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How Television Can Cloud Your Stock Trading Judgement

December 27th, 2012

Most people on TV have an agenda to some degree. For example, if someone on TV says a stock is going to tank, they may be looking for their audience to sell the stock so they can purchase it at a lower price. They need a large group of people to change their persuasion in order to have the stock decline. They are looking to move the market.

The same happens in reverse. If somebody on TV wants the stock to go up so that they can sell it, they might try to build up a stock and talk about how great it is with the intent of selling it once it does go up.

That is the nature of the stock market. People don't always reveal what they're looking to do in the future. It is wise to stay away from the TV channels that discuss stocks, unless you are able to view it neutrally.

It is more effective to read the company's earnings reports and website in order to learn what actually is going on within the company, rather than focusing on one person's opinion of what is happening with the company.

People are willing to manipulate others in order to make the stock go up or down. It is important to be aware of that fact and to trade according to your research and rules rather than what others say.

Understanding Stock Sympathy Plays

December 26th, 2012

What are sympathy plays?

  • Something that is played on the news headline based on the initial news coverage.
  • Example: If Google releases completely new algorithms that other search engines can use, it will benefit other search engines such as Yahoo and BIDU, while hurting other companies like newspapers and print companies.
  • The sympathy play is to buy the Yahoo or the BIDU. The reverse manner would be to short sell the newspaper or print companies.
  • The reason you do this is because typically Google's news would get released first. If you miss the move, you can play the other search engines. Those take a longer time to catch up to the original news.
  • The same can happen with the oil and gas industry. If oil companies benefit from news, their stock will go up in price. You can play the opposite of that and focus on solar and energy companies, which might be going down in value.
  • Sympathy plays are important to look out for because they have already digested the original news.

Stock Trading Rules, Why Have them, and Examples

December 25th, 2012

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What are Trading Rules?

  • They are made to keep you disciplined and away from trouble.
  • You should come up with your own rules and set of expectations for when you trade.
  • Rules apply more toward internal psychology than stock trading in general.

Examples of Trading Rules

  1. Do not force a trade: Many times traders and stock brokers become bored and try to make trades even if there aren't trades available  If you don't see an opportunity, do not trade. Spend the day doing something else.
  2. Take profits: Whether you are trading daily, monthly, swing trading, etc do not forget to take profits. The stock market goes in cycles so you need to make sure you're taking profits because eventually the stock will start retracting.
  3. Be patient: If a stock is going up, let it run its course. If a stock is going down, be patient and wait until it hits the bottom. Even if the stock is retracting slightly, be patient.
  4. Always honor stops: For example, if you bought a stock for $50 and you have a $1 stop, and the stock dips down to $48, you should get rid of the stock and take a small loss rather than waiting for it to continue to descend. The same goes for making profits.
  5. Never trade earnings plays: Even if the earnings are great, the stock might  tank. It's all a matter of the buyer/seller's perception. You have to keep in mind the perception of the news, rather than the news itself.
  6. Always set monthly/yearly goals, not daily: Don't focus on daily fluctuations.  This is why it is important to be patient. If the average of your trades are positive then you don't need to worry.
  7. No trading once the day loss exceeds more than $X: This mostly applies to day trading. Decide on a figure that you're comfortable with, and do not continue to trade once your day loss exceeds that number. You don't want to keep killing your account.
  8. Get in before headlines: Get in before the headlines rather than trying to play the headlines. That way you get the full potential either on the upside or the downside.
  9. No tips, do your own homework: Don't give out tips and don't listen to them. If people are looking for feedback then do so in a neutral way. Do not be influenced by tips; this goes along with watching TV.
  10. Shrug off losses if the rules are followed: There is always another day and there is always another trade. The market will still be there. Don't let your losses stress you out if you followed the rules because it will affect you in the future. You want to be able to trade confidently and effectively the next time.

You don't need to follow all of these rules all of the time, but they're a good starting point.

Trading the Triple Top Chart Pattern

December 21st, 2012

Triple Top Pattern

  • It is a reversal pattern.
  • It forms from a previous uptrend.
  • You need to be aware that this pattern has the potential to be multiple patterns, and you cannot be sure that it is a triple top until it hits the third point on the resistance line.
  • Once it breaks under the support line you can enter the trade to the downside or sell it short.
  • The volume will spike once it breaks the support line.
  • Remember that this pattern happens over a time-frame of 3-6 months.
  • Be neutral until it breaks because it could be a sideways pattern.

Trading the Triple Bottom Chart Pattern

December 20th, 2012

Triple Bottom Reversal Pattern

  • Important: This pattern should be treated as a neutral pattern until it reaches the third bottom point. Before that moment it could form as other patterns such as a double top, a declining wedge, etc.
  • If it breaks past the resistance line that is when the trade should be entered.
  • If it doesn’t break out, it will continue in a sideways motion.
  • Typical time-frame: 3-6 months.
  • The volume should spike when it’s breaking the resistance line. At that point the resistance line becomes the support.

Trading the Ascending Triangle Stock Chart Pattern

December 18th, 2012

The Ascending Triangle

  • It resembles accumulation.
  • It is a bullish pattern.
  • It doesn’t have to happen on an uptrend, but it is very helpful when it does.
  • The top of the triangle is fairly straight and the bottom of the triangle is ascending. The stock ascends and descends between these two lines of the triangle.
  • As the stock inclines, the volume declines because accumulation is taking place.
  • You want the volume to increase when it breaks, but the volume won’t always increase on the breakout.
  • Time-frame: a few weeks to a few months. The time-frame is less relevant than with the Cup and Handle Pattern.

Finding a Comfortable Starting Account Balance to Trade With

December 17th, 2012

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Account Balance Amounts

There are a few different levels of account balances when it comes to trading. It can be helpful to have three separate accounts: one for an IRA, one for trading/day trading, and another for swing positions. How you manage your accounts is up to you, but there are a few guidelines.

These guidelines may change based on the price of the stock you are trading. Accounts will be different between a $500 stock compared to a $20 stock. At $500,000+ you will buy more shares of a company trading at $1 per share and you might be able to move that stock heavily. If you purchase the same $1 stock with the $0 to $1,000 account,  you will not move the stock.

$0 to $1,000

  • You may only have one account when you have a smaller amount of money available for trading.
  • You may have trouble finding brokers.
  • There is a law that states accounts less than $25,000 can't day trade and can't trade more than three trades every five days.

$5,000 to $20,000

  • This amount is what most people start with.
  • $5,000 is close to the minimal requirement for most brokers.
  • You will not be able to buy a lot of expensive stocks. You need to give them more room to play.

$25,000 to $150,000

  • If you buy a lot of one stock you could be down a considerable mount of money in one to two days.
  • You need to know how to manage your risks and trades, and you need to build up your experience before trading.

$500,000+

  • At this point you will start to move stocks slightly, especially if you are putting in $300,000 to $400,000 to one stock.

Once your account gets to $3 million to $5 million you may want to buy $300,000 of one stock. If you have 4 or 5 stocks it won't dampen your account value too much. That is when you start moving the market. You want to be careful and watch how you trade. You want to really know what you are doing when you get to this level. You may want to be gradual rather than buying everything at once. For example, you may want to wait for a basing pattern and buy in increments.

The important thing to understand about higher account values is that you start to move the market. With lower account values you need to manage your risk more. You will also pay more on commissions with lower account values.

Make sure that when you are first start to trade that you trade three to five shares as a test run. It gives you the emotional experience behind trading. You will probably lose out on most of them because of commissions  but it will be more educational than paper trading.

Stock Trading Mistake: When You are Right, But Still Lose!

December 14th, 2012

This mistake is all about timing and when you get into the trade  - you are right but you still end up losing.

A Scenario to Avoid

  • Stocks (usually penny stocks) that have a supernova spike
  • It is spiking incredibly high, but you enter short
  • You're looking for the decline to happen right away, but it keeps increasing
  • You were right that it would decline, but it happened later than you expected so you take a loss
  • Even though you were right, you still lose because your timing was off

Option Basics and Fundamentals

December 13th, 2012

Option Basics

  • Options are contracts
  • You pay a premium for them
  • You are able to buy or sell stock
  • 1 option = 100 shares
  • They expire the third Friday of the month you purchase them for
  • Strike price = expiration price
  • You pay a premium
  • The option gets traded and sold versus the stock
  • Most people just trade the contracts

Example

  • Think of options like buying a house
  • You find a house that you like in an area where the houses are selling for $150k. You knock on the door and ask to buy the house. You are willing to give $10k up front if the house is sold to you within 6 months for $200k.
  • It is a win-win situation.
  • The homeowner gets the $10k and you get the option to purchase the house in the future and you can do research to check if the area is actually developing.
  • You have the right, but not the obligation to purchase the house. You pay $10k in order to have the option to buy it.
  • If someone gave the homeowner a higher bid, the homeowner would not be able to sell the house because you have the legal right to buy it in the future for $200k.
  • The homeowner would have to buy out the contract with you before selling the house for $300k.

Types of Options

1. Call

  • You are expecting the stock to go up

2. Put

  • You are expecting the stock to go down

Understanding the VIX – The Fear Index in Stocks

December 12th, 2012

The VIX is known as the fear index because it is based on the amount of puts that are purchased.

Why?

  • The more puts that are purchased on the SP500, the higher the VIX
  • When puts are high that means people are buying protection
  • They think the market is going down

High v. Low VIX

  • High VIX versus low VIX is relative
  • It depends whether you're looking at historical or implied relativity, a high VIX can't necessarily be determined by its numerical value
  • The implied VIX is the state that you are currently in
  • Remember: when the VIX is high, it's time to buy; when the VIX is low, look out below
  • The VIX works opposite of the market (but it's not always 1:1)
  • When the VIX is high, stock prices go down because fear impacts selling to the negative side
  • When the VIX is low, stock prices start to increase because there is less fear, which means stocks will eventual tumble
  • It shows you how much protection people are buying with the puts

 

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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