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

Mike Davies asked:


Regardless of platform, all traders will be faced with a series of tough questions, mental debates and challenges on a daily basis.

Here are four important questions, one of which will be in any traders head at any given time.

1 If the price of a stock that I hold is still rising I would be foolish to sell when it could go up even further?

2 Should i wait till the stock starts to fall before selling? The price has been rising steadily, it won’t crash overnight will it?

3 If the stock has just plummeted then something is wrong with this company and it is not worth buying?

4 The stock is soaring, I must buy now or I will lose out?

Although all these four statements appear to make sense, on closer analysis it can be seen that for basic fundamental reasons an experienced trader should know innately that all four statements are in fact incorrect, for one of the fundamental reasons outlined below.

1 When a stock is “oversold” we can say that supply exceeds demand and so the price will fall, conversely if demand exceeds supply the stock is “overbought” the price will rise. How do we as traders pinpoint the specific point where the demand/supply ratio is about to switch?

2 This is of course the eternal, essential question and the answer is we don’t. It is impossible to predict the “exact” point at which a market switch event will occur, despite hundreds of attempts involving expensive computer programmes etc.

3 The volatility of your stock is intimately linked to news and events that in some way will affect your stock. Some of this news can of course at first glance seem completely unrelated to your particular stock ie the global economy can affect the entire index for your stock and movements of the index then directly affect your given stock.

4 We have seen in the recent credit crunch how corrections in one particular sector – the banking sector can affect the entire market around the globe wiping billions of dollars off literally every index, from commodities to pharmaceuticals. The Market is NOT king. Confidence in the market IS king.

5 When a market “switch” event does occur it can often create a stampede amongst traders which can wipe out recent gains in a matter of minutes, this is the herd mentality and can leave stocks hugely undervalued after a selling spree.

Experienced traders know that following a market crash is in fact not a time to be negative, and in fact this is the prime time to buy certain stocks which have been “oversold” as they represent “value” buys.

But as always there are important caveats, if a stock has crashed because a company is being liquidated then it obviously does not represent value at any price.

If it is undervalued because the entire index has simply suffered a bout of selling or a crisis of confidence then we can be assured that at some point confidence will return and the stock will rise again.

However in times of crisis it can seem difficult to muster up the courage to start buying again, and this is where novice traders lose out.

So how do you as a day trader make use of this mass of information to trade on the stock market.

Well you do it because it is your job, but many day traders fail and many are indeed turning to the betting exchanges as an alternative where their skills can be put to better use.

In many ways the betting exchanges offer a more coherent overall view of the market and volatility. With fast internet and racing TV a race trader has ALL the means to assess relevant aspects of volatility In advance of the market. Its all about control.

Also as the stock only exists for less than one day, the trades are closed at the end of each race and a trader can go to sleep knowing that nothing untoward can happen to his equities overnight.

Day traders come to the betting exchanges with a solid background in Technical Analysis and Fundamentals, they will have experienced the pain of losing trades and will understand the relationship between volatility, liquidity and the market spread.

For day traders used to working the stock market, the betting exchanges offer fast turnover, quicker more agile trades.

Why bother with the slow torture of leaving medium/ long term trades open in the stock market when you can have made 5 or 6 trades in 15 minutes on one single horse race.

Lets look at the benefits of trading horses on Betfair

* You choose which horse and which race to bet on.

* You know the exact time of the race and therefore the time that the trade will close.

* Medium term trades can be opened early morning or the night before and closed during the afternoon of the race.

* Pure scalpers can use short term scalp, swing and momentum trades which can be opened and closed in the 15 minutes before a race as liquidity soars.

* Trades can even be placed during the actual event taking advantages of extreme volatility. (not for the faint hearted and not for those without racing TV).

* At the end of each days racing a trader can examine the profit and loss account to see precisely the fruits of his days labour.

* You can forget about the global economy, forget about events out of your control, forget about the 8.30 am opening time on the markets and forget about boring economics and accounting.

The fundamentals which are part of your armoury are all online at:

1. http://www.racingpost.co.uk

2. http://www.oddschecker.com

3. http://www.attheraces.com

4. http://www.sportinglife.com

Technical Analysis platforms allow you to take your trading to the next level and they are a steal compared to the expensive financial packages that day traders will have been used to.

Bet Angel Professional is the flagship trading platform for Betfair, the real time Supercharting facility is recognised as second to none.

Ladder trading allows you whole market views of liquidity, and one click trading with offset allows you to fire trades into the market in microseconds stealing a big advantage over users stuck with the standard Betfair interface.

Simple chart setups using Quick Moving Average Back Price, Price Envelope’s, and Long Weight of Money Moving Average highlight simple scalp, swing and momentum trades in the pre race markets.

Most importantly you need to decide on your opening pot, you need a willingness to learn your new trade or platform and the confidence that your mindset is strong enough to cope with this type of career.

So just for the record what has since become of the poor online casino operator.

By Oct 2 2006 from a peak of 176p PartyGaming was down at 47p, following one of the biggest one day losses (56%) in FTSE 100 history.

Today it totters happily around 25p, a realistic price/earnings ratio, using a realistic and sustainable business model without flouting any established legislation.

Who knows, with the recent change of leadership in the US, the gambling legislation may be reversed and the reverse fortune could occur for this particular operator.

What can we take from this cautionary tale as we sail off to the betting exchanges; Quite simply, make volatility and liquidity your best friends as the alternative situation could truly represent Armageddon for your finances.

What can we learn?

1 Learn to spot trends early on

2 Identify and analyse potential risks using fundamentals

3 Use technical analysis software to take the heat out of timing your trades.

4 Get in early before the herd stampedes onto a likely winner.

5 Get out early before the herd flies over the edge of the cliff.

Remember if volatility scared you in stocks it will terrify you in horse racing.



Daniel

Karan asked:


Trade Fairs or Trade shows have now become an integral part of the urban life style of Indian people .Today’s everybody knows very well that International Trade Fairs in India play such a big role in Indian International market. Indian market day by day growing with help of it. Here a question arise that why International Trade Fairs much successful in India?

Indian trades have been legendary (famous) as this was the reason why so many countries in the past tried to establish a trade route with India. Today India has established itself in the commercial market of the world and countries from far and wide find this as a great opportunity to benefit from the continuous boom in the Indian economy. Trade shows are organized in every major city to encourage the locals as well as the multi national companies to come and see the response of the Indian International market towards their products. The main reason of International trade fairs in India is its largest population and due to its large population in India Demand of products always very high. So producers always willing to invest in India. In India some companies that operate on the international level to get in touch with the real end consumers and to understand the needs and also the demand of their product by the consumers. On the other hand consumers can have a direct interface with the new and cheap products in the markets and can also enjoy purchasing and browsing through the new products in the market. By this way Indian market has got the benefit by making its own place in International Market. That’s why Indian government invested with very high budgetary outlay. The other main reason is Indian Open Market which proved very much beneficial for Indian market. Now Indian government allows Direct Foreign Investment and also privatized some sectors and these are also the main reason that other countries invest in India because it’s easy for them. For this purpose Indian government also has been providing some facilities like reduced import custom duties, declares latest Tax exemption and financial incentives. Now a day’s Indian government also simplified imports procedures. So by this way Cost of the Products and services effected. To invest in India is very cost effective than other country. India provides Labors, raw material, other expenses with very cheapest cost which benefited for both to India and other countries. Indian people also get employment by their countries and no doubt economical growth happens. Another main reason is Indian culture. Indian culture is very rich which becomes another important reason to attract the other countries toward India.

Now in India huge number of upcoming Trade fairs falls. Import maximum of products because of large Indian area and largest population. Recently result of some survey shows Indian market has an amazing growth and opportunities.



Charles