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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

 

Understanding Market Volatility and Trading Volatile Days

December 11th, 2012

What is Volatility?

  • The magnitude of the change
  • It is independent of direction, it refers to the change of ups and downs

Why is it Important?

  • The more volatile the market is, the crazier it gets
  • Trends are harder to spot when they are more volatile
  • Swing trading becomes riskier
  • It is better to stick to day trading during high volatility days or months because you want to lower your risk on those days

What to do on High Volatility Days

  • Inverse ETFs (e.g. BGZ, SKF, TZA, FAZ)
  • They are opposite of the market
  • They are more stable than one specific stock.
  • Can trade off of 15 minute or 5 minutes charts (day trading charts)

Understanding Gaps: Common, Breakaway, Runaway, and Exhaustion Gap

December 10th, 2012

What Is a Gap?

  • When a stock ends the day at a certain level and then starts at a new level even though no trades took place.
  • Gaps are usually from one day to the next.
  • The reason is that something within the company or industry can change: earnings report, etc.
  • Weekly charts can also have gaps, but that usually happens over the weekend and it isn't as common.

4 Types of Gaps

1. Common

  • Likely caused by low trading volume.
  • It will usually be filled (prices slowly revert to that gap).

2. Breakaway

  • More meaningful than common gaps
  • They can happen in the middle of the trading day
  • They have a downward momentum
  • Suddenly the stock dips down below the support line. The gap is between the support line and the dip down. This is due to a change in psychology, and people start to sell their shares.
  • Make sure you see an increase in volume at the gap point. That is confirmation of the downward move.
  • Another way to be sure that the breakaway gap is a healthy gap is if it happens with another pattern (e.g. a descending triangle pattern).

3. Runaway

  • Similar to the breakaway gap
  • Instead of going to the down side it is going to the up side
  • It is basically a stock price jumping up to a new level (typically due to product releases, news events, etc)
  • Anything that creates positive sentiment creates a runaway gap
  • There are three possibilities it can go through:
  • 1. Downard trend and back up, hops and continues to go up
  • 2. Upward incline, gap to incline
  • 3. Downward trend to a slingshot upward
  • Runaway gaps are more powerful when they come out of an ascending triangle or trend line.

4. Exhaustion

  • Very good to trade with, if you watch them
  • They can be dangerous if you are new to the stock market or are not spotting them correctly
  • They happen when a stock shoots up, jumps and continues to trend up, but will eventually decline
  • This can happen with a decline as well (declines, jumps down, continues to decline and then shoots up)
  • You want to be cautious with these gaps because they typically happen in a state of panic

Stock Market Daily Recap Dec 10, 2012

December 10th, 2012

Indicies and ETF's

Many indexes and ETF's are pushing towards the upside. They still have not cleared their resistance points, but they appear to have a strong push in the positive direction at least for the short term.

The Dow Jones (DJIA) - is one of the few that broke its critical resistance area at 13,050 mark and continues to move forward.

Read More  

Technical Analysis: Understanding Trend Lines within Stocks

December 7th, 2012

Trend lines are a way for you to predict price because technical analysis is based on future predictions.

Trend Lines

  • Trend lines have to hit the price points two or more times
  • You can have a positive or negative trend
  • They help you look at the future
  • They can change angles at higher or lower slopes depending on how strong the trend is
  • Trend lines can be validated with a third or fourth point
  • Pay attention to trend line spacing or the distance between each point
  • Tighter points have more validity toward the trend line
  • Pay attention to angles: the steeper the angle of the trend line, the less validity its support and resistance has (because the price points are being climbed rapidly)
  • Both upward and downward sloping trend lines can help you to predict future prices within technical analysis

The Basics of Stock Dividends

December 6th, 2012

Dividends can be a great perk of a healthy company, but don't become overly excited by them because they do not necessarily mean a healthy stock.

What Are They?

  • A payment every quarter of the fiscal year.
  • If a company is producing x every year, you get paid out 3 or 4 times.
  • You can change the payout rate if you are a major shareholder.
  • Most are paid out every 4 months
  • You can get paid in: cash, stock bonuses, or more shares
  • Amateur traders love dividends
  • Not every stock pays out a dividend

Dividend Pitfalls

  • Stocks fluctuate and if the stock declines you may get your dividend, but you still lose a portion of your investment
  • Don't choose stocks just because they offer a dividend.
  • You want a stock that is in an appreciation
  • A dividend should be viewed as an added perk of a healthy company (if you hold onto stocks longer than a quarter)

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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This website and content is for information purposes only as Rise2Learn, TradersFly, and Sasha Evdakov are NOT registered as a securities broker-dealer nor an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Rise2Learn, TradersFly, and Sasha Evdakov cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Rise2Learn, TradersFly, and Sasha Evdakov in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Rise2Learn, TradersFly, and Sasha Evdakov accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.