Investing Archives

Momentum Day Trading Strategies: Entry Strategy

In today’s blog post we are going to focus on developing an entry strategy into your day trading toolbox. A good entry strategy is important because when and where you enter on a stock can have a huge influence on your bottom line. As you have probably already figured out by now, some securities are better candidates than others for day trading. That is because a day trader should be looking for two things when looking for a good stock for day trading and that is liquidity and volatility.

Liquidity

Stock liquidity is how easy it is to buy and sell a stock without seeing a change in the price. Good liquidity will allow you to enter and then exit a stock at an advantageous price. For example, if you buy stock “A” at $20 a share and can sell it immediately for the same price, the market is perfectly liquid for that stock. If you cannot sell that stock at all, it would be perfectly illiquid. These examples happen very, very seldom. More often than not the market for a stock is somewhere between the two extremes.

Volatility

Stock volatility is the measurement of the expected daily price range. This range is the area in which the day trader has to learn to operate to make a profit. Successful day trading requires you to get comfortable operating in this range. The higher the daily volatility for a stock, the higher the potential for profit or loss.

Now, that you have learned how to evaluate a stock’s liquidity and volatility, you need to find your entry point. All momentum day trading strategies need to include a good entry point strategy. Intraday candlestick pattern’s and charts are a great way to find an appropriate entry point.

Intraday Candlestick Pattern

A candlestick chart shows a stock’s price at opening for that day, its intraday high price, its intraday low price, and its closing price all on one graph. At first glance the chart my look confusing, but it is an essential tool to learn for day trading. Learning how to read a candlestick chart will help you find patterns and those patterns will help you identify an entry point.

Real-Time News

Everyone who day trades, knows that news makes stocks move. You can make all the intraday candlestick patterns in the world but if you do not have a good, reliable, real time news source you could get caught behind the bell curve. Twitter is a great way to get up to the minute news information. You can follow all the standard news channels but we also recommend following Warrior Trading. They share great up to the minute news that you are going to want to know about.

Any serious day trader knows that picking the right entry point is one of the most important skills you can develop as a day trader. The good news is there is no secret to it, you just need to learn how to use the information to your advantage. If you would like to learn more day trading strategies head on over to Warrior Trading .They have tons of great strategies and advice for both newbie and advanced day traders. Good luck out there!

Is CFD Trading the Right Style of Trading For You?

Whats Does CFD Trading Involve?

CFD, or Cost for Differance, is a type of trading that involves predicting the behaviour of a base asset over a specific time frame. It’s a derivative trading that enables the trader to gain potential profit through speculation, allowing you to open a contract for difference in price of an asset based on the falling or rising prices of global financial products or markets such as currencies, indices, shares, commodities, and treasuries. What makes CFD trading popular is that it allows the trader to profit regardless of the direction of prices in the financial markets.

A CFD contract is normally between a trader and broker and derives its value from the difference between the value of the underlying asset when it was purchased (or sold) and when it is sold (or bought). A trader can either go long (buy) or go short (sell). If a trader decides to go short on a CFD for 50 shares to the value of $500 ($10 per share), they would be selling that pair with a view to buying them back after the CFD has ended in their favour. So, the trader has predicted that the price will drop by the end of the CFD contract period. If they’re correct and they drop to $8, the trader will be ‘in the money’ by $2 x 50 = $100. This is because they will virtually buy back the shares for the lower price which is when they realise the profit value. In short, with CFDs the profit is in the difference, as demonstrated in the above example. Whichever way the trader predicts, the profit or losses are proportional to the difference.

Leverage and Margin

A CFD is what is known as a derivative financial product because its value is tied to, or derived from, the value of a base asset but not in the actual ownership of that asset. It’s also a leveraged product meaning that only a small margin or deposit (often 5%) is required to place a trade for a much larger amount. Now, in the above example the trader did not have to actually pay the full value of the trade because it is a leveraged product. At 5% the trader would only have had to pay $25 to be exposed to a $500 trade. So they would have profited by $100 plus their original deposit of $25 which equates to $125 for a small £25 outlay. That is the beauty of leverage. But it’s important to take note that there is a potential downside to leverage, which we’ll look at below.

The Dangers of Margin Closeout

The same mechanism that can amplify the financial returns of a small investment can also amplify the losses. What this means is that if the above example went against the trader and the shares increased from $10 to $12, the trader would be at a loss of $2 x 50 = $100 + $25= $125. This example may not seem such an extreme loss until you increase the margin and trade value so that the 5% margin is actually $500. The trade would have been worth $10,000 and the loss $2500! If a trader’s account drops below a predetermined threshold they could face what’s called a ‘Margin Closeout’, where all of the open positions belonging to that account are arbitrarily closed at the current value, regardless of whether that puts them at a profit or a loss. This is done to safeguard the broker and the trader, since losses can be incurred rapidly particularly when there are multiple leveraged products being traded at the same time.

Can I Make Substantial Profits Trading CFDs?

It’s possible to make a decent and even substantial amount of money trading CFDs, but that doesn’t mean it’s for everyone, or that it will yield instant gratification. It’s important to fully understand how CFD trading works before attempting to start live trading to minimise your chances of a loss. Although you only need to invest a deposit, typically 5%, due to it being a leveraged product, as well as potential to make good profit, you can just as easily stand to lose more than your deposit if the trade moves against you. This is something that needs to be taken into careful consideration if thinking about whether CFD trading is right for you. Ask yourself if you have the patience and self control to be able to trade responsibly, and whether you can afford financially to withstand making a loss.

How Do I Know if CFD Trading Is Right For Me?

If you’ve come this far without being put of by the risks then CFD trading could well be right for you. As you’re only required to put forward a small deposit (as we’ve already discussed), this may appeal to those who don’t have don’t have a huge amount to start with. However, due to the high risk factor, I actually wouldn’t recommend CFD trading to someone in this position. CFD trading is best suited to a seasoned trader, who is confident in their abilities to make rational and well placed bets, with the foresight not to bet too high when there is an increased risk of loss. It is not for the flighty or impulsive trader. It would be sensible to use an existing source of savings or income to place bets, increasing the ‘pot’ as you profit, so that you’re never putting your stable income or assets in danger should you make a loss. CFD trading can certainly be a lucrative and rewarding, but it’s important to decipher whether or not you posses the traits to make it successful.

How to Start Trading CFDs Safely

The best way to approach CFD trading is rationally, and with a good understanding of both the positives and the pitfalls. Ensure that you understand the risks involved, and consider whether it’s worth seeking advice prior to starting from an independant financial advisor. Start by betting small, and never invest more than you can afford to lose. As well as this, finding the right online broker is very important when considering a career in CFD trading. Never be swayed by claims of virtually risk-free profit but look closer for a reputable and well established online broker with existing presence in the market place.

Creating a Diversified Portfolio

I see advertisements and news articles galore on robo-advisors popping up everywhere I look. Don’t get me wrong, I find these services to be much more cost efficient than the traditional financial advisors. Companies like Edward Jones still charge excessive investment and administrative fees so that they can cover their expensive overhead. Brick and mortar investment advisories have rent, utilities, and employees that they need to pay, and after all of that they still want to turn a decent profit. You, as the investor, are paying for that overhead. We as a society need to understand that creating a diversified portfolio with a risk tolerance comparable to your years until retirement, and that nothing more, or less, is needed.

First and foremost, a general rule of thumb is to limit your bond investing to your age less 10 points. So if you are 30 years of age, you should be 20% invested in bonds. The remainder of your portfolio should fall into equities! Now I am not saying you need to invest 80% into Apple stock, rather, you should diversify amongst a basket of equities.

Low cost mutual and index funds are usually the way to invest. Notice I said “low cost”. Index funds cover a wide variety of industries and stocks, some domestic, some international, and hopefully some that pay a healthy dividend as well. You want a high performing fund that takes as little off the top as possible. I generally try and stay within 0.5% for fund fees. Remember, those advisors charge you a fee on top of fees these individual funds charged, so chances are these are fees that you are already incurring that you may not even be aware of.

If you are looking for other investment options to further diversify your portfolio there are many. Binary options investing can a reliable fixed return investment to add to your burgeoning portfolio. Companies like Banc De Binary have a plethora of online resources for you to review and read up on. Consider that commodities are making a hot comeback as well. I know these types of investments are typically deemed to be stodgy and stale, but gold and silver are limited in quantity, and the limitation of a resource almost always makes it more valuable. We are even seeing silver rising in value at a faster rate than gold for the first time in a long awhile.

Whether you’re a bullish investor or a bearish investor, stock buybacks are something that you’ve probably been talking about over the last couple of years.

The fact is, buybacks have long been touted by bullish investors as having many excellent benefits, including the fact that shareholders get return capital without being taxed twice, which causes the per share earnings increase and, technically, increases demand for the company’s shares as well.

If you talk to a bearish investor however, they will tell you that buybacks are the reason that earnings have risen during the last few years, and will likely insist that buybacks are just “financial engineering”. Even worse, many bears will tell you that buybacks demonstrate a company’s a lack of strength in their fundamentals.

The truth is that both of these arguments have merit, depending on the specific situation in which they are used.

Take a company that’s in a highly cyclical industry, or one that doesn’t have any barriers to competition, and you’ll find a company that shouldn’t be buying back stocks. The same can be said with a company that has structural issues, or no confidence in being able to sustain a specific level of earnings.

A perfect example would be Weight Watchers International.  The company repurchased 18.3 million shares back in 2012 at $82 dollars per share, totaling $1.5 billion. Recently their stock closed at $8.19 however, and their entire market Is now under $500 million.

On the other side of the coin you have consumer staple companies, utilities and telecom companies, which have proven the stability of their business through several different market environments and built excellent barriers to competition. In this case, any extra cash they have could certainly be returned to shareholders in the form of buybacks.

This of course assumes that they aren’t over-leveraged or don’t have the option of investing that cash in an area with higher returns.

The simple fact is that the more stable an industry is, the more debt they can take on due to their ability to pay interest and principal at maturity, and also because of the confidence that the market has in them.

In short, all buybacks are definitely not alike. Before taking a side whether they are “good” or “bad”, it pays to dig deeper into the specific company and stock that you have in mind.

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