Before Short Selling-Know These Shocking Facts

Sunday, March 7th, 2010

Short selling is one of the favorite day trading strategies employed by many day traders. Many companies hate short sellers as they believe that short sellers were responsible in the fall of their stock prices. Nothing can be far from the truth. Short selling is just like anyother market mechanism that provides liquidity and better price discovery. Short selling can never destroy a company if its’ fundamentals are strong. Many stock brokers now let you short stocks with just the click of a mouse. When you sell stocks from your online brokerage account, the message asks you whether you are selling your own shares or short selling. You just need to click once on short selling and the rest is taken care of by the broker. These shares are a loan to you by the broker that you will have to return at a later date!

In some cases,a stock gets so much shorted that there are no more shares of that stock left for you or your broker to borrow anymore. Now, you cannot always short a stock instantly. Most of the investors work on rumors. In that case, you simple will have to cross your fingers and see how the other short sellers do on that stock while you search for another stock to short!

Day traders are not looking for long term fundamentals in order to go short. A day trader might go short on a stock that had go up for three consecutive days, figuring that they will go down on the fourth day. Day traders are only looking for stock that might go down in price for mundane reasons.

You have to be careful about the uptick rule as stock exchanges have rules in place to help maintain an upward bias in the stock market. What this means is that you can only short a stock when the last trade was a move up. In other words, you can’t short a stock that is moving down.

How much risky short selling can be? Well, in theory there is no stopping a stock price to reach the sky. So if you are wrong in your short selling decision, your loss can be catastrophic. But don’t worry, short sellers also use stop loss so if the price starts to move up, your position will get closed automatically by the stop loss order.

Know something known as Short Squeeze. Once that happens, almost all short sellers get desperate to dump their stocks and exit but when they try to buy back the stock, they get more hurt as the prices go even higher and higher on rising demand for the stock in the market. Now, don’t get caught in the market with short selling when good news spreads about the stock that you had shorted driving its price up.

If you have already shorted that stock, you might get a call from your broker to return that stock immediately. In such a case, you will have to immediately return the stock even if it doesn’t make any sense to you!As said before, companies, investors and many brokers hate short sellers. They think that short sellers had intentionally driven down the stock prices. So sometimes, they will spread rumors of good news to create a momentary short squeeze. Sometimes, a campaign will be started by the owners of a particular stock instructing their brokers not to loan out their stocks to short sellers.

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Candlestick Charting Patterns- The Hammer, the Hanging Man and the Spinning Top!

Thursday, March 4th, 2010

Candlestick charting is a highly powerful tool in the trading arsenal of any trader. In the last two decades, candlestick charting has become highly popular. There are many candlestick patterns that give profitable trading signals. Some are simple while other are complex. Hammer, the Hanging Man and the Spinning Top are three simple candlestick patterns that can be easily spotted. All three are different!

The first question. How do you identify whether this is a Hanging Man or a Hammer? Hammer and the Hanging Man both have a very small candle body accompanied by a long wick either on the bottom. If this type of pattern appears at the top of an uptrend with the long wick at the bottom, it is a Hanging Man. And if it appears at the bottom of an downtrend it is a Hammer.

Now, in most of the cases, you will also find a small wick on the top of the candle body. Now suppose, you find the Hammer or the Hanging Man. What you need is to look for the confirmation the next day!

Now suppose, you think that you have spotted the Hanging Man in an uptrend. Wait for the confirmation the next day with the opening price. If the opening price on the next day is less than the previous day’s close, you have a true Hanging Man. If not, then that was not a true Hanging Man.

Similarly suppose, you think that you have correctly spotted the Hammer in a downtrend. A Hammer should have a very small candle body with a long wick at the bottom. You should confirm this with the opening price on the next day. If the opening price is higher than the closing price the previous day, you have a true Hammer. If the opening price is not higher than the closing price the last day, it is not a true Hammer!

The best chart for these candlestick patterns is the daily chart. Once, you get the confirmation, trade these patterns. They can be highly profitable. But in case, you don’t get the confirmation the next day with the price action, simply ignore the pattern as not true. Whenever, you trade candlestick patterns, first spot them correctly than wait for the confirmation on the following day.

A Spinning Top is another candlestick pattern that reveals a tight battle between the bulls and the bears. Whenever, the battle between the bulls and the bears ends in a draw on a trading day, the following day, one side has to give in. When this happens an explosive move in one direction is highly likely.

How to identify a SPINNING TOP? A Spinning Top has a very small candle body in the middle with two equal wicks on the top and the bottom. This pattern appears very frequently in the daily charts and can be highly profitable if spotted correctly.

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Harami And The Harami Cross Candlestick Patterns Can Be Highly Profitable!

Sunday, February 28th, 2010

There are simple as well as complex candlestick patterns. There are single stick, two stick as well as three stick candlestick patterns. Harami is a two stick candlestick pattern. Two stick patterns take two days to form on daily charts. A Harami is formed whent the first day candle is longer than the second day candle. Harami can be bullish as well as bearish!

A bullish Harami is formed in a downtrend when the first day candle is very bearish. But on the second day, the bulls come into play and beat the bears out of the market by taking the prices higher. However, the bulls are not completely successful and the second day is still lower than the first day open and the first day high is not crossed. But this is an important signal that bulls are now active and trying to take hold of the market. This means that the downtrend will be soon over and an uptrend is about to start.

The second day is still a down day that follows a bearish trend. On the second day, the open is higher than the close of the first day. The bulls ruled the second day as the close is higher than the open.

The bulls are still cautious after the downtrend thinking that the bears are going to come back again and push the prices still lower. The confidence the bulls gain when this does not happens encourages more buying and the culmination of the downtrend and the start of an uptrend.

Just like with other candlestick patterns, a Harami pattern can fail. So to be on the safe side when trading on the Harami, place the stop loss close to the open of the second day or what you call the signal day.

Harami pattern has got few variations. On of them is the Bullish Harami Cross Pattern. The first day in case of a Bullish Harami Cross is a bearish candle. The signal day or the second day is a Bullish Doji with an open higher than the close of the first day and the close lower than the open of the first day. Now,a Bullish Harami Cross is not formed very frequently. But when it does form, it means an sudden trend reversal. So you should act immediatetly when you spot it.

When a bearish Harami is formed what this indicates is that bears have taken hold of the market now and are about to push the prices down signalling a downtrend is about to start! The bearish Harami is similar to a bullish Harami. It is formed in an uptrend. The first day is a usual bullish candle that forms in an uptrend. The second day candle is a bearish candle. It’s open is lower than the close of the first day. And it’s close is higher than the open of the first day.

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Inverted Hammer Candlestick Pattern-An Accurate Signal On Trend Reversal!

Saturday, February 27th, 2010

There are many candlestick trend reversal and trend continuation patterns. These candlestick patterns can help you confirm a trend reversal or a trend continuation. Inverted Hammer Candlestick Pattern is an important trend reversal pattern that can give accurate signal on trend reversal. However, this pattern occurs rarely but when it does, it means that the trend will reverse itself soon.

The first day is a usual bearish candle in the downtrend. On the second day or what you call the signal day you find the inverted hammer something quite rare as the price action required to produce such a pattern seldom takes place.

An inverted hammer has a very small body at the bottom with a long wick at the top. As the high is way above the body, most of the trading took place near the small area close to the low. This low serves as the support for the upcoming days.

Now, you should wait for the confirmation the following day in order to trade this bullish inverted hammer pattern. If the open of the next day after the appearance of the inverted hammer pattern is higher than the low of the previous day, the inverted hammer pattern is a true pattern and you can trade it by putting the stop at the same level of the open of the day.

Now, let’s talk about an uptrend. Identifying an Inverted Hammer in an uptrend is almost similar to a downtrend. When an inverted hammer is formed in an uptrend, it means that the uptrend is about to reverse itself into a downtrend. On the first day, you will find the usual bullish candle signalling that the bulls are in control of the market. This is followed by a gap opening and more buying.

But soon the bears start to take control of the market and push the prices down. The close of the day is equal to or close to the low of the day. When you idenfity a bearish inverted hammer pattern, you can safely go short by putting a stop near the open of the signal day or the day when inverted hammer was formed.

Once, you have placed the stop, you have limited your risk. In case, the market moves in the direction as anticipated, you make a nice profit. Placing a stop loss is very important in trading risk management. If the subsequent price movements do not confirm the inverted hammer, the stop loss comes into action and takes you out of the market at an acceptable loss. If you are an aggressive trader, you can place the stop loss close to the high of the inverted hammer.

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Back Testing Your Trading System-Know These Shocking Limitations

Saturday, February 27th, 2010

Developing a trading system is not easy. It requires first of all good trading experience. Than you need to test your trading system under live trading conditions. It might take time as well as involve the risk of losing money. To overcome this difficulty in testing a trading system or a trading strategy, backtesting has been developed. Backtesting is possible with the use of software. A trading system might comprise of a set of two or more indicators with a set of rules that tell when to enter or exit the trade.

How to do backtesting? Using a backtesting software makes it very simple and easy. Backtesting uses historical data to test the performance of the trading system under the past market conditions.

Now, back testing is done with historical data. What this means is that although your trading system might perform very well with back testing, it may not work in the present market. Market conditions keep on changing and what worked in the past may not work in the present. In the same way, what didn’t work in the past may start working now.

So when you look at back testing results, you should look at them with scepticism. But it doesn’t mean that backtesting is entirely useless! What we can say is that no two trades are exactly alike.

Back testing can give you a feel how a particular market behaves under certain conditions. Back testing can also spot you certain general characteristics of the market like the seasonal trends and market tendencies.

On the other hand, you might not find much seasonal trends in the currencies and bond market. Some though talk of the January Effect but this effect is not that pronounced now a days. In case of stocks, stock prices tend to rise at the end of each month and the first few days of each new month as institutional investors tend to put new money to work during that time frame.

US Dollar Index trendlines might last for months to years. In other markets too backtesting can help you figure out important trends that lasts for last times. Backtesting can help you figure out how long a trend might last in a particular market.

Now when you back test your trading system and the set of indicators, you can check their accuracy. For example, if you using a trading system based on moving average crossovers, you can back test it using different combinations. Then monitor each combination under live conditions to see which works the best.

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Momentum Investing Shocking Secrets

Saturday, February 27th, 2010

There is a difference between trading and investing. Trading is always short term while investing is long term. The time horizon in trading can be as short as a few minutes to a few days to a few weeks. Whereas in investing, the time horizon can be months to years. Many people day trade or swing trade stocks, currencies, futures, options, ETFs, commodities or other markets. In day trading, a trader opens a position and closes it in the same day making a quick profit. In swing trading, a trader tries to ride a trend in the market as long as it lasts. On the other hand, an investor is least pushed about the short term swings in the market. He or she has a long term time horizon like a few months to even a few years. This long time horizon matches their investment and financial goals!

Investors in theory can wait for a long time to see their stock pick to play out. A company’s stock may be ridiculously cheap. But it may stay like that for a long time before it catches everyone else’s attention and the price is bid up. It might be good for investors to learn a few tricks from traders especially day trading that can help them make a few quick bucks.

Successful day trading requires an innate sense of discipline. Successful day trading requires the sense when to commit money to a trade and when to cut the losses and run. However, if you are an investor who has never day traded, you might have done so much research and committed so much time waiting for a position to work out that you might forget the cardinal rule of traders: The market doesn’t know you are in it.

When, there is momentum behind a security, it means that it’s price will continue to icnrease as long as it has got momentum. This way by investing in stocks having momentum behind them, you avoid the risk of getting stuck in stocks that might not move for months and months.

One of the tricks that you can learn from day traders is momentum investing. In momentum investing, you look for securities that are expected to go up in prices accompanied by the underlying momentum. When investing, you try to buy low and sell high. In momentum investing, you buy high and sell even higher!

How to you find that a security has got momentum behind it? You can use these technical indicators like the MACD ( Moving Average Convergence and Divergence), RSI (Relative Strength Index) or the Stochastic. A swing trader is also looking to ride a trend as long as it lasts. A trend lasts as long as it has got momentum behind it. Momentum investing is similar to swing trading.

Momentum investing can also lead to bubbles like that happened in the dot com bubble in the last few years of 1990s. It is always a good idea to do some fundamental research on the companies before doing momentum investing.

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Using Automatic Forex Trading Software For Bigger Profits

Sunday, January 24th, 2010

Forex trading has gained tremendously in interest and popularity in recent years mostly due to the introduction of automatic and automated forex trading systems. The market that was open to banks and similar big financial institutions is now luring medium and even small investors.

Forex trading involves the exchange of one currency of one country for the currency of another country. As forex trades happen round the clock with transactions of billions or perhaps trillion of dollars everyday, thus it is considered one of the largest and most active financial markets.

As the internet has become widespread and technology advances, sophisticated automated forex trading systems has become very common. It makes participating in the forex market very easy. Anyone who has a computer, internet connection, forex brokerage account can participate in the market.

But staying on top of a forex position requires constant monitoring, as this global market is practically open round the clock. Automatic and automated forex trading systems is a tool that lets you specify a currency, an asking price, and a selling price beforehand. With a small seed amount and with the help of a broker, your purchase and sell orders will be executed instantly.

You can profit from the forex market without even become an expert in trading with an automatic forex trading system. In a good automated trading system, it is the program who will executes the trades for you through your managed accounts.

Another advantage of an auto trading system is you are not required to do the actual trading. Thus it frees up a lot of your time. If you do watch the market constantly, you can manage multiple accounts from your trading platform simultaneously. This was not possible with manual trading. With automated trading system, it lets you trade multiple systems and multiple markets.

With automatic and automated forex trading, you do not need to miss any profitable trade even if you are not present in front of your computer terminal. The system will help you make trades at any time of the day or night regardless of your presence.

Using an automated forex trading system helps you to take advantage of various forex strategies and systems. As different systems are designed to be triggered by different trade indicators, you can lower your risk.

By using an automated system, it can eliminates your human emotions and psychology. This is important as those can often affect you in making proper and profitable trading decisions. Also only with the automatic system, you will be capable of monitoring a few currency pairs at a time and execute all of the trading signals.

Having said so much about automated forex trading system, you will still have to learn about the basics of forex trading. You should understand some fundamental analysis, technical indicators.

Having an automated trading system will never ensure you to be profitable. There are simpy too many variables and parameters. Only with good decision rules input into the system will ensure you to make money from the forex market.

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Leveraged Short ETFs

Friday, November 20th, 2009

A short ETF returns the inverse of the index it is linked to. For example, the ProShares Short Dow 30 ETF (DOG) will return the inverse of the Dow Jones Industrial Average (DJIA) on daily basis. If the DJIA falls by 2%, DOG rises by 2% and if the DJIA rises by 2%, DOG will fall by 2%.

During the past few years, the number of Short ETFs has risen dramatically. Short ETFs not only cover the major stock indices like the S&P 500 or the DJIA but also different sectors like the energy, utilities or technology. You will even find Inverse ETFs on currencies now. Short ETFs are also known as Inverse ETFs or Bear ETFs.

Most of the ETFs are designed around some market index. ETF shares trade like ordinary stock shares. You can buy them. You can sell them unlike the mutual funds that can only be sold at the end of the day. The ProShares UltraShort Dow 30 ETF (DXD) rises 2% when the DJIA falls by 1%. So you can even find leverage short ETFs. A leveraged short ETF gives the trader leverage without the use of margins.

Over the years, short ETFs have risen in popularity with the investors and hedge funds. Short ETFs give you an excellent opportunity to profit from the volatility in the market and the major indices.

Short ETFs are a great product as they have created new opportunities for traders. A trader had to actually short sell stocks to take advantage of a market drop before the introduction of short ETFs.

Traders are not allowed to sell short stocks or ETFs in their retirement accounts. In the past if the market was dropping, the trader had to go against the trend and buy or else move into cash or fixed income. Short and leveraged ETFs provide traders with new opportunities.

Ever wanted to trade international stocks? Emerging markets give a higher rate of return as compared to the mature economies. China is one example that garners a lot of attention. The Shanghai Index in China rose 100% in 2007. In the first quarter of 2008, the Shanghai Index was down 35%. ETFs also provide you with the opportunity to take advantage of the global market swings.

The ProShares family of ETFs introduced the Ultrashort FTSE/Xinhua China 25 ETF (FXP). Now if you want to trade the fall of Chinese stocks, you can trade FXP ETF. In the past, traders who wanted to benefit from the fall of Chinese stocks could only short Chinese stocks that were traded in US Stock Exchanges.

Short ETFs can be used for other purposes as well. Assume you have a portfolio of $100,000 composed of 75% stocks and 25% money market fixed income. As a long term investor you can take advantage of short ETFs to hedge your portfolio position.

The forecast of the market for the next six months is not good. But you are reluctant to sell your stocks due to tax reasons. Suppose the market falls by 10%. Your stock portfolio falls by 7.5% assuming the same ratio between the market and your portfolio.

Mr. Ahmad Hassam is a Harvard University Graduate. Try This Cash Printing Forex Signal Service From Heaven! Learn Swing Trading! Get a totally unique version of this article from our article submission service

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Stocks Short Selling

Thursday, November 19th, 2009

You must be thinking that short selling is counter intuitive. It’s not! Short selling is a way to profit from a falling market. In nutshell in short selling stocks, an investor who is short selling is borrowing stocks from the brokers and selling them to another buyer. At some point, the investor has to buy back the stock ideally at a lower price to make profit and return it to the broker. The sale money goes to the account of the investor.

Suppose you are using the RSI technical indicator that is giving a crossover sell signal. All signs are pointing towards to at least a small pullback. You feel that the stock ABC is overvalued at $60 and at some point in the near future the market will make a correction.

You decide to short 1000 shares of stock ABC. So 1000 shares of stock ABC are sold by your broker at $60 and $60,000 is placed in your account. You had placed an order with your broker to short 1000 shares of ABC stock at $60. Over the next week, but now you are jittery as the stock ABC instead of going down climbs to $65.

Stock prices can go up as well as down. Technical indicators can give you a likely direction of the market but they are never 100% right. Did you cater for the situation when the stock price rises instead of falling? However, you have catered for this eventuality by placing a stop loss at 10% of your account. This comes out to be $6,000. So the stop loss is not triggered and you are still in the market hoping for the price to stop going up.

You are prepared to lose $6,000 in anticipation of a stock price tumble as your technical indicators are giving you the sell signals. If the price goes up to $66, your stop loss will be triggered and you will be out of the market.

Every quarter companies are supposed to release their earnings reports. You can time your trade around the release of such a report. Now most earnings mishaps last a few days. So you wait and don’t cover your short position for the next few days. Suddenly on the release of a disappointing earnings report, the stock price tumbles 20% in one day.

You decide to cover your short position, stock ABC price falls to $45. You need to buy back the 100 shares of ABC that were sold short earlier at the market price of $45 in order to close your position.

Now should be able to understand short selling as easy as long buying. With this simple example, you should be able to understand the mechanics of short selling stocks. You pay $45,000 to buy back 1000 shares of stock ABC and return them to your broker. So your net profit in this case is $60,000-$45,000= $15,000.

Assume that you had bought the stocks for $45 per share and sold them at $60 per share, the same profit would have been made. In reality, you paid $45 per share to buy ABC stocks and sold them at $60 per share giving you a profit of $15 per share.

The goal is to sell it at a higher price but in the case of short selling stocks, selling takes place first instead of buying when you short a stock. The goal of buying a stock is to sell it at a higher price in the future. Do you want to try short selling now?

Mr. Ahmad Hassam has done Masters from Harvard University. Try This Cash Printing Forex Signal Service From Heaven! Learn Swing Trading! Get a totally unique version of this article from our article submission service

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What Are LEAP Options?

Tuesday, November 17th, 2009

British Pound is known to be a stable currency. Great Britain is a strong economy. But, Great Britain was finding it difficult to stay within the tight exchange rate band set by the European Monetary Union (EMU) in the early’90s. One person who made history with options was George Soros who is famously known as the man who broke the Bank of England.

George Soros is a famous name in the world of investing. He is famous for his speculative attacks on currencies that he had the intuition of being intrinsically weak. He had always believed in contrarian investing. Contrarian investing means doing exactly opposite of what the crowd is doing. George Soros had this intuition that the Bank of England could be forced to devalue British Pound. So he bought call options on German Marks and put options on British Pound. He made a bet of $10 Billion by leveraging all the assets in his hedge fund.

Bank of England had made a number of public statements regarding its intention of staying within the EMU. When George Soros made his bet on the intrinsic weakness of British Pound, other currency speculators followed suit and placed their bets too. This build up an immense selling pressure on the British Pound! Bank of England was brought to its knees as it was unable to sustain the immense selling pressure on the British Pound within a few days of the speculative attack on the British Pound. Bank of England was forced to devalue British Pound in a few short days.

When you a strong intuition, you should go for the big kill. George Soros made a cool $1 Billion profit on his bet in a matter of a few days. Can you make such a bet? Maybe not but this one example show the immense power options have if used correctly. Options are risky; there should be no doubt about it.

Trading options has become hot in recent years especially after the recent stock market crash. What are options? Options derive their value from the underlying asset or security on which the options contract is based. Options contract give you the right to buy or sell an underlying security like stocks, futures, commodities or currencies at a price before a certain date. This price is known as the Strike Price. This date is known as the Expiry Date. However, in European Style options you can only buy or sell on the expiry date not before that. Most people who trade options lose money, plain and simple.

You need to learn the Options Greeks. Time factor is very important when valuing an option. Further out the options contract is from expiration, you will have to pay a higher premium. As the options contract approaches the expiration date and if it is out of money, it loses its value very fast.

Have your heard about the LEAP options? LEAP stands for long term equity anticipation. It basically means that the option is much like the regular option except that the timeframe to expire is greater than 1 year. LEAP options are basically long term options. Leap options can help you profit over the long haul. You can use LEAP options in options strategies like the covered calls, straddles, spreads and so on.

LEAP options can be incredibly profitable if used correctly. However, LEAP options are risky because the option writer usually demands a hefty premium for taking on the long term risk. The buyer of the LEAP options has the right to exercise the option prior to expiration should the price of the underlying stock move in the money. Long timeframe means that the possibility of the LEAP options moving in the money is always high hence a high LEAP options premium.

See, closer the out of money option is to expiration, faster its value drops. What this means is that the buyer of the options loses the premium that was paid for getting the right to buy or sell the underlying security. LEAP options can be a great trading vehicle for swing traders as they mitigate some of the time decay that is inherent in short term options.

Mr. Ahmad Hassam has done Masters from Harvard University. Learn Candlestick Charting! Know Fibonacci Retracement! You are welcome to reprint this article - but get your own unique content version here.

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