This article was originally featured in Daryl Guppy’s ‘Tutorials in Applied Technical Analysis’, voted no 1 trading newsletter in Australia by Shares magazine & no 4 in the world by US Stocks & Commodities magazine and is reprinted here with Daryl’s permission.
In addition to developing sound technical analysis skills, strong trading psychology coupled with well thought-out money and risk management are also vital key secrets for success when trading or investing in the market.
From real life experience and lessons in portfolio management learnt the very hard way, John Atkinson originally designed his series of three Money and Risk Management spreadsheets to help his own trading. Through the help of programmers Stephen Parsons and Peter Tamsett, he recently added several user friendly macros and has now made them available as simple to use and very affordable tools to help traders and investors plan and manage their portfolios.
They are designed to assist in the planning and developing of profitable portfolio growth, by putting structured money & risk management control in place and as a means of keeping simple and accurate records.
Many investors and traders spend less time planning the risk of individual trades and their overall portfolio for their wealth creation than they do planning their grocery shopping. Many do not plan, accurately track or review their progress at all.
Some think that spreading or ‘diversifying’ their portfolio into several large positions in ’safe’ blue chips is their way to address money & risk management. They do not realise that overloading in too many positions or too large a position can put their portfolio seriously at risk.
Without proper planning one may end up with a portfolio that is a disaster waiting to happen. We know. We’ve been there & we wouldn’t want you to go through the sleepless nights and gut wrenching fear, financial and emotional loss that we and a few traders we know have experienced as a result.
A major reason why we lost our Sydney waterfront home in 2000 and more since was not developing or adhering to correct risk & money management rules - so our series of three portfolio tools has been created from our own personal very hard knock experience at a very real financial cost of literally hundreds of thousands of dollars and at a huge emotional cost.
We subsequently went looking for the information which we wish we’d looked for, or had been advised of, prior. These tools are based on various ‘world’s best practice’ principles and strategies taught by this newsletter, Daryl Guppy’s books and by other trader authors such as Alan Hull, Louise Bedford, Dr Alexander Elder and Dr Van Tharp.
They consist of the:
• Atkinson Portfolio Planner © - to plan your stock selection & overall sector & portfolio risk in advance
• Atkinson Trade Optimizer © - which stock to buy when you have a few to choose from & funds only available for one?
• Atkinson Portfolio Manager © - stop loss, targets, individual stock & combined portfolio equity curves, expectancy of closed trades and much more
Over the coming weeks we will discuss each of these tools in detail.
We start this week with the Atkinson Portfolio Planner ©.
This tool is designed to help you plan your portfolio correctly so you can sleep at night, knowing you have a balanced portfolio and are not too exposed in any one trade, volatility grouping or sector.
Also, that you have planned the correct number and size of open positions to ensure that your total portfolio risk does not exceed your specified criteria.
This easy-to-use tool allows you to check your planned allocation of:
Mix of high, medium and low volatility shares
Mix of shares between sectors
Individual risk of each position as a % of your portfolio
Maximum % of your portfolio in any one position
Total risk of your combined portfolio
Once you have entered your requirements, the Atkinson Portfolio Planner © will calculate the above essential factors and even flag red alerts if any of your planned or open positions exceed your personal risk profile.
This allows the user to ensure in the planning stages that your hard earned capital will be apportioned correctly to conform to risk levels selected by your own Trading Plan.
It is the responsibility of the user to research and select the criteria to be applied for his/her Trading Plan and as key input to the Portfolio Planner © e.g. volatility and sector allocation, stop loss levels and % risk factors; and for the ultimate selection of which stock(s) to buy and the applicable position size(s).
Putting all or most of your available funds into one stock or sector; placing at risk a large % of one’s portfolio in any one position or having too many open positions with an unacceptable total % of portfolio at risk are recipes for potential disaster.
Experience of other traders shows that it is also wise to diversify their capital in a chosen proportion between a range of high, medium and low volatility stocks to maximise annual growth of their portfolio.
Experienced traders and investors have varying rules for money and risk management.
The following are some typical examples from the literature:
1. In his books and this newsletter Daryl Guppy chooses 1/7 (14.3%) in high volatility (e.g. ’speculatives’); 2/7 (28.6%) in medium volatility (e.g. ‘mid caps’) and 4/7 (57.1%) in low volatility (e.g. ‘blue chips’). Others may choose a maximum of 10% in high volatility. The final choice is the user’s responsibility
2. For small portfolios, in his book Share Trading #, Daryl Guppy provides an example of building from $6k to $21k, by starting with $2k (i.e. 1/3rd) in high volatility and $4k (i.e. 2/3rd) in low volatility stocks; then splitting this back to 1/7; 2/7 and 4/7 when the portfolio has grown to $14k.
3. Maximum position size as a % of total portfolio: commonly 20-25% absolute max; some reduce to 15% or less for large portfolios or speculative stocks.
4. Maximum Equity Risk: No more than 2% of portfolio to be placed at risk in any one trade - some choose to reduce this 1 % or 0.5% for larger portfolios or for more highly volatile positions.
5. In my book ‘10 Ways Not to Lose Your Home in the Stock Market’ (due 2005) I wrote “What we also failed to realise was that instead of spreading our risk, we were magnifying our risk. For instance, using a stop loss of 2% portfolio risk, let’s say a trader has ten positions. That means if the market takes a sudden dive and all stops are triggered, they risk losing 20% of their entire portfolio value. Expand that out to twenty positions, then 20 x 2% = 40% of their portfolio is at risk. It can happen - it did happen. If you freeze or have margin loans, the destruction can be far worse….
Dr Elder refers to the 2% risk rule as protection against shark attack and extends the concept further to a 6% rule to protect against piranha attack i.e. to close out the whole portfolio if it drops by 6% in the past month.
Taking this to its logical extension, Dr Elder describes how, using this strategy, also limits traders to three positions (at 2% risk) to start off with, until some of them rise into profit, before opening any additional positions.”
(Readers may wish to refer to my Home Study course module on Money & Risk Management which is based on and includes Daryl Guppy’s Share Trading & Better Trading books and includes my portfolio tools - available at our site. Also refer to books by Louise Bedford (e.g.Trading Secrets) and Dr Alexander Elder (e.g. Come into my Trading Room) for further explanation.)
In the next article I discuss how we use the Atkinson Portfolio Planner to ensure that the following planned risk and money management criteria are met:
1. The maximum total value spent in each volatility grouping
2. The maximum total value spent in any sector
3. The maximum position size as a % of total portfolio
4. The equity risk for each position
5. The combined total portfolio risk exposure
Sharetradingeducation.com includes the Investing Online Newsletter ©, launching 2 July 2005 to teach online investors how to find, select & manage which stocks or shares to buy; money & risk management; importantly when to sell; traders’ & investors’ experiences; psychology, fundamental & technical analysis, articles from leading authors;& a DFS Equities portfolio to track weekly performance of sample selections. The first editions of the Investing Online Newsletter © will also cover how you can draw up your own investment or trading plan.
Also at Sharetradingeducation.com:
* Jim Berg’s Trading Strategies with Metastock Home Study Course with one month’s email support from Jim Berg
*New Ebook of articles written by John Atkinson for Daryl Guppy’s newsletter’The Atkinson-Guppy Articles’
* Stock & Share Market Home Study Courses on the work of Jim Berg, Daryl Guppy, Alan Hull, Simon Sherwood & Van Tharp
* Money & Risk Management Portfolio Tools
* A FREE exclusive online trading & investing stock market club with access to FREE downloads
Visit http://www.sharetradingeducation.com
Hair Thinning is usually one of the most mystifying conditions men & women have ever had to struggle with. A lot of individuals think of their hair as; a decisive ingredient of one’s individuality, a large part of one’s self. Hair and hair loss is traditionally measured as signs of one’s real age. That is clearly why people are continuously concerned when faced with the prospect of baldness. And so people constantly do everything they can & believe everything they are told merely to guarantee that they safeguard that astonishing hair of theirs as lush & as healthy as can be.
Baldness can happen to ladies & is more widespread following the menopause; though; alopecia is unlikely to manifest in every case. Instead, in a great of cases the person will just witness increased baldness and thinning of the hair; numerous treatments can improve the outcome. Although alopecia is commonly tolerable in men it’s intolerable in women and in many occasions it can have distressing impact on the person’s emotional situation & self-belief. Nevertheless you must not be concerned - baldness can be cured and stopped once you know what causes it & what you must do.
The most familiar form of hair thinning seen in ladies is androgenetic alopecia, also recognised as female pattern alopecia or baldness. This is seen as hair thinning mostly over the crest and sides of the scalp. It affects approximately one-third of all vulnerable women, though it is most usually observed after menopause, although it may well start as soon as puberty. On average hair fall is there or thereabouts one hundred to one hundred and twenty-five hairs daily. Fortunately, these hairs are replaced by the systems in the body. It is certainly true that hair loss happens when lost hairs are not replaced or when the daily hair shed exceeds one hundred & twenty-five hairs. Hereditarily, hair loss can come from either parent’s division of the family line. If you are thinking about hair replacement and regrowth treatments then take a look at the AdvancedHairStudio website.
Wise investments of your spare funds can be a great way to grow rich. These days, savings accounts offer very low interest and it is a waste to allow your money to lie in them. Based on your appetite for risk and your financial needs, you have various other investment schemes and options to choose from.
It is always safer to have a diversified portfolio, that is, to spread you money around in various types of schemes, so that the risks and returns get balanced out. The company you work for would have a 401(k) plan which is always a safe bet. In this scheme, they will deduct a part of your salary every month and give it to an independent financial source to manage the investment, so that you get a healthy return at the end of your tenure. For those of you with greater risk-taking ability, stock markets or mutual funds can be a good idea. In stock markets, you can buy shares of companies listed on the stock exchange. Usually, good companies offer dividends along with a fair return on your investment. Dividends are not mandatory, but a lot of companies like to distribute their profits among shareholders as dividends.
Some companies prefer to reinvest the profits into expansion projects instead of declaring dividends. These reinvestments in turn should lead to further profits. However, the stock markets are unpredictable and a lot of people who dabble in stocks with the purpose of making some quick bucks may end up with losses instead.
Mutual funds are relatively safer investments, though they are also subject to market risk. Mutual funds are investments made in the stock market by financial managers with a fund collected from actual investors. There can be sector-specific mutual funds for instance those that invest in Pharmaceutical or IT or infrastructure companies only. Whatever be the mode of your investment in the markets, it is vital that you track these on a regular basis. If the prices of your shares or mutual funds decline at a time when there is a slowdown in the economy as a whole, there is no need to panic and sell at a loss. The markets will quite likely bounce back to where they were or perhaps even better. However, if the markets are strong and yet, the value of your mutual funds is on a decline, it could mean it is not well invested and it would be advisable for you to sell and move your money into something that will generate better returns. A financial consultant can advise you about the market situation and what types of investments will suit your needs best.
Investing information on www.ausinvesting.com with your host, Sintilia Miecevole, is wating for you. You’ll have resources at your fingertips from investing, mutual funds and planning to business, stocks, bonds and more. Click on to www.ausinvesting.com and start investing.
Don’t I Know You From Somewhere?
If any of the following situations look familiar to you, you may want to consider our quick fix. For every situation, there is an appropriate response that can maximize your benefit, and limit your loss. Take a look at some of these for example.
Holding A Dog
Your stock continues to sink, week by week. You keep thinking that it can’t go any lower, or that it will rebound eventually. Volume dries up, the price flat-lines… Rumors of reverse splits materialize. The stock is below minimum listing requirements for its parent exchange.
Diagnosis: You are probably holding a sinking ship. You may think it can’t go lower, but it can. It can go to zero. Usually after a reverse-split the price continues to decline. If shares are bumped from their exchange two things will happen: the price will take an immediate hit, and trading volumes will dry up so it will be harder to sell shares. Usually in these situations it is better to admit you made a mistake and get what capital you have left out of the investment.
Worm-Tongue
Your associate tells you about a penny stock that is going to make a serious move. They’ve got a patented technology that sounds flashy, although even after he explains it neither of you really understand what it does or how it works. It is going to set a new standard in the industry, and the potential market for their sales is in the billions. His tip comes from an ‘inside’ guy at the company. He doesn’t know the official title of the inside guy, and he can’t tell you the company’s revenues, employee size, management structure, or how long they’ve been in business.
Diagnosis: Your associate may be the victim of a ‘promotional’ stock. Be careful! It’s catchy. You are about to become the next victim in the line, and you’ll probably infect a few others too. And when they tell the story of this miraculously undiscovered penny stock, they’ll be saying this news all comes from an ‘inside guy’ at the company. Almost always these situations turn out badly. Things are not as they seem. You aren’t taking a gamble on a stock with some potential. You are one of a hundred targets in a carefully constructed and well-planned promotional scheme to drive the share price up. These schemes are immoral, illegal, and… they happen all the time.
Message In A Bottle
You read a detrimental comment in a chat room or message board about a stock you hold or are thinking of buying. It scares you and makes you second guess your investment decisions. You see that other people have responded in agreement to the posted message.
Diagnosis: Maybe there is some truth to it, maybe none whatsoever. Check with some official sources to confirm or deny the comments. Look at the latest press releases if it is a factual matter. Call the Investor Relations department if it is a theoretical or rumor-based matter. Consider all message board and chat room information dishonest until proven honest.
Shooting The Moon
Your stock has been soaring, and your profits are significant, although you still haven’t sold your shares. You like the company and had intended to invest for the long-term, although you hadn’t expected such strong performance. If the stock has spiked this high, it’s value must be getting recognized, so it could probably go higher.
Diagnosis: The stock may be ready for a short term pull back. Profit-taking sales are inevitable, and each time the shares go a little higher the number of people thinking about taking their money out increases. After a strong run-up shares usually suffer some weakness, and if the rise was based on a press release or rumor that won’t significantly impact the company’s ability to meet their goals, shares may be prone to coming all the way back down to their previous level. You may want to sell half of your holdings to lock in your gains, and let the rest ride.
One of the most distressful financial nightmares is bad credit. People who have negative credit usually seek to get rid of it by employing the services of a third party company. Even so, with the innumerable number of such businesses all offering their own range of services, it can get hard to go after the best option. And the fact that these agencies make it appear complicated does not contribute to the issue very much. Added to that is the problem of getting a loan with the existing global economic status; banks now require specially high credit standings prior to approving a loan on positive terms. If you’re one of those people whose financial standing has been damaged because of bad credit, then fast credit repair is what you’re after. Keep in mind, that you do not need to have specialized knowledge on fast credit repair. You can get out of that depressing credit rating without necessarily having to use the services of an independant company and pay sky high service charges.
A major source of bad credit is relentless use of credit cards. Try not to use athe credit card if it is not required. And if you can, try to arrange a monthly limit on your credit card, so you don’t accidentally over-spend. This is one of the strategies used for fast credit repair and will assist to keep your credit card expenses low. Additionally, close any other unnecessary credit accounts. They may not accrue you any significant expenses, their appearance on your credit reports can harm your aggregate score. You’ll realize that fast credit repair is not really difficult!
People generally tend to disregard the simple strategies to fast credit repair. They do not deal with the problem themselves. Instead, they employ expensive services. These services are almost identical. They go through the credit statements of the person and draw up a conclusion which is based on their findings. This task is not difficult, rather something that can effortlessly be achieved by the individual himself. Thus, people are better off performing the simple tasks themselves, rather than paying high charges to get them done elsewhere. Because, towards the end of the day, getting yourself out of bad credit is something you must achieve yourself, and not the agency you’ve engaged the services of.
REAL ESTATE MARGIN CALLS by AL THOMAS Have you ever heard of a real estate margin call? You know about stock market margin calls. That’s when you have bought more stock than you have money and borrowed from your broker to buy extra shares. You bought $10,000 of stock, but only have $5,000 in your account. It is great as long as the shares continue to advance. If the stock declines by a certain percentage the broker will call you to send in a check to cover the shortage. Hence, a margin call. If you don’t send in the money he will sell out your position and you will have a loss which you must pay. Many people send in money and continue to do so if the stock declines. All professional traders will tell you, “Never meet a margin call. Sell.” In real estate we all (most of us) have that thing called a mortgage. We bought that house on margin. As long as you send in the money every month you may remain in the house. Today there are many people speculating in real estate as they did in the stock market. Buy something and wait for the market to go up and then sell. Just like buying AT&T stock at $40 and selling it at $100. You could have done that. Today it is around $20. Condominiums are being bought with a small deposit of five percent or less before the ground is broken. Speculators will sell as soon as the building is completed or before to another speculator and he sells to another speculator until he runs out of greater fools. It has been a speculator’s dream and many have made large sums doing it. It’s like the kid’s game of musical chairs. Private individuals are re-mortgaging at larger amounts to take out equity to spend on their home, invest in other real estate as a speculator or for other purposes. They are increasing their monthly payments and ARM rates are increasing. This will work as long as the borrower continues to have income. Many count on the incomes of both spouses. If and when the economy slows down (and it seems to doing that now) it might be difficult or impossible to meet the margin call, make the mortgage payment. History has shown that there are 2 declining economic periods within any 10 year period and there are longer 16 year cycles of good times and poor times. To maintain the investment in property the mortgagee must keep up the payments. It has been recorded in recent history that when the home values fell below the mortgage amount many folks walked away. That is not allowed any more as the new bankruptcy law does not forgive mortgage obligations. The borrower must repay any loss to the lending institution. Mortgage payments are like margin calls. Failure to meet the call every month means the loss of your equity. This is a margin call you will want to meet.
Market timing discipline means controlling impulses and controlling emotions. When emotions rule our trading, loses are usually the result.
This is why successful market timers follow a thoroughly tested timing strategy. One that has been used in all kinds of markets, including bull, bear and sideways markets.
As many novice market timers can tell you, however, maintaining discipline is often easier said than done.
Usually the first problem arises when the markets are between market trends. Possibly you had a nice profit during a rally, but now the market is trading sideways and has generated several small false signals. There is now no trend, or one is certainly not obvious.
You were strong the first couple of signals, making all the trades, but after a couple of small losses, you are starting to second guess the timing strategy.
Self-Doubt Arises
Just as the vast majority of market participants are driven by fear and greed, many new market timers find it difficult to avoid succumbing to self-doubt and panic.
Market timing is challenging in that we often take positions “against” the prevailing sentiment of most traders. It also has times when false signals are generated. But a good strategy does not stick with the false signal. it changes and protects capital from large losses.
If those small losses are worrying you, don’t let them. Losses are part of trading with “all” successful strategies. Small losses are acceptable. Large ones are not.
And remember this, sideways markets are almost always either a base, or a top, and are followed by the next profitable trend. If you do not take all the trades, how will be sure to take the one that generates all the profits?
Invariably, the trade you skip, is the big profit maker. The one that starts the next huge trend. And there is “always” a next trend. In fact, 200 years of trading history shows the markets are in a trend 80% of the time. That 20% in between can be rough, but soon the next trend will begin.
Discipline is key. It is vital to take whatever steps are necessary to maintain discipline and take every trade.
Markets Are Unpredictable In Short Timer Frames
The markets are chaotic and unpredictable in short time frames. The current volatility being a perfect example. When faced with an uncertain set of circumstances, it is easy to see why market timers may, at times, feel unsure and unsettled.
Timers follow strategies that provide entry and exit signals based on timing strategies designed to be profitable over time. Strategies that are also designed to protect their capital during the inevitable sideways markets. “The more structure you have to follow, the less uncertain and unorganized you’ll feel. You will know what to do and when to do it.”
But no timer can know with certainty how any “one” buy or sell decision will play out. Some market timers thrive on the excitement, but many find it disconcerting.
The best way to combat feelings of uncertainty is by following a trading plan. If one trades with a detailed trading plan, such as the strategies offered at FibTimer.com, he or she will impose structure onto an unstructured reality.
The more structure you have to follow, the less uncertain and unorganized you’ll feel. You will know what to do and when to do it.
The markets may seem at times like a mass of confusion, but you can address it by following a strategy that actually uses the volatility of the markets to generate timing signals.
Optimistic Yet Realistic
One’s mood and attitude is another factor that impacts the ability to maintain discipline. An optimistic yet realistic attitude is vital to maintain market timing success.
Market timing often places you at odds with the current market sentiment. It is understandably hard to feel optimistic when your position is at odds with the majority.
Many market timers struggle with trying to maintain a positive or at least neutral mood.
It takes practice.
Emotions And Decision Making
Maintaining discipline is vital for market timing success. It can be extremely difficult at times, especially in sideways (non-trending) markets.
The best way to be disciplined is to stick to your timing strategy and keep your emotions and impulses under control.
Take a look at the trading history of the strategy you are following. Every timing strategy at FibTimer has a “Trading History” link. You will see times when it generated losses. On paper they seem insignificant. But when they occurred, subscribers had difficulty making the trades.
Now look at the results of the trading strategy after a year. Two years. Three years. Those small losses did not stop the strategies from being very profitable. This important fact will help you to stay the course and make all of the trades.
Only by maintaining discipline can you realize long term success timing the markets.
Stock prices fall into two basic categories; penny stocks (a.k.a. stocks trading under $1.00) and pretty much everything else. To some degree, you can lump stocks under $5.00 into the penny stock category as well. However, keep in mind that this will not always be a fair representation.
Lower priced stocks have a very seductive allure. Not only can you buy large numbers of shares, but also when the stock does move, it typically moves in larger percentage steps. However, that works both ways and there are additional risks with lower prices stocks (typically they are lower volume and this can negatively impact your trading).
Personally, I feel much more comfortable trading a stock that is above $20 if at all possible. Generally, stocks that carry low share prices tend to be more risky. They also tend to be lower priced due to lack of interest from both the public as well as professional investment community. This is not to suggest that there are not good quality low priced stocks - certainly there are. However, especially when you are first beginning, we feel it’s best to avoid stocks that trade under $5.00 unless you really know what you are doing. In the end, you usually stand about the same chance of seeing a higher priced stock move 10% as you would seeing a lower priced stock move 10%. Since this is usually (but not always) the case, there tends to be a little more safety in trading in the higher dollar stocks. Penny stocks can and do sometimes produce amazing short term gains, but unless you really understand the risks associated with these lower priced and often more thinly traded securities, we suggest you stick to more “name brand” stocks which tend to trade at higher per share prices.
Some people really enjoy owning Gold stocks or stocks related to oil drilling or diamond mining. I personally do not. Stocks of these types lack some of the inflation fighting components that traditional businesses provide. As a general rule of thumb, if the stock doesn’t produce a product or provide a service, then it’s generally best to limit your trading in them, at least in my opinion. Stick to companies that produce a product or provide a service and you never have to worry about hitting a “dry hole” or a sudden drop in the price of Gold or Silver.
It is important not to “chase” stocks. Stocks go up because people (usually large numbers of people) are buying the stock. As a trader, this is usually not a good time to also be buying. As such, be very cautious about buying stocks that are rapidly moving away from you; he true money in stocks is made by buying stocks prior to a sudden move, not during a sudden move. The one possible exception to this may be if there is some very positive news that has caught the markets off guard and/or if the news is so outstanding that there is a high probability that the stock may benefit for multiple days. Keeping in mind, however, that a sudden move in a stock is often quite different than a change in the overall trend. Sudden moves tend to reverse and if you get into the habit of chasing stocks that are moving up, more times than not you’ll end up paying overly high prices and/or getting caught in a downward move shortly thereafter.
Again, generally people that buy late are buying on pure emotion (greed and fear); greed that they may make a lot of money very quickly and fear that they may miss out should they not “get on board”. Those are the two worst reasons to buy anything - not just stocks. True you may miss out on the stock, however, in most all cases, it’s better to wait and find another stock, than to pay too much. Patience in the stock market is very important; usually you’ll do better by avoiding the temptation to “jump” when that impulse is largely a result of a move in the share price alone.
Don’t rush into any trade. This is along the lines of the above comment. However, it is worth elaborating on. Often times stocks will give you many chances to get into them at current (or sometimes even lower) levels. Generally, there are few cases that require sudden action if you are really careful in how you trade. Sometimes the best trades are ones in which you wait patiently for the stock to come to you. If you feel the need to rush to order a stock, that’s sometimes (not always, but sometimes) a warning sign that you are acting not on a well laid out plan for the trade, but an impulse to “get into a trade” regardless of whether or not the stock is trading at what is really an ideal price.
Keep in mind as well; it’s often not a bad idea to take up positions in a trade little by little. If you plan to own 1000 shares, consider buying 300 shares and then seeing how the stock trades. Often times this will allow you to better judge the market and take advantage of intraday weakness. If you do happen to miss purchasing the additional shares, there is almost always another trade you can put the cash to work in.
Do not let yourself get greedy. This spells danger. Two of the biggest emotions a trader has to over come are fear and greed. Many traders fall victim to greed once they see a trade become profitable - simply by not having a firm exit point in mind. It’s generally best to decide at what levels you wish to sell prior to entering into a trade to avoid this. If you feel yourself trying to justify higher levels from the stock and/or ignoring the current profit “as though it were nothing”, you probably need to stop and consider not only the value of your profit, but the current risk to it by holding longer.
Often time’s traders who are successful tend to lose respect for the actual value of a dollar. Regardless of how much money you have, you must not lose sight of what each trade produces and the value of the returns in relation to the capital used to produce those gains. An example might be someone with several million dollars. If this person put $10,000 into a position and saw it produce a gain of $2,000 they might not realize it’s time to take profits. While $2,000 is nothing when compared to several million, a 20% gain should always sound alarm (i.e. sell) bells in a trader’s head. In fact, typically a gain of 10% or perhaps even as little as 5% should do this as well. A common method to help combat this is to look at your trades strictly from a percentage standpoint of view, rather than a dollar standpoint. This allows you to always calculate gains and losses with consideration to the amount of capital at risk for any given trade.
In the movies, “greed is good”, but in trading it’s generally an emotion that does little more than get in the way of clear and level headed thinking.
Good luck in the markets!
No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. Questions and comments can be sent to Ray at articles@daytraders.com.
The straddle strategy is an option strategy that’s based on buying both a call and put of a stock. Note that there are various forms of straddles, but we will only be covering the basic straddle strategy. To initiate a Straddle, we would buy a Call and Put of a stock with the same expiration date and strike price. For example, we would initiate a Straddle for company ABC by buying a June $20 Call as well as a June $20 Put.
Now why would we want to buy both a Call and a Put? Calls are for when you expect the stock to go up, and Puts are for when you expect the stock to go down, right?
In an ideal world, we would like to be able to clearly predict the direction of a stock. However, in the real world, it’s quite difficult. On the other hand, it’s relatively easier to predict whether a stock is going to move (without knowing whether the move is up or down). One method of predicting volatility is by using the Technical Indicator called Bollinger Bands.
For example, you know that ABC’s annual report is coming out this week, but do not know whether they will exceed expectations or not. You could assume that the stock price will be quite volatile, but since you don’t know the news in the annual report, you wouldn’t have a clue which direction the stock will move. In cases like this, a Straddle strategy would be good to adopt.
If the price of the stock shoots up, your Call will be way In-The-Money, and your Put will be worthless. If the price plummets, your Put will be way In-The-Money, and your Call will be worthless. This is safer than buying either just a Call or just a Put. If you just bought a one-sided option, and the price goes the wrong way, you’re looking at possibly losing your entire premium investment. In the case of Straddles, you will be safe either way, though you are spending more initially since you have to pay the premiums of both the Call and the Put.
Let’s look at a numerical example:
For stock XYZ, let’s imagine the share price is now sitting at $63. There is news that a legal suit against XYZ will conclude tomorrow. No matter the result of the suit, you know that there will be volatility. If they win, the price will jump. If they lose, the price will plummet.
So we decide to initiate a Straddle strategy on the XYZ stock. We decide to buy a $65 Call and a $65 Put on XYZ, $65 being the closest strike price to the current stock price of $63. The premium for the Call (which is $2 Out-Of-The-Money) is $0.75, and the premium for the Put (which is $2 In-The-Money) is $3.00. So our total initial investment is the sum of both premiums, which is $3.75.
Fast forward 2 days. XYZ won the legal battle! Investors are more confident of the stock and the price jumps to $72. The $65 Call is now $7 In-The-Money and its premium is now $8.00. The $65 Put is now Way-Out-Of-The-Money and its premium is now $0.25. If we close out both positions and sell both options, we would cash in $8.00 + $0.25 = $8.25. That’s a profit of $4.50 on our initial $3.75 investment!
Of course, we could have just bought a basic Call option and earned a greater profit. But we didn’t know which direction the stock price would go. If XYZ lost the legal battle, the price could have dropped $10, making our Call worthless and causing us to lose our entire investment. A Straddle strategy is more conservative and will profit whether the stock goes up or down.
If Straddles are so good, why doesn’t everybody use them for every investment?
It fails when the stock price doesn’t move. If the price of the stock hovers around the initial price, both the Call and the Put will not be that much In-The-Money. Furthermore, the closer it is to the expiration date, the cheaper premiums are. Option premiums have a Time Value associated with them. So an option expiring this month will have a cheaper premium than an option with the same strike price expiring next year.
So in the case where the stock price doesn’t move, the premiums of both the Call and Put will slowly decay, and we could end up losing a large percentage of our investment. The bottom line is: for a Straddle strategy to be profitable, there has to be volatility, and a marked movement in the stock price.
A more advanced investor can tweak Straddles to create many variations. They can buy different amounts of Calls and Puts with different Strike Prices or Expiration Dates, modifying the Straddles to suit their individual strategies and risk tolerance.
Steven is the webmaster of http://www.option-trading-guide.com If you would like to learn more about Option Trading or Technical Analysis, do visit for various strategies and resources to help your stock market investments.
X-Box is Microsoft’s first video game console. In 2001 Microsoft developed it. And already worldwide they have sold 20 million units. To compete with Sony’s Playstation, Microsoft rebuilt the X-Box and came up with X-Box 360. Hers Experimental Design Laboratory Inc. of Japan and Astro Studios of USA developed the exterior of the system. This game can be played from Media Center PC, MP3 player, digital camera or any Microsoft® Windows® XP-based PC.
It is a very powerful machine. And it has an online version as well. The online version is called X-Box live. With X-Box 360 we can do a lot of activities. Apart from video games we can rip, stream, download any media including movies, music etc.
There are two types of X-Box 360 available in the market:
X-Box 360 and X-Box 360 Core System.
The X-Box pack also contains a HD AV cable, an Ethernet connectivity cable, a headset, a wireless controller, a media remote and a removable hard drive. In the X-box core system an AV cable and a wired controller are additional articles. Paul has been providing answers to lots of queries through his website on a wide variety of subjects ranging from satellite phones to acne. To learn more visit http://www.askaquery.com/Answers/qn507.html
Paul has been providing answers to lots of queries through his website on a wide variety of subjects ranging from satellite phones to acne. To learn more visit http://www.askaquery.com/Answers/qn507.html
