Stock Market Trading – Top 4 Trading Myths That Jeopardize Your Success

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Jan 262010
 

Do you believe buy & hold is safe? Or that selling short is risky? Read below the top 4 myths that are widely believed, and keeping people from their trading potential. When you properly understand these myths, you will be leaps ahead of everyone else.Myth #1 Selling Short Is RiskyThis trading myth comes from the fact that some stocks can trade down to zero while there is no limit to how high that stock can trade. So losses for long positions are limited on the downside, but short positions can suffer unlimited losses.But the belief that short selling is risky is preventing you from minimizing risk and preventing you making money. You see, selling short works just as well as buying long if done properly. The level of a positions risk depends on good money management methods.A small percentage of traders have realized this and have developed a trading strategy to sell short and profit easily regardless of which way the stock market is moving.Myth #2 Buying & Holding is SafeThis would have to be the most common trading myth, that stems from the belief that the stock market always goes up in the long run. This is true enough, but it can also take an extremely long time. Some markets have been known to drop dramatically, and not return for 25 years! Like the Dow Jones Industrial Average from 1929 to 1954.It dropped so low during this time that no one would sit through it. Money managers who can duplicate the performance of the general market are very rare. You need an exit strategy that limits risk for every strategy, whether investor or trader.A small percentage of traders are using a trading method that will actually apply to any market. This potentially gives them a winning edge. They aren’t simply buying, holding, and hoping like most traders do.Myth #3 Trading is easyIf making money consistently from the stock market was easy, everyone would be doing it, and all be wealthy from it. Yeah, the physical part is easy enough, but many people have this idea that trading is easy, but they were never given the tools that make it easy. It’s not that trading needs to be difficult, but it requires a solid trading method, and diligence on the traders part to stick with it. And unless you also trade with discipline and use good money management principals like the most successful traders, you can only hope to be less than successful.Myth #4 The existence of the Holy GrailI see far too many traders hopping from method to method, pursuing the next guaranteed thing only to be repeatedly let down. Newbies tend to think they should be able to win practically every trade. Thinking they should be having a straight line of wins without any major setbacks. When armatures try something, they conclude that their system doesn’t work after the first few losses in a row. So they jump on something else. How can anyone expect to succeed this way. Unless you want to continue to suffer losing trades, and eventually give up, stop chasing this holy grail nonsense.The holy grail of trading doesn’t exist. It would seem more than 90% of traders are wasting years of their life with this myth. Think of the progress, the money that could have been made, if they had spent that time and energy on a solid trading system, and a good trading method.

Where to go from here:Well first, simply understand and clear your head of the above stock, and trading myths. Free yourself from these beliefs that restrain your potential as a trader. This will automatically put you in front of most traders.There are a few traders however, less than 1%, who understand the above and more. who are quietly making a killing from the stock market, and are spending no more time trading than you. A lot of them keep their winning system and their successful trading secrets to themselves, but there are a few who will share this information with the publicJust remember, none of these super traders are born geniuses. And they don’t have a crystal ball forecasting the stock market. They simply have found a winning system that isn’t restricted to any time frame or market. The most successful traders are nobody special, apart from the stock market secrets they learned and diligence to put them in action.Regardless of whether you trade Stocks, Options, Futures or Forex, or your level of experience, you can’t afford to keep buying and hoping. Stop leaving your success to chance when you can take control. It isn’t necessary to keep wasting all this time and money on the common trading methods. Even if you are ahead, the average trader could trade far more efficiently.You too can become one of the very small percent of traders. Seriously, you just need to learn how to properly, plot the chart, the right setup conditions, the best entry point, stop loss point, and place your profit target point. To learn how to do the things listed above, and for actual insider trading secrets on how the most profitable traders really do it – Read on.

 Posted by at 3:11 am  Tagged with: , , , , , ,

Carry Trade as a Tool of Profit Making

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Jan 242010
 

CARRY TRADE AS A TOOL OF PROFIT MAKING

Introduction

First, let’s take a look at the carry trade. In short, the carry trade is used when an investor or speculator is attempting to capture the price appreciation or depreciation in a currency while also profiting on the interest differential. Using this strategy, a trader is essentially selling a currency that is offering a relatively low interest rate while buying a currency that is offering a higher interest rate. This way, the trader is able to profit from the differential of interest rates.

With the introduction of the carry trade , yen currency pairs have become the speculator’s preference. Currency crosses like the GBP/JPY and NZD/JPY have been able to net small intraday or even longer term profits for the currency trader as speculation continues to support the bid tone. But how can one enter into a market that is already seemingly overheated? Even if a trader could, what would be a good price, and doesn’t everything that goes up come down? The answer is easier and simpler than most believe. In this article we’ll show you how to use carry trades to profit from overwhelming market momentum.

Definition

A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates – which can often be substantial, depending on the amount of leverage the investor chooses to use.

For example, taking one of the favored pairs in the market right now, let’s take a look at the New Zealand dollar/Japanese yen currency pair. Here, a carry trader would borrow Japanese yen and then convert it into New Zealand dollars. After the conversion, the speculator would then buy a Kiwi bond for the corresponding amount, earning 8%. Therefore, the investor makes a 7.5% return on the interest alone after taking into account the 0.5% that is paid on the yen funds.

Now on the earning side of the trade, the investor is also hoping that the price will appreciate in order to make further gains on the transaction. In this case, anyone that has invested in the NZD/JPY trade has been able to reap plenty of benefits.

Evolution of the carry trade

The first wave of carry trade started in the late 1980s when financial speculators borrowed in yen and invested in European securities. This first phase ended in 1993 after the Japanese bubble collapsed, Japanese investors retreated home and the yen appreciated.

The second round of carry trade began in the summer of 1995 and ended in late 1998 after Russia defaulted, the Long-Term Capital Management hedge fund collapsed, and the Japanese government planned to recapitalize the distressed banking sector. The yen rose 15% against the dollar in a week.

The recent wave of the yen carry trade is built on the Japanese government’s policy of keeping its interest rate and currency low in order to export its way out of recession and deflation. It has continued until (10-17 August) when the yen jumped 10% caused by the default in sub-prime mortgages and the knock-on effects on equity markets worldwide.

Profitability in carry trade

Over the past five years, official interest rates have been lowest in Japan and Switzerland, and the yen and the Swiss franc are the most commonly cited funding currencies (Graph 1). The Australian dollar, the New Zealand dollar and sterling have appreciated steadily and have been cited as popular target currencies, although a number of other currencies are often used as well (eg the Brazilian real and the South African rand). Since 2004, with the normalization of policy rates from historically low levels, the US dollar has moved from being a funding currency to a potential target.

The carry-to-risk ratio is a popular ex ante measure of the attractiveness of carry trades. It adjusts the interest rate differential by the risk of future exchange rate movements, where this risk is proxied by the expected volatility (implied by foreign exchange options) of the relevant currency pair. By this measure, carry trade positions that were short yen and long target currencies such as the Australian dollar were increasingly promising from 2002 to 2005.

Graph: 1

Sources: Bloomberg; JPMorgan Chase; national data; BIS calculations

These positions have remained so on average, despite two bouts of higher volatility which led to significant, albeit temporary, declines in the attractiveness of some target currencies (eg the South African rand).Over the longer term, however, the attractiveness of carry trades relative to other investments is less clear (Burnside et al (2006)).

Risk reversals – or the price difference between two equivalently out of the-money options – potentially provide an alternative market indicator of perceived risks in carry trades. If the risk associated with carry trade returns is not generalized uncertainty about future values of the exchange rates, as the carry-to-risk measure implicitly assumes, but rather directional uncertainty, this will be more effectively captured by risk reversals calculated from out-of-the money options. A strong correlation between the two measures is apparent in Graph 1. In addition, Gagnon and Chaboud (2007) argue that movements in risk reversals tend to post-date large exchange rate movements in periods of high volatility.

The Mechanics of Earning Interest

One of the cornerstones of the carry trade strategy is the ability to earn interest. The income is accrued every day for long carry trades with triple rollover given on Wednesday to account for Saturday and Sunday rolls. Roughly speaking, the daily interest is calculated in the following way:

(Interest Rate of the Currency that you are Long – Interest Rate of the Currency that you are Short) x Notional of Your Position

———————————————————————–

No of Days in a Year

For example one lot of NZD/JPY that has a notional of 100,000, we compute interest the following way:

(.8 – 0.005) x 100,000 = approximately $20 a day

365

It is important to realize that this amount can only be earned by traders who are long NZD/JPY. For those who are fading the carry, interest will need to be paid every day.

Flags and Pennants in carry trade

At present in this currency rising trend, how can a trader really capture market profits in the bull market? One such formation that has proved to be a great setup may be the all too familiar, flag and pennant formations. This has been especially useful in carry currency crosses such as British pound/Japanese yen and New Zealand dollar/Japanese yen. Both formations are used in similar capacities; they are great short-term tools that can be applied to capture nothing but continuations in the foreign exchange market. They are both even more applicable when the market, especially in the case of carry trade currencies, has been trading higher and higher in every session.

To get a better sense of how this works, let’s quickly review the differences between a flag and a pennant:

• A flag formation is a charting pattern that is indicative of consolidation following an upward surge in price. The name is attributed to the fact that it resembles an actual flag with a downward-sloping body (due to price consolidation) and a visually evident post. Targets are also very reliable in flag formations. Traders who use this technical pattern will reference the distance from the bottom of the post (significant support level) to the top. Subsequently, when the price breaks the upper trend line of the flag, the distance of the post will more often than not be equivalent to the next level of resistance.

• A pennant formation is similar to the flag formation – it differs only in the form of consolidation. Instead of a body of consolidation that moves in the opposite direction of the post (as in the case of a flag), the pennant’s body is simply a symmetrical triangle. Although pennants have been known to slope downward as well, the textbook formation has also been noted as a symmetrical triangle, hence the name.

Similar setups are seen in the cross currency pairs, giving the trader plenty of opportunities in the currency market, with or without dollar exposure. Taking another market favorite, the British pound/Japanese yen, let’s take a look at how this method can be applied to the chart.

In the short-term 60-minute chart in Graph 2, a typically long flag formation is coming around in the GBP/JPY currency pair. In order to establish the formation initially, it is recommended that the chartist draw the topside trend line first. This rule is a must as an initial drawing of the bottom trend line may lead to varying interpretations. Once the initial downward-sloping trend line is drawn, the bottom is a simple duplicate. Here, the trader will make sure to note a touch by the session bodies rather than the wicks in verifying the formation as true. This is to isolate only true price action and not volatility or common “noise” that may occur in the short term.

Step by Step procedure for carry traders:

Now let’s take a look at a step by step process that will allow traders to enter on the carry trade momentum in the market. Figure 3 shows a great opportunity in the New Zealand dollar/Japanese yen cross pair. Following the complete downturn that occurred July 9 – July11, 2007, a visual burst can be seen by chartists as bidders take the currency higher over the next 48 hours, establishing a temporary top at Point A.

Source: FX Trek Intellicharts Figure 3: Following A Sharp Decline, NZDJPY Vaults Higher Off Of Support

1. After consolidation, draw the topside trend line first, completing the formation with the duplicate bottom trend line giving the chartist the flag boundaries.

2. On a sign of a trend line break, measure the distance from the bottom of the post to the top. In this instance, the bottom support of the post is 93.81 with the top at 95.74. This gives the trader a potential for 193 pips on the trade after a break of the top trend line.

3. Once there is a confirmed break of the trend line, place the entry that is at the session close or lower of the finished candle. In this case, the break occurs approximately at 95.40 with the entry being placed at that session’s close of 95.46 (Point C). Subsequently, a corresponding stop is placed five pips below the session low of 95.37. Ultimately, the position is well within normal risk parameters as it is risking 14 pips to make 193 pips.

4. Set initial and full targets. With the full move estimated at 193 pips, we get a partial distance of 96 pips (193 pips / 2). As a result, the initial target is set for 96.42 (Point B).

5. Set contingent trailing stops. Once the initial target is achieved, the overall position should be reduced by half with the rest being protected by a trailing stop set at the entry price (or break-even). This will allow for further gains while protecting against adverse moves against whatever is left. Longer term strategies will hold to the entry price as the ultimate stop, promoting a worst-case scenario of break-even.

Best Way to Trade Carry

With the pros and cons of carry trading in mind, the best way to trade carry is through a basket. When it comes to carry trades, at any point in time, one central bank may be holding interest rates steady while another may be increasing or decreasing them. With a basket that consists of the three highest and the three lowest yielding currencies, any one currency pair only represents a portion of the whole portfolio; therefore, even if there is carry trade liquidation in one currency pair, the losses are controlled by owning a basket. This is actually the preferred way of trading carry for investment banks and hedge funds. This strategy may be a bit tricky for individuals because trading a basket would naturally require greater capital, but it can be done with smaller lot sizes. The key with a basket is to dynamically change the portfolio allocations based upon the interest rate curve and monetary policies of the central banks.

Conclusion

The carry trade is a long-term strategy that is far more suitable for investors than traders because investors will revel in the fact that they will only need to check price quotes a few times a week rather than a few times a day. True carry traders, including the leading banks on , will hold their positions for months (if not years) at a time. The cornerstone of the carry trade strategy is to get paid while you wait, so waiting is actually a good thing.

Partly due to the demand for carry trades, trends in the currency market are strong and directional. This is important for short-term traders as well because, in a currency pair where the interest rate differential is very significant, it may be far more profitable to look for opportunities to buy on dips in the direction of the carry than to try to fade it. For those who insist on fading AUD/JPY strength for example, they should be wary of holding short positions for too long because with each passing day, more interest will need to be paid. The best way for shorter term traders to look at interest is that earning it helps to reduce your average price while paying interest increases it. For an intraday trade, the carry will not matter, but for a three-, four- or five-day trade, the direction of carry becomes far more meaningful.

 Posted by at 3:55 pm  Tagged with: , , , , , ,

Alternative Investments in a Bear Market

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Jan 232010
 

Treasury Bills, Commercial Paper, Corporate Bonds, Certificate of Deposits and Repurchase Agreements. Collectively are referred to as Money Market Instruments.

Money market instruments are short term debt obligations generally regarded as low risk, low to medium return investment for the holder. They are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower risks than most other securities. They have maturities ranging from one day to one year.

Treasury bills

Treasury bills are issued by the Central banks such as the Bank of England or government treasury departments. The Treasury sells bills at regularly scheduled auctions to refinance government projects and obligations. It also helps to finance current government deficits.

Commercial Paper

Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers is a maximum of 9 months. They are very safe since the financial situation of the corporation can be anticipated over a few months.

Corporate Bonds

A corporate bond is an IOU issued by a public company, such as BT, ICI or Marks & Spencer. When you invest in a corporate bond, you are lending money to the company. In return you will receive interest at a fixed rate and the promise that your capital will be repaid at a certain date in the future.

Certificate of Deposit

A certificate of deposit (CD) is a time deposit with a bank. CDs are generally issued by commercial banks but they can be bought through brokerages. They bear a specific maturity date (from three months to five years), a specified interest rate, and can be issued in any denomination, much like bonds. CDs offer a slightly higher yield than Treasury Bills because of the slightly higher risk for a bank but, overall, the likelihood that a large bank will go broke is pretty slim. (Northern Rock Plc being the exception of course).

Repurchase Agreements

The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due to government backing. Due to this short turnaround time, these agreements are the most liquid of all money market investments, they are very similar to bank deposit accounts, and many corporations arrange for their banks to transfer excess cash to such funds automatically.

Its is however important to note that Although securities purchased on the money market carry less risk than long-term debt, they are still not entirely risk free. After all, as we all know banks do sometimes fail, and the fortunes of companies can change rather rapidly. But it has to be said that the range of possible outcomes is less for short-term investments than for conventional equity and fixed income investments.

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How to Trade Stocks, Forex and Emini Futures

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Jan 182010
 

Trading is usually simple but most of the people make it a very complex game. It depends how you approach it whether for quick riches or stable income every month. Trading wants you to have a positive and a neutral mind. Successful traders follow rules all the time and earn their living trading just two hours a day. Many failed traders already develop their mind of particular direction. Neutrality itself requires that there is no direction of the market. Whenever there is a setup formed according to the given rules, one should act quickly without any confusion and hesitation. What actually happens that failed traders hesitate at the time of signal but execute trade as per their emotions. Here comes the discipline.
Successful trading in futures, emini, stocks, options, forex or any market requires sound strategies and discipline. Discipline has more weight than strategies. Learning the great and profitable strategies will not make you successful unless you have conviction to follow rules religiously. A good strategy can be applied to stock trading, currency trading and emini futures because rules are universal. Technical analysis and price action cover every market. There are some analysts in the market who teach that rules apply to one market only and at particular time. Objective analysis covers every market exhibiting number of opportunities in a week for daytrading as well as swing trading. If you have discipline to limit your risk effectively you can do daytrading or swing trading in any trading instrument. It means if you learn rules of trading you have great exposure to trading in every time frame whether it is emini, dow futures, S&P 500, commodity trading, futures trading, options and stocks. Stock trading itself presents multiple opportunities because there are hundreds of stocks in stock market. Another considerable market is a currency market with great volatility. Currency trading usually called forex trading offers huge potential of income if you are equipped with best risk management strategy. Many large brokers are now offering currency trading requiring very low margin. The important point is how you discipline yourself and control your emotions.
Nobody can deny the importance of stop-loss. People who are afraid of taking small loss incur a big loss and are usually wiped out in just few days. Discipline of taking loss will keep you in the trading game forever if you have profitable strategy. Nobody in this world can win every trade. Some traders are very disappointed after taking loss. They lose control and trade immediately in the hope that they will recover loss quickly. It’s a huge blunder. You should come back with fresh mind after spending considerable time away from your computer after making a losing trade.
Many new traders try to trade live immediately after they have learned how to trade and it is a huge mistake because they are playing with their real money. Paper trading with discipline could give substantial amount of confidence over a period of few months. What differentiates successful traders from irresponsible traders is quick decision at right time.

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The Banes Of Losers In Trading Forex Online

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Jan 172010
 

One of the reasons why people are lured into doing online forex trading is the strong message that online forex trading is a quick and easy way to get rich. It is true that a lot of money can be made by being a good forex trader. But it is definitely not quick and easy. There is a certain amount of effort that a forex trader has to exert to succeed in this business. Those forex traders who simply plunge into the trade without knowing how the trades work are doomed to lose money.

A lot of people are convinced by online marketing campaigns to purchase e-books at low retail prices in exchange for the knowledge of how to make millions in the forex market. While the e-books may contain snippets of information and advice, you can hardly expect to get rich simply by reading these books and knowing what they contain. Success in trading in the forex market comes from your own strategy and how you play the market. There are things that you can learn while trading in the market that you will not learn from any e-book.

There is also no such thing as getting rich in the forex market over the short term. Yes, there might be one or two good trades with marginal profits but these can easily be eroded by small losses. No short trader ever lasts for long. Neither does a forex trader with no understanding of the volatility and risk that the forex market presents. One that does not understand this concept is likely to fall into badly timed trades. An understanding of price standard deviation will present a clear picture of the volatility of the market.

The practice of buying low and selling high is something that is not adviced if a forex trader is to be more proactive in his trading. More gains can be experienced even in buying high and selling even higher. Spotting breakouts and timing the market are the keys in succeeding this strategy. The important thing is to stay faithful to your system and have the courage to wait for signals especially in bad times. Forex traders incur losses for wavering on their trading systems. Having the discipline to implement and execute your trading system will put you on top of the trading game.

 

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What You Ought to Know About Currency Trading Online?

 Option Trading  No Responses »
Jan 162010
 

If you are a forex trader who wants to participate in currency trading online, then you’re making it big. However, making big profits does not save you from risks. Most forex traders do not understand such because they are too suited with the rewards they are going to receive. However, there is a simple way you can acquire higher profits but still manage your risks.

First, accept this fact. Risks are part of getting rewards but it does not mean of any hindrance on your part. Bigger rewards mean bigger risks. This does not also come from forex markets but also on forex traders.

While it may appear that you are risking more with the online currency trading strategy outlined below, you are actually taking calculated risks and trading the odds and this actually increases your chance of winning. Although it seems you are taking bigger risks with currency trading online, these are calculated risks.

Meaning, these can be prevented at manageable times and increases the opportunities to success. Now you are probably asking what and how to manage risks. Here are some of the ways:

1. Big Trend Trade

Always search for bigger trends because these foreign exchange trends give thousands of dollars. Maybe you will notice that bigger trends only appear few times in a year. It’s like a feeling of excitement while rushing to trade with bigger trends. However, this only gives money on a short-term basis.

2. Search for Mega Trends

Most forex traders do not realize the importance of biggest trends along with forex market lows and forex market highs. Hence, you need to take a look at the valid currency trading breaks for support and resistance.

By following these simple methods, you can easily manage risks in currency trading online. These methods will guide you to trade with higher profits.

 Posted by at 3:47 pm  Tagged with: , , ,

Finding the Best Forex Expert Advisor

 Option Trading  No Responses »
Jan 162010
 

To find the best Forex expert advisor is indeed a daunting task as there is a vast amount of options available on the market these days. A Forex expert advisor is a sophisticated tool designed for the Metatrader trading platform which helps you make more intelligent and informed trading decisions in the market, and they can also completely automate your Trading if you wish. You can download the software’s for free from some websites, while other programs that have been thoroughly tested and proven, require you to pay a certain sum to seek the services of their so called “Forex Robots”.

Not all expert advisor are the same and they all contain unique features and benefits, depending on their trading plan and strategy. Some EA’s are very simple and could’ve been designed by anyone who has a basic understanding of Forex Trading, while others are remarkably complex and require immense experience and knowledge within the Forex Market. This is why you will see some Expert Advisors out there that are priced a little bit higher than others; it also depends on how the EA has performed in Live market Conditions and if it can offer regular updates, however with that being said a good Forex expert Advisor can range from anywhere between $100-$400.

Recently expert advisors have gained immense popularity amongst the Forex Trading community, and I believe this can mainly be attributed to their exceptional benefits, which easily outweigh their costs. After purchasing a Forex expert advisor for a small payment its benefits are endless, they can help you make a ton of money off the Forex Market and also organize your time more efficiently, as they can be completely automated, meaning you don’t have to sit infornt of your computer and monitor the market all day long. The money you invest on these systems can be made back within minutes as just one winning trade will probably lead you to get your money back and after that it is all profits (if you stick to proper money management techniques). Traders that are just learning the ropes of how the market works are easily attracted by expert advisors as they can help them make some money while they are still learning the ins and outs of the market. However I strongly recommend that you have a firm grasp of Technical analysis and how the Forex Market Operates before you purchase any expert advisor and risk your own money on Live Markets, this is just to make sure you know exactly what your doing and how the Forex EA functions.

Now before you go out and part with Your Hard Earned Money here a few key principles to consider when looking for The Best Forex Expert Advisor:

- Firstly always make sure that the seller of the EA is fully legitimate, there are a lot of scammers out there and you don’t want to fall prey to these vultures. The best way to see if the site is legit is to look for an email contact, most likely if there is no email contact then the site is a scam and should be avoided.

- Look for a trading system that suits your trading personality and personal requirements. You may want an aggressive strategy with a moderate level of risk involved or you may want to trade with a conservative strategy with minimal drawdown. It is entirely up to you so make sure you do your research and look around to make comparisons of different systems to see which one is best suited for you and your situation.

- Always look for Forward Test Statements, or better yet Live Forward test statements. Live forward test are conducted on real money accounts in real time and are the closest things to letting you know how the EA will perform in actual live market conditions. Forward Test statements will easily let you know the profitability of a certain EA and are the most important things to look for when purchasing an expert advisor; do not buy an EA that doesn’t provide Forward Test Statements.

- Lastly I believe it is absolutely essential that the seller of the EA is the creator of the EA and offers regular ongoing after sales support about his product. Ideally the site should contain some sort of a Forum, Live chat support or email support. By offering after sales support it lets you know that the seller is dedicated to making his system work for himself and others and is serious about helping people make money off the Forex Market. It also lets you know that you are in good hands as you will receive regular updates and will have prompt answers to your inquires if you shall encounter any problems.

Therefore if you adhere to the guidelines above then they will certainly help you when choosing a profitable Forex expert advisor and you should be able to give any expert advisor a through examination before you make any final decisions.

It is no secret that in order to succeed in the world of Forex Trading You must follow a good trading system and adhere to strict money management techniques. An Expert Advisor can seriously simplify the process and get you well on your way. If you wish to automate your Forex Trading Decisions by using a Forex Expert Advisor then check out this Collection of The best Expert Advisors available for Forex Trading.

 Posted by at 3:13 am  Tagged with: , , , , , ,

Covered Call Writing Using the Over Write Strategy

 Option Trading  No Responses »
Jan 152010
 

Writing covered calls is an excellent way to use options in a low risk way, to generate additional income on your existing portfolio of shares. If you buy shares at the same time that you write the calls then the transaction is known as a buy-write. If you write calls on shares you already hold then it is called an over-write. The covered aspect comes from the fact that you own the underlying stock or share. If the contract is exercised then you have the underlying goods to fulfil the contract ( like the car in our first example). There is another type of call writing called naked. NEVER, EVER write naked calls – you are exposing yourself to UNLIMITED RISK.

The first technique is called over writing, so let’s take a look see how it works. Before we start there is one difference between UK equity options and US equity options. In the UK one option contract relates to 1000 shares, but in the US one option contract relates to 100 shares of stock.

Imagine you have a portfolio of shares that you have held for some time and these are mainly UK ‘blue chip’ companies. One of your shares is British Airways which you have held for some time, and you have 1500 shares bought at 200p. The market price at the moment is 365p per share. It is June and you decide to look at the current option chain for the next expiry period which is September. The option expires on the 15th September. You look at all the strike prices available and see that there are contracts at 330p, 360p, and 390p. You check the premium of the contract at 390p and see that the premium is currently 16p. You decide to sell ONE contract for which you receive a premium of 1000 x 16p = £160. (the premium is multiplied by the number of shares for one contract i.e. 1000). Please note – you still have 500 shares left in your portfolio as you do not have enough to write a second contract. You have now sold 1 contract which obligates you to supply 1000 BA shares at 390p on or before the 15th September (Amercian Style Contract) to the owner of the contract if exercised in the period. In return for this you have been paid a premium of £160 which is yours to keep whatever the outcome of the contract. OK – lets look at the possible outcomes of this contract as follows:

Outcome A – the company becomes a takeover target and shares jump to 520p

In agreeing to the contract at 390p per share, you have lost out on the takeover news and have missed the opportunity of ‘making’ 1300 (130 x 1000) on your share holding. This is the downside of writing a call option on your shares, that you could miss out on a rise in prices during the contract period. This is undoubtedly true, however there is no guarantee that you would sell your shares at this point, in other words it is only a paper profit had you kept them. The £1300 lost ‘opportunity’ profits are offset by the premium you have received to £1140.

Outcome B – the share price falls to 295p as competition increases in the industry

The price has fallen during the period, and the contract expires. Whilst the price has declined by 65p, this is partly offset by the premium you have received, reducing your ‘paper loss’ to 49p per share. You still retain your shares and any future dividends.

Outcome C – the market is quiet and the share price closes at 390p

You have made a small ‘paper profit’ here, and a real profit of £160.You have kept your shares and any future dividends. The reason you would probably keep your shares is that with dealing costs etc it would not be worthwhile for someone to exercise, although you can never be sure. I have been exercised when the strike and market price close at the same price, but I have also been left unexercised with prices very slightly above the strike. It depends how your broker closes out positions and reconciles their contracts – sometimes you may be lucky, other times not.

Now, with B and C, you still retain your shares so what might you do? – write another call to earn some more income. You look to the next series (probably Dec) and write another option earning more income. With B, where the share is now trading at 295, you might look for a strike at 320 – 340, and with C, probably around 430 – 440. And so on, until on one contract you will be exercised. The most options I have written on the same block of shares is 4! Finally on the 5th contract the price went up and I was exercised. Please remember it is possible to write a contract so that you have built in a loss. Suppose you purchased some shares for 250p which then declined in price , and you wrote a contract at 225p with a premium of 10p. If it was exercised you would be receiving 235p (225+10) for shares you had paid 250p. Now, on occasion I have done this deliberately where I wanted to get rid of the stock for some reason. PLEASE DON’T DO THIS BY ACCIDENT. There are lots of packages around that will give you a graphical display of the breakeven point – most of these are free.

Finally, I mentioned dividends a couple of times above. Naturally, whilst you hold the shares you receive any dividend payments from the company. You should be aware when dividend payments are due for two important reasons. Firstly you may decide not to write an option as a dividend is payable in the next few weeks and you decide to wait. Secondly If you do write a call and a dividend is due shortly, the likelihood of exercise is much higher right before a dividend payment. The perfect outcome of course is where you keep your shares, your premium, and a dividend is paid during the contract ! – it does happen.

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Get Best Automated Forex Robots

 Option Trading  No Responses »
Jan 152010
 

If you don’t already have years of experience trading currency, using one of the better automated forex robots out there today is the best course of action for you as these programs effectively carry out every aspect of trading the forex market by reacting to changes and keeping you on the winning sides of your trades 100% of the time. These programs won’t make you rich, but at the very least they bring in some good, reliable no effort or risk profits for you, and not to mention they also teach you how to effectively trade.

Here is how to get yourself one of the best automated forex robots.

The major difference separating the vast majority of automated forex robots lies in how they trade. Some programs trade more aggressively and go after more trades without adequately analyzing them first. Other programs have been designed with this in mind and only enact a trade when they are sure that they’ll make money from it, enough to make it worth their trouble and ensuring that that is a safe and sound investment. I recommend going with one of these more conservative programs as these are the ones which bring in reliable gains without your having to watch over their shoulders at any point.

Also, some publishers have put together ineffective automated forex robots just hoping to capitalize on the success of this market in general. Do yourself a favor and make sure that the program you go with has a money back guarantee in place as this significantly helps to cut out the scamming and disreputable publishers out there. This also extends you the opportunity to test the program for a few weeks with the option of getting out in full if you choose at first, as well.

 

 

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