Mark Crisp asked:


Both short term and long term trading can be effective trading strategies, however, long term trading has several significant advantages. These include the effect of compounding, the opportunity to earn from dividends, reduction of the impact of price fluctuations, the ability to make corrections in a more timely manner, less time spent monitoring stocks.

1. Compounding

Time can be investor’s best friend because it gives compounding time to work its magic. Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal.

2. Dividends

Holding a stock to take advantage of payouts from dividends is another way to increase the value of an investment. Some companies offer the ability to reinvest dividends with additional share purchases thereby increasing the overall value of your investment. Additionally, dividends are more a reflection of a company’s overall business strategy and success than volatile price fluctuations based on market emotions.

3. Reduction Of The Impact Of Price Fluctuations

In the long term investment the persons is less affected by short term volatility. The market tends to address all factors that keep changing in the short term. So a person involved in long term investment or trading will not be affected as much by short term instability due to factors such as liquidity, fancy of a particular sector or stock which may make the price of a stock over or undervalued. In the long term, good stocks which may have been affected due to some other factors (in the short term) will give better than average returns.

Long-term investors, particularly those who invest in a diversified portfolio, can ride out down markets without dramatically affecting his or her ability to reach their goals.

4. Making Corrections

It is highly likely that you could achieve a constant return over a long period. The reality is that there will be times when your investments earn less and other times when you make a lot of money in short term. There may also be times when you lose money in short term but as you are in quality stocks and have long perspective of investment you will earn good returns over a period of time.

There are always times when some stocks do not perform and it is the wise choice to pull out of an investment. With a long term perspective based on quality stocks, it is easier to make decisions to change in a more timely manner without the urgency that accompanies short term and day trading strategies chasing volatile changes.

5. Less Time Spent Monitoring Stocks

Unlike day trading that can require constant monitoring of stocks throughout the day to capitalize on intraday volatility, long term trading can be carried out effectively using a weekly monitoring system. This approach is most often far less stressful than watching prices constantly on a daily basis.

Overall, investors that begin early and stay in the market have a much better chance of riding out the bad times and capitalizing on the periods when the market is rising.



William

Jason Ng asked:


Read the oldest stock market wisdom from the world renowned physicist.

This revelation had me surprised too. I was idly flipping through my old physics textbooks yesterday when it suddenly struck me. I was amazed to realize that Sir Issac Newton’s laws of physics points to so many profound and important rules in the stock markets today.

So, here we are… the physics of the stock markets.

Newton’s First Law of Trading

“A Stock at rest tends to stay at rest and a Trending Stock tends to stay in trend unless acted upon by an equal and opposite reaction or an unbalanced force.”

This law teaches us the same thing the old commodity traders will… that the trend is your friend. If a stock is trending sideways, it tends to stay sideways until a powerful enough market force takes it out of its trend. If a stock is trending up or downwards, it will tend to stay moving up or downwards until drastic changes happen to the company or the market at large creating an “equal and opposite reaction”. We should therefore always trade in the direction of a trend and always be vigilant for signs of an “equal and opposite reaction” or the “unbalanced force”. Such a force may take the form of a drastic change in the market sentiment at large or drastic change in the performance of the specific company in question.

Newton’s Second Law of Trading

“The acceleration of a stock as produced by a market consensus is directly proportional to the magnitude of that consensus, in the same direction as the consensus, and inversely proportional to the mass of the stock.”

This law teaches us that a stock moves up or down into a trend due to a force created by market consensus. How much a stock moves up or down that trend is determined by the magnitude of the market consensus and how “massive” a stock is. By “massive” we are talking about the price of a stock. The more expensive a stock is, the more well established the company has been and the lesser in percentage you will make out of the same move in absolute dollar versus a smaller, less massive stock.

The force of the market consensus is directly proportionate to the event that spurred it. If a company produces a breakthrough product on a worldwide patent, it creates an extremely strong market consensus that is likely to take a stock very far. If a company merely scores a marginally higher earning this quarter, it is unlikely to produce a market consensus that will go very far.

Newton teaches us to not only look at what the news is but also how well established the company is in order to determine how much momentum it will produce in a given trend. The same breakthrough that drives a small company’s shares up by hundreds of percentage points may perhaps move a big company’s shares only by a fraction of that percentage.

Newton’s Third Law of Trading

“For every action, there is an equal and opposite reaction.”

No need to explain this one in much detail, do I?

For every buying or selling, there must be an equal amount of buyers or sellers on the other side. The stock market is a zero sum game. For every buyer, there must be a seller and for every seller, there must be a buyer. The real question is, who is profiting from each of their buying and selling. There is really no such thing as more buyers today than sellers or vice versa. Every trader needs to understand that you can be on the wrong side of the table at anytime and only a sensible portfolio management system can help you go in the long run.

I have traded actively in the stock markets for over a decade and survived with ancient wisdom such as what you have read here. There is indeed wisdom to be found in every corner of our life and if we care to look carefully, we will never be in a lack of guidance.



Eddie

John Forman asked:


People make all kinds of excuses as to why they cannot get involved in investing or trading the financial markets. In this article, some of the most prominent are debunked.

“I don’t have time”

Despite being one of the most frequently heard, this is probably the most pathetic excuse for not trading there is. Why? Because the availability of technology and information in the modern day means that we can operate in literally any time frame we want. Many people, when they hear “trading”, think it means sitting in front of the computer all day. While that certainly is one form of trading, most of us do not have the schedule to allow us to dedicate hours each day to monitoring the markets. The good news is that we don’t have to in order to trade effectively.

I will use myself as an example. My college coaching position has me frequently in the gym, in meetings, and on the road. What’s more, I run a club program and a couple of businesses on the side. In 2004, even though there were long periods when I did not trade at all, and I probably only put on a dozen total positions all year, I was still able to make 200% in the stock market. If I can trade given my schedule, and have performance like that, anyone can.

“I don’t have the money”

In the past, this was a pretty viable excuse for not trading. These days, though, one can trade with relatively little money. Transaction costs have dropped dramatically over the last decade and there are more trading options than ever before. There is one particular trading platform which allows an individual to put on trades of at little as $1 in value, and they have no minimum account size requirement.

Is it better to have more money? Absolutely. The more capital you have at your disposal, the better are your available options and the more actual money you can make in raw dollar terms.

Having more money is not always a good thing, though. For the inexperienced trader, it is better to have only a little money at risk. Why? It is the same as anything else. Just like anyone new to a skill make mistakes as they are learning, so do new traders. And just as a coach would not willingly throw a new player in to a championship game against experienced opponents, neither should those new to the markets to take on large trades and put significant portions of their assets at risk. It’s common sense. Better to make the inevitable mistakes when there is relatively little at risk.

“It’s too risky”

Trading is only as risky as you make it. If you take risky trades, then trading is risky. If you don’t, then it isn’t. There will always be the risk of losing money on a trade. That is completely unavoidable. But that could be said about all of life.

Driving is one of the most risky things in the modern world, but we still do it. We reduce the risk by obeying traffic rules, planning our route, wearing seatbelts, paying attention, and all that. Does that completely eliminate the risk that of ending up in an accident? No, it doesn’t. Nor does it necessarily keep us out of traffic jams or from getting lost. We understand the risks, though, and weigh them against our need to get places in a timely fashion.

Trading is the same. We do it because it helps get us where we want to go, in this case financially. There are going to be hiccups along the way, but if we are focused and conscientious, we can minimize the risks, and potentially the damage an unfortunately turn inflicts, and remain on course.

“It’s too complicated”

Technology and competition have combined to make trading so much easier than it has ever been before. All it takes is a couple of clicks and you can execute a trade, check your positions, get news, and anything else you need to do. The fact that you are reading this article says you have all the basic skills necessary to trade or invest.

Can trading be complex? Sure it can. There are those in the markets who use complicated software, mathematical algorithms, even artificial intelligence. None of that is necessary, though. Some of the best traders use little more than price quotes or a simple bar chart. How intricate you get is strictly a matter of personal preference, not necessity.

Is there a learning curve? You bet. Trading is like anything else. There are things you need to know. The good thing, though, is that there are loads of resources out there to help you learn.



Cory

Jason Brumbalow asked:


BEFORE YOU BEGIN TRADING – “Plan your trade and trade your plan.”

Before you even consider trading it is important to take the time to seriously question your intentions in the market. Do you see futures as the means to a quick profit? Are you trading for excitement or a rush? Are you interested in trading because you seek satisfaction on a purely intellectual level? Do you see trading as a hobby or as an additional avenue of investment? Are you looking for a way to fund early retirement or do you see trading as an opportunity to augment your savings? Do you need the profits that trading might bring to cover debts or other financial commitments?

Many traders do not know why they want to be in the market. By taking the time to honestly evaluate your reasons for trading, not only will you learn more about yourself but you’ll also be forced to justify your commitment of hard earned capital to the market. Remember if your rationale is floored so too will be your trading. For those contemplating a career in futures trading, the following provides a useful list of issues that should be covered prior to entering the futures market and the pitfalls that all too often cut short the career of an aspiring futures trader.

2. Developing a written trading plan

When someone decides to start a business, the first task usually tackled is drafting a business plan. Most people would see this as mere common sense; however it seems the same logic does not apply to MOST new traders. Rather than planning how and where their capital is to be allocated, many new traders will launch headlong into a trading career with little regard as to their risk and profit objectives. By failing to have a trading plan, a trader will not know what to do when the market goes in their favor or worse still, when it moves against them. Without the structure that a trading plan provides, you will find yourself not only at the mercy of changing market conditions but also of your own conflicting emotions -a sure recipe for disaster.

Many surveys successful and experienced traders use a plan that is consistent with their temperament and the amount of money they have in their accounts. While a plan will not prevent losses, at least it provides you with some guidelines to follow. You can and should make minor adjustments to your initial trading plan throughout the trading period, but do not let the ups and downs of the market affect your overall game plan. Do not abandon your original objective, unless the market conditions that led you to place your trade change. The trading plan therefore imposes the disciplined structure that is essential for long term success.

A written trading plan helps keep you from making poorly conceived, spontaneous, thoughtless, emotional trades. An unwritten plan often gets changed when the trader’s mood changes. A written plan keeps you from many trading pitfalls such as greed, fear, boredom, a need to be right, a need to be a victim, and masochism. While a trading plan may contain many elements, at minimum it should at least contain the following characteristics:

1. Select your investment universe (ie. Futures market and the contract/s FX markets and contracts)

2. Appropriate account size (capital you can afford to lose. Allow for diversification). UNIT allocation based on the trading model

3. Define your style of trading (aggressive, medium , conservative)

4. Define your time frame (day / short / medium / long term trader)

5. Have specific ‘Rules Of Engagement’ (eg. DIV SOS 3)

6. Add risk management parameters stop loss (fixed dollar, trailing, swing)

7. Outline your money management

1. How much to risk – percentage based on capital

2. Percentage of money to risk on each trade

3. Where to place stops

4. When to add to a winning position

5. When to liquidate part / all of a losing position (Stop Placement)

6. When to liquidate part / all of a winning position (Profit Target 1,2,3)

7. Profit objective for trade / week / month / year (including MM)

8. Impact of commissions and fees on trades – individual and overall

– Slippage

– Continuing Education

– Subscriptions

9. Are you overtrading? (How many SIGNALS did your model generate this week? How many TRADES did you take?)

8. Back test the system as well as forward testing (referred to as paper trading)

9. Performance measurement (risk / reward ratio)

10. This will help you to determine your expectations (REASONABLE)

11. Determine your necessary requirements (resources to get the job done)

12. When should I start trading

13. Is trading for me?

A good trading plan is always complimented by a diary of your trading successes and mistakes. What you learn from your mistakes is more important. You paid for them; you may as well learn something from them, if you don’t remember them you are bound to repeat them. It often takes courage and cold hard unemotional judgment to stick with your trading plan.

Continued in Part 2….



Derek

Tim Moore asked:


Today people are bombarded with lucrative offers from various trading companies offering $10, $7 or even $4 per stock trade. It looks very tempting to sign up and start trading since the terms are much better than it was before the Internet trading was possible.

That was the good news. The bad news is that those companies are selling you the tools and service only. They do not sell you any guarantees of success. It does not matter if you profit or lose money, the trading company will get its fee for each trade anyway.

Since you are considering going into the stock market, most likely you are planning to get a significant return on your investment which should also be better than what you would get buy investing your money into mutual funds (less risky than single stocks) or even no-risk certificate of deposits (CDs) where returns are guaranteed.

Well, how can you get such returns? The answer of course is simple and well known: buy low, sell high. If you do it most of the time you’ll be a successful stock trader. Now the first problem comes: how do you know when to buy? There are probably several ways to do that, we do not discuss this here, let’s assume that you know somehow or think you do know. Lets say you got lucky and the stock after you bought it is going up, just as you planned.

Now another problem comes: when to sell? After the stock is up 20%, what do you do? Sell now, or wait until it is up 50%, 100% or 200%? Do you listen to investor news and do what everybody else does: selling, buying more, or continue holding the stock? If you choose one of the first two options, how much of the stock you should buy or sell? Or if you hold the stock, are you sure it will continue to go up, or you may end up waiting until the stock price is back to the original and than lose it’s value resulting in your losses.

The truth is some people actually do know the answers to those questions most of the time and actually make profit. The question is, are you as good as those people? Most people are losing money guessing and trying to time the market. If you’re new in this game and not planning to spend much time on research, chances are you will lose. You will be competing with professional traders, big players and insiders who profit mostly because many others keep losing. Plus what are the chances that you can predict the market? The chances are very slim.

Some may argue: “I had that stock, I sold it when it was up 20%, but if I did not sell it at that time, now it would be up 300%. How stupid I was when I sold it, if I did not I’d made a lot of money. I have to do this again. It really proves that I can make a lot of money there and it’s easy!” That is right you can make a lot of money, but it is not that easy as it looks. Lets assume you did not sell the stock at the time it was up 20%. Then what makes you think you would wait until it is up 300%? You may have sold it when it was up only 25%. Or it may go down several times below 20% increase, you could have thought it was going down forever and sold it even with a lower than 20% profit.

The bottom line is that it is easy to look at the past and see all the mistakes you’ve made. However it is very difficult to do right things for the future. Unless you know market trends well, understand related industries and stock company financials, most likely you will not be able to make profitable trades. Even professional traders do mistakes and lose money. If you are not one of them or not planning to become one, your best bet would be investing into CDs, mutual funds or your own business.



Nicholas

Ricky Lim asked:


Many people often get confused by the financial terms such as currency, forex exchange, trading etc. It’s a big complex financial world and one of the new trading concepts is day trading.

Day trading in its simplest term means buying and selling securities, stock and other financial investment within a single trading day. It covers a wide variety of financial products such as stocks, currencies, forex, equity index, futures and commodities.

The financial products that are brought are only held with a trading day and must be sold at the end of a trading day

Due to the short time period in which to buy and sell stocks, day trading is considered risky. If you are interested in day trading, be prepared to have sufficient capital. You need to purchase at least 1000 shares of a stock. Be prepared for this capital to be expendable.

Although day trading is risky, it does have big rewards if you know how to play in this game. Many day traders never allow themselves to get emotional with any one stock. They should know when to cut their losses when the need arises as well as able to analyze the current market trend particularly in the short term.

One advantage of day trading is that the intraday margin is 50 to 1. That’s means you are allowed to trade up to 50 times your initial capital.

So what if you do not have the necessary capital to invest in day trading. Thankfully, you could try day trading currencies. Trading currencies requires less capital. You only need a couple of hundred dollars to be able to open a forex mini account.

One major disadvantage of day trading is the stock market is only open for about 8 hours each day. However for currency trading, the forex market is open 24/7. That means you can trade just about any time of the day.

Another advantage of day trading currencies is that most day traders get an intraday margin of 4. That means with the same capital, you can trade up to 4 times your capital. For example, if you have $10,000 as capital, you can trade up to $40,000. This gives you more leverage if you decide to buy higher price currencies.

Day trading currrencies are also easier to monitor and predict compared to stocks as there are less of them and the factors influencing global forex market are lesser

In day trading, you can lose big as well as win big all in a single day so I would not recommend anyone to take up day trading until you have sufficient experience and knowledge in the stock or forex markets. Wise and quick decision making is needed as well as the usual stock research analysis, market analysis etc.



Patricia

John Forman asked:


I’m going to tell you a little story.

In March of this year I was looking at the markets, reviewing the price charts to see if there was anything worth trading. In this particular instance it was the foreign exchange (forex) market I was scanning and I did come across an interesting development.

You see, the Euro was setting up to making what looked to be a big break higher against the Dollar. Based on my analysis, which took all of about two minutes, I saw a pattern forming which told me to prepare for an uptrend. Now I don’t want to imply that in two minutes I found a great trade. It probably took me 30 minutes to go through all the charts that day. Oh, and since I actually wrote up the analysis of the trading strategy for my report subscribers, you can add on maybe another 30 minutes. That makes an hour.

The strategy I devised that day had me buying the Euro against the Dollar at about $1.21 (meaning each Euro was worth $1.21). That was mid-March. About two months later I exited the position at around $1.28. If you are familiar with forex trading, you will know that’s a nice profit. If you don’t have forex experience, let me explain.

Let’s say that I bought 100,000 Euros against the Dollar. That’s a position size of about $121,000. Because forex is a leverage market, I would only need a margin deposit of maybe $2500 to put on that trade – potentially less. At the time I exited the trade, the 100,000 Euros had increased in value to approximately $128,000. That’s a gain of $7000, which is not a bad return at all on the initial $2500 deposit.

Now let’s say I checked on the trade once per day during the time I held it. That’s about eight weeks, which is forty trading days. If I spent five minutes each day looking at that trade – which is probably quite a generous figure – then I accumulated 200 minutes of trade monitoring time. Add that to the sixty minutes I used identifying the trade and creating a strategy and you have 260 minutes. Rounding that up, we’ll call it 4 1/2 hours.

So if I had put on a 100,000 Euro position I would have spent 4 1/2 hours to make $7000 – more than $1500 per hour. That’s one heck of a part-time job!

This story isn’t about telling you how great a trader I am. Rather, the point is that I was able to make those kinds of profits in the market without having to spend hour upon hour in front of the computer screen watching the charts and trying to interpret news events. This is something you can do as well.

Let’s face it. There are a heck of a lot more people who trade part-time than full-time. The day traders, though, account for more of the noise and they have a great many people convinced that one has to be dedicated heart and soul to the markets to make good returns. That just simply isn’t true.

Part-time traders are at least as capable of doing well in the markets and making a positive contribution to their financial well-being as those who spend long days focused on the market. It is just a question of managing their time well and finding an approach which suits their situation.



Robert

Dalip Singh Wasan asked:


We Must be Master of Atleast One Trade

We may be jack of all trades. That is good. But at the same time we must master of one trade at which we are working. Everybody dealing with us must know that work in which we are busy is our main subject and we are very efficient and master of that trade. When work of this type comes to the organization, everybody present in that organization must have an eye on us and they must take up the work only because they shall be giving the work to us and we shall be meeting the demands of the customer coming to the organization. Similar is the position in Government office where the officer incharge knows the capacity of each one under him and when we are present, he shall be asking us to do that work. And it is very easy to have proficiency in one trade. We have been on the seat because of our minimum qualifications prescribed for that trade and with little efforts we can acquire more and more knowledge in that trade. Today some institutions are providing more and more training in particular trades and if we could spare some time, we can upgrade our knowledge in that trade and we can get higher certificates, diplomas and even degrees. We cannot say that such people shall remain from where they had started. We shall see that such people shall get promotions after promotions and one day they shall rise to the highest status in that organization. Acquiring more and more knowledge and keeping knowledge upto date is very easy because even help books are available in the market and the work itself teaches us much. We must have a will and a desire to become master of that trade and one day we shall actually be master of that trade.



Sansi Collen

John Forman asked:


It seems like I am always answering the question as to whether trading can be done meaningfully on a part-time basis. My answer is always the same – “Absolutely!”

Somehow people have been convinced that you have to spend hour upon hour in front of computer watching the markets in order to have a chance at success. That is simply just not true. Part-time trading can be extremely worthwhile – in some cases even more so than trading more actively. I am proof of that. Even though I sometimes do have the opportunity to trade more frequently, my best trades always seem to be the ones I do on a more part-time basis – the ones that only require an occasional check of the markets.

This may sound strange coming from someone who used to be a professional analyst and really does enjoy the markets, but I really have no desire to spend all day in front of the trading screens. It’s a grind, and I have a lot of other things I enjoy doing a whole lot more than watching price quotes tick up and down. I’m sure you could say the same.

Effective part-time trading is simply a matter of maximizing the time you have available. That might be an hour a night, or maybe a couple hours on the weekend. Maybe it’s even less than that. It doesn’t matter. If you make the most of what you have, you can do good things trading part-time. Doing so is a matter of developing a method for your work and applying it consistently.

I’ll use myself as an example.

My schedule is somewhat convoluted. I travel frequently and my activities have a seasonal nature to them. There are points in the year when I have almost no time to devote to the markets. At other times I can maybe put in an hour each morning. Then there are also times when things are more open and I can be a bit more active.

Regardless of my time availability, though, I always do the same thing. I scan the charts for the markets I’m interested in trading and look for something specific. If I don’t see it, I move on to the next. If I don’t see anything good, I don’t trade. It’s as simple as that.

My available trading time will dictate which timeframe charts I look at when doing my scan. If I’m at a point where I can be more active, I’ll perhaps look at the hourly charts. If I can only check in on things once or twice a week, I’ll look to the daily and/or weekly charts to find possible trades with longer holding periods. In that way, I can choose the best timeframe for me to operate in for my schedule at that point.

What is more, I don’t ever have to trade. That’s a major advantage for part-time traders. Unlike our full-time peers who are under pressure to produce results every day, we can pick our spots and only go after trades likely to be big winners. I’ll take that relaxed approach any day!

Let’s face it. Full-time trading is a commitment most of us will either never be able to or never be willing to make. That doesn’t mean we cannot make excellent use of the markets to better our financial situation. Part-time trading can certainly provide the opportunity to do just that.



Gregory

John Forman asked:


One of the least understood financial markets is the one for futures. That is in part a function of the fact that for many years it has been referred to as “commodity futures”, which has no doubt turned many would-be traders away, folks who don’t have any interest in things like Pork Bellies and Frozen Concentrated Orange Juice (to include a few from the popular Trading Places film). The other factor is the perceived complexity of the futures market. The fact of the matter, though, is that futures trading is incredibly diverse and not as difficult to do as many think.

Sure, for decades futures trading focused on the commodity markets. That’s a simple function of how they developed. Now, however, the focal point has shifted considerably. Yes, one can certainly trade agricultural good, energy products, and metals. These days, though, there is more action in things like interest rates, currencies, stock indices, and even stocks themselves.

What’s more, technological developments have made the futures market much more accessible to the individual trader. It is now possible for even lightly capitalized traders to operate effectively in the futures market, something difficult to do in years gone by. That has opened up a whole array of new opportunities for the individual to pursue their trading goals.

Consider this. Nowadays just about anyone can trade things like Gold and Crude Oil. These markets have made enormous runs in recent years. One could also take positions in the US Dollar at a time when it has shown persistent weakness, or in US Interest Rates as they were steadily increased.

As for futures being complicated – not really. Are they different than trading stocks? Sure. They are leveraged instruments. That means they present some very exciting opportunities for traders who use them in the context of well developed risk management strategies (which all traders should have anyway, regardless of market).

Futures prices move just like those in any other market. The same analytic techniques used to trade stocks or forex or any other market can be applied to futures. Their prices are, after all, based on those of the markets underlying them. That is why they are referred to as derivative instruments – they derive their value from other markets. Stock index futures track stock indices. Currency futures prices move with foreign exchange rates. Single stock futures follow the prices of the stocks they represent.

Naturally, this derivative nature does mean some differences in the actual trading of futures as opposed to the markets underlying them. The concepts involved, however, are easily understood. It is possible for one with a basic understanding of trading and the markets to grasp them quickly and be operating effectively in the futures markets within only a short period of time.

If you haven’t already done so – and if you’ve read this far it’s a fair bet that you haven’t – take the time to look at the futures market. They could very well provide you with the opportunity to make excellent strides in your profitability and risk management.



Brent