Trading With Price and Volume

On any given major stock exchange, from Wall Street to Bombay or from London to Hong Kong, billions of shares are traded each day that represent trillions of dollars exchanged back and forth. This buying and selling action represents volume, which is the result of the exchange of stock or commodity between both buyer and seller. Volume, then, is the prime mover in the price for a given stock or commodity in a given amount of time.

If there is more buying than selling for a ABC stock then what results is the rise in price for that stock. Likewise, if there is more selling then buying in ABC stock then share price is likely to fall in value. This makes the study of volume a valuable indicator to determine if a stock is either in demand or likely to increase in share value in the future.

Many aspiring stock traders practice a style of stock trading popularly referred to as ”momentum investing” where one attempts to identify stocks that are fluctuating in a given price range for a length of time and are likely to have explosive moves to the upside or downside out of those ranges. The confirmation for those explosive moves are taking long positions at the upper end of that price range or short positions at the lower end of that price range on greater than average volume.

Let me offer an example of the importance in volume by stating that volume is literally the fuel for stock values. Like the space shuttle when it is launched into space the majority of fuel is spent to just get it into orbit. This explosive force of energy to propel the space shuttle into space or new heights requires an above average reserve of the fuel but then the space shuttle can then use only a small portion of the remaining fuel reserve to carry out the rest of its mission. Volume is to stocks what rocket fuel is to the space shuttle.

A good average is a 150% of its normal volume but I would also stress that its important to become familiar with a given stock’s volume pattern to gain true mastery. Baker Hughes, Inc. (BHI) typically will move in force with just a 20-25% higher volume spike while some of the lesser known small-cap stocks might require 150% or more.

The study of price and volume relationships also reveals a condition known as ”climatic volume” which to a skilled trader can reveal a complete reversal in a given trend. After a stock has had strong advance or decline is where climatic volume can result (the operative phrase is ”after” a strong advance or decline).

After an explosive move, usually the result of a volume spike, climatic volume results when traders come into the last stages of that advance of decline and price moves sharply at the last move of its trend. At this point, all the buying and/or selling has resulted and the move has exhausted itself and volume is then considered climatic when it exceeds two times the average daily volume over the last ten days. At these extreme volume levels price often goes almost parabolic or straight up in price without a noticeable pull back.

Master traders can spot these ”Bump and Run the Top” or ”Rising or Declining Wedge” patterns and use these climatic volume spikes to exit their positions and then use them to spot the trend reversal and get in at the beginning of a new trend transition.

The study of the relationship between price and volume can give both technical and systemic traders the confirmation that they need to get in on explosive moves and also serve as indicators as to when its time to get out and, possibly, even spot a new trend in transition to exploit profitably. Volume should be considered as the most important precursor to price movement at the disposal of investors or traders and can possibly lead to some huge gains to those who take the time to understand the relationship between price and volume.

Trading Psychology & Self-Concept

The only way to keep up with the latest about stock options, option trading is to constantly stay on the lookout for new information. If you read everything you find about stock options, option trading, it won’t take long for you to become an influential authority. To be a successful trader you also have to have good technical skills and sound money management skills.

Also, though, you have to have a positive psychological outlook to give you the mental and emotional balance to be successful. One of the most important discoveries of the twentieth century psychology was the discovery of the ”self-concept”. The self-concept is the master program of one’s life. It is the bundle of beliefs that you hold about yourself and the world at large. It determines your reality in that you always see the world through a screen of prejudices formed by your belief structure. It is the belief structure that predicts your performance and behavior in every area of your life. You always act in a manner consistent with your self-concept, consistent with the bundle of beliefs that you have acquired from infancy onward. If you change one of your beliefs at a subconscious level you change your reality.

It is common in trading that two traders given a winning system to trade will often not get the same results. One trader may hesitate and/or hang on to a trade too long or exit before the system will give a exit signal. The other trader may execute the system perfectly and even if he has a few losing trades is able to take it in stride because he can ”see” himself trading successfully and ”believe” in himself that he will be successful.

Ed Seykota, one of the world’s greatest traders, observed a trader that would self-destruct after building his trading capital up to $250,000. What do think his self-concept was revealing about himself? Maybe he had a fear of success? Maybe that he couldn’t get his family’s attention and love without a tragedy? Maybe he couldn’t see himself with that much money and making dumb trades and losing it was his way of not dealing with it? This is common with winners of the lotteries. Winners often blow their money within a few years because they can’t see themselves as rich on a deep fundamental level.

Fortunately, a person can change their self-concept to be self-empowering instead of self-limiting.

There is a direct relationship between how well you do anything and your self-concept in that area of your life. You perform as well as you believe yourself to be in whatever you do. You can never be better or different on the outside than you believe yourself to be on the inside.

Whenever you feel good about yourself and are doing well at your job, or in your relationships, or at a sport, you are demonstrating a positive self-concept in that area.

It seems like new information is discovered about something every day. And the topic of stock options, option trading is no exception. Keep reading to get more fresh news about stock options, option trading.

Whenever you do poorly or feel inferior or clumsy, or behave badly in some situation, your negative beliefs about yourself are being demonstrated in your behavior.

What makes change positive change possible is largely subjective, not objective. Whatever negative beliefs you hold in your self-concept are largely false but if accepted subconsciously can be very self-limiting nonetheless.

As soon as you begin to identify, question, and reject self-limiting beliefs and replace them with new self-liberating beliefs, your old beliefs lose their power over you and you true potential become limitless.

Developing good trading skills about stock options, option trading is useful but one of the best ways to improve your success is to spend an equal amount of time developing mental/emotional skills to bring your trading to new heights. Indeed, developing those skills will bring success into all aspects of your life.

Trading in Different Time Frames

This interesting article addresses some of the key issues regarding option trading. A careful reading of this material could make a big difference in how you think about option trading.

Lets discuss time frames. One, there is the long-term time frame which one considers a time period months to years. Buy and hold investing or trend following typically looks at this time frame for their trades.

Second, there is the intermediate term time frame. This is the type of time frame that I mostly participate in and you consider the price action from weeks to months. Traders and option traders typically participate in this time frame.

Lastly, there is the short term time frame. This type of time frame is where you consider the price action from days to weeks. Day traders will often operate in this time frame on a daily basis while swing traders and option traders may also participate in this time frame for 1-7 day positions. I also operate in this time frame.

Understanding the three time frames will help you determine what type of trading works for you and what you are comfortable with. For example, if you like the idea of being involved with the market everyday and you’re currently working at a job where you are on the night shift or the evening shift then this may be a time frame you would want to trade in.

If you don’t have accurate details regarding option trading, then you might make a bad choice on the subject. Don’t let that happen: keep reading.

If, on the other hand, you have a profession where you are on call or your hours are irregular like being a policeman, a salesman, or a doctor then you may want to consider an intermediate or long term time frame.

I have had success at day trading, option trading, and stocks for the long term, and swing trading but for my life as it is today, intermediate time frames work best for me. If you’re a trading junkie and you want to learn all the techniques to trade the different time frames, more power to you. That’s what I have done but I have found out that it is impossible for me to trade every time frame and stay profitable with all that I have going on in my life.

Many aspiring traders have tons of enthusiasm for this game and when they begin they soak up everything thing that they can on the subject of trading. But its better to look at your trading preferences and, more importantly, take a realistic view of your life to see which time frame will better support you. Remember, trading is to support our lives, development, and provide a better life for ourselves and families. If you try to do it all then you’ll never accomplish any of these things.

Knowing enough about option trading to make solid, informed choices cuts down on the fear factor. If you apply what you’ve just learned about using larger time frames to capture trends on small time frames, you should have nothing to worry about.

Spotting Market Accumulation and Distribution

During the trading week almost any news break will report the gains or losses for the Standard & Poor’s 500 (S & P 500), the Dow Jones Industrial (DOW), and the NASDAQ Stock Exchange (NASD). The reason is that gauging the health of the these indices is because up to 70% of the stocks that make up these various indices will move in tandem with their movement. Also, by comparing there price action with the amount of buying and selling taking place then it can be determined if the overall market is under accumulation or distribution.

Accumulation is when investors are buying more shares than are being sold. The biggest investors in the market are the major financial institutions like big mutual funds and pension funds. When these institutions are putting tens of billions of dollar to work by buying up stocks in various companies it is reflected in the price action of the indices which are made up of these companies.

Likewise, when the market is under distribution investors are selling more than buying. When the same institutions mentioned are selling tens of billions of dollars worth of securities then it begins to affect the indices that are made up from the broad spectrum of those stocks. What results is that over several days of selling or distribution the index may begin to decline in price.

What helps to determine the accumulation of the market is volume. Volume simply measures how much buying and selling is taking place over a given time period. For example, if the price for the S & P 500, or SPX, rises over the previous day and that day’s volume was greater than the previous day then for that day then the SPX was under accumulation. If there are 4 or 5 such days over a 4 to 6 week period it can result in an overall bull market rally in the SPX.

If, in the SPX, price declines lower than the previous day with greater volume than the previous day then for that day the SPX was under distribution. That means that the 500 companies that make up that index were overall being sold more than bought. If there is 4 to 5 such distribution days over a 4 to 6 week period can cause the SPX to slip into a bear market decline.

Knowing how to spot accumulation and distribution days is an invaluable way to gauge the overall market’s health. It allows an investor or trader to determine whether to buy aggressively, hedge their positions with options, or get prepared for shorting opportunities.

Six Keys to Finding Momentum Stocks

Momentum stock trading has been around for awhile and has been proven to a sound method for creating incredible wealth in the stock market. During the 1990s, for example, Clear Channel Communications went up 5,615%, Emulex rose 6,412%, Dell Computer went up 10,198%, Activision went up 13,819%, and Semtech rose 15,231%.

It is not uncommon to find stocks that accelerate in price that go on to make 100% to 300% returns in less than year or even in a few months. However, for beginning investors it can be a confusing and frustrating experience to find such stocks.

While many momentum stock traders all have different criteria when searching out tomorrow’s big winners there are typically six key steps when screening for a big winner.

They are:

1) Accelerating earnings or EPS (earnings per share). 2) Annual earnings up 25% or more in the last 3 years. 3) Minimum volume of 100,000 or at least increasing volume. 4) A 17% ROE (return on equity) or better. 5) Has leadership role in the market place. 6) Price at an all-time high.

Potential stocks for momentum trading should show strong fundamentals on there balance sheet and show that they are growing at an accelerated rate. By selecting stocks that are showing high EPS ratings and accelerating rates of growth over previous quarters you can be sure that you have a company that is growing out an above average rate. Wall Street loves earnings that are growing quickly and a company that does will be rewarded with institutional sponsorship by the big funds further causing share value to increase.

Momentum stocks also have shown that they are strong players in their market and prove there value by exhibiting strong annual earnings. Less than a 25% annual increase in annual earnings will not stimulate interest by the big mutual funds or investors resulting in a stock whose price will likely remain stagnant or increase in value at too slow a pace for momentum investing.

Stocks for consideration should have a daily average of 100,000 shares or at least see there average daily volume increase as the value of the stock rises. Any volume less than this shows little interest by the investment community and you could find yourself having trouble with liquidity in the stock if you need to sell and get out.

A potential stock should show a ROE of 17% or better. ROE is the net income divided by the number of shares held by investors. It shows the responsible return on capital by investors and the higher this ratio is the better for investors. In my opinion, this is one of the most important attributes for any stock investment.

Momentum stocks are also leaders in the market. When the major indices have declines true stock leaders exhibit strength by holding or even exceeding there highs or near there highs. When the major indices rally these leaders typically lead the rally and go on to make new highs and outpace the market.

Momentum stocks should also be traded at there all time highs. Buy trading at these levels at key technical entry points you are likely to ride the trend as the stock increases in share price. This type of characteristic increase your chances for profitability because a up trend in place is six times more likely to stay in place so you have the odds on your side.

You can stock for scans like these at Yahoo Financial or MSN Financial for free. Begin keeping a list of potential candidates and then track there performance. It may take a little practice but with time you will be able to spot the stocks that go on to make the big moves of 100% or more.

As with all types of investing keep in mind to cut your losers quickly and ride your winners with a good money management plan.

Good luck and good trading.

Seven Keys For Successful Part-time Trading

Stock and option traders are often inundated with promotional material in the form of direct mail, seminar promoters, software vendors, and the occasional infomercial late at night that implies if you just had the secrets they contain that you too can build your fortune by trading stocks, options, and the like. However, one thing that many of the authors of these materials don’t consider is the fact that many people have jobs, families, and businesses that require your attention. While many people are drawn to the markets and sincerely have the desire as well as the will to apply themselves many of these promoters and authors are unable to understand the needs of part-time traders. This, unfortunately, leads many aspiring traders to the false conclusion that they cannot trade profitably since they are unable to trade full-time but this doesn’t have to be the case if the individual keeps certain key fundamental criteria to make money trading the markets.

First, you have to trade your own time frame. It is critical that you adopt a trading style that fits your own time frame. Don’t choose to be a intermediate stock trader but then try to be a day trader too. Part-time traders have a limited time and its best to find an approach that complements both. By trying to utilize several different methods a part-time trader will rarely find the success that he or she is looking for. One trader that I know of was deeply involved with another business and had to stop trading short term options but adopted an intermediate stock momentum method. He only made 8 trades that year but made a 200% return.

Second, adopt a method that suits your personality. Time is typically a factor with part-time traders and many find that swing trading, trading in the intermediate time frames, and trading options can give them the potential returns they look for while fitting the methods to their own personalities. One trader I know of is a writer but trades momentum stocks off of the weekly charts. On the weekends he checks his charts, adjusts any stops if he has any positions, and enters buy orders for any setups that may show up in only 5-10 minutes on the weekend. In the last 8 years, he has never reported a losing year and in 4 out of the last 8 years has had returns of 100% +. Another trader I know of swing trades stocks on a simple pullback method he developed using a simple indicator while still working as an engineer at one of the major auto manufacturers and during his first year he reported profits of over $200,000. Each of these traders found methods that work along with their personalities.

The third thing that aspiring part-time traders must do, as well as professional traders, is to absolutely have a system of risk control in place. It is almost universal trait that traders of all levels of experiences focus more on entries rather than exits. Containing your losses is going to 90 percent of the battle for part-timers because many will not be in front of the screen and must learn how to set stop loss points, learn when to reduce or increase the size of the position, and how to use diversification to control risk. If a trader loses his capital then can’t play this game and, in some instances, without proper risk control a trader can end up owing a lot of money if they traded on margin!

The fourth key that’s important for aspiring part-time traders to keep in mind is to identify low-risk trades and be more selective. If there are a handful of stocks that are offering compelling reasons for a long position spend some time and research them closely to select the best one or two. Which ones are in the strongest industries? Which ones are in the strongest sectors within those industries? Which ones are the strongest sub sectors within those sectors? Is there a stock that has the strongest fundamentals or gives the strongest technical setups to trade? By spending a few more minutes and examining the key criteria that you look for in a trading setup you can potentially lower your risk and raise the probability for a profitable trade by becoming more selective in identifying low-risk trades.

The fifth key for part-time traders need to have is an edge. An edge is any trading technique, method, or tool that gives that trader an advantage that can be exploited for trading profitably. An edge can be how a trader reads charts, studies price/volume relationships, selects stocks to trade, a system of trade management, or reads price patters. One very famous swing trader uses technical analysis, chart patterns, and volume studies to trade. In the late 1990, he turned an $11,000 account into $43,000,000 in only 23 months! Edges can be very simple tools that a trader has refined and has great skill in trading with.

The sixth key is learn how to be at peace with the inevitable losses that come from being involved with the market. When we are young we learn how to exist within a structured environment thru a series of rewards and punishments. In your home as a child, your parents would reward your good behavior and punish your bad behavior. As a result, you learned your boundaries and how to exist within that structured environment. When aspiring traders come to the market, however, they find that there is no structured environment and that the rules they learned when they were young no longer apply. The keys listed here are to help you survive and eventually prosper but you must relearn your own behavior in order to find the success you seek in the markets. If you can learn to love your losses while sticking the rules of trading you have set up for yourself then you are on your way to financial success. But if you lose sleep at night or in a constant state of anxiety because you fear taking a loss or have experienced a loss then you need to stop trading till you find the kind of peace that successful traders have come to understand that losses are just part of the business.

Finally, the seventh fundamental key for successful part-time trading is developing self-awareness. Every trader, beginner or professional, must be aware of personal weaknesses that may impede trading success and make the appropriate adjustments. From my own experiences, observations, and research, I have come to the realization that all traders experience confusion, frustration, anxiety, and the pain of failure. Self-discipline, determination, and self-control are key attributes one must have or develop within themselves in order to reach the pinnacle of success they seek in trading or any part of their life. Fortunately, these key attributes are not inborn but can be learned and strengthened much like you exercise a muscle which becomes stronger in time. You only have to spend some times developing your self-awareness and then once you have a grasp of your strengths and weaknesses you can create a plan to take action on them. This is fundamental for you to be at peace with the daily swings in the market as well as your own emotions in dealing with the market.

These seven keys for successful part-time trading are going to be fundamental truths to discover the kind of success you desire in trading the markets. Part-time traders often have many advantages over those traders who watch the markets all day and it has been proven that many part-timers are just as profitable. However, many would-be traders spend a lot of time on the external things like trading systems, stock newsletters, hot tips, and the like but rarely do the fundamental truths in real trading. Sadly, even rarer do they succeed with their own trading goals because these simple keys aren’t as flashy as the latest $7,000 trading software or $5,000 day trading seminar. By devoting some time to work on these seven keys now and throughout your trading you will build a stronger foundation for your success.