Moving Average Secrets

One of the most popular technical analysis indicators is the simple moving average also known as SMA, if you learn how to use these correctly they can be a very useful tool to help you to make good trading decisions.

The 50 simple moving average, or 50 SMA, is simply the sum of the last 50 values for each period, divided by 50, this is a moving window, as time moves on so does the average. Notice that I used the word period because this indicator works on any time period in exactly the same way.

It can be used on monthly, weekly, daily, hourly, 30 minutes, 15 minute and on whatever time period you want to monitor and trade. Although the SMA is the most widley used there is also the exponential moving average or EMA. This is a weighted version of the formula using the mathematical exponent function to give more weight to the more recent values, this has the effect of making it a slightly faster average that many traders prefer.

The reality is that it probably does not matter if you used the SMA or the EMA, what does matter however is that you use one or the other and then be very consistent with it. Do not switch between them, it is more important that you trust your chosen indicator then a slight difference in its value.

The simple moving average is primarily used to determine what the current trend of the stock is, depending on the value used it could be a short term, medium term or long term trend. An important point to note is that moving averages are really only useful when the stock is trending, if the moving average is flat, i.e. horizontal on your chart it can become very choppy, this is a good time to not trade.

The general rule is that if the current price is above the SMA the trend is up, if below the trend is down. This is very important to know because it forms the basics of trend trading and trading with the trend.

For the short term trend many traders like using a 5-8 SMA or EMA, here is a trading secret, never trade again the direction of the short term tend, this is really just common sense when you think about it.

Moving averages can often act as support or resistance, many traders use the 15, 21 or 30 SMA for this purpose.

There are a number of other very important moving averages that you need to know about, these are the 50, 100 and 200 SMA, and this mostly applies to the daily and weekly charts. A lot of big players in the markets, like the the mutual funds, investment banks etc use the 50 and 200 SMA as support and resistance, if they decide to buy or sell based on these you need to follow suite, the 100 to a lesser extent. These are very useful averages to watch if you trade EFT’s like an Oil ETF.

A useful tip is that when a stock breaks through one moving average it will often move all the way to the next, for example, if a stock breaks the 30 SMA it may move to the 50 before finding some support or resistance.

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How To Buy Good Stocks

Learn To Buy Good Stocks

Although it may seem obvious to most stock market swing traders there are a number of simple rules that you can follow which will ensure that you have more success when buying stocks:

In the USA stock market there are 3 major indexes which are each made up of a basket of stocks, they are the S and P 500 (also known as the S&P500), the DOW 30 and the Nadaq 100. These stock indexes generally only contain major blue chip stocks, as long as you buy from these 3 groups you will at least know that you are getting a well known solid stock.

For example the DOW 30 contains major industrials and large multinational stocks such as Home Depot (HD) and Johnson and Johnson (JNJ) whereas the Nasdaq 100 mainly contains techical companies such as Apple (AAPL) and Miscrosoft (MSFT).

Always buy a stock that is liquid, this means that it is a highly traded stock, this will enable you to easily buy and sell at the price you want without having a delay. You will also get a smaller spread, thats the difference between the BID and ASK price of the stock. For a stock to be considered very liquid it should trade at least 500,000 shares per day, ideally even more.

It is best to avoid stocks that are bellow as this usually means the company is in trouble, although with the bear market of 2008 there have been a lot of good stocks at bargin prices between and . Avoid buying a stock below at anytime.

Another consideration is options, does the stock has options?, this will be important if you want to trade options around your stock, such as a covered call, or you may want to buy a PUT option in order to protect your stock.

Be very cautious about buying a stock just before it’s earnings release, stocks often drop significantly if you come out with a poor report. Earnings are released 4 times a year with one of them being the annual report.

If you are going to trade options make sure that you learn how to trade by getting some good education. There are many swing trading strategies that work well with stocks in todays volatile markets.

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How To Trade Options Correctly

Learn To Trade Options Correctly

There is a lot of hype surrounding options trading, and for good reason, it’s a good way make a lot of cash fast, or can be used to grow your capital consistently month after month.

There’s also a lot of hype about how complicated it is and why you need to spend thousands of dollars on options trading education before you get started. Needless to say this last statement usually comes from trading seminar companies trying to sell your their trading course on options.

Lets cover a few of the basics about options trading and set you straight about a few important points. Firstly yes it is true that you can make a lot of money trading options, but of course you can also lose money just as fast.

When trading stocks your leverage is 1:1, if you go full out on margin you get get 1:2 leverage, but thats about it. With options it is not as straight forward to calculate the leverage but generally speaking you can get between 1:5 and 1:10 when you buy an option on a stock, or ETF.

So with 1:10 leverage, when the stock increases by 5% your option can increase by approx 50%, and this can happen in just a few days, this is why swing trading strategies using options on stocks is so popular.

However the downside is that the reverse can happen, if the stock drops by 5% your option can also drop by 50%, at which point you may want to close the trade and save some of your option value, it really depends on what your stop loss and risk management plan is.

What I’ve described above is called directional option trading where you are betting on the getting the direction of the stock movement correct, this is highly speculative. Options can also be used in option strategies which are much more non-directional, such as covered call trades, credit spreads and Iron Condors. In these trades there is much lower dependance on getting the stock direction correct, but it still matters.

So should you learn to trade options?, in my opinion you should not do directional option trades until you become very good at trading stocks. This is because you really need to be very precise with your entry and exit strategy and trading plan, and be very good at technical analysis.

Whereas if you want to do non directional option trades you don’t need to be such an experianced stock trader to be successful, but of course it does not hurt either.

Learning how to trade options is a very good skill to have, but don’t rush into it and blow out your account. Make sure that you get a good options trading education before you start, and also make sure that you have a very solid stock trading education as well, such one from Top Dog Trading Review.

Understanding The True Value of Gann Square of Nine

Gann Square of Nine or Gann Pyramid as it is also called, is one of the most useful tools in the investment industry. Though it is somewhat more complicated than other tools, once mastered it is very useful when applied to financial analysis.

The Gann Square of Nine is most often used to confirm the significance of highs and lows in terms of stocks, commodities and other types of investments. Imagine being able to predict when to buy a particular stock and how much to pay. The Gann Square of Nine makes this not only possible, but also a reality that has worked for many investors over the past century.

It is important here to note that Gann Square of Nine should never be used to choose tops and bottoms when selecting stocks, but it can be utilized to provide additional information to confirm how significant a recent high or low point in the market was when a break in a trend occurs. Gann Square of Nine is similar in shape and concept to a wheel or circle, and is often also referred to as the Gann Wheel.

It starts with the number 1 in the center and radiates out to the first square of nine. This begins with the number 2or number 1 to the left of the center, it then spirals clockwise to the number 9 in order to form its first rotation around the square of nine. This rotation then shifts one unit to the left of nine and the next rotation begins at the number 10. It then continues its spiral to the number 20 and so on.

Here is a picture of the Gann Square of nine:

http://www.stock-commodity-trading.com/gannsquare.gif

The Gann Square of Nine is a time and price calculator that figures the square root of numbers, both odd and even and their midpoints as well. It also seeks time and price alignments from a specified starting point or price level. One example of this would be a significant high or low point in a given market.

If you look at the numbers that appear on the grid that run down to the bottom left corner on the Gann Square of Nine, you will find them to be the square root of odd numbers. An example of this would be 5×5 = 25. If, on the other hand, you look at the numbers that run up to the top right corner on the Gann Square of Nine, you will find that they are the square root of even numbers. An example of this is 4×4 = 16.

The numbers that run down to the bottom right corner will show you the midpoint between the squares of odd and even numbers. Let’s use the numbers 25 and 16 mentioned above to illustrate this. Here, the number 21 would represent their midpoint because it falls exactly between them.

The Gann Square of Nine is an arrangement of numbers with a specific order and a used in a number of ways. Further review of Gann Square of Nine will show you how it works and illustrate its usefulness in determining market highs and lows.

Make Money Trading Options

Learn Options Trading

Trading options is both similar to and different from trading stocks. There are many ways to make money trading stocks from going long to day trading.In this regard,options and stock trading, are similar.

The starting point for learning options trading is knowing the difference between an option and a stock. An option is merely the right to purchase a particular stock at a specific price over a specific period of time.Since we’re talking about stock prices here, there is volatility in their value over the option expiration interval.

Options, however,since they expire on a specific date, have to be exercised before that date. And there’s no rule saying you have to exercise your option if you choose not to. Plus, you can purchase an option for a fraction of the actual price of the stock.Options traders can leverage their investment by being able to trade more stocks.They can acquire the option to buy a $100 stock for only a fraction of that price.Hence, they can acquire options for more stocks than if they were actually purchasing the stocks outright.This leverage makes options very attractive as an investment.

There are different types of options,too. You can exercise an American option any time up to and including the expiration date, but European options can only be exercised on the expiration date.And just to complicate matters, where you purchase the option has nothing to do with it’s being American or European.The “American” options tend to apply to stocks and bonds, while the “European” type applies more often to indexes. And options expire on the Saturday after the third Friday of the month. But U.S. Since markets are closed in the U.S, on weekends,American options expire on the third Friday of each month and European options the Saturday after the third Friday.

An option is the right to either buy a stock (“call” option) or sell a stock (“put” option) either on or before its expiration date.You have several choices when you purchase an option. You can either hold it until its expiration date and exercise it just before it expires, or you can exercise it any time before that date.Or you can sell the option itself before the expiration date and recoup some of your investment. If you don’t exercise the option before it expires, you lose your investment.Let’s look at these situations more closely:

Let’s say you buy an option for Acme Chemicals Corp.for $2 a share with a strike price of $20. Now most options contracts require a minimum purchase of 100 shares, so you’d have to pay $200 (for 100 shares) for the contract.Acme’s stock price rises to $25 two weeks later and rather than waiting for the expiration date, you decide to take your profit and run. You exercise your option and buy the stock for $20, then you turn around and and sell right away it for $25.You deduct the  $2-per-share cost of the option and you’re left with a $3 per share profit,or $300 less brokerage fees.Pretty conservative, but you made money.And that’s a good thing!

But consider the opposite scenario. What happens if the Acme’s share price doesn’t rise. What happens if the price of the stock falls below $20? If you sold your options for half of what they cost you, in this example,you’d only be out $100. Bear in mind that owning an option does not require you to purchase the stock. So you can sell the option and recoup a portion of your investment. This is better than acquiring 100 shares of Acme’s stock outright. You can jump in and exercise the option when you know you will make a profit, or you could wait it out until the expiration date and make your decision then. I personally think the more conservative approach is more likely to result in consistently positive returns, albeit perhaps lower than a more aggressive strategy. But that’s just the way I would do it. The higher the risk, the higher the return. Higher profits. And potentially greater losses.And like other investments.

This is just a simple explanation of how to trade options. It is more complicated than this and you should really educate yourself before you commit much of your capital to it. The best options trading trading tutorial I know is the one taught by David Vallieres, which you can review here and the video above from the free demo video series he provides. I think this course is the best because you’ll not only learn how to trade options, but you’ll also learn how to make money.

 

 

 

3 Common Mistakes Made When Trading Options

#1 Trading options in only one direction and that’s usually up.

A common mistake options traders make is one of omission. They forget or fail to realize that options trading allows one to make money on falling prices as well as rising prices. By not trading in both directions they leave a lot of money on the table. When you stop trading when the market is in a downturn, you are potentially leaving half the available money on the table.

Additionally, security prices tend to fall faster than they rise, so some of the biggest, quickest gainers are executed via falling share prices. So if the intrepid options trader is not looking for short trades they are truly cheating themselves out of some of the best trades going.

#2 Not having money-management rules in place.

Another common mistake is to not strictly adhere to sound money-management rules. Critical metrics arise from guiding principles such as how much should you trade and how much should you risk? Where should you set your stops or in what manner should you hedge?

Solid money management rules control help you to control your trades. And most importantly, they help to prevent catastrophic losses so that you can trade another day.

#3 Letting your emotions dictate your trade entry and exit points.

Many times behavior that is illogical makes investors execute trades that lack the necessary fundamentals. Instead of letting sterile indicator guide their decision making, they operate on emotion or impulse. Fear of price reversal drives traders out of winning trades too soon and fear of loss makes them stay in losing trades for too long.

And because there is zero way to eliminate your emotions completely, you must learn to control them. The most realistic and effective way to do so is to develop a set of trading rules to constrict your trading activities and to conduct the majority of your research and trading decisions outside of open trading hours.