You've probably heard the terms spread or bid and ask spread before, but you may not know what they mean or how they relate to the stock market. The bid-ask spread can affect the price at which a purchase or sale is made - and an investor's overall portfolio return. What this means is that if you want to dabble in the equities markets, you need to become familiar with this concept.
Supply and Demand
Investors must first understand the concept of supply and demand before learning the ins and outs of the spread. Supply refers to the volume or abundance of a particular item in the marketplace, such as the supply of stock for sale. Demand refers to an individual's willingness to pay a particular price for an item or stock.
Example - How...
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Articles
Most people who are interested in learning how to become profitable traders need only spend a few minutes online before reading such phrases as "plan your trade; trade your plan" and "keep your losses to a minimum." For new traders, these tidbits of information can seem more like a distraction than any actionable advice. New traders often just want to know how to set up their charts so they can hurry up and make money.
To be successful in trading, one needs to understand the importance of and adhere to a set of tried-and-true rules that have guided all types of traders, with a variety of trading account sizes.
Each rule alone is important, but when they work together the effects are strong.
Trading with these rules can greatly...
Although they would not admit it, most portfolio managers take a core/satellite approach when managing their equity portfolios. The part of the portfolio that might mirror the overall market could be considered the "core" and the part of the portfolio that deviates from the overall market can be considered the "satellite" portion. When you hear portfolio managers say they are trading around their "core" bank holdings - or they are currently overweight oil stocks and underweight technology stocks, or they have a small cap tilt to their portfolios - they are essentially taking the core/satellite approach.
But what about the average investor? Exchange-traded funds (ETFs) provide an easy way of implementing a core/satellite approach. We...
Amid thousands of stocks actively trading in global markets, a significant percentage are very thinly traded stocks, in other words, stocks that trade irregularly at low volumes. Investors should be aware of the considerable risks of trading in these low-volume stocks.
One risk of low-volume stocks is that they lack liquidity, an important criterion in stock trading. Liquidity is the ability to be easily bought or sold in the market without a change in price. This means that a stock which is trading at $25 per share should be easily bought or sold in large amounts (say 100,000 shares) while still maintaining the price of $25 per share. For stocks, a good measure of liquidity is the average daily trading volume. In general, any stock...
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...
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...
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...
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...
Exchange-traded funds (ETFs) are ideal for beginning investors because of their many benefits likes low expense ratios, abundant liquidity, wide range of investment choices, diversification, low investment threshold, and so on.These features also make ETFs perfect vehicles for various trading and investment strategies used by new traders and investors. Here are seven of the best ETF trading strategies for beginners presented in no particular order.
1) Dollar-Cost Averaging
We begin with the most basic strategy: dollar-cost averaging. Dollar-cost averaging is the technique of buying a certain fixed-dollar amount of an asset on a regular schedule, regardless of the changing cost of the asset. Beginner investors are typically young...
If you start any type of business you first have to come up with the initial seed capital to get the business off the ground. This comes with the understanding that there’s always risk because there’s never a guarantee that the business will prosper. With any traditional business we will always be subjected to the vagaries of the economy, litigation, and growing competition in whatever field we decide to venture into. This makes starting a business for many people somewhat challenging.
One of the advantages of using trading as a vehicle for generating income is that once a skill is learned, all of the aforementioned challenges that a traditional business faces no longer apply. If you learn how to trade properly, any market condition...
Thanks to online discount brokerages, anyone with an Internet connection and a bank account can be up and trading stocks within a week. This ease of access is great because it encourages more people to explore investing for themselves, rather than depending solely on mutual funds or money managers. However, there are some common mistakes that first time investors have to be aware of before they try picking stocks like Buffett or shorting like Soros.
1) Jumping in Head First
The basics of investing are quite simple in theory – buy low and sell high. In practice, however, you have to know what “low” and “high” really mean. What is “high” to the seller is considered “low” (enough) to the buyer in any transaction, so you can see how...
Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors. Such frequent trading and shorter holding periods can result in mistakes that can wipe out a new trader's investing capital quickly. Here are the 10 worst mistakes made by beginner traders:
Letting losses mount
One of the defining characteristics of successful traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, get paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may to hold on to a losing position in the hope that the trade will eventually work out. In addition to tying...
Based on experience, here are my thoughts on what makes a successful trader.
I have been teaching beginners to trade for many years, and over all those years I have found that things do not change very much, with one exception – the technology improves. When I started out, never in my wildest dreams could I envisage trading from a mobile phone or an iPad. However, it can be confusing to the newcomer. I’m sure if I was starting my trading adventure right now I would be faced with mind boggling choices and really wouldn’t have a clue where to start. When I started all those years ago, there were very few places you could go to get a solid foundation in the basics of trading.
Now, you are spoilt for choice. There are literally hundreds...
The Articles section of T2W is a veritable repository of trading knowledge, experience and ideas. It’s compiled with one aim in mind: to help you achieve your trading objectives. At the time of writing (March 2012), there are 468 articles in total which, between them, have received well in excess of 4.6 million views - and counting! There are contributions from some of the best known experts in their field, including: Jake Bernstein, John Bollinger, Linda Bradford Raschke, Dr Alexander Elder, Steve Nison, William O'Neil, Martin J. Pring and Brett N. Steenbarger - to name but a few.
However, unless you’ve been a T2W member since 2005 and diligently read all of the contributions as and when they were published – you’ve got a mountain of...
Is it possible to trade with a full time job? Most certainly yes, but challenges will arise for those that want to devote their limited time to two full time professions. In this article, I am going to address the debate over whether or not you can be a successful trader with a full time job or not. I will also provide 5 tips for making the most out of your trading while still working your full time job.
To start out this article, I'll give a little background on my personal experiences in trading whilst working a full time job. When I first got involved in trading, I was a full time college student working a full time job who also wanted to become a full time trader. It doesn't take a mathematician to figure out that there's 3...
In the world of investments, you'll often hear about stocks and bonds. They are both feasible forms of investment. They allow you the opportunity to invest your money with a specific company or corporation with the possibility of future profits. But how exactly do they work? And what are the differences between the two?
Bonds
Let's start with bonds. The easiest way to define a bond is through the concept of a loan. When you invest in bonds, you are essentially loaning your money to a company, corporation, or government of your choosing. That institution, in turn, will give you a receipt for your loan, along with a promise of interest, in the form of a bond.
Bonds are bought and sold in the open market. Fluctuation in their values...
There is always "year one" for every commodity futures trader. I had mine and made every mistake a trader can make and more. Here's my story of how I stumbled into the lion's den, got gored a few times and even made some money. My hope is that beginners will read this and avoid some of the more obvious stuff. Here's to all new traders!
It all started in the spring of 1979. I was 28 years old. I was in the office of my new retail electronics company. I was going over some paperwork and got a call from a young and excited broker from Boston Commodities, or some name like that. He must have had the list of new businesses and was cold calling the small business owners.
I had no idea, but at the time sugar was in a major bull market...
Getting Started Technical Analysis Technical Analysis: What you need to know before you start charting
This article is aimed at all those new to trading and we look at the basics of what technical analysis actually is.
What is Technical Analysis?
Technical analysis is the study of price data and statistical indicators that are formed by market activity. Market activity illustrates the flow of supply and demand. This supply and demand is a reflection of beliefs and opinions translated into human behaviour and specifically, herd mentality. Therefore, technical analysts would argue, price patterns and indicator signals can be categorised based on historical data with a reasonably high expectation that they will occur again at some point in the future. This argument is based on the theory that human behaviour is innate and, although it...
There are really no "secrets" about how to invest successfully. There are lots of good ideas out there in plain sight - in books, newsletters, magazines and more - and you can acquire them cheaply.
The problem is there are also lots of really bad ideas about investing out there too. Most people can't tell the difference between the two. This makes it hard to create a winning investment strategy. It would be like trying to make apple pie without knowing a ripe apple from a rotten one. That's problem No. 1.
The second difficulty is that even when you find the genuine article - a timeless bit of investing wisdom - it is not something you can use to great effect in isolation. In other words, the "secret" to creating a successful investing...
In this article we take a look at what the IRS requires for you to be called a trader and what forms are required to be completed with your yearly tax returns.
Just because you call yourself a securities trader doesn't make you one in the eyes of the Internal Revenue Service. In fact, Uncle Sam is predisposed to consider you merely an investor, and thus deny you more favorable tax status, unless you meet a number of tests that are frustratingly open to interpretation.
That's right: the tax code contains no actual definition of trader status. Instead, the IRS has issued guidelines that the courts have further delineated by case law, most of which denied taxpayer appeals. What we're left with is a blurred image, like a photograph of a...
The six stages of a developing trader are looked at below.
Stage One: The Clueless Trader
This is the first stage when you enter trading. You may have picked up a book on technical analysis somewhere, heard of a day trader making millions, or got lucky in an earlier stock investment. After all, how hard can it be? The money sounds appealing and the freedom to be independent sounds attractive.
I don't mean to shatter anybody's dream but those who succeed in trading are the minority! Approximately 90-95% traders lose money. This is the cold hard facts. In the first stage, every trader is optimistic. You open a direct access brokerage account and the sound of Level II, ask/bid, and market makers make trading sound like hi-tech video...
Getting Started Swing & Position Trading Day Trading & Scalping Different Types of Market Orders: Using Each for the Best Fills
I was recently asked about stops and different types of market orders. They were good questions and they reiterated to me the fact that I work with people that range from seasoned trading professionals to those testing the futures trading waters for the first time.
One thing I always like to point out to the less-experienced traders: There are no "dumb" questions and there is no shame in being inexperienced. Every single futures trader that ever walked the face of the earth has been inexperienced at one point.
This section on types of market orders, including stops, may be a "refresher" feature for the more experienced traders, and will likely be a more valuable feature for the traders newer to this fascinating field.
Market Order...
When you begin trading, the one thing you want most is success. You are trying something new. Most traders first starting out feel unsure, a bit uneasy. You're taking a chance with your hard-earned money; there is big risk involved. I don't know of any beginning trader who plans on failing, yet the possibility is there, and it is beyond your imagination to consider what you'll do next in the event you fail. It has been our experience here at Trading Educators, that many beginning traders never even consider failure as a possible outcome of their attempt at trading. In fact, it is often just the opposite. Apart from being a bit apprehensive, most feel impervious to failure, if they think of it at all. I have never met a beginner who had...
How focusing on the prize can leave you feeling frustrated
My wife and I can't help ourselves. When the Olympics are on, summer or winter, we spend an inordinate amount of time in front of the television, often watching the games late into the night. I'm not sure if we watch with the same motivation. My wife loves to comment on the scenery, the clothing and the colors. I watch with a sense of awe and inspiration at the athletes' level of skill and commitment. Years and years of training and preparation oftentimes boil down to a brief moment of competition; a series of dives, a downhill run, a few laps around the track. Gold, silver, bronze, or a conciliatory pat on the back all hang in the balance.
A common sight at the Olympics...
I recently went to watch my 13 year old nephew, Joey, play in a baseball tournament. Every parent / grandparent / uncle is quick to brag about their son / grandson / nephew's athletic ability. I am no different. Joey is an exceptional baseball player. He is exceptional in that he is a switch hitter with power from both sides of the plate. Besides that, he has an amazing ability to draw walks because is so patient at bat. He has roughly 150 at bats with 40 walks and an on base percentage of 600. When I asked him how he was able to be so patient and draw so many walks, he said with a profound simplicity, "I don't swing at crap. It's not that hard." (I could write an entire article about that as it pertains trading).
Joey's...
I started my career on the floor of the Chicago Mercantile Exchange facilitating institutional order flow. This means taking large buy and sell orders from banks, institutions, money managers, hedge funds, and more, paying close attention to market price, and then making sure those orders get executed and filled at the proper prices. I started in the currency quadrant and was specifically responsible for the Japanese Yen, Canadian Dollar, British Pound, Deutsch Mark, and Swiss Franc markets. The highest volume and most volatile market of this group back then was the Japanese Yen, so that's where much of my focus was.
One of the main reasons for the high volume and volatility was the Bank of Japan (BOJ) as they were very active in this...
Before starting my career at the Chicago Mercantile Exchange, I did two things and really two things only. I played ice hockey and went to school where the focus of my studies was Biology and Genetics. I know what you're thinking, how boring... Well, I actually was and am still fascinated with the study of life so I really enjoyed those days. Around every corner of Biology, Chemistry, Genetics, and so on is another mathematical equation. After diving into this field, I quickly realized that though there were so many equations, the underlying goal of most of these equations was to quantify the forces of "change", "action", or "energy." So, one could argue that all these equations were really different variations of the same thing. For my...
"Rather than maniacally trading volatile pairs multiple times in a single day, rule-based discretionary traders are now holding onto open positions longer, relying more on planning and patience rather than fast reflexes."
Rule-based discretionary traders are among the best traders on this planet. The trading strategy I want to explain here is a rule-based discretionary system. Every trader will face both winning and losing streaks alternatively, so the key to trading successfully is to make more money during a winning streak than you lose during a losing streak.
It's very disturbing that so many traders find it difficult to survive in the markets. The issue is; even if you're disciplined, it'll be difficult for you to survive with a...
In my top 3 books about trading rests Trading in the Zone by Mark Douglas. I found this book to be the most helpful trading book in my earlier days of learning to trade. I find it interesting that one of my favorite books on trading doesn't have 1 chart, indicator, setup, or any full methodology within its pages. It is almost entirely about individual trader psychology, and I have learned that this is the crux of the trader's issue. The traders mind, both friend and enemy, both roadblock and engine.
Mark Douglas, in this book, was the first to introduce me to trading in samples. I had heard about it in passing, but never paid any real attention to it as it seemed to me an obscure way to deal with trader psychology. Why not just focus...
Whether you want to be a fundamental trader or technical trader, you need to have a sound understanding for how markets work. As a price action trader, economics major and trading educator, I fully understand how markets work, but do you?
There are tens of thousands of trading websites and thousands of different trading methods being sold on them, most of which never really explain to you, the trader, exactly how or why they work. To me this is just shady business practices from these companies, and is more times than not due to the fact that these methods either don't work or the person in charge of marketing these methods doesn't know how they work. I am writing this article wearing the shoes not only of a full time trader and...