In this last article of the series, I’m going to look at what is perhaps the biggest mistake of all, and yet should be the easiest to overcome.

Mistake Number Seven – Not Taking Action

For every trader who opens a brokerage account and starts placing trades, there must be a hundred more who had every intention of doing so, but for one reason or another, never actually took that step.

It’s a blindingly obvious statement to make I know, but you cannot make a profit from the markets if you don’t actually start trading them! Why do so many potential traders buy the books, ready the forums, and study the charts, but never actually place a trade? The most common reasons I hear are these:

Fear “I’m worried I’m going to lose to much money”.

If you trade on a simulator, you can’t lose a penny. Today’s technology makes simulated trading more accessible and more realistic than ever. Having a go risk-free will either give you the confidence to take the next step, or will prove to you that trading really isn’t your thing. Either way, you’ve got nothing to lose by trying.

Time “I don’t have time to sit in front of a computer all day learning this stuff”. There are stocks and futures markets in every developed country in the world. With the wonder of the internet, we can trade them all. That means that when you have some spare time, there is a market open somewhere. There’s no need to give up the day job to try out trading.

Money “I don’t have enough cash to trade with”. As trading becomes ever more popular, and brokers try and reach out to bigger audiences, minimum account levels are falling. If you have a few hundred spare dollars (US), you can start trading. Having said that, never trade with money you cannot afford to lose. If losing your starting capital is going to put you on the streets, you really shouldn’t be trading with cash. However, there’s no reason you can’t paper trade while you save up that pot.

No Confidence “I don’t think I can do this, it’s not for me”. If you really think trading is not your thing, of course there is no point in pursuing it. If however you simply fear that you won’t succeed for whatever reason, then you could be missing out on a great opportunity for nothing. Get yourself some free charts and a free simulator, or even a pen and paper, and have a go. If you don’t try, you’ll never know!

Action: Ultimately, only you can take the next step to becoming a profitable trader. It’s a sad fact that many who read this will never take their trading dream further. But those few that do, will be well on their way to success, profit, and trading freedom.

That’s the end of this seven part Seven Deadly Mistakes series. I hope you’ve enjoyed reading it as much as I’ve enjoyed putting it together.

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

By studying at the most frequent reasons for failure, we can avoid making the same mistakes as the crowd, and thus turn these negative points into positives. In this series of articles, I will be looking at the seven most common mistakes I see made by traders.

Mistake Number One – Switching Strategies

or “The Hunt For The Holy Grail”

The holy grail of trading – we’ve all looked for it – the super system that never loses. We’ve searched forums, read books, been to seminars, discussed in chatrooms, but the secret system that wins every time continues to elude us.

Why do we waste so much time and effort searching for something that doesn’t – cannot even – exist? Because it’s far easier than facing up to the reality that trading isn’t quite as simple as buying when a magic indicator says “buy” and selling when it says “sell”, and watching the endless profits roll in.

Actually, it is almost a simple as that, but we’ll come to that later in this series. For the moment, the important thing is, that there is no holy grail-always-wins trading system.

The grail hunt is a highly destructive behavioral pattern that affects almost every trader at some point in their career. Typically, the trader starts by learning a system or strategy, and trading it for a short period of time. The strategy may prove profitable almost immediately, or may incur an early loss. Either way, sooner or later a loss will happen, and equally inevitably, a run of losses will occur together. At this point, the trader decides that this is not the system for them, and heads off in search of a new method.

In jumping from system to system in this manner, the trader never gives a strategy time enough to prove itself over the long term. All systems involve some losing trades, that’s the nature of the markets, but as long as a strategy has positive expectancy overall (that is to say, it will on average win more than it loses), those losses are of no importance.

Action: As traders, we must accept that fact that losses are to be expected, and stick to our chosen system for long enough to prove or disprove its expected long-term outcome. In doing so, we break the grail hunt cycle and overcome one of the biggest obstacles to our success.

As a final note on this subject, I want to add a word about forums and chatrooms. Whilst these are undoubedtly excellent sources of information and ideas, they can be very dangerous in fueling the cycle of strategy jumping. The nature of these resources means that they continually offer new ideas, and to the trader that means new temptations. By all means test out or paper trade new ideas alongside a live strategy, but beware of becoming a forum-follower and re-entering that pattern of always jumping aboard the ‘next big thing’.

In the next article, I’m going to look at trading plans, and why failing to plan means planning to fail.

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.
day-trading-freedom.com

As I predicted, a rally. They’re climbing a little today. But I was wrong about the depth. I thought they’d decrease a couple of clicks more before recouping losses. So, they didn’t hit the depths of a few weeks ago.

I did think about buying yeterday but I waited. That’s the way it is. It could have gone either way today.

But no problem. This is a volatile period. And we’ll be back here again.

As usual, mining is leading the way. Which means there is more money to be made and more money to be lost trading them. The risk premium.

The ECB rate rise didn’t seem to have an effect. But it means there are worries about inflation / overheating etc.

Now also….look what’s happening in Tokyo…an early rally and then a drop…so I wouldn’t be surprised if that is mirrored here today.

Today I’m looking at luxury goods and services…something that tends to hold during a bear and a bull….investigating a firm that seems to be doing will – share price risen dramatically – but also has plans for expansion in the right places…

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Typical day traders and swing traders look for stocks with quick,
short term movements, and are not in the business of holding
positions overnight let alone a week or two. So the use of
options has not usually been a component of their trading
strategies.

Now however, some new opportunities for profit are available
since many day trading firms are allowing their traders to trade
options. Unfortunately, many option strategies do not apply to
the quick in and out nature of day trading. Neither day traders
nor swing traders are typically in a single stock long enough for
the strategy of selling options for premium collection to be
viable.

Since these traders often look for break-outs, and sometimes go
bottom fishing to find opportunities for profit, a premium paying
option might work well for them. Why? Because the trader would
be buying protection from catastrophic losses. Bottom fishing
and breakouts are associated with volatility, which means
uncertainty and risk. However, there is a strategy that will
provide the necessary protection for these traders to carry
positions through overnight risk, while remaining fully
protected. This would still allow also them to take advantage of
the large potential upswing that was the original goal of
identifying the bottom and the break-out. This strategy is
called the protective put.

THE PROTECTIVE PUT

The Protective Put Strategy involves the purchase of put options
in combination with the purchase of stock and works well in
situations where a stock is prone to rapid, volatile movements.

A put option gives an owner the right, but not the obligation, to
sell a certain stock, at a certain price, by a specified date.
For this right, the owner pays a premium. The buyer, who
receives the premium, is obligated to take delivery of the stock
should the owner wish to sell at the strike price by the
specified date. A strategically used put option offers
protection against substantial loss.

The protective put strategy is a strategy that is ideal for a
trader who wants full hedging coverage. This strategy is very
effective in stocks that normally trade under high volatility, or
in stocks that normally do not trade under such high volatility
but may be involved in an event driven, highly volatile
situation.

When an investor purchases a stock, they can buy the put
(protective put) to provide a proper hedge. The construction of
this position is actually quite simple. You buy the stock and
you buy the put in a one to one ratio meaning one put for every
one hundred shares. Remember, one option contract is worth 100
shares. So, if you buy 400 shares of IBM then you need to
purchase exactly four puts.

From a premium standpoint, you must keep in mind that by
purchasing an option, you are paying out money as opposed to
collecting money. This means that your position must
“outperform” the amount of money that you paid for the put. If
you were to pay $1.00 for a put and you owned stock against it,
the stock would have to increase in price $1.00 just to break
even. The protective put strategy has time premium working
against it, thus the stock needs to move to a greater degree, and
more quickly, to offset the cost of the put.

When we buy a stock, three potential outcomes exist. The stock
can go up, go down or it can remain stagnant. If we were to
analyze the three scenarios, we would find that only one
scenario, the up scenario, can produce a positive return and
that’s only when the stock increases more than the amount you
paid for the puts. The other scenarios produce losses. If the
stock is stagnant, you lose the amount you paid for the put. If
the stock goes down, you lose again- but the loss is limited. It
is the limiting of loss in highly volatile situations that makes
the protective put an attractive and useful strategy.

This is how it works! Imagine you buy stock for $31.00 and buy
the 30 strike put for $1.00. If the stock goes down, the
position will produce a loss. For example, if the stock is down
to $30.00 (down $1.00) at expiration of the option, you have a
$1.00 capital loss. With the stock at $30.00, the 30 strike puts
will be worthless, thus you incur a $1.00 loss because that is
what you paid for the put. Your total loss will be $2.00. Using
the protective put strategy set a cap on your losses. The put
strategy’s attractiveness is that it will allow you to set loss
limits!

Let’s see how that works. We’ll set the stock price down to
$28.00. Since you purchased the stock at $31.00, there will be a
capital loss of $3.00. The puts, however, are now in the money
with the stock below $30.00. With the stock at $28.00, the 30
strike puts are worth $2.00. You paid $1.00 for them so you have
a $1.00 profit in the puts. Combine the put profit ($1.00) with
the capital loss ($3.00) and you have an overall loss of $2.00.
The $2.00 loss is the maximum you can lose no matter how low the
stock goes because the buyer of your put must take the stock at
the strike price. This is the protection the put provides.

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Right – we’ve looked at strategies and planning, so now we’re ready to trade right? Wrong! At least, we’re not ready to trade live.

Mistake Number Four – Not Testing

Trading is a great business, it offers potential levels of income and freedom that most people can only dream of. So it’s quite natural that having got the groundwork out of the way, the novice trader is eager to get clicking those buy and sell buttons and see the profits roll in. But hang on – the preparation isn’t over yet!

Imagine for a moment that you decided you wanted to become an airliner pilot. You spent time and effort researching the type of aircraft you were going to pilot, you read some books on how to fly, and one day you found yourself in the cockpit at the end of the runway. Clearly, without having actually taken some time to learn how to fly this machine full of passengers, trying to take off would be a disaster! So why is it so many traders believe they can read a book about trading and then leap into the market without first getting some experience?

If you were going for the pilots job, you’d take a training programme which would undoubtedly see you getting some no-risk experience in a flight simulator. This would give you the opportunity to make all of your early mistakes without crashing a few seriously expensive airplanes in the process.

As traders, we are very fortunate in that we, like airline pilots, can practise and hone our skills in a risk-free environment. Indeed we have the added benefit that we can simulate our activity with high degrees of realism at little or no financial cost at all.

I am of course talking about “paper trading”. In the most basic sense of the term, paper trading means that we follow our trading plan exactly as if we were going to put real money into the market, but at the point where we would actually buy or sell, we simply make a note of the current price instead of opening a live trade. We would continue to manage the trade exactly as if we had real money in the market, and would exit accordingly, again writing down the exit price.

Going a step further from pen and paper, today’s internet-generation trader can take advantage of software simulators like TSim+, which imitate a live trading platform. These programs have the advantage of making the paper trading experience much more realistic; they also cannot be cheated in the same way as a note on a piece of paper, that is to say we cannot conveniently decide to erase a trade we later decide was a mistake!

There are some who believe that paper trading is not worthwhile as it can never reproduce the emotional stresses that are involved in live trading. Whilst that is true to a certain extent, I would argue that if you are not sufficiently proficient at executing your trading plan in a simulator, why would you be able to do so with real money?

Paper trading gives us a great opportunity to put into practise what we have learnt, test new strategies, and tune our skills with no risk. Once a trader can consistently show a profit on a simulator, they are ready to take the next step – live trading. Again, this is not something to be rushed, and again, like airline pilots we can work our way up to this.

Just as the pilot is probably not going to make his first flight in a jumbo jet, neither do we as traders need to take a full-size trade when we start for real. If trading equities (shares), we can buy and sell very small amounts at almost negligible cost. If trading futures, we can usually start with “mini” contracts which are valued at a fraction of the price of a full size version. Whilst this limits our profit potential as we take our first steps in the live market, it very importantly also limits our potential losses.

With the huge array of software tools available to us, along with discount brokers offering cheap trading instruments, there is no need for any trader to get seriously burned on their first outing into the market.

Action: We must commit to testing and practising our trading in a risk-free environment before putting our capital into the live market. Only when we can show consistent profit on a simulator should we move on to trading real money, and then only in small doses.

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

Just think of all the people who bought stocks last month and have watched their portfolio shrink. Aren’t you glad you didn’t choose to get into the market back then like they did? You’re very fortunate right now if you’re thinking of entering the stock market in a big way. Stocks are on sale. Just as I always like to wait for a discount or use a coupon when buying clothes or groceries, I also like to wait for a sale in the stock market before buying stocks.

How can you tell that the stock market is bottoming out right now? Well, this is the million dollar question and I’ll admit I never really know for sure, nobody does. But, what I use to make my bold statement that we are at a low comes from the sentiment that I get a feeling for from the stock analysts that I follow. I watch many shows on T.V. like Kudlow and Company and Jim Cramer’s Mad Money. I watch Nightly Business report on a daily basis to keep myself up to date on the psychology that investors possess. This is really the key in my opinion.

You can read up all you want on stats and try to say that interest rates and inflation are going to kill the market. You can say that the fed wants to ruin the economy and cause a major slowdown. But, that’s all really unimportant if investors tune that out and decide they are bullish on stocks despite what they fed wants to try and do to the market. Statistics and economical data only go so far to determine if we have reached a bottom in the market. 90% of what you need to base your decision on is psychology and market sentiment. Watch as many analysts as you can and try to go with the flow. Never trust any one source, but follow as many as you can and you will know which way the market is moving. This way you have the rest of the investors at your back and moving with you when you want to enter the market.

Bob Alvord is a retired teacher who manages his portfolio by himself. His interest in the stock market is more than a hobby, it’s his retirement and he takes pride in the fact that he has done well in the market. Please visit his website at http://stockmarkettips.org to see more of his stock market tips.

To understand stock options, we need to look at Webster’s Dictionary’s definition of the word strategy.

Webster’s Dictionary defines the term strategy as

1. a) the science of planning and directing larger scale military operations, specifically (as distinguished from TACTICS) of maneuvering forces into the most advantageous position prior to actual engagement with the enemy

b) a plan or action based on this.

2. a) skill in managing or planning, especially by using stratagems

b) a stratagem or artful means to some end.

When applying a definition to investing in the market, we want to pay particular attention to the words maneuvering into the most advantageous position prior to actual engagement and the words skill in managing or planning especially by using stratagems.

Picking a stock or group of stocks is only half the battle. Making the most from the chosen investment opportunity is the other half. This is where your strategy comes in.

The wrong strategy even when applied to the right opportunity can produce increased risk, decreased profits and even potential loss. Therefore, understanding and applying the proper strategy is critical.

The actual selection of an investment opportunity from those offered normally depends on the type and style of research the stock options investor favors and deems necessary.

This selection process, or investment selection protocols, is a checklist of different types and pieces of data that are favored by the individual stock options investor. These pieces of data can consist of charts, indicators, oscillators, fundamental analysis, news or even tips.

Each stock options investor has his own investment selection protocol. As a stock options investor, once you complete this process and choose your investment opportunity, your strategy takes over. Inherent in the selection of the stock is expectation.

Every stock options investor has some expectation for any chosen opportunity. Therefore a strategy must be selected which best fits those expectations.

The proper strategy will be the strategy thay allows for the highest possible return with the least amount of risk and the best possible protection that can be afforded.

Obviously, since every opportunity will have a somewhat different expectation along with different variables surrounding it, each opportunity should have a different ideal strategy. By and large, when choosing a stock to invest in, most stock options investors look to purchase a stock they think will go up. The directional play is as good a place as any to start our discussion of option strategies.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
If You Would Like to Learn More About Stock Options
Responsibilities Then Discover How to Protect Your Investments
With the Leveraged Power of options & Learn How to Trade Options
Like the Pros..

Click Here –> http://www.options-university.org
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Forex Trading, meaning Currency Trading, is a world wide, little known market, which will become the most popular source of income for investors in the very near future. It is open for banks, rich investors and small ones alike and, depending on the sum of money they are willing to risk, the earnings demonstrate this is the best way to start getting rich.

Why choose currency trading over stock, real estate or futures trading?

The currency trading advantages are speed, liquidity, commission-free transactions, increased safety, short-term trading and great earnings. Let’s study each of these advantages in other trading systems:

- Speed: Currency trading is instant due to a large amount of transactions while future trading implies a longer time to trade certain commodities, agricultural products, financial instruments and goods (contracts need to be written and signed)

- Stock traders must pay brokers a certain fee for each transaction made. The brokerage fee is available for all futures transactions, but not in the case of currency trading. In currency trading brokers earn money by studying and profiting from the difference of price between sold and bought currencies.

- Liquidity: The currency market is opened non-stop, anywhere in the world giving currency traders the chance to trade whenever they find the opportune moment and prices. This is a characteristic attributed only to currency trading.

- Safety: while other trading systems are based on speculation, on the fluctuation of price, on slippage and market gaps, currency trading is controlled with the help of built in safeguards that limit slip-ups.

- Short term trading, like currency trading, is more efficient for profit making than long term trading. Day trading does not increase speculation, risk and does not imply that the broker’s commission will reduce any profit made.

Anyone can start trading currencies. This means Currency Trading is easy therefore making money is easy! The potential profit that can be made by buying and selling currencies and with a minimum capital for investment is amazing. Currency trading techniques are available online for learning for those interested in doing so, but the best choice would be to let a broker do business for you.

Tricks and traps are everywhere for inexperienced and the best way to avoid loosing money and time is to hire a broker who knows how the currency market works and how to increase your venues. Let someone else do the trading for you!

The Currency market is very vast and it involves traders all over the world.

Therefore the market can not be monopolized, cornered in any way for a single beneficiary. There are many participants, many banks involved and currency trading is a global phenomenon. The amount of business done during a particular period of time by the Currency market is 30 times bigger than that done by the US Equity markets.

The average sum of money exchanged during one day of transactions with many currencies goes over 1.6 trillion US$. The impressive numbers don’t stop here. The Currency market predictions of growth in the futures are over 2.0 trillion US$. These facts together with others (like the lack of physical location or centralization of any kind) offer the Currency trader safety.

Trading currencies allows investors to make money quick and efficient, with little risk and in a big way! So what’s keeping you from becoming a Currency trader?

About The Author
(c) 2005 Gamit Ana
Please feel free to publish this article anywhere you like, but save the author’s resource box.
Author Gamit is a staff-writer of Forex Trading Plus and can be emailed at: For future investments one can find the best financial guidance and support at http://www.forextradingplus.com

Sometimes you just have to take a deep breadth. And though I sometimes avoid information for fear of it influencing me adversely [journalists who know NOTHING talking up a situation], today I read the FT first thing.

Yesterday’s drops could be the start of a big fall. But i’m gambling it’s not. After the fear of today has subsided, I expect a rally. But I also expect a lot of volatility in the coming weeks / months [until something significant causes balance] and so I expect to make short bursts of quick profits.

From watching the charts, I can see that many investors have the same idea. There’s a lot of buying going on amongst the selling.

But like I said yesterday, things are looking cheap from a certain perspective. So even if I buy today and we’re not at the bottom of the trough, I am pretty confident that I am buying at a low enough price that will eaily be surpassed shortly.

Unless I’ve got it all wrong. Which puts me in the same club as many other big names. Nobody knows anything.

I have what I call a market-stall approach. The stocks for me are just like bananas. What are they worth today? How much can I sell them for later? How many do I buy? How much working capital am I risking? How perishable are they?

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How many of you out there think that the market is performing well?

How many think the market is performing poorly?

And how many feel the markets performance is neutral?

Actually none of these answers is correct. You see, learning and reading our options made easy articles, you will realize that the market does not perform, you do. You perform!

Sometimes you perform well, and other times you do not perform so well. The market doesn’t perform, it moves. It moves up, it moves down and it moves sideways. This is all apart of learning our options made easy article course.

It moves along like anything else that travels in a business cycle. If the market did perform, then you would only be able to make money in an up market.

As you know, it is possible to make money in a down market, and even in a stagnant market. Thus it stands to reason that the market simply moves and you react to it. So, let’s talk about your performance. You have two ways that you can perform, directly and indirectly.

Options made easy means directly, you pick your own stocks. Indirectly, someone else picks your stocks for you, whether it is your broker or a fund manager.

In the latter case, the fact that you chose someone else to pick the actual stock does not mean that the responsibility of a loss is theirs. After all, it was you who chose them.

In the end, it is you and you alone who are responsible for your performance. Consequently, it is your responsibility to become an educated investor and read our options made easy articles that we post.

Years ago, individual investors didn’t have to worry about who was managing their money. Now, things have changed as poor returns from money managers and investment firm scandals have shaken our confidence in these professionals.

To get a better look at what lies ahead, you have to go back and look at what transpired to get you to where you are now. From there, maybe a clearer path into the future will become visible.

During the Great Bull Market of the 1990’s, many investors, like you, entered the market and reaped the returns of the largest bull market in history.

Everyone, it seemed, made incredibly high rates of return. The market’s incredible, unprecedented move appeared to make geniuses of us all – but in actuality, it masked some major flaws with many industry professionals. It also created a misconception in the general public that all market professionals were experts.

Suddenly, the bubble burst and those flaws were exposed.

Not only did we find out that most of those experts possessed more luck than skill, but we also discovered that some had been cheating us out of our hard earned savings.

Many investors were discouraged with these market developments, and to make matters worse, many had lost significant amounts of money. Not to mention, the prospect of regaining these losses seemed slim to uncertain, at best.

Furthermore, options made easy does not mean the very people we normally looked to for help in retrieving these losses either lacked the talent to recover them or had lost enough of our trust and confidence that we wouldn’t even entertain the thought of letting them try.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

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and Discover How to Protect Your Investments With the
Leveraged Power of Options & Learn How to Trade Options
Like the Pros..

Click Here –> http://www.options-university.org

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Before you start trading, you absolutely have to know what stocks you want to buy and hold for a while, which is called going long or holding a long stock position. You likewise have to know at what point holding that stock is no longer worthwhile. Similarly, you need to know at what price you want to enter or trade into a position and at what price you want to exit or trade out of a position. You may be surprised to find out that you can even profit by selling a stock without ever owning it, in a process called shorting.

You can even make money buying and selling options on stocks to simulate long or short stock positions. Buying an option known as call enables you to stimulate a long stock position, in much the same way that buying an option known as put enables you to simulate a short stock position. You make money on calls when the option related stock rises in price, and you make money on a put when the option related stock falls in price.

When placing orders for puts and calls, you are never guaranteed to make money, even when you are right about the direction a stock will take. The values of options are affected by how volatile stock prices are in relationship to the overall direction (up or down) in which they are headed.

Managing your trades so that you don’t lose a bunch of money is critical. Although one can’t guarantee that you will never lose money, experts can provide you with useful strategies for minimizing your losses and getting out before your stock portfolio takes a huge hit. The key is knowing when to hold them and when to fold them. You must think of your trading as a business and the stocks that you hold as its inventory.

Trade Stocks provides detailed information on Trade Stocks, Online Stock Trades, Wise Stock Trades, How to Trade Stocks and more. Trade Stocks is affiliated with Penny Stock Research.

1fac

An option is a derivative trading product that is best used by investors as a hedging tool providing investing profit protection and profit enhancement. Although it is a powerful risk management tool, it can also be used effectively as a stand-alone trading vehicle.

Under the proper conditions, options do not have to be paired with stock or another option to be an effective trading tool. When investing, to successfully trade naked options, an investor must realize that certain options will fit certain scenarios and certain options will not.

One of the major misconceptions that investors have about investing in options stems from the fact that most do not know how to trade them properly. When they lose money trading them, they feel that there is something wrong with the option. They do not understand that options are on a higher, more sophisticated level when compared to stocks.

Stock trading has fewer variables involved and is therefore easier. No one is saying that the individual investor isn’t smart enough to invest in trade options. The problem is not intelligence; it’s just education and experience. Most investors have not been properly educated in the proper use of investing options, and even fewer have had any real experience trading them.

One of the biggest problems investors have is this: While investing and even if you buy a call and the stock goes up, you can still lose money. Most investors tend to buy out of the money options at a cheap price. The stock trades up a little, which is the right direction, but the option still loses money and the investor wonders why.

What the investor fails to realize is that in order for the option to be profitable the options delta must out-pace its rate of decay. Implied volatility also plays a key role if the stock does trade up while implied volatility decreases, the options delta must then outperform the decrease in volatility. Remember, when volatility increases, the price of all options goes up. When volatility decreases, the price of all options goes down.

We have categorized options in several ways. One way is by the option’s strike price, and its distance from the stock price. We identified these options as either in-the-money, at-the-money, or out-of-the-money.

In our discussion about trading naked calls and puts, we will identify trading opportunities or situations that fit each of these types of options, for both calls and puts. But it is important to first review the definition of Delta before continuing.

Remember, delta tells you how much the option will move with a similar move in the stock and is given as a percentage. For example, a 33 delta option means that the option will move 33% of the movement of the stock and 70 delta option will move 70%. In-the-money options act like stock. The deeper in the money the calls are, the more they act like the stock. As the call moves deeper and deeper in the money, the calls delta approaches 100 which means it’s price movement will reflect 100% of the stock’s movement. (This is discussed in more detail later in The Stock Replacement Covered Call Strategy).

In fact, deep-in-the-money options are sometimes even used to replace stock positions. If you look at the charts below, you can see how closely the in-the-money call mimics the upward movement of the stock (2nd quadrant).

View Graphic

In the money options are best used for smaller stock movements. The reason is that in-the-money options contain less extrinsic value. The extrinsic value can work against you when purchasing an option because extrinsic value is affected by time decay.

As you wait for your stock movement, the in-the-money option will decay less than either the at-the-money or out-of-the-money options because it has less extrinsic value. The amount of money you lose in time decay must then be made back by additional stock movement.

Obviously, the less you lose in decay, the less the stock has to move for you to be profitable because it has less decay loss to make up for.

This is because an in-the-money call has a high delta and a much higher percentage chance of finishing in-the-money by expiration so they follow the stock more closely.

With less extrinsic value loss in the options investing to make up for, a smaller movement in the stock will produce a greater profit. For a call example, as you can see in the chart below, the in-the-money produces a profit with the least amount of stock movement. With less extrinsic value, the ITM option has a lower break-even point.

For chart below, stock price = $35.00

 Strike  Option  Delta  Breakeven  Extrinsic

 Price   Price                       Value

$30        5.20        85        35.20          $.20

 $35        1.00        52        36.00          $1.00

 $40         .30         20        40.30           $.30   

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In online FX trading, traders look for a currency that offers the highest return with the lowest risk. For example, if a nation’s financial instruments, such as stocks and bonds, offer high rates of return with relatively low risk, then traders who are foreign to that nation want to buy that currency, thus increasing the demand. Currency is also in demand when its country is going through a growth segment in its business cycle, highlighted by stable prices and a whole range of goods and services for sale. Forex traders who speculate on the values of currencies to earn their keep look for specific signs to indicate when exchange rates may change.

Traders in online FX trading try to predict well in advance the factors like political instability, rising interest rates and economic reforms so that they can get in or out of a currency before others. Correctly guessing where a currency is going and taking a position in that currency at the beginning of the trend can mean huge profits for a trader.

Traders make money either by buying the currency at a lower price and then selling it later at a higher price, or by selling their holdings in currencies of other countries at higher prices before they have time to react negatively to improvements in the first currency. After the markets for their original holding fall, they simply reestablish positions in them at bargain prices.

When a trader purchases a large amount of a particular currency, then he or she is long on the currency. Conversely, when a trader sells a large amount of a currency, then he or she is short on the currency. The Forex market is dominated by four currencies, which account for 80 per cent of the market- the US dollar, the Euro, the Japanese Yen and the British pound.

FX Trading provides detailed information on FX Trading, Online FX Trading, FX Currency Trading, FX Trading Platforms and more. FX Trading is affiliated with Online Forex Trading Systems.

If you have ever traveled outside the United States, you have probably traded in a foreign currency. Every time you travel outside your home country, you have to exchange your country’s currency for the currency used in the country you are visiting. That’s why it is very important that you should know the exchange rate of various currencies used in the world. By this way, the average tourist uses foreign currency exchange. On the other hand, foreign currency traders trade much larger sums of money thousands of times a day.

The majority of trades take place in three main centers of currency trading- the United States, United Kingdom and Japan. The rest of the trading takes place primarily in Singapore, Switzerland, Hong Kong, France, Germany and Australia. The United Kingdom manages the largest share. The United States is second, followed by Japan.

FX currency trading is ongoing 24 hours a day, with some countries just getting started, as others are finishing up their business day. For example, when the trading day opens at 8 a.m. in London, the trading day is ending for Singapore and Hong Kong. When New York opens its trading doors, it’s already 1 p.m. in London. Thus, traders must be alert around the clock, because a major event at an off hour anywhere in the world can shake the markets at any time.

Individual trades in the range of $200 million to $500 million are not uncommon. In fact, the US Federal Reserve estimates that approximately $1.5 trillion dollars are traded every day, and that represents more than $200 every business day of the year for every man, woman and child living on the planet. That’s several times the daily turnover in US government securities, which is the world’s second-largest market. In fact, estimates indicate that quoted price changes occur as frequently as 20 times per minute, and the most active currency rates can change as many as 18,000 times in a single day according to the federal reserve.

FX Trading provides detailed information on FX Trading, Online FX Trading, FX Currency Trading, FX Trading Platforms and more. FX Trading is affiliated with Online Forex Trading Systems.

The stochastic oscillator was presented by George Lane in 1950s. George Lane designed a number of indicators that withstood the test of time. These indicators rank among most popular and widely used. Lane’s stochastic oscillator can warn of strength or weakness in the market ahead. As a momentum indicator stochastic helps to find turning points within the scope of the more significant trend. To achieve better result, stochastic needs to be used in conjunction with trend analysis or trend following indicators.

The best technique is to use stochastic with trend analysis to time trades in the duration of the major trend. Stochastic indicates short-term price fluctuation within the major trend support and resistance level. Using these two techniques in conjunction gives a number of excellent opportunities.

The basic assumption behind the indicator is that in an upward trend price tend to close near the highs of the day. In downward trend price tend to close near their low. The stochastic oscillator is plotted as two lines, a fast line called %K, and a slow line %D.

%K = 100 * (C – LN) / (HN – LN)

%K – fast stochastic
C – latest close price
HN – highest high for N periods
LN – lowest low for N periods

%D – is an ‘n’ periods simple moving average of %K

Usually n = 3 periods.
George Lane recommended a 14 period measurement. The number can be varied to change the sensitivity and desired time frame. Period can represent days, weeks or month.
Lane’s stochastic is a percentage indicator. It always stays between 0 and 100.

Market technicians use stochastic oscillators as a timing indicator for signals of market reversal. There are three main signals the stochastic generates.

1. The level above 80% is considered as an overbought warning signal, and the level below 20% is used as oversold warning signal. This signal should be considered only in conjunction with other factors. Lane recommended waiting when stochastic rises above 80% and sell when it falls below this level. Similar for level below 20% it is recommended waiting for rise back above 20%.

The stochastic oscillator is very sensitive to the price movement and usually gives too many signals and to many whipsaws. One way to limit the sensitivity is using 5% and 95% level as more reliable. Some technicians prefer smoothing normal stochastic by 3-day simple moving average. The normal stochastic is sometimes referred as “fast” to distinguish it from smoothed “slow” stochastic. Some technicians believe that slow stochastic provides more accurate signals.

This technique is simple and elegant. Technical analysis software does all the calculations, and makes analysis easier and available not only for professional traders, but even for average investors.

2. The second important signal generated by Lane’s Stochastic is the crossover between the %D and %K lines. It is considered a buy signal when the %K line rises above the %D line and a sell signal when the %K line falls below %D. To avoid whipsaws you can wait for crossover accruing within overbought/oversold area, or after a peak or bottom in the %D line.

3. The third and one of the most reliable signals is divergence between %D and the price. A bullish divergence occurs when price makes a series of lower lows while %D makes a series of higher lows. A bearish divergence occurs when price makes a series of higher highs while %D makes a series of lower highs.

Now when we know the basics, we can discuss the advanced techniques. The most important and difficult question is when to apply Lane’s Stochastic. The basic assumption of stochastic is the certain market cyclicity. The simple technique will present useful signals for intermediate top and bottom in trading market, but in strong trending market stochastic is too sensitive to generate reliable signals. We would like to stress it again that stochastic oscillator is a momentum indicator. Momentum indicators help identify turning points, but it needs to be used in conjunction with trend following indicators or trend analysis.

The simplest and one of the most popular trends following indicator is the moving average. A lot of technicians use stochastic oscillator in conjunction with MACD – moving average converge/divergence indicator. MACD is the trend following indicator that can help to identify the direction of the major trend. Then you can use the stochastic signals to trade in the direction of the major trend.

Using oscillators in conjunction with trend analysis and patterns recognition is probably one of the most profitable techniques devised for the experienced trader. Oversold/overbought conditions and stochastic divergence usually confirm termination patterns and give useful tips about when the current trend is about to change.

Trend support/resistance lines confirmed by oversold/overbought stochastic indicators and price divergence would present most reliable and accurate signals and often help to pick the bottom/top of the price trend.

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To create momentum in your options trading you need to understand the advantages and disadvantages of at-the-money options, in-the-money options and out-of-the-money options.

An at-the-money option has both advantages and disadvantages over stock and in-the-money options. First, the at-the-money option will be cheaper then both the stock and the in-the-money option. So there is less capital requirement and less total risk.

Remember, when buying an option, you can only lose what you spend. Creating momentum is understanding this problem, what is the amount of extrinsic in the at-the-money option.

In order for you to profit from buying an at-the-money option, you need the stock to make a move very quickly. Because you have so much extrinsic value, you will be battling against the option’s daily rate of decay.

So, the movement of the stock must happen quickly enough and large enough to offset the amount of money you will be losing daily as expiration draws near.

With this said, the best chance you have to make money when buying a naked at-the-money option is to use it as a short term trade. The longer you hold onto this option, the harder it is for you to be profitable due to the options decaying extrinsic value.

At The Money Call vs. In The Money Call

For chart below, stock price = $35.00

 Strike   Option   Delta   Breakeven   Extrinsic
 Price    Price                          Value

$30         5.20           85          35.20             $.20
 $35         1.00           52          36.00            $1.00
 $40          .30            20          40.30             $.30    

An out-of-the-money option presents many of the same advantage & disadvantage parameters to the investor. The out-of-the-money option is even cheaper then the at-the-money option which means more leverage and less risk.

However, with a smaller delta, the stock must move much more than either the in or at-the-money options in order for the options to become profitable. Again, we need the option’s delta to outpace the option’s rate of decay.

Now, with the out-of-the-money option, there is less extrinsic value than the at-the-money option so the amount of total possible decay (cost of the option) and the rate of this decay is less than the at-the-money option.

By being further out-of-the-money, this option needs more movement from the stock. As a naked option, this out-or-the-money example is extremely speculative and should only be used naked when the investor feels there is a very good chance of a stock having a large percentage move.

An investor must understand that the odds of them profiting from the purchase of a naked out-of-the-money option is very slim. When purchasing a naked out-of-the-money option, be prepared to lose your entire investment.

Out of The Money Call vs. At The Money Call

For chart below, stock price = $35.00

 Strike   Option   Delta   Breakeven   Extrinsic
 Price    Price                          Value

$30         5.20           85          35.20             $.20
 $35         1.00           52          36.00            $1.00
 $40          .30            20          40.30             $.30    

Although options can be traded by themselves for directional plays, and can perform well under the right conditions, they are much better used in coordination with stock or other options in formatted strategies which will be discussed in the next section.

While buying naked calls and puts can provide some of the biggest leverage and highest returns, they can also involve the most risk. This momentum strategy should only be used by experienced options traders or traders using risk capital.

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