Candlestick Trading Blog

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Whether traders are involved in the stock market, commodities markets, options trading, futures trading, or trading the foreign exchange market there are trading limits. A daily trading limit is the maximum that an equity can go up or down in a day before the security exchange halts trading for the day. Personal trading limits include the limit orders that traders use to reduce investment risk. Limits also exist for the number of contracts a trader can hold at one time during the day as well as the number of contracts traded per day. There is currently a concern expressed by ex Federal Reserve Chairman Paul Volcker that limits on risky trading need to be placed on banks to protect depositors. Daily Trading Limits Trading limits came into being help prevent market crashes. If trading on stocks, commodities, or futures goes into freefall, trading is halted on an equity or on the entire market. Although addition of daily limits on trading is relatively new it is akin to the very old practice of declaring bank holidays during an economic crisis. Traders should be aware, however, that each limit is for one day. The next day the same limit applies so an equity can still fall dramatically over several days. Limit Orders A good piece of advice is never to buy or sell at market prices. Whether you are trading commodities online or calling a stock broker to buy a stock for long term investing always use a limit order. Offer to buy at or below a given stock price or sell at or above a given commodity price. Using limit orders will get you in and out of the various markets at the prices you determine. A stop loss order is a type of limit order. The investor will place an order to sell a security if the stock price drops to a certain price to prevent further loss. Number of Contracts a Day or in Hand A commodities exchange will typically limit activity of large, usually institutional, investors who have the capacity to corner the market. Thus the exchange will place a limit on how many contracts an institution may trade in a day and how many trades it can have in hand at any moment. These rules are enforced by the exchanges. The stock market news recently reported a fine of over $100,000 given a large institutional investor for exceeding the limit on number of contracts a day. This came on the heels of the same institution being fined for having too many contracts trading at the same time. Trading Limits and Protection of Bank Depositors A more global issue related to trading limits may have an effect on bank stock investing. The market news reports a talk given by past Federal Reserve Chairman Paul Volcker. Mr. Volcker is currently a White House economic advisor and, speaking for the White House, expressed concern about banks hedging in highly leveraged investments. The concern is that banks have a responsibility to depositors to stay solvent. Although hedged investments can be very profitable they also can be very risky as stock market crashes have demonstrated. As many banks were bailed out in the early stages of the economic recovery they may be beholding to the government and government appointees on their boards of directors to limit trading in high risk investments. Online Stock Market Reviews presented live via the internet by Stephen Bigalow	Website Specials

posted by Stephen W. Bigalow at 10:04 AM   Add to del.icio.us DIGG THIS!

In projecting how a company will perform in the coming months or even years its officers will estimate the company’s anticipated earnings. Anticipated earnings are based upon expected consumer demand, ability to price effectively, and success in controlling costs. The basics of stock market investing such as fundamental analysis include using earnings projections in helping investors in picking stocks. Anticipated earnings are basic stock information along with the price to earnings ratio, Candlestick chart formations, and a stock’s dividend yield. Long term investing based upon stock fundamental analysis will rely much more heavily on anticipated earnings than does day trading. This is because the trader steeped in Candlestick basics knows that the market can tell traders what it will do for those using Candlestick analysis. Value stock investing is particularly interested in what the future will bring for a company as this type of stock investing seeks to buy shares in stocks that are currently undervalued. The value investor does not really care why the technical traders are undervaluing a stock. He or she knows that the stock is likely to out perform the market in months and years to come during which time its stock price will appreciate substantially. The day trader lives and dies by technical analysis charts such as Candlestick stock charts. He or she knows that the market has typically figured everything that it knows into the current stock price. The long term investor is equally sure that few investors or traders have picked up on his information derived from company and market analysis. In reality both day trader and long term value investor are correct. The trader is more interested in short term movement which is driven by current information. The long term investor is patient and can wait a month or a year for a stock to turn around, for a new product to come to market, for a company to get its costs in line with sales, and for new management to take an old company with strong assets in a new direction. Anticipated earnings for a company can be improved by showing that a company can find and successfully market new products. They can be improved if companies demonstrate that they can find new business in new market sectors thus enlarging their markets. Anticipated earnings are very commonly expected to improve with workforce cutbacks. This is a common action taken by companies in financial trouble. The long term problem in industries that require strong skill sets is that cutting trained staff requires hiring new workers later, training them and waiting for their skills to mature. Often an effective means of dealing with promising earnings estimates is to buy options. A long straddle option is useful in that it allows the options trader to profit from either an increase or a decrease in stock price. The trader exercises this options strategy by buying calls and buying puts on the same stock for the same expiration date. If the stock does not move in price he or she is out the premiums paid. If earnings estimates are correct the stock price will go up and the call will pay off. If the estimates are dead wrong the stock price will go down and the put will pay off. It is all in how anticipated earnings turn out. Online Stock Market Reviews presented live via the internet by Stephen Bigalow	Website Specials

posted by Stephen W. Bigalow at 6:19 PM   Add to del.icio.us DIGG THIS!

Derivative contracts are agreements by which a trader gains leverage on investments in underlying financial instruments such as stock shares. Derivative contracts derive their value from the underlying instrument. However, they offer the opportunity for greater profit, the option to buy stock or sell stock at a given price, the possibility of hedging risk, and the possibility of trading where there is no underlying financial instrument. Derivatives contracts include those used in trading options, futures, commodities, foreign exchange trading, interest rates, or credits. Derivative contracts can be complex (exotic) or they can be simple (vanilla). The underlying features that all have in common is the ability to gain more profit and to have more choices at a future date. The risk with these contracts varies. For example, buying calls in options trading gives the buyer the option to buy 100 shares of stock per contract on or before a given date, the contract expiration date. Traders will pay a premium for this opportunity and will exercise options contracts, the derivatives, if the stock price goes up enough to make a profit. On the other hand selling calls gains the trader a premium but gives away the opportunity for substantial profits if the stock price goes up dramatically. The risk involved in derivative contracts varies. In fact, many trade derivatives as part of a hedging strategy while others engage in options trading and futures trading with potentially unlimited risk. An example of trading derivatives to reduce investment or business risk is a gold mining company selling futures on gold at a price below the current market value. The company guarantees themselves a profit on part of their expected production. This trading strategy can be used by investors in the company as well. Those engaged in long term investing can also take advantage of derivative contracts. A common tactic is the use of covered call options. An investor who is familiar with the support and resistance zones of one of his cyclical stocks can profit by selling covered calls when the stock is at the top of its traditional trading range. The investor gains the premium, offsetting his portfolio loss, while the stock cycles down in price. Another covered option is buying puts on a stock that has recently run up in price. The stock owner pays a little insurance in the form of the premium. If the stock corrects substantially he or she will then exercise the put options, sell at the strike price, and buy again at the new, lower, spot price. Managing risk in trading derivative contracts is important. Selling uncovered call options or uncovered put options opens the trader to potentially huge risk if the underlying financial instrument goes up dramatically in price. This sort of trading in derivatives is statistically very profitable. That is why large institutional traders do it. The problem for the individual investor or trader is that every so often the trade goes bad and there is a price to pay. Large institutions can handle the cost. Most individual investors cannot and should typically avoid trading where the potential for loss is great. Online Stock Market Reviews presented live via the internet by Stephen Bigalow	Website Specials

posted by Stephen W. Bigalow at 6:22 PM   Add to del.icio.us DIGG THIS!

A common means of profiting from investing in the stock market is investing in the business cycle. Business cycles are fluctuations in economic activity and production that last for months or years. Business cycles occur during long term economic growth, long term decline, and times of relative economic stagnation. Investing in the business cycle takes advantage of how different market sectors perform during economic upswings and downturns. An investment strategy for investing in the business cycle during a downturn might be picking stocks in basic consumer services. During an upswing of the business cycle home builders, autos and the entertainment industry might be better stock picks. Long term investing typically ignores business cycles although the investor may engage in market timing when buying stocks at an opportune time in the business cycle. Business cycles are caused by a number of factors including availability of credit, fluctuations in the value of currency, gain or loss of economic markets, as well as political disruption and war. Despite being referred to as cycles these periodic disruptions in the economy and stock market do not recur on a clock like basis. Likewise their lengths may be months and sometimes years. What tends to be uniform is that certain stock market strategies are useful in investing in the business cycle. When stock market movement is downward, investors will often invest in stocks in stable companies, which pay dividends. Power companies, consumer products companies, and, usually, banks are considered good stocks to buy as the economy and business cycle head into a recession. During the low point of the business cycle companies making televisions, automobiles, boats, and other expensive or discretionary items will typically have less business and see their stock prices drop. When investors and traders believe that the stock market and business cycle are about to turn around they will begin again investing in the business cycle as they purchase shares of these depressed stocks. These individuals typically make money on the upward stock market trends in the second half of business cycle, the recovery. Stock option trading also takes advantage of movements in the business cycle. A trader anticipating the recovery of the market will purchase call options contracts on stocks which he or she expects to go up substantially in price in the second half of the business cycle. The only cost to this options trader is the premium paid for the option. The potential profit is the difference between the price of the contract, the strike price, and the price of the stock when he or she exercises the option. There are many theories as to what causes and what repairs business cycles. These go back hundred of years. Until the current day economists have argued about the exact causes of business cycles. Over that same time investors and traders have not worried about the esoteric details but have made money investing in the business cycle. Going back to Japan when Candlestick principles were established traders have known that Candlestick basics will help traders spot market reversals during a business cycle. Candlestick pattern formations will help the trader see when a stock is about to break either way out of support and resistance zones. For stock trading and long term investing it is the predictability of the business cycle that leads to profits with the ability to predict stock market prices throughout the business cycle. Online Stock Market Reviews presented live via the internet by Stephen Bigalow	Website Specials

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The use of the word strike to mean that a business deal has been consummated goes back to horse traders in Ireland slapping hands when a price was agreed on. In today’s world of traders the strike price is the agreed upon price of futures, commodities, or options contracts. This price differs from the current price of the underlying stock or commodity which is called the spot price. It is the divergence of spot price from strike price that leads to profit and loss in buying and selling options or trading futures. Understanding the moving relationship between strike price and spot price is a key to understanding the stock market. The strike price stays put while the stock market, commodity market, or futures market move in response to the news of the day, fundamental analysis projections, and technical stock trading. This price is what a contract will be settled at, whether trading is European style in which contracts are settled at expiration or United States style in which the buyer of an options contract can exercise the contract at any point during the contract’s term. So, what determines the price at which a contract will be settled? When options are offered they are based upon the current price of the underlying stock, commodity, or future. Often a range of options is offered in steps going up for the current price. Traders will then decide on whether to buy or sell and whether to deal in puts or calls based upon their own projections of whether the equity underlying the contract will be higher or lower priced by the time the contract expires. The strike price is also referred to as the exercise price because it is the price at which the contract will be exercised no matter what current stock market prices or prices of futures and commodities will be. As time advances toward the expiration date a contract is said to be in the money, at the money, or out of the money depending upon whether the spot price is above or below the strike price. However, this varies with whether the trader is buying puts or buying calls. Basically in, at, or out of the money refer to what would happen if you were to exercise the contract today. A trader who buys call options and finds that the underlying stock prices go up over the exercise price will have contracts that are in the money. An options trader who buys put options on stocks will be in the money with the options if the prices of the underlying stocks in the equity market go down in price. The old term for whether or not a contract is currently profitable is the moneyness of the contract. In all of this the exercise price does not budge. It is the spot price that determines profit or loss and the spot price is driven by stock market news, those engaged in long term investing, and technical traders in search of short term profits. Online Stock Market Reviews presented live via the internet by Stephen Bigalow	Website Specials

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