Stock Market Trading Tips
Stock Market as a Strategic
Investment
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The Stock Market
Have you ever wondered why some people seem to
know the secret of making money in the stock market? They are no smarter
than you. They do not work any harder and neither are they lucky than you.
But, unlike you, they never seem to worry about having money. You see most
people miss the big idea here. They think it takes a lot of money to make
a lot of money. But that is not how it is done. The idea is to make
pennies consistently and to use them to build vast personal fortunes. The
stock market is a proven wealth builder and can and should benefit all
participants. It is only right that everyone should be entitled to a piece
of the action. Having said that we now set out to show how the
ordinary 'none-smart money' traders can benefit from this. We assume the
reader has the basics of stock trading, otherwise read the book How to
Trade in Stocks. |
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Fig. 1
Whilst higher crests and lower troughs are one of the best measure of strength
and weakness respectively, this method has serious drawbacks. It is only varied
only if you are to compare troughs and crests of the same degree.
Identification of troughs and crest of the same degree in real time is difficult
for our lazy brains to visualize. If you look in figure 1 above it may
look easy to compare troughs to troughs and crests to crests, but even then it
would be difficulty in real time to tell if the trough or a crest has ended to
start the comparison.
Fig.2
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Figure 2 is the same as figure 1 but it is in finer
prints. Here you will notice that there are small wiggles in between the bigger
troughs/crests and identifying which one should be grouped together in real life
is an impossible intellectual challenge, leave alone being able to see and
isolate them.
It is because of these challenges that we made the
assumption that the movement of stock market price, which is a vibrations of
waves that are repetitive in time and amplitude, is linear (even though we
know very well it is not linear). |
Moving Averages
The real forces that move the markets are the
moving averages. They are a measure of accumulation of strength and weakness
over time due to news, economic growth reports, manipulation, fear and greed.
There are many moving averages just as there are different types of traders. It
is through the dynamics of the moving averages that there are crests and
troughs. Every day the bulls and the bears are continuously in a see-saw of
moving averages trying to take advantage of the next motion of the see-saw so
created. The day traders are in it losing sight that at distance there are
weekly, monthly, quarterly and yearly traders on the same see-saw, the swing
traders are at it losing sight of all the others, and so on and so forth.
At any one time there is a moving average that
form the equilibrium line between winning bulls and winning bears. For example:
a stock can exhibit the characteristic that anytime the price is above say the
moving averages of less than 40 days the bulls win, and when the price is below,
the bears win. Unfortunately this does not last forever because the properties
of the stock changes. These properties is the standard deviation which the
market call volatility. The other major drawback with the moving averages
is the time lag. This explain why many traders make very little profit because
they are unknowingly buying to open at the tops of crest and selling to
close at the bottom of troughs.
Multiple Timeframe
Moving averages are a measure of waves (crests and
troughs). If two crests of different degree moves in the same direction up with
one another the resultant net effect is of enhanced crest. This interference is
known as constructive interference. If a crest and a trough of different degree
move in one direction with one another the two pulses will try to cancel each
other's effect and the resultant net effect will tend toward zero or the
equilibrium position. This therefore means that markets move against the trend
of one greater degree only with a seeming struggle. Resistance from the larger
trend will prevent the shorter trend that carry your money from developing full
strength or weakness resulting in loses to your money. This struggle between the
two oppositely trending degrees generally makes visualizing well defined troughs
and crest impossible. This really is like trying to saw the wood up against the
grains - it's tedious and the bundles are not sliced clearly leaving a rough
surface with lots of defects.
One of the most successful trading tool since time
immemorial is multiple moving averages crossover, and the change in all averages
are either positive in all averages or negative in all averages that you are
using. If the change in averages is positive, you go long, and if the change is
negative, you go short. This really is multiple time frame where you trade using
the shorter trend but only if the longer trend supports it.
Stop Losses
Since you place the stop loss order when you open
your stock position, your stop loss will take the emotion out of a decision to
close your stock position. This control of your emotions is the single most
important thing about stop loss order. Set that automatic stop loss today and
not tomorrow. If you do not place a stop order to get you out of your trades, it is human
nature to try and impose your will in favour of your open trades. You do not
have to listen to anybody, news, think in favour of your
open trades or try to
impose your will on the market. Your stop loss based on the charts and only charts will always tell you what the
market is doing. The secret is to wait for the market to talk before trading and
continue to listen in case it changes its mind.
And then the
question is usually asked: do traders follow the charts because the charts work
or the charts work because traders follow them? Whatever the case, price action
on the charts is the way to go rather
than try to imagine you can see certain geometrical shapes in the price - if
truly you want to see geometrical shapes in the price line, then you will see
many that will support what you want to see.
Following Market Direction with Precision
In view of the above we have considered only proven mathematical
logics. We now shall intermarry all these logics and follow profitable market
directions that will beat everyone else hands down. We look at the table below
which shows trades on QQQQ as a stock from April 05, 2007 to the current date.
If you look at the net realized, to many people, these are small percentages
perhaps not worth the effort.
Power
Shares Exchange-Traded Fund Trust, QQQQ
(from
April 05, 2007 to the current date, updated May 23rd, 2009)
|
Entry Date |
Position |
Entry Price |
Initial
Stop Loss Breakout
Conditions |
Current Stop Loss (also Initial
Entry Conditions in Opposite Direction) |
Exit Date |
Exit Price |
Net Realized |
Where The Stock Market is Today |
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April 02, 2009 |
LONG QQQQ |
31.46 |
(a) If QQQQ<25.63 AND
(b) If $COMQ <$1265.52 |
(a) If QQQQ<32.96 AND
(b) If $COMQ <$1664.19 |
= |
= |
= |
Tradable Troughs and Crests
|
|
Jan 15 2009 |
SHORT QQQQ |
$28.46 |
(a) If QQQQ>$31.63 AND
(b) If $COMQ >$1665.63 |
(a) If QQQQ>$31.68 AND
(b) If $COMQ >$1598.50 |
April 02, 2009 |
31.46 |
-10.54% |
Tradable Troughs and Crests
|
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Dec 08 2008 |
LONG QQQQ |
$29.44 |
(a) If QQQQ<$25.05 AND
(b) If $COMQ <$1295.48 |
(a) If QQQQ<$28.46 AND
(b) If $COMQ <$1493.45 |
Jan 15 2009 |
28.46 |
-3.33% |
Tradable Troughs and Crests
|
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June 11, 2008 |
SHORT QQQQ |
$47.37 |
(a) If QQQQ>$50.61 AND
(b) If $COMQ >$2549.94 |
(a) If QQQQ>$29.36 AND
(b) If $COMQ >$1535.57 |
Dec 8th, 2008 |
29.44 |
37.90% |
Tradable Troughs and Crests
|
|
Apr 02 2008 |
LONG QQQQ |
$45.49 |
(a) If QQQQ<$41.05 AND
(b) If $COMQ <$2155.42 |
(a) If QQQQ<$47.82 AND
(b) If $COMQ <$2430.36 |
June 11, 2008 |
$47.37 |
+04.13% |
Tradable Troughs and Crests
|
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Nov 08 2007 |
SHORT QQQQ |
$51.73 |
(a) If QQQQ>$52.63 AND
(b) If $COMQ >$2727.55 |
(a) If QQQQ>$44.53 AND
(b) If $COMQ >$2363.52 |
April 02 2008 |
$45.49 |
+12.06% |
Tradable Troughs and Crests
|
|
Sept 04 2007 |
LONG QQQQ |
$49.68 |
(a) If QQQQ<$44.39 AND
(b) If $COMQ <$2386.69 |
(a) If QQQQ<$52.02 AND
(b) If $COMQ <$2698.14 |
Nov 08 2007 |
$51.73 |
+04.13% |
Tradable Troughs and Crests
|
|
Aug 10 2007 |
SHORT QQQQ |
$47.28 |
(a) If QQQQ>$50.66 AND
(b) If $COMQ >$2724.74 |
(a) If QQQQ>$49.06 AND
(b) If $COMQ >$262775 |
Sept 04 2007 |
$49.68 |
-05.08% |
Tradable Troughs and Crests
|
|
Apr 05 2007 |
LONG QQQQ |
44.56 |
(a) If QQQQ<$42.06 AND
(b) If $COMQ <$2331.57 |
(a) If QQQQ<$46.70 AND
(b) If $COMQ <$2560.45 |
Aug 10 2007 |
$47.28 |
+06.10% |
Tradable Troughs and Crests
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But that 5% gain in stock may translate to 100% gain in its options. The
opposite is also true. Next, we look at trading these small gains to generate
better gains from options. Bear in mind that even where there is a loss in QQQQ
stock, in-between there may be several profitable crests and troughs.
Should you be interested in trading QQQQ for these
small gains, then you have to keep on checking here for update on "Final Exit
and Initial Entry Conditions" as this is the key that determine where to
initiate and exit your trades.
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And because losing a trade can be painful to some people, the contents of this
site are meant for entertainment purposes only. But you can try with a
Free stocks trading Practice account that you can find. It will not cost you any cent. Use the stop loss I
use here and update the stop loss accordingly. With time you will be an expert
in trading the stock market. All that will be free.
Stop Loss Order
Always make sure that every
position that you open has a corresponding stop loss order, repeat, every
position that you open has a corresponding stop loss order. We can repeat this
until breakfast tomorrow. Trading without stop loss orders is like driving an
automobile with faulty breaking system. Every now and then check to see if your
stop loss orders are still active. If your broker's system fails, when it come
back it may come without your stop loss orders and that is why you should keep
checking on your open positions and your stops. And these stops are not free.
There is a small fee to pay your broker and it only fair that he should get it.
The secret to trading is to wait for the market to talk before trading and continue to
listen in case it changes its mind. You cannot impose your will on the market.
The market will always tell you what it is doing. So what happened next? We got
out with a profit at between 26.2656 and 26.2460.
Your Stock Broker
Get yourself a good stock broker who has low
commission fees because you will be making many trades per month. A broker who
charges more than $1.0 per 100 shares of stock is expensive. Likewise, A broker
who charges more than $1.0 per contact (options) is expensive. A good broker
should at this age have modern technology and may even include the capability
for you to trade anywhere on this planet. Search and you will find that there are many
brokers who meet these criteria.
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Low Cost High Yielding Stock Options
You may
have wondered why some people seem to know the secret of making money in the
stock market. Their secret relies on low cost high yielding stock options that
are readily available and can be bought with pennies. And yes, I mean those
stock options that will fluctuate at lightening speeds like propane and naked
flame. Everybody seems to fear options, and with a good reason. The Mathematics
involved in the dynamics of options is advanced Mathematics and that coupled
with the Market Timing of the underlying stock makes it a mystery for everyone
to tell you to keep off options. And yes, if you try to play a game you do not
understand, then it will not take you long before you become the hunted and you
will lose very fast. |
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Getting an accurate Market Timing is a very difficulty thing regardless of what
you may have been made to believe. To neutralize the effects of inaccurate
Market Timing is the so called neutral options trades biased in favour of what
you think is the trend of the underlying stock. Contrary to the belief that
determining the security's trend is easy, in real time this is very difficulty.
That being the case, it would be fair if I mention a few things you need to know
about options for you to trade neutral trades. There is a way to go about
trading options that will eliminate all those fears. I am going to start by
assuming that you have the basics of options and that you know what stock
options are, and the details of puts and calls, strike-prices and expiration
dates, in-the-money, at-the-money, out-of-the-money, short and long positions.
If you do not have the basics, read a book on options as a Strategic Investment.
To beat inaccurate Stock Market Timing, the secret
to this neutral options game plan is to use other people's money in that the
options you sell pays for the better part of what you buy, with your money
paying just for the difference or the gap. If you do this, it will not take long
before you realize that you are ahead of the game. Unfortunately many of us
place a lot of weight on trying to predict the difficulty Stock Market Timing
and hardly use this strategy.
This style of options trading is a sedative strategy and you should not expect
your money to multiply rampantly overnight but rather slow and consistence
profits throughout the year – its waiting is like watching water in a cup dry. A
35% profit within a period of two to three weeks is normal but bigger gains in
less time are not unusual. So, what Happens? The sold options and the bought
options are confined in a channel such that the sold options decays or lose
value faster than the bought options and the spread between their prices widen
with time. When the situations warrant the appropriate adjustments and or
rollovers are made to ensure all options are within the profit-yielding channel
without reversing their roles.
90 percent of all options expire worthless. Time for logic: Does this mean that
90 percent of all those buying options lose their monies and that 90 percent of
those who sell options make money from those options? Do not try any of these
because either way you will most likely lose your money. But combine both and
you see the difference. It's no wonder covered call writing is so popular. If
you think the market is going up you can do the following: (a) buy long stock
and sell a call, (b) buy deep in-the-money call/leap and sell at-the-money call,
or (c) buy long stock. If you think the market is going down you can do the
following: (a) short the stock and sell a put, (b) buy deep in-the-money
put/leap and sell at-the-money put, or (c) short the stock. You will have to
consider the issue of margin or collateral where applicable. These really are
neutral positions but still the issue of combined delta, wear, volatility, price
direction and so forth and so on has to be well understood.
Facts about Neutral Positions
Why is it then that Neutral Positions have high chances of making a profit? Two
factors come into play here. (a) The short options nearer the expiration month
wear or decay faster in time value in favor of the options writer and against
the options buyer. (b) The stocks spend a lot of time fluctuating in neutral
sideway ranges and during which options issued against them are losing time
value. By twisting call and put options in certain ways, we can reduce the money
we put at risk and still stand good chances of making nice profits.
Options are highly affected by implied volatility. The implied volatility is the
monster that has to be contained at all cost. This implied volatility measures
the cheapness and expensiveness of options premiums. Its impact to an option
price is indeed very significant and cannot be ignored. Fortunately, the mere
fact that you are buying an option and simultaneously selling another one tends
to cancel this effect. |
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Stocks and
options trading involve substantial risk of loss. Only use investment capital.
Hypothetical performance results have many inherent limitations.
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