A struggle many traders tend to have, and one that makes it hard to be a good trader, is overthinking. Whenever I teach, right off the bat I ask my students one simple question: Have you ever been emotional about money at some point in your life? Without doubt, every hand in the room is raised. Obviously, I already knew the answer; but I ask the question because most of us never think about this simple dynamic and its impact on our trading goals.
From a young age we have been taught that it is good to be right in work and in play, like our grades at school, during sports and in day to day business. The problem is, you take this attitude to the market and you will inevitably fail. You can be right nine times out of ten, take just one...
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Getting Blindsided by Implicit Emotional Brain Beliefs
Trading success seems so simple in principle, then the reality of trading blindsides traders. Without having a clue about what they are getting themselves into, traders walk into an emotional minefield for which they are completely unprepared and end up paying the price of emotionally undisciplined trading. The thinking, logical left brain simply gets blown out of the water consistently by primitive emotional responses to the stress of trading. Yet few acknowledge the power that emotion and trading psychology have on achieving their potential in trading. It is almost like there is a conspiracy in the deep state of trading to keep this knowledge out of sight and out of mind.
With...
If you have looked at option trading at all, you probably know that the price of an option has two components: intrinsic value and time value. Intrinsic value is easy to understand; time value is much more interesting.
To dispose of intrinsic value first, think of it as the amount of the built-in discount. If I own a call option at the $98 strike price, on a stock that is trading at $100, then exercising that option would get me the stock at a $2.00 discount. This discount (current stock price minus call strike price) is the call’s intrinsic value. The call will be worth at least that amount (except in rare cases we need not be concerned about).
Puts also have intrinsic value (at least some of them do). If I own a put at the $50...
Options are conditional derivative contracts that allow buyers of the contracts (option holders) to buy or sell a security at a chosen price. Option buyers are charged an amount called a "premium" by the sellers for such a right. Should market prices be unfavorable for option holders, they will let the option expire worthless, thus ensuring the losses are not higher than the premium. In contrast, option sellers (option writers) assume greater risk than the option buyers, which is why they demand this premium.
Options are divided into "call" and "put" options. With a call option, the buyer of the contract purchases the right to buy the underlying asset in the future at a predetermined price, called exercise price or strike price. With a...
Google is well known for its popular search engine, email service, web browser, and various online tools we use daily at work, at home, and on the go. What many don’t think about day-to-day, however, is that all of these services are free. Parent company Alphabet (GOOGL) released Q3 2018 earnings on October 25, 2018. The global tech giant reported revenues of $33.7 billion for the quarter, roughly a 21% increase from $27.77 billion in Q3 2017.
On Dec 11th 2018, Google CEO Sundar Pichai testified before the U.S. Congress in a wide-range hearing about data breaches, misinformation campaigns, and concerns about working with China. The hearing was almost certainly a result of Pichai's absence in Congress earlier in the year when the chief...
There are a wide range of books available for learning technical analysis, covering topics like chart patterns, crowd psychology, and even trading system development. While many of these books provide outdated or irrelevant information, there are several books that have become timeless masterpieces when it comes to mastering the art of trading.
In this article, we will look at seven books on technical analysis to help traders and investors better understand the subject and use as possible strategies in their own trading.
Getting Started in Technical Analysis:- Jack Schwager
This book is an excellent starting point for novice traders that covers every major topic in technical analysis. In addition to covering chart patterns and...
Fundamental Analysis Technical Analysis Day Trading & Scalping How to Know the Difference Between Retracements and Reversals
Most of us have wondered whether a decline in the price of a stock we're holding is long-term or a mere market hiccup. Some of us have sold our stock in such a situation, only to see it rise to new highs just days later. This is a frustrating and all too common scenario. Whilst it can't be totally avoided, if you know how to identify and trade retracements properly, you will start to see improvement in your performance.
Retracements Versus Reversals
Retracements are temporary price reversals that take place within a larger trend. The key here is that these price reversals are temporary and do not indicate a change in the larger trend. A reversal, on the other hand, is when the trend changes direction, meaning that the price is likely...
Beginning stock traders know the stock market has regular trading hours - they are open for business between 9:30 a.m. and 4:00 p.m. Billions of shares of stock are traded in the American markets alone, making the markets very liquid and efficient.
What beginners may not know is the stock market is also open for business after regular trading hours. Pre-market and post-market trading sessions allow investors to trade stocks between the hours of 4:00 a.m. and 9:30 a.m. during pre-market trading, and 4:00 p.m. to 8:00 p.m. for the post-market session.
Compared to the billions of shares traded during the day, after-hours sessions trade only a small fraction of that volume, which invites other problems traders have to consider before...
Swing & Position Trading Technical Analysis Day Trading & Scalping Using Fractals: A Guide for Traders
Although prices may appear to be random, they actually create repeating patterns and trends. One of the most basic repeating patterns is a fractal. Fractals are simple five-bar reversal patterns. This article will explain fractals and how you might apply them to your trading strategy.
Introduction to Fractals
When people hear the word "fractal," they often think about complex mathematics. That is not what we are talking about here. Fractals also refer to a recurring pattern that occurs amid larger more chaotic price movements.
Fractals are composed of five or more bars. The rules for identifying fractals are as follows:
A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on...
One creative way in which put options can be used is to buy a desired stock at a discounted price.
This strategy works best when a stock has recently had a sharp drop, to a point that you believe is a bargain price. It will allow you to buy the stock at a discount from the current market, if the stock behaves as you expect. And if the stock suddenly soars, you may make a tidy profit even though you missed buying the stock. Here’s how it works.
When stocks drop sharply, some of the people who hold them buy put options as protection. From their point of view, they are buying a guaranteed stop-loss. This increased demand for puts drives up their price.
A savvy investor can then sell put options on the stock in such a way that the only...
If you ever look at the volume leaders for the trading day, you almost always will find Bank of America Corp. (BAC). On a day in October 2018, trading volume for BAC totaled 58,868,598. General Electric Company (GE) was even higher: 110,448,094. Those are big numbers, but where do they come from, and what do they mean?
The first part of the question can be answered with ease: market exchanges. The second part requires a little more detail. If you’re a retail investor, read on. While volume is only one tool of many, it adds value to your investing decision.
How it Works
Calculating volume is simply the total amount of shares traded for the day, which includes both buy and sell orders. You can determine the daily trading volume on your...
As the year winds down, it is the time where traders and advisors take stock of what the year has brought them and what they expect from the markets to come. We, too, shall look at the charts to see what they are predicting for the new year.
This has not been an easy year for investors. As of the date I am writing this article, the S&P 500 index is trading at nearly the same level as it started the year. Buy and hold investors are either flat or more likely negative for the year due to fees.
For those without the proper knowledge, this has been a lost year because many investments were flat, and you lost an entire year of your investing life. However, with the right knowledge and strategy, this was an excellent market to profit from...
Value investing is an investment discipline that was popularized by Benjamin Graham through his seminal books like Security Analysis published in 1934 and The Intelligent Investor in 1949. Value investing seeks to identify undervalued stocks that are trading below their intrinsic value, and buying and holding them until they turn around. Such value stocks typically trade at price-to-earnings (P/E) and price-to-book (P/B) multiples that are significantly below the valuations at which the market or their peers trade. While Warren Buffett has amassed a colossal fortune by adhering to the principles of value investing, there is little doubt that for us lesser mortals, value investing has its pitfalls in addition to its undeniable benefits...
I was asked the other day about "volatility" by a popular media outlet. The question was: "What should traders and investors do in a volatile market?" I didn't have to think about the answer, I had it before they were halfway done with the question. Simple, if you don't know how to time the market's turning points in advance, don't have money at risk in the market. If you do know how to time the market's turning points, you love market volatility. Recently, the markets have experienced a period of extreme market volatility. During these periods, those who know market timing typically see above average profits and those who don't experience above average losses. No matter what type of trading or investing you are doing, you can't get...
When a stock's price starts to rise rapidly, short sellers want out, as they only profit when the stock goes down. They can face theoretically unlimited losses when shares rise. Their pain, however, can be a short squeezer's gain.
Understanding Short Squeezes
Before you can understand short squeezes, you have to understand how short sellingS works.
If a short seller thinks a stock is overvalued and shares are likely to drop in price, he or she can borrow the stock through a margin account. The short seller will then sell the stock and hold onto the proceeds in the margin account as collateral. Eventually, the seller will have to buy back shares. If the stock's price has dropped, the short seller makes money because he or she can cash...
Like all things in life, the trade begins in the mind of the trader. Nothing exists outside of nature that didn’t begin as a thought. In other words, every-thing began as a thought first…every building, invention, device or concept started in someone’s mind. Additionally, virtually everything that you have become also began as a thought due to the choices that you have made and your experiences in life. So, let’s face it, thoughts are some of the most powerful things in the Universe.
Yes, thoughts are things; and as such thoughts are also manifestations of energy. Isn’t it interesting that energy, which is at the core of all universal expressions, is also a huge part of trade fundamentals. Since thoughts are things and energy, it...
I hate to lose. It’s just such a bad feeling when I lose. Everything else in my life I can pretty much force my way and prevail – but trading has my number. And I know that losing is part of trading, but that doesn’t make it any easier to take a loss. It’s one thing to tell yourself that platitude, but it’s quite another to actually take a series of losses and see your P/L shrinking. It’s getting harder to keep my winning attitude when I lose, so I have to push myself even more. I can see what I’m doing is not working, but I keep on doing it hoping that through sheer determination things will turn around.
Your Winning Mindset Is Killing Your Trading
To be successful, traders must travel down a collision course between two equal...
For a time, it looked as if high-frequency trading, or HFT, would take over the market completely. In 2010, HFT made up over 60% of U.S. equity volume. But the trend may be waning. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day, according to Bloomberg. At the same time, average profits fell from “about a tenth of a penny per share to a twentieth of a penny,” the report noted.
In 2017, HFT accounted for just under half of all domestic equity volume.
In HFT, powerful computers use complex algorithms to analyze markets and execute super fast trades, usually in large volumes. HFT requires advanced trading infrastructure like powerful computers with high-end hardware costing huge...
One of the biggest differences between individual investors and professional portfolio managers is how they view performance. Individual Investors tend to overvalue short-term performance, placing too much emphasis on one, three and five-year returns. Professional portfolio managers place most of their analysis on seven to 10-year periods, since they coincide with a full market cycle. This is a marked difference and it can greatly change long-term results. To view how significant the differences can be, let’s take a look at 20 years of past performance.
Short-Term Performance
We will start by looking at the diversification chart below, which shows how various asset classes have performed. (The S&P 500 is represented by the category...
It is not a mystery that in the financial markets there are two distinct groups, those that make money a large portion of the time (banks and institutions) and, on the other side, those who don’t (the general trading and investing public). These folks tend to struggle to keep up with market returns at best; or end up washing out and losing all their money at worst.
On Wall Street, the cohort that makes money consistently is referred to as the smart money and the aforementioned latter group is referred to as, let’s just say, not so smart money. To be fair, the vast majority of retail traders and investors, through no fault of their own, just don’t know how financial markets really work. They’ve bought into what all the trading books...
One of the questions I'm most frequently asked has to do with what's needed to begin investing. Some folks want to know how much money they need to begin. Others have a strong desire to buy a few stocks they heard about. And then there are people who have spent a long time thinking about getting underway, but never had the courage to take any steps in that direction.
The process of getting started in investing is simple and straightforward. It's a matter of filling out some basic forms, having funds available to move into the investment account, deciding what to buy, and then turning that decision into action. The logistics are easy. What's more difficult is developing the discipline to create and follow an asset allocation plan that...
When investors think about the capital markets, they typically ponder the merits of bonds, stocks or derivatives. Because it isn't as sexy and doesn't have the volatility of other securities, the money market is often far from the top of the list. Nevertheless, virtually all investors can use the money market to enhance their portfolios in one way or another. In this article, we'll explain how investors can use the dependability of the money market to their advantage.
What Is It?
The money market is a market that provides liquidity for individuals and institutions by dealing in short-term borrowing such as certificates of deposit, T-bills or other similar instruments with a maturity date of about one year or less. With that in mind...
Today's investors and active traders have access to a growing number of trading instruments, from tried-and-true blue chip stocks and industrials, to the fast-paced futures and foreign exchange (or forex) markets. Deciding which of these markets to trade can be complicated, and many factors need to be considered in order to make the best choice.
The most important element may be the trader's or investor's risk tolerance and trading style. For example, buy-and-hold investors are often more suited to participating in the stock market, while short-term traders – including swing, day and scalp traders – may prefer markets wherein price volatility is more pronounced. In this article, we'll compare investing in the forex market to buying...
Financial markets attract all sorts of participants, from part-time hobbyists looking for extra cash to multinational institutions moving billions of dollars across thousands of instruments. The trading game stretches across both ends of the spectrum, with part-timers and at-home gamers competing for profits with traditional funds and lightning-fast computer algorithms.
Data suggest the majority of traders playing at the shallow end of the market pool will eventually fail at the endeavor and pick up stakes, letting someone else manage their money, or simply giving up and looking for another way to build wealth. Ironically, many of these folks never had a chance to succeed because they came into the game with a casino mentality that...
‘You can’t change what you can’t face, and you can’t face what you don’t know.’ This obscure but very important quote was coined by my friend, Jackie in a conversation we had some years ago. We were discussing the challenges that all humans face with initiating and managing change. Within this conversation we both agreed enthusiastically that, embodied in this simple yet deeply profound statement is a principled truth about how acutely and pervasively awareness plays into your ability to detect and repair issues.
The speed and effectiveness with which you become aware that you have initiated an error in the sequence of behaviors needed to secure an effective outcome to an endeavor…like trading… will determine whether you get stuck...
It is rare to hear any long discussion of the stock market without some mention being made of the economic outlook. As of Summer 2018, it's safe to say that the economy has recovered to a certain extent from the recession of 2008. What analysts are now wondering about is if the current good fortune is sustainable or if there's another crash around the corner.
Given that the economists on business TV seem to live to disagree, what should a regular investor do? Just what should an economic recovery look like? Follow these economic indicators for signs of a recovery.
Employment
It is difficult to talk about an economy in recovery if people are not getting back to work. There are such things as "jobless recoveries", where there is enough...
Risk tolerance is a topic that is often discussed, but rarely defined. It is not unusual to read a trade recommendation discussing alternatives or options based on different risk tolerances. But how does an individual investor determine his or her risk tolerance? How can understanding this concept help investors in diversifying their portfolios? Read on as we delve into this concept.
Risk Tolerance by Time frame
An often seen cliché is that of what we'll refer to as "age-based" risk tolerance. It is conventional wisdom that a younger investor has a long-term time horizon in terms of the need for investments and can take more risk. Following this logic, an older individual has a short investment horizon, especially once that individual...
As we all know, the stock market has been in a bull run for a very long time. By the time you read this, it will be the longest bull market on record.
In the nine and a half years since the final down month of the previous bear market (February 2009), the S&P 500 Index has increased by almost 300%. That makes it an average compounded annual growth rate of over 15%. Add in an annual dividend yield of around 2%, and the past decade has been a very good time for stock investors.
The current environment seems favorable to a continued boom in the stock market. Corporate earnings are at record highs and GDP growth is strong; while unemployment and inflation are both very low. It’s a Goldilocks economy again – not too hot, not too cold, just...
Futures and options are both derivative instruments, which means they derive their value from an underlying asset or instrument. Both futures and options have their own advantages and disadvantages. One of the advantages of options is obvious. An option contract provides the contract buyer the right, but not the obligation, to buy or sell an asset or financial instrument at a fixed price on or before a predetermined future month. That means the maximum risk to the buyer of an option is limited to the premium paid.
But futures have some significant advantages over options. A futures contract is a binding agreement between a buyer and seller to buy or sell an asset or financial instrument at a fixed price at a predetermined future month...
Psychology The Invisible Wall that Separates You from Your Potential: Establishing a Disciplined Impartial Trading Psychology
“I see the potential, but I keep hitting an invisible wall. My trading mind is in good shape one minute and then, out of nowhere, a switch goes off. I don’t see it coming. That’s where I keep falling apart – I even see it happening right in front of my eyes. It’s like I’m a spectator and I am paralyzed from doing anything. My impartial trading mind flies out the window, along with my trading rules. When the dust settles and I can see clearly again, I see that I lost control again. I keep trying to stay impartial, but I keep losing that battle. It’s frustrating because I’m trying hard, and I’m so close. That invisible wall is what keeps me stuck where I am as a trader. If I could get past it, it would make all the difference in...