If you’ve been following these lessons through so far, you might by now be wondering if this trading thing is really worth it. What with all the planning, testing, and continued effort, it perhaps seems much more complicated than you first thought.

Mistake Number Six – Overcomplicating It

It’s easy to get caught up in the details, but if we take a step back for a moment, trading really need not be complicated at all. Finding a strategy to work with can take as long or short a time as you like – there are plenty available off the shelf (including within my own course, naturally!) Formalising that strategy into a written personal trading plan is something that requires only a couple of hours of time up front – after that it can be refined and added to as you go along.

So already we see that very quickly we can get to the stage where we are ready to begin simulated or “paper” trading. And it’s at this stage where lots of traders really start to overcomplicate matters.

If you remember back a few weeks ago in the first lesson, I talked about strategy jumping. A close relative of that particular problem, is strategy morphing. The cycle is very similar indeed. The trader starts trading their plan with all good intentions. Things may or may not go well straight away, but sooner or later as the markets behaviour ebbs and flows with and against the strategy’s strengths and weaknesses, losing trades will inevitably occur.

At this point, the strategy-morpher gets scared. They don’t like to give money back to the market, so they decide to try and modify the system to filter out trades like that last losing one. They begin to add indicators to charts, coming up with new ever more convoluted combinations, furiously testing to see what cuts out the most bad signals whilst leaving in place the good ones. A few times round this loop and their chart starts to resemble something a siezemologist might be more used to seeing than a price chart!

I’m not saying that modifying and testing of new systems and ideas isn’t valid, but when it’s done at the expense of trading an already profitable system, the trader ends up chasing his own tail, and loses out in the long run.

Remember that every strategy will have losing trades. When those losses are within the normal expectations of the system, there is no need to start fiddling. Stick with it and as long as the system has positive expectancy, the law of averages will see you through those drawdown periods and you will make money. Paper trading the system thoroughly beforehand will give you the faith in the setups to be able to do this.

Markets are complicated, but trading them need not be. Simple really is the best policy. A simple system makes for easier to spot entries and exits, a less stressful trading day, and consequently a less stressed and more profitable trader. Almost all of the successful traders I know have found this out the hard way, by trying the complicated route first.

Action: To avoid mistake number six, you actually need to do *less* work. Put in a little effort up front in the planning stages, and then relax and just follow your plan to the letter. Thinking too much can damage your trading, not to mention your stress levels!

About The Author
Harvey Walsh is both a trader and trading coach. He can be contacted via his website, where you can also read more about his day trading book – http://www.day-trading-freedom.com
day-trading-freedom.com

The trend downward is being led by mining again. This is a slower decline than the last dip and could indicate a consistent trend. A consistent trend down is not good [unless there are spikes].

But once we get to the lows of last time there’ll be a push to take a risk on a rally. Which I guess is likely. People need to make money, right?

Not a good day to buy, but as we’re near the low of last time, a good time to set up a Limit Order.

Lots of consolidation going on. Which is always a good opportunity to make money if you can guess who the next target will be.

Lots of mixed signals: oil bouncing around the $70 mark; the Japanese recovery etc. Mixed signals are good, because some people will bet down and some will bet up and if you’re on the winning side you’ll make money. This game is all about Knowledge and Translation and gaining from the differentiation.

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Have you ever wondered what it would be like to be a day trader? Oh come on, you’ve had to have pondered this career at some point. I think it’s reasonable to say that most of us harbor a certain curiosity regarding the stock market. Not to mention being able to work from your laptop or notebook computer.

The concept alone seduces us a little further toward telling our bosses to go jump in a lake. Okay, so maybe not all of us, but you get the point. In this day and age the stock exchange plays a massive role in all aspects of business. I don’t care what company you work for, they probably have some link to the stock market. However, for many of us, stock trading systems are a new and unfamiliar game.

We just haven’t taken the proper time to delve in yet. Are you ready to get your feet wet? The water is looking mighty green if you catch my drift.

Are you currently involved with any stock trading systems? Where did you begin your knowledge of the trading game? Let me guess; a friend introduced you to some decent stock trading systems online. This is rather common it seems. I for one knew nothing about stocks, buying or selling them.

How do you know when is the right time to cash in on your investment? Well, the first thing you need to worry about is acquiring crucial knowledge. You can easily do this from your living room sofa. Simply hop on your personal computer and do a search for stock trading systems and beginner tips and pointers. This will provide you with all sorts of feedback and suggestions concerning the stock market.

What you don’t want to do is immediately hop online and start buying stock like a mad person. This could end very badly. The key to any prudent investments is knowing your limitations. What can you afford to invest with? In other words, what can you afford to lose? It’s not certain that you will lose, but it’s always a gamble. Just like with any other investing in life, it pays to know and understand the game before taking that leap.

If you are anxious to find some stock trading systems that have been proven beneficial over and over, hop on Google for a closer look. Getting started with stock trading systems can be a rewarding path if pursued in the right way. It’s all about knowing the game.

If you’re looking for a way to generate a passive income stream from online enterprises and if you can bear the ups and downs of risky deals, then you should consider investing in a high-yield investment program, or HYIP for short.  HYIPs are among the hottest online programs around, and are generating a great deal of interest and excitement among wealth-seekers all over the world. 

There are hundreds of existing HYIP opportunities for you to check out, and new ones spring up by the dozens every day.So dive right in and se what the HYIP (excuse the pun) is all about. 

A typical HYIP is run by an individual or a small group of investors.  Unfortunately, you often won’t be able to dig up very much background information about these people.  In fact, you probably won’t even get the full names of the people operating a particular HYIP, so you can’t be sure if they are experienced investors or not.  At any rate, they pool members’ money together and then invest in different markets or commodities, such as forex, stocks, futures, precious metals, real estate, and oil. 

The investments are very risky, which means you’ll either get outstanding returns on your money or lose everything.  Some verified HYIPs yield as much as 12% per day, so you can certainly make a small fortune by investing in the right program.But equally with highs come lows so this is definately a game of two halves.  

And that is of course the tricky part.  Determining which HYIP offers are legitimate and which ones are outright scams can be quite difficult for beginners.  The first thing you should do when you find a HYIP that sounds like a good bet is to run a Google search on the program name.  In addition to the program homepage, the search results should point you to review websites where former or current members can post messages about their personal experiences. 

These messages generally contain information about whether or not the program pays out on time and lives up to all the claims made by the operators.  If a particular program generates a lot of negative responses, you’ll know that you should stay as far away as possible. 

Conversely, if it receives numerous glowing reviews, including proof of payment received by members, then you should feel more confident about giving it a shot.A little time spent on research can give you a massive return on investment both in saved time and money.

As with any other type of investment, do not put up more money than you can afford to lose.  There is great risk involved in every HYIP out there, even the ones that appear stable for the time being.  It’s not uncommon for a program to pay out on time for the first few weeks or months of its existence, and then suddenly collapse without any warning. 

So just because you receive a couple of nice payments at the beginning, that doesn’t mean you should mortgage your house or dump your life savings into the program.  The key is to proceed with caution, make a bit of a profit, and then get out before things go south.

Remember the old saying ( with a little twist) It is better to fight (and win) and run away and live to invest another day.

Investing in a solid HYIP can provide you with a great second income and can even lead to financial independence.  However, you should always exercise due diligence and thoroughly check out every program before you hand over your money. 

If there is one thing I know nothing about it’s the stock market. I understand the basics of how it works, but I don’t really know much beyond that. I do understand that people can buy shares of a company and if that company makes money then so do they. I also understand that the economy greatly affects the market, and when the economy is bad, people can lose a lot of money.

The stock market is often a feature on the news each night because so many people have an interest. Even if you don’t own stock, your company probably has publicly traded shares. The people who buy these shares have a stake in whether your company succeeds and makes money. Oh, the pressure, right?

I also know that entire towns can depend on a company’s performance on the market. There have been towns that have died when stocks have plummeted, leaving workers without jobs. 

Though I don’t personally have any stock in the market, the company that handles our retirement fund does. This is has caused me to keep a closer eye on news about the stock market, but I have no idea what I even want to hear.

I guess if the stock market is doing good then I have nothing to worry about. I do know that we are involved in low risk investments, and that is the best choice for us right now. In the future, we may change that. The more money you have to play around with the better. That way perhaps you could invest some in low risk ventures, and put a little in the high risk category to see if you can make a quick profit.

If you want to get in on the stock market, you simple have to have some money to buy stock. This can be easy or it can be extremely complicated. If your knowledge of the stock market is as limited as mine is, you should probably find someone to help you with your investments.

Though this is risky, you can find someone who knows when to buy and when to sell, and you can leave that up to them. If you know more about it, and you have the time, you can manage your own stocks, but I would strongly suggest you know what you are doing before you attempt that. I have heard too many bad stories about people losing a lot of money just because they didn’t entirely understand the game.

A stock option is defined as a right to buy or sell a stock at a stated price within a specified time. Buyers of stock options are called holders and those who sell options are writers. “Call” suggests an option contract giving the owner the right but not the obligation to buy a specified amount of an underlying security at a specified price within a specified time. “Put” refers to an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.

A stock option contract’s value or premium is decided by five factors: the price of the stock, the strike price, the expiration date, the cumulative cost required to hold a position in the stock (including interest plus dividends), and the estimate of the future volatility of the stock price. The price at which an underlying stock can be purchased or sold is called the strike price. A stock price must go above (for calls) or go below (for puts) the strike price, before a position can be exercised for a profit.

Stock options are a flexible way for companies to share ownership with employees, to reward employees, and attract and retain a motivated staff. Stock option plans, often referred to as Employee Stock Options (ESOs), are used both in privately and publicly held companies. ESOs may be Incentive Stock Options (ISOs) that are qualified options or statutory options, and Nonqualified Stock Options (NSOs).

To trade a stock option, the most common way used is trading standardized options contracts listed by various futures and options exchanges. The major stock exchanges in the United States include Philadelphia Stock Exchange (PHLX), American Stock Exchange (AMEX) in New York City, and Pacific Exchange (PCX) in San Francisco.

Stock Options provides detailed information on Stock Options, Stock Option Trading, Employee Stock Options, Stock Option Software and more. Stock Options is affiliated with Stock Broker Career.

So far we’ve looked at how not sticking to a strategy, and not planning our trading will inevitably lead us to loss. Now I want to talk about one aspect of planning in more detail – money management.

You’re probably thinking that’s a really really boring subject, but before you decide to skip this article, let me say that money management isn’t just about making sure you survive long enough to turn a profit, it can also open up whole new trading opportunities to you.

Mistake Number Three – Not Understanding Money Management

There are two distinct sides to this subject, and for some unknown reason, most people only ever talk about one of those – survival – or what I call classic money management. It is hugely important though, so let’s cover that right now.

The idea is simple; firstly, we have a pot of money to trade with. Secondly, as we have established, losses are a part of trading and so there will be times when the cash in that pot decreases instead of increasing. Therefore, it stands to reason that if we don’t manage that cash correctly, it is entirely possible that we lose it all and can no longer trade.

So the concept of classic money management is to trade in such a way that our losses do not disproportionally affect our ability to trade. An example will make this clearer:

Assume we have a starting balance of $5000. We want to ensure that we can survive in this trading game for at least six months – long enough to prove our strategy and ability, and to turn a profit. At its simplest, we could say therefore that the maximum we would allow ourselves to lose each day is $40. If we hit that limit, we would stop trading for the day. This would keep us “in the game” for our six months assuming the worst case scenario of losing every day.

We could expand this money management strategy to say that if we lost our maximum limit of $40 a day four days in a row, we wouldn’t trade on the fifth day of the week, and if we lost 3 weeks in a row, we wouldn’t trade the last week of the month, and so forth. If we were losing as badly as that, clearly something would be wrong either with the strategy or our ability to execute it and so these enforced breaks would offer a chance to step back and analyse where we were going wrong.

Assuming a $40 a day maximum loss, it stands to reason that we could not enter any trade where the possibility for loss was greater than $40 – to do so would be to expose our account to a greater loss than is permissible. So our daily limit gives us a starting point for calculating risk and reward ratios for actual trading setups.

Knowing beforehand the maximum we can lose in any one day or on any one trade gives us a huge psychological advantage in our trading, as well as keeping us in the game for long enough to allow our strategy to turn a profit.

There is as I mentioned, another side to money management – position sizing. Many traders will trade fixed position sizes based on the availability of funds. This is perfectly valid, but it means that when looking at instruments to trade, they are inherently limited in what they can trade. Dynamically adjusting the size of position a trader is willing to take in relation to the cost of the underlying instrument can open up whole new trading possibilities.

For a much more detailed expalanation, I refer you to an article I have previously written on the subject, you can find it here.

Action: In order to give ourselves the best chance of survival in the market, we must define clear money management rules for our trading, based on our available capital. Doing so will give us the added benefits of relieving the psychological pressure involved in taking losses, and opening up new trading possibilites that may previously have been thought too risky.

With our strategy, trading plan, and money management taken care of, we’re ready to trade! In the next article we’ll look at another error that too many traders make in their impatience to earn big profits.

About The Author
Harvey Walsh is both a trader and trading coach. He can be contacted via his website, where you can also read more about his day trading book – http://www.day-trading-freedom.com
day-trading-freedom.com

One of the most fundamental and basic principle of gauging a stock behavior is to study the trendlines of a stock.

If you observe a stock, you will find that the prices move in trends. Quite often, a series of ascending bottoms in a rising market can be joined together by a straight line, just as can the tops of an ascending series of rally peaks. These lines are called “trendlines” and the area between the two trendlines is also known as the trend channel. Channels may trend up, down or sideways.

By drawing lines connecting market highs and market lows, you can often determine a trend channel. A trend reversal is often indicated when a market changes direction and break out of its trend lines.

For example, a trendline joining a series of troughs is eventually penetrated on the downside. Once this downward penetration of the trendline is sighted, you may expect a bearish market to be forthcoming. If the reverse occurs, we can expect a bullish situation.

So far, our assumption is that once there is a move away from an established trendline, or a breakout, a trend reversal is imminent. However, experienced traders would know such simplistic assumptions are in fact dangerous and even cause misleading moves or “whipsaws”.

How shall we avoid this then?

Before we can conclude that an outbreak is valid and decide on future trading signals based on such trendline outbreaks, it is important to test the outbreak.

It would be to your advantage to await a 3 percent penetration of the boundaries in terms of price before finally concluding that a signal is indeed confirmed.

Another method to test the validity of the outbreak is to examine the volume characteristics that accompany the outbreak. There is a common practice by many traders to place total emphasis on price alone and neglect volume. This is indeed a serious flaw in any trading strategy to neglect volume.

The general principle is that volume moves together with the trend. This means that as prices of a stock increase, there should be an accompanying increase in volume. Anything that does not confirm this rule will create a “divergence” and is a warning sign that the prevailing trend is probably in the process of reversing.

This rule will help you avoid being caught by misleading signals. It may be a simple rule, but its application will eventually prove to be one that will bring substantial benefits to filter out weak misleading signals.

By using the principles of trendlines and using the penetration test of 3% or the volume principle, you will be able to identify the trend of any stock and decide whether the impending signal is indeed weak or is a whipsaw.

Peter Lim is a Certified Financial Planner and is the Author of “Swing Trading for Gigantic Profits” http://signaldot.poolofwisdom.com/swingbook.phtml.
For free trading resources, visit his website on Swing Trading at http://www.online-guides.info.

Before entering college, you may find yourself pondering exactly how you will be able to pay for college. Many public colleges and universities cost thousands of dollars, while private colleges and universities can cost $10,000, $20,000, $30,000, or even more just to attend. Before getting too worried about these high prices, it is important to know that help is just a click of the computer mouse away, as the internet can help you to find the financial aid option that is right for you!

FAFSA First

Without knowing any of the options, it is important to first fill out a FAFSA form with your school’s financial aid department. The FAFSA form allows you to tell the federal government all of your financial information. Once they have that in hand, they can determine what your best financial aid options are.

Loan Options

One option often used by students entering college is loans. Loans, like the federal PLUS loan, Perkins loan, Stafford loan, and FFEL loan, can all help you to pay your way through college without putting a dime down to do so. You will, of course, be required to pay back some or all of these loans (depending upon your financial status and the financial status of your parents), but loans can be an effective way of paying your way through college.

Grant Options

Another option is grants, which can be obtained through the government (like the Federal Pell Grant, for example) or through your particular school. Grants pay your way through college and do not need to be repaid once you graduate. These grants are usually only “granted” to those who are in need of financial aid, but be sure to apply for them if you think that you are eligible.

Other Financial Aid Options!

Other less conventional methods of financial aid are also available to college students. Federal work study allows students to work at colleges and universities while they are enrolled there for several hours per week. Money earned can then be used as a means of financial aid. Check with your specific college or university for other financial aid options that may exist and be at your disposal.

This article is distributed by NextStudent. At NextStudent, we believe that getting an education is the best investment you can make, and we’re dedicated to helping you pursue your education dreams by making college funding as easy as possible. We invite you to learn more about Financial Aid Options at http://www.NextStudent.com.

My goal is to help every student succeed – education is one of the most important things a person can have, so I have made it my personal mission to help every student pay for their education. Aside from that, I am just a pretty average girl from SD.

The market is down but, oddly, some mining shares are up. As miners lead the way up and down, what does this mean? Ah…just seen it. Miners have indicated a share buy back and dividend increase et al. That’s why it’s bucking the trend slightly. But for how long? Just goes to show the value of information, how much of it there is and is it really possible to disseminate it all?

Right now we have oil jitters [iran], interest rate jitters [Fed], a feeling that everything is already overpriced [the bull of the past three years] and the worries over the falls over the last few weeks. More pointing to a downward push than a rally.

I have this feeling that somewhere around the corner there will be another huge sell off. It seems more logical to wait for that than to risk a rally. I feel like i’m watching a bomb but not knowing whether the fuse is lit.

But obviously the analysts have to keep confidence high and so are arguing the reverse. BUT THEY’RE NOT RISKING THEY’RE OWN MONEY.

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You just finished high school and realize you have two months to work and save up for your very expensive post secondary education. Your parents are willing to help you out a bit, you have a very impressive $4.32 stashed in your savings account, and you have a rewarding job at Wal-Mart 3 days a week. You should be set right? Wrong. College and university is one of the biggest financial commitments you will make during your life. . Most students get a loan of some sort and almost all have credit cards. That’s why it’s important to know you have options

Government Student Loans

Here in Canada and in many parts of the world there are government student loan programs which almost anyone is eligible for. The loan amount is usually based on a number different factors including, how much financial support you are receiving from parents, and the total cost of tuition and other fees. The major benefit to a government issued student loan is that most require repayment only after you have completed your studies. However, like any loan, a heavy interest rate is the downside.

Student loan through a bank

Most major financial institutions offer student loans or student line of credit. There are several benefits to this form of loan. Most often the interest rates are reasonable, and minimal payment is usually expected. Most banks even further the convenience by attaching the loan to an existing account, or by giving you a credit card. Remember, banks “bank” on the fact that you will spend that money.

Credit cards

Many students rely on their credit card(s) to get them through school. On a short term basis, credit cards are a great source of cash which is easily accessible However unlike a loan, you have to start paying back immediately (monthly), often with outrageous interest rates. Most times, students rely too much on credit cards and find themselves having money trouble before the school year is even finished. And once a credit card is “maxed” and you are unable to pay the minimal payment, additional interest rates and “service” fees are attached.

College educations are not cheap. In fact, tuition fees go up by staggering numbers every year. The truth of the matter is, unless you have parents who are willing to flip the bill or some other support, you are likely going to need a loan or some sort of financial assistance. The best advice is to educate yourself. Know what is involved in a loan, know the interest rates, and know your responsibility of payment. A four year education is an awesome financial burden, so it’s important to know your options.

Ron is the CTO for Dice Ventures Inc an internet holdings and development company.
For more student information check out this Student loan site or our Canadian MBA resources.

By now you might be thinking that this trading business requires somewhat more effort than you first thought. And you would be right! In fact, that’s the subject of todays lesson.

Mistake Number Five – Not Putting In The Required Effort

It’s a strange phenomenon that seems almost unique to the field of internet trading; people believe that they can read a book, open an brokerage account, and start making huge amounts of cash just like that.

I used the analogy of an airline pilot in the last article, so lets continue with that theme here. Not many people would expect to decide on Monday that they wanted to fly long-haul airliners, buy and read a book on the principals of flight on Tuesday, and start work as a Captain on Wednesday. But with trading, such a short learning curve appears to many to be perfectly expected.

Whilst I certainly agree that, proportionally in relation to other activites day trading can provide much greater returns for much less effort, it nonetheless does require some effort to get going.

Trading, like any other skill, takes time and commitment to learn and become proficient. However, unlike many other skills, that time to become sufficiently adept need not be costly, or at the expense of existing obligations. In other words, a novice trader can learn the markets and practise their trading whilst continuing in their day-job, and without significant outlay.

Indeed I would advise any would-be trader to have a steady source of income when they start out. The absolute need to generate a profit can have a hugely detrimental effect on trading decisions.

A problem a lot of student traders I work with have is that they start out with a healthy dose of motivation, but when the going gets tough they start to lose interest. Suddenly it becomes too much like hard work. The first losing trades make for a powerful reality check. Motivation goes out the window, and plans to quit the day job are quietly forgotton about. Part of this problem is down to unrealistic expectations at the outset, and part is due to a lack of accountability. In a regular job, we’re normally answerable to someone. If something doesn’t get done, there’s usually someone higher up the food chain ready to kick our butts.

When we’re trading our own account, that concept no longer exists. We’re only accoubtable to ourselves. For many people that’s a first. The solution is to get back to that written trading plan. If the plan has been well thought out, it will include the all important mission statement, and perhaps a set of attainable goals. Re-reading these every day will help reinforce self-accountabilty and motivation.

Trading isn’t difficult (something I’ll talk more about in the next article), but neither is it an instant source of riches there for the taking. Like anything worthwhile, you get back what you put in. The difference between trading and other activities is that once you have mastered the skill, relative to the amount of time you spend “working” you will get back much more more than you ever put in!

About The Author
Harvey Walsh is both a trader and trading coach. He can be contacted via his website, where you can also read more about his day trading book – http://www.day-trading-freedom.com
day-trading-freedom.com

Trading in London hasn’t even started but I’m expecting a big fall. The Dow closed down 200 points and the Fed made some interesting comments: http://biz.yahoo.com/ap/060605/wall_street_close.html?.v=5

This is exciting – a chance to make some money – i’m expecting a mini-crash and then a rally in the next few days. But don’t take my word for it: nobody knows anything.

A day for waiting – definitely not buying. Watch your portfolio plummet today.

What did you expect on 6-6-06?

All this just demonstrates the importance and effect of the macro environment. Price may vary up and down, sometimes quite significantly, yet this is nothing to do with the underlying fundamentals of the company; good and bad firms move with the tide.

Take Yahoo during the tech boom: it would double every few months; was that the company performing twice as well in that short space, no, it was just confidence in the market that pushed it to the stratosphere.

What’s going to happen to Microsoft? Google brings out a version Excel Spreadsheets..that’s a definite move to an online and easily accessible alternative version of MS Office. They haven’t been innovating: they need to speak to this guy: creativity-management.com/

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Before every protective put trade it is possible to calculate
your anticipated maximum loss. Use the formula: (stock price
minus strike price) plus option price. For example, suppose you
will pay $30.00 for your stock, and you want no more than a $3.50
loss on the position. Then you would choose the $27.50 strike
put which costs $1.00. Following the formula, you take your
stock price ($30.00) and subtract the put’s strike price (27.50)
which leaves you $2.50. To this $2.50 loss, you then add the
amount you spent on the option ($1.00), which gives you a
combined, maximum loss of $3.50 for this position. You can set
your loss limit by the strike price of the put you buy and the
cost of the put. This formula will work every time. Remember,
stock loss, (stock price paid – strike price), plus option cost
(option price) equals maximum potential position loss.

The protective put strategy, when used correctly, will allow
investors to take advantage of the same opportunities that could
provide large potential gains, but without being exposed to the
extreme risks the position could potentially present. In these
scenarios, the protective put strategy deserves consideration.

For example, a stock in the process of a steep decline would be a
good opportunity to implement a protective put, when trying to
pick a bottom. Quite often, stocks experience bad news or break
down through a technical support level and trade down to seek a
new, lower trading range.

Everyone wants to find the bottom to buy and go long, catching
the technical rebound, or to start accumulating the stock at
lower levels for the longer term.

There is a potential for a very big reward if you pick the
“right” bottom. However, with the big potential gain comes the
big potential loss that is common in these types of risk/reward
scenarios. Here is a perfect opportunity to employ the protective
put strategy! It will provide protection against substantial
loss, while allowing room for potential gains if the stock should
bounce.

Remember, the protective put allows for a large potential upside
with a limited, fixed downside risk. If you feel that the stock
has bottomed out and is starting to consolidate, you purchase the
stock and then purchase the put at the same time as insurance
against further decline in the stock.

If you are right, and the stock runs back up, the stock profit
will well exceed the price paid for the put. Once the stock
trades back up, consolidates, and develops its new trading range,
the need for the protective put is over. At this time, if you
still like the stock and want to hold on to the long position,
you could always start selling calls against it.

Use the formula for maximum loss discussed earlier. Calculate the
loss in the stock and the amount you paid for the put and add
them together for your maximum loss in this position. The
protective put has limited your loss.

Maximum Loss = (Stock Price – Strike Price) + Option Price

This protection will save you enough money when you pick a false
(wrong) bottom that you may, if you like, try to pick the bottom
again at a lower point. The exhaustion scenario, as described
here, is a perfect opportunity to apply the protective put
strategy.

As seen with the exhaustion example, the protective put strategy
is best used in situations where the stock has a potential for an
aggressive upside move and the chance of a big downside move.

Another potential opportunity for using the protective put is in
combination with Technical Analysis. Technical Analysis is the
study of charts, indicators oscillators, etc. Charting has
proven to be reasonably accurate in forecasting future stock
movements.

Stocks travel in cycles that can and do form repetitious
patterns. These patterns are predictable and detectable by the
use of any number of charts, indicators and oscillators.

Although there are many, many forms and styles of technical
analysis, they all have several similarities. The one we want to
focus on is the technical “break-out.” A break-out is described
as a movement of the stock where its price trades quickly through
and beyond an obvious “technical resistance” or resistance point.

For a bullish breakout, this level is at the very top of its
present trading range. Once through that level, the stock is
considered to have “broken out” of its trading range and will now
often trade higher, and establish a new higher trading range.

The “break-out” is normally a rapid, large upward movement that
usually offers an outstanding potential return if identified
properly and acted upon in a timely fashion. However, if the
break-out fails, the stock could trade back down to the bottom of
the previous trading range.

If this were to happen, you would have incurred a large loss
because you would have bought at the upper end of the previous
trading range. As you can see the “break-out” scenario is an
opportunity that has large potential rewards but can on occasion,
have a large downside risk.

However, if you were to apply a protective put strategy with the
stock purchase, you can drastically limit your downside exposure.
For instance, say you were to buy the 65 strike put for $2.00.
If the stock trades up to $75.00, you would make $9.00 if done
naked but only make $7.00 if done with the protective put.

This difference is the cost of the put. This $2.00 investment is
more than worth it should the stock go down. If the break-out
turns out to be a “false” break-out and the stock reverses and
trades down, your 65 put will allow you to sell your stock out at
$65.00 minus the $2.00 you paid for the put. This limits your
loss to $3.00 instead of a potential $8.00 loss. This is a much
better risk/reward scenario.

Most professional traders, including day traders and swing
traders can reap huge rewards for the protective put strategy.
The reason is in how most traders attain profits and losses.
Normally, successful traders make a little money on a consistent
basis. They make a little bit day in and day out. But when it
comes to losses, they lose in large chunks. They spend a month
building up profits only to lose that money in one day usually in
one stock. If a trader could figure out how to avoid even a
handful of these large losses, his or her profitability would
soar. My answer is to start using the protective put when buying
on breakouts and when bottom fishing.

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