable bullish reversal formation.
For On Neck pattern: the second day candlestick closes below the first day's closing. The candlestick needs to be short; if it is long, it may form Bullish Meeting Lines pattern.

Both In Neck and On Neck candlestick formations occur commonly in downtrends and are considered undeveloped versions of bullish piercing line pattern. As bulls are failing to close trades distinctly above the first day's close, the downtrend is expected to continue, at least for a short term.

Both In Neck and On Neck are moderately reliable candlestick patterns. The bearishness of the formation increases with increase in length of the first day bearish candlestick. Confirmation of trend continuation is recommended.

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QStick Momentum Indicator

noreply@blogger.com (Daniel Pipitone) — Wed, 28 Oct 2009 13:13:00 +0000

QStick or Q-Stick is a momentum indicator developed by Tushar Chande. It is a simple indicator used to identify the trends over a period of time. QStick indicator shows the numerical value of a trend. It is calculated by taking the moving average of the difference between opening and closing prices for a period.

With QStick momentum indicator, values below zero indicate that the trend has a bearish bias, which increases with increase in negative values. Values above zero indicate that the trend has a bullish bias. Crossings of the zero level are used to identify trend changes. Traders may also use a short-term moving average of the indicator as a trigger line.

QStick is an easy to trade momentum indicator, trading signals can be generated in many ways.

Crossovers: Buy signals are generated when the indicator crosses zero line from below and sell signals are generated when indicator crosses zero line from above.
Extreme Values: Buy signals are generated when the indicator is in extreme low levels but turning up and sell signals are generated when the indicator is in extreme high levels but turning down.
Divergences: Buy signals are generated when the indicator is moving up but price is moving down and sell signals are generated when the indicator is moving down but price is moving up.

Like any other momentum indicator, QStick also offers better results when used in conjunction with other indicators.

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Trading Agriculture ETFs

noreply@blogger.com (Daniel Pipitone) — Tue, 27 Oct 2009 14:37:00 +0000

Agriculture Exchange Traded Funds or ETFs are ETFs that enable traders to profit from ever-changing agriculture commodity prices. They are becoming increasingly popular and are growing in number. Investing in agriculture ETFs is considered a good way of diversifying the portfolio as agriculture commodity prices often move independent of stocks and exchange indexes.

Now there is a variety of agriculture ETFs available for trading.

Some of them track single agriculture commodities such as wheat, soybean, cotton, coffee and sugar.
Some track a particular type of commodity such as grains, soft commodities, etc.
Livestock ETFs.
Normal and leverage ETFs.
ETFs which track specific agricultural indexes and ETFs which track futures price of specific commodities.
ETFs which give same weightage to all commodities they track and ETFs which give more weightage to specific commodities.

Like the agricultural commodities, supply and demand is the main factor which controls the price of agricultural ETFs. The long-term and near-term predictions & news affect the price. Agricultural ETFs are good for all those traders who want to profit from changing commodity prices but do not want to trade the commodities directly. They are also good option for traders who want to hedge their portfolio, want to diversify the portfolio, and who trade futures & options on these commodities.

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Trading Entry and Exit Points

noreply@blogger.com (Daniel Pipitone) — Mon, 26 Oct 2009 14:53:00 +0000

Market timing is all about finding the right points to enter a trade at the start of a trend, namely, entry points; and the right points to exit the trade at the end of the trend with maximum profit, namely, exit points. Entry and exit points are important in all forms of trading, but are most important in short-term trading, when traders want to capitalize on a relatively small price movement.

The entry and exit points should match traders' trading style, market/security volatility, anticipated price movement, trading goals, margin, position size, etc.
The trader should be clear about the nature of the trend that he can capitalize with his setup - his trading skill, risk tolerance, money flow, trading system, etc.
There are a variety of tools available for finding entry points; traders can use indicators, chart patterns, candlestick patterns and fundamentals to find an opportunity.
Traders should use more than one tool to confirm the opportunity. It is good to use the tool(s) one is most comfortable with to find the entry points and use others to confirm it. It is also better to use different kinds of tools, rather than the same one.
Perhaps finding exit points is more difficult than finding entry points. There are some indicators which predict reversals, support and resistance levels; and trend strengths can be good tools for finding them.

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ETF Sponsors and Creation Units

noreply@blogger.com (Daniel Pipitone) — Fri, 23 Oct 2009 13:47:00 +0000

ETF sponsors are financial firms that create and manage exchange traded funds. Now there are a number of ETF sponsors offering different types of ETFs that track different products and markets; examples include iShares, PowerShares, State Street, etc.

ETF sponsors create ETFs by creating an underlying index which is passively managed. This underlying index can be of stocks, currencies, derivatives, bonds, commodities, etc. Institutional investors help them in creating the initial underlying index by delivering them the stocks or derivatives needed for that. In exchange they receive creation units from ETF sponsors. The institutional investors can then market the shares of the creation units they are holding to retail investors in open markets or centralized exchanges.

Creation Units

Creation units are ETF shares which are considered as units of ETFs. Creation units can vary with the ETF provider and with ETF; usually a creation unit can contain 25,000 to 600,000 ETF shares; and units containing 100,000 shares are most common. It is the creation units that give liquidity as they are the small units of an ETF which is available for intraday trading. ETF sponsors also make necessary changes to the ETF portfolio with time, to best mimic the tracking index. They exchange old securities with the creation unit holders to get new securities.

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Cup and Handle Formation

noreply@blogger.com (Daniel Pipitone) — Thu, 22 Oct 2009 13:27:00 +0000

Cup and Handle formation, or the Cup with Handle formation, is a bullish continuation chart pattern. The formation was discovered by William O'Neil and introduced in his 1988 book 'How to make Money in Stock'. Cup and handle formation is very popular among investors, and that is one reason for the success of the pattern; because traders buy in high volumes creating the bullish breakout at the end of the formation.

The requirements of cup and handle formation include,

The pattern should form after a not too mature (2 or 3 months old) strong bullish trend. The pattern weakens when formed after matured uptrends, as the upside potential is low.
The pattern must have two components, the U-shaped Cup and a handle. The handle must always follow the cup.
The cup is like a semi-circle and is formed as a result of (steady) price decline followed by flattening of trend and then a (steady) price increase.
The handle is a downtrend after the formation of the cup.
The end of the handle formation is marked by increased buying volume resulting in a sharp upside breakout.

The shape and duration of the cup formation is important. V-shaped cups, formed because of sharp decrease and then sharp increase of the price, are not considered valid. The more rounded the formation, the better reliable it is. The cup formation lasts for a few weeks or months; the ideal one extends from 2 to 6 months. The depth of the cup should be below 30 to 50 percentage of the prior trend; depths above 65% are considered less reliable. In an ideal cup formation, both sides have equal highs. The handle formation lasts 1 to 4 weeks and the depth should be below 30% of the cup formation.

Many traders enter the trade when the breakout after handle formation crosses the descending trendline (drawn connecting the highs of the handle). Many other traders wait till the breakout crosses the two peaks of the cup formation. With cup and handle formation the confirmation of breakout, in the form of sharp increase in trading volume, is essential.

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Chande Momentum Oscillator or CMO

noreply@blogger.com (Daniel Pipitone) — Wed, 21 Oct 2009 13:37:00 +0000

Chande momentum oscillator or CMO developed by Tushar Chande shows the momentum of the underlying security. CMO is similar to Relative Strength Indicator, Rate of Change indicator and Stochastic Oscillator but differs from them in many ways. It uses the data of both up days and down days, uses no smoothing of data and does not hide any short-term movements; but like other oscillators it is ranged between +100 and -100.

Chande momentum oscillator is the difference between the sum of all gains and the sum of all losses for a period divided by the sum of all price movements. The formula for CMO is,

CMO = [(Su – Sd) / (Su + Sd)] x 100

Where Su is the sum of the difference between current and previous closes on up days and Sd is the sum of the difference between current and previous closes on down days.

Positive values of Chande momentum indicator show bullish trends and negative values show bearish trends. Oversold level is identified when CMO is below -50 and overbought level is identified when CMO is above +50. The 0 level is used to identify the change in momentum. With CMO, many traders use a (nine period) simple moving average to generate buy and sell signals. Buy signals are generated when the oscillator crosses above the signal line, and sell signals are generated when the oscillator crosses below the signal line.

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What is Reflation?

noreply@blogger.com (Daniel Pipitone) — Tue, 20 Oct 2009 13:47:00 +0000

Reflation is the intentional practice of a government to reverse the existing deflation. Today the word is also used widely to describe the first phase of recovery after a recession. Reflation is a complex process and involves many steps which aim at increasing a country's economical output. Usually a reflation policy includes,

Reducing (almost all types of) taxes.
Changing the money supply or injecting money to key economic sectors like infrastructure development.
Lowering interest rates.

The resultant injection of money into the economy causes rise in commodity prices and inflation. Many investors take the reflation phase as an investing opportunity. They can change their investments from low-risk low-profit instruments like treasury investments to high-risk high-profit investments like stocks. They can also take this as an opportunity to reinvest the pre-invested money. But the success of these strategies greatly depends on the trader's investing knowledge and skill in money/risk management.

Over the years, many countries and governments have implemented different reflation policies with different levels of success. Reflation policies are also implemented widely to sustain the economic boom by reducing the chances of backward growth. One thing every reflation policy does is increase the national deficit or debt. Over a long term, this increased debt tempts the policymakers to reverse the entire procedure - increase taxes and increase the interest rate - to fill the debt.

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NobleTrading Newsletter, October 19, 2009

noreply@blogger.com (Daniel Pipitone) — Mon, 19 Oct 2009 14:07:00 +0000

The Week Ahead: Markets recoiled Friday after an unexpected drop in October consumer sentiment and a reported $1.4 trillion budget deficit. In addition, Bank of America's $1 billion loss and GE's reduced bottom line versus a year ago did not help. Watch the PPI report along with the housing starts number on Tuesday. Jobless claims are due on Thursday along with September's Leading Economic Indicators from the Conference Board. Existing home sales are released on Friday.

Stocks to Watch: Apple Computer (AAPL) will release its widely anticipated quarterly results on Monday. Other significant earnings reports include Boeing (BA), Ebay (EBAY), and Wells Fargo (WFC) all released on Wednesday. Cytec Industries (CYT), a specialty chemical producer, beat estimates for Q3 by .23 and increased full year guidance for '09 as the stock regained levels last reached in October '08. Cryptologic Limited (CRYP) which develops internet gaming software sank hard after forecasting a Q3 trading loss of $3.4 million.

Special Note: Stock indexes look to complete very near term peaks in momentum as prices approach and push into strong upside resistance between 10,100 and 10,400 on the Dow Industrials, 1100-1125 on the S&P 500, and 2200-2250 on the Nasdaq. The timeframe for these moves could be from now until mid November. Another technical warning comes from the 10-day CBOE total U.S. equity/index put call ratio which has dropped to .755 near levels reached at the 2007 top.

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

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What is Stock Replacement Strategy?

noreply@blogger.com (Daniel Pipitone) — Fri, 16 Oct 2009 13:16:00 +0000

Stock replacement strategy, as the name suggests, is a strategy to mimic the returns of trading stocks through derivatives. The strategy aims at profiting from a stock, without directly trading the stock. In stock replacement strategy, traders use options (especially deep in-the-money options) and futures on the stock. For example, traders can buy deep in-the-money options having delta close to 1, then a $1 rise in stock price will also cause a $1 rise for the option.

Advantages of stock replacement strategy:

The strategy offers all benefits associated with trading (group of) stocks.
Reduces costs associated with opening long positions and holding them.
Offers more leverage, most money can be retained for hedging purposes.
Offers low downside risk, with options traders having the option to do or not to do, and futures positions can easily be offset.
Both simple and complex options trading strategies can be followed for getting custom results.

Disadvantages of stock replacement strategy:

Needs good trading experience and skills to master the strategy.
The strategy may fail, when the stock stays on (almost) the same price or moves sidewise with minimal volatility.
Sometimes the costs of trading options can match or exceed those of trading stocks.

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Bullish Deliberation Candlestick Pattern

noreply@blogger.com (Daniel Pipitone) — Thu, 15 Oct 2009 12:55:00 +0000

Bullish deliberation is a bullish trend reversal candlestick pattern indicating the possible reversal of an existing downtrend. The pattern resembles three black crows pattern, but the latter is a bearish candlestick formation. Bullish deliberation is a three candlestick pattern, formed of all black or colored candlesticks.

Requirements of a bullish deliberation candlestick pattern include,

The pattern should form at the bottom of a significant downtrend.
The first day is a long bearish day.
The second day is also a long bearish day, opening within the body of the first candlestick and closing at a new low.
The third day is also a bearish day characterized by a small bearish candlestick which opens near of a gap below the second candlestick and closes at a new low.

Although the formation seems bearish (and the existing downtrend can continue), a close look would reveal that the trend is weakening. The long bearish candlesticks on the first two days indicate that the bearish trend is strengthening, and also contribute to a gap down opening on the third trading day. But the formation of a small candlestick on the third day indicates that the downtrend is losing momentum; at least temporarily. There is a sign of indecision, hence the name deliberation, and as prices are at low levels, trend reversal is possible.

Bullish deliberation pattern is a weakly reliable pattern; and is less popular than bearish deliberation pattern. Reliability of formation increases with previous downtrend and with shortening of real-body of third day candlesticks (doji and star formations). Most traders do not take bullish deliberation as a true reversal pattern, but as a short-term price change indicator. Traders use the pattern to lock profits and to move up the stop-losses.

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Money Flow Index or MFI

noreply@blogger.com (Daniel Pipitone) — Wed, 14 Oct 2009 12:51:00 +0000

Money flow index or MFI is a momentum indicator used to gauge the strength of a trend by analyzing the price and volume associated with a security. It is similar to Relative Strength Index or RSI, the difference is it also considers volume, whereas RSI only considers price. MFI measures the strength of money flow in and out of the security and is a comparison of positive and negative money flow. The formula is,

Money Flow Index, MFI = 100 - (100/1 + Money Ratio)
OR
MFI = 100 x (PMF / (PMF + NMF)

Both calculations give the same result. Money ratio, PMF and NMF values are calculated by,

Typical Price = (High + Low + Close) / 3
Money Flow = Typical Price x Volume.
Positive Money Flow (PMF) = Sum of money flow for days where typical price is increased.
Negative Money Flow (NMF) = Sum of money flow for days where typical price is decreased.
Money Ratio = (Positive Money Flow /Negative Money Flow)

Money flow index is represented as a range bound oscillator having a maximum value of 100 and minimum value of 0. It is interpreted the same as RSI, the values above 80 are considered overbought and values below 20 are considered oversold. Divergences of price and MFI are considered more important signals. When price and MFI moves in opposite directions, it indicates the weakening of an existing trend and a possibility of trend reversal. Like RSI, MFI is also widely used with a 14 day time period, but traders can adjust that to get custom results; the lesser the time frame, the more the volatility of the indicator..

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Trading ETF Options

noreply@blogger.com (Daniel Pipitone) — Tue, 13 Oct 2009 13:02:00 +0000

Like futures contracts on exchange traded funds or ETFs, options contracts on the same are also available. Currently there are around hundred ETF options available for traders. ETF options can serve the dual purpose of limiting the downside risk of holding the ETFs and maximizing profitability. They also allow traders to buy or sell specific ETFs at a point of time in the future.

ETF options are very similar to stock options; the difference is that ETF options track specific exchange traded funds rather than specific stocks. They have all other specifications similar to stocks. Both call and put options are available and all the simple and complex trading strategies followed for trading stock options are also applicable to them.

Advantages of ETF options

Options let you fully explore one of the most liquid and diversified trading instruments, ETFs
Traders can use them to lock profits, explore short-term and long-term price trends, maximize the return from holding the ETFs or find the right buying/selling opportunities.
ETF options are suitable for both novice and experienced traders as a range of trading strategies are available.
There is no downside risk compared to directly buying/selling/holding ETFs.

Disadvantages of ETF Options

They are not suitable for all types of investors, especially very small-scale traders, and traders who are not comfortable with options & options strategies.
The opportunities an option offers depends on many things, like underlying instrument, expiration date, option premium, volatility, etc. Thus it might be hard to find the right opportunity at the right time.
The trading costs and option premium should also be considered.

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NobleTrading Weekly Newsletter, October 12, 2009

noreply@blogger.com (Daniel Pipitone) — Mon, 12 Oct 2009 14:15:00 +0000

The Week Ahead: A Labor Department report shows there are 6 unemployed people for every 1 job opening which is the highest level recorded since this data began 9 years ago. In addition companies looking to hire is also at historic lows. Bond markets are closed for Columbus Day on Monday. The FOMC Minutes from September are released Tuesday. Retail sales and import price data come out on Wednesday. The CPI and jobless claims arrive on Thursday and Industrial Production numbers on Friday.

Stocks to Watch: NCR Corp. (NCR) after a sizeable drop Thursday from the sudden resignation of its CFO rebounded Friday, but it does appear the stock may have peaked for a while. Sunrise Senior Living (SRZ) will sell 21 assisted living communities for $204 million to Brookdale Senior Living (BKD) as both stocks benefited. Regal Beloit (RBC) which manufactures electrical products boosted its Q3 EPS guidance by 33% from earlier estimates. Scientific Learning (SCIL) had strong Q3 earnings and record revenue almost doubling in price before selling off.

Special Note: The Dow Industrials have surpassed the September closing high, but so far has not been confirmed by the S&P 500 or Nasdaq. An alternating pattern seems to be in progress for the main indexes since 2007 with October and November marking high points in '07, low points in '08, and what appears to be a high in development for the same two months this year. Insider selling as a ratio to insider buying is still expanding reaching 44 to 1 in early October.

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

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Trading Technical Corrections

noreply@blogger.com (Daniel Pipitone) — Fri, 09 Oct 2009 11:33:00 +0000

Technical corrections are common market phenomena in which the price of a stock (or any other instrument) sharply declines (often to the next short-term support level), and often stocks are revalued with respect to their performances and market expectations. Most technical corrections last for a short-period, the original bullish trend is expected to continue, and thus is considered a very good buying opportunity. However, trading in technical corrections is a very risky strategy because of unpredictability of market movements.

Short and steep technical corrections can be considered good buying opportunities; but trading in long and steady corrections is much more risky. This is because with time, the price of the stocks holding decreases, trading expenses (per share) increase, chances of sharp market recoveries diminish, the cash-flow slows-down, and portfolio allocation and goals can change. The short and steep corrections are also not that much easy, the trader should have good market knowledge, access to info resources and enough experience to time his trades.

Although you are trading a short-term correction, prepare for long-term ones—plans for right stop-losses, ways to reduce trading expenses, ways to increase your money-flow, and hedging of risks are needed.
Buy slowly till the correction continues.
Stick to the basics – right portfolio allocation, no greed, right risk management, move with the market (avoid predicting it).
Understand market history, support and resistance levels.
Concentrate more on value stocks. This can reduce the risk.

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Bearish Deliberation Candlestick Pattern

noreply@blogger.com (Daniel Pipitone) — Thu, 08 Oct 2009 13:11:00 +0000

Bearish deliberation is a bearish trend reversal candlestick pattern indicating the possible reversal of an existing uptrend and the start of a new downtrend. The pattern resembles bearish advance block pattern and three white soldiers pattern (which is a bullish formation). Bearish deliberation is a three candlestick pattern, formed of all bullish (white or colorless) candlesticks.

Requirements of bearish deliberation candlestick pattern include:

The pattern should form at the top of a significant uptrend.
The first day is a long bullish day closing at a new high.
The second day is also a long bullish day opening within the real-body of the first candlestick and closing above the first candlestick, forming a new high.
The third day is also a bullish day characterized by a small candlestick which opens near or a gap above the second day's candlestick.

The long bullish candlesticks of the first two days indicate that the bullish trend is in full swing. But the formation of a small candlestick on the third day indicates that the bulls are losing their strength; at least temporarily. This is a sign of indecision, hence the name deliberation, and as prices are at high levels, trend reversal is possible.

Bearish deliberation pattern is a moderately reliable candlestick formation. Reliability increases with previous uptrend and with shortening of real-body of the third day candlestick. Bearish deliberation pattern is not usually considered a true reversal pattern, but rather as an indicator of possible correction/short-term price decline. Many traders use the pattern to liquidate long positions rather than open short positions. Confirmation of trend-reversal is needed, which can be a bearish candlestick, a lower close or a large gap down opening on the fourth trading day.

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Relative Momentum Index Indicator

noreply@blogger.com (Daniel Pipitone) — Wed, 07 Oct 2009 12:26:00 +0000

Relative Momentum Index or RMI is a momentum indicator developed by Roger Altman and is used for finding oversold and overbought levels. RMI was created by modifying the Relative Strength Indicator or RSI, one of the most popular momentum indicators. RMI effectively shows overbought and oversold levels as RSI does and it also reduces the inconsistent oscillation of the index between those levels (which is its major advantage over RSI).

Relative momentum index has an additional momentum component than RSI. Instead of counting the up and down days from close to close (as RSI does), it counts the up and down days from the close relative to the close x-days ago; and the 'x' needn't be 1 as RSI requires. The modified formula is

RMI = RM / (1 + RM)

Where RM = average up momentum (over 'n' period) / average down momentum (over 'n' period)

Relative momentum index is interpreted as the same as RSI, in fact with RMI the situations can be better interpreted than RSI. The values range from 1 to 100; values below 30 are considered oversold levels and values above 70 are considered overbought levels. The value of 50 is considered a crossing point for a change in trend. In non-trending market, RMI predictably fluctuates between the oversold and overbought levels (often between 10 and 90). Support and resistance level formations and chart patterns, breakouts and divergences within RMI can be used to enter and exit trades. Like any other momentum indicator, RMI can offer better results when used in conjunction with other indicators.

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ETF Evolution - A Quick Update

noreply@blogger.com (Daniel Pipitone) — Tue, 06 Oct 2009 13:03:00 +0000

Ever since the introduction of the first exchange traded fund (ETF) in 1993, the ETF market has stayed a highly active and attractive market. The market is evolving so quickly; now the market is so much diversified and liquid. Here is one quick update.

More than 50 percent of the market is constituted by two big ETF managers, Barclays (through its iShare ETFs) and State Street Global Advisor (through its SPDRs). Together they have around 200 greatly diversified ETFs. Vanguard is the third big ETF manager; steadily growing its market share and is offering a great diversity in their products.
Many new players are emerging. This includes many established banks and asset management firms such as PowerShares Capital Management, ProShares, WisdomTree Asset Management, Rydex Investments, Bank of New York, Victoria Bay Asset Management and First Trust Advisors. Many of these ETF managers follow aggressive ETF management strategies rather than traditional diversified low-cost approach.
Active ETFs are becoming popular. Leveraged ETFs, Ultra ETFs, Inverse ETFs, emerging market ETFs, sector specific ETFs, Currency/Geography/Commodity specific ETFs, etc are now common.
Market consolidation: as new and new funds are coming up and competition increasing, many ETFs - with few assets - are getting eliminated. Besides, duplicate ETFs offered by small firms are less preferred. The consolidation process will continue as performance histories of new ETFs become available to traders.

The great diversity in ETFs has provided more choices to investors, but the choice is rather simple. When choosing an ETF to include in the portfolio, one should be clear about its management, his portfolio goals and risk tolerance.

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Weekly Stock Trader Newsletter, October 5, 2009

noreply@blogger.com (Daniel Pipitone) — Mon, 05 Oct 2009 13:55:00 +0000

The Week Ahead: The unemployment rate creeps up to 9.8% with over 7 million jobs lost since December of 2007. The U-6 unemployment rate now tops 17%. The Fed's expected to keep rate hikes on hold for a while. Watch the consumer credit report on Wednesday, and the kick-off to earnings season for the third quarter with Alcoa (AA) reporting first. Chain store sales figures are released Thursday along with wholesale trade numbers and the weekly jobless claims. The week ends with the August trade balance report.

Stocks to Watch: PNC Financial Services (PNC) received a downgrade by a major brokerage on concerns that earnings estimates are too high. Like many volatile bank stocks this one has tripled its March low. Invesco (IVZ) is seen as the leading contender to acquire Morgan Stanley's Van Kampen Fund business. Amdocs Limited (DOX), a software company, received a downgrade by BoA/ Merrill Lynch because it sees little upside from current price levels. The Steifel Nicholas brokerage is upbeat on Nu Skin Enterprises' (NUS) anti-aging product.

Special Note: The support line drawn off the March and July lows has been breached on the S&P 500 and Nasdaq Composite indexes. The Dow Industrials is the only hold out of the three.. This doesn't preclude another rally to a higher high, but diminishes the bullish momentum in the markets achieved until now from the March low. The topping process is complete or nearly so with the potential of one more zigzag higher to the 10400 level on the DOW by January, but this is far from certain. The area surrounding 9000 is the next significant area of support.

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

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