Stock Trading

Futures are negative across the board as fears continue about the economic recovery. We could see Fridays lows challenged today.

Continuing to watch PL, GDI, SLH, and TCB. PL and SLH were up nicely yesterday on above average volume. GDI and TCB were down but on lower volume.

View the full GDI chart at Wikinvest

The market I believe has held up quite well so far for all the negative news and sentiment out there. Most of the headlines are really negative, but the market is not reacting as negatively.

One would have to conclude that there is some accumulation going on in the market. Big boys are buying stock that you and I are selling.

Money managers have to use weakness in the market to accumulate their positions. They have to do this so that they do not put up the prices by their own buying. So, they become buyers when everyone else is selling.

As an example of overly negative tone of the headlines see the story below from CNBC:

For American taxpayers, now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans, that amount could be just the tip of the iceberg.

According to the Congressional Budget Office, the losses could balloon to $400 billion. And if housing prices fall further, the cost to the taxpayer could hit as much as $1 trillion. Go to the story on CNBC.

One of the most common worries among individuals of all ages is how they are going to save for retirement.  Unfortunately, many of the people who have reached midlife haven’t been able to save much towards this era in their lives.  This is why everyone should consider learning about the stock market.  The truth is, learning about stock trading on the Internet is really quite simple.

The first thing you must realize is that all of the information you could ever need on stock trading can be found online.  However, this doesn’t mean you want to jump right in and start reading everything at once.  Start with the very basics.  By getting the basic terminology and steps down, you are going to build a good foundation of knowledge.

Understanding that the process is going to take time is also going to help you.  If you think you are going to be completely knowledgeable in all facets of the market within a few weeks, you are only going to find yourself overwhelmed and stressed out.  Instead, plan on learning a little bit at a time and you will find the information sticks with you.

Last, you also have to be careful on where you are getting your information.  Not all of the Internet sites are going to give you the best information.  The best place to start is with sites that are geared toward the novice investor or even online classes that can teach you the basic terms of investing.

Trying to save enough money for when you retire can be quite stressful.  To help you plan ahead, you may want to learn the ins and outs of stock trading on the Internet.  With some great investment strategies, you will no longer have to worry about your own financial future.  In fact, if things go extremely well, you may find you have made enough money to even retire earlier than you expected.

Over the next few days, we will be discussing stock trading principles. Here is the first part in an ongoing series.

You can access all of these principles in one place my clicking on the Stock Trading Principles tag at the bottom this post.

Most of us are attracted to stock trading by the promise of higher returns that most commercials of brokerage houses claim.

A legitimate question that we should ask is, is it really true that you can get higher returns by trading or investing in stocks?

Well, like in anything we undertake, it is really depends on the individual stock trader or investor.

It is absolutely true that investing or trading in stocks provides us ample opportunities to eek out much higher rates of return on investment than money market funds, savings accounts, and mutual funds.

But, and this is big but, it is really up to the trader to make it happen.

The Stock market exposes the weaknesses in our characters like nothing else ever can.

As traders or investors the sooner we can come to grips with the fundamental truth about making money in the market, the better the returns will be.

And the fundamental truth is that nobody ever can predict what the market is going to do in the future. As traders, we have to learn to deal with uncertainties and probabilities.

You have to learn to accept that you might be wrong half or more than half of the time when trading in stocks.

You have to be willing, and able, to accept that you are wrong. And worse. Your account would be poorer as well.

If you think you can do that, think again!

Because, it is also true that more than ninety percent of traders are net losers. And the primary reason for this is that they did not accept that they were wrong in time to preserve their capital.

Every successful stock trader eventually figures out that their need to be right is ruining their chances of making money trading stocks.

Once they overcome this fatal human flaw, at least as far as stock trading is concerned, they begin to count their market blessings!

The key takeaway is: You can be wrong about the market a few times, and still come out ahead in the long run. And make loads of money.

You are dealing in probabilities, and have to use win-lose ratios, and money management methods to put you on the winning side of this equation.

We will work our way through all those in the coming parts in this series.

Most Stock Traders start their day before the opening bell. They turn to their favorite information source online or on TV to check the Stock Index futures.

Namely, DOW, NASDAQ, and S&P 500 futures. They use the futures levels as a guide to how stocks the direction of stock market during the regular trading session.

But, what are futures?

Futures are tradable financial instruments that are derived from another underlying financial instrument.

An example would help.

Let us look at Crude Oil. Crude Oil can be traded in Spot or Futures market.

When you trade in the Spot market, you are buying the ‘physical commodity’ Crude Oil at the current price. You pay the seller, and take delivery of the product – much like you and I would when we buy gas at the pump.

When you trade Crude Oil in the futures market, you buy or sell contracts on Crude oil to take future delivery (when buying) or to make future delivery (when selling).

Contracts traded on exchanges are standardized to increase liquidity, so the contracts are set to expire following a well known schedule.

For example, you may trade June 2010 Futures Contracts in Crude Oil – these would be due for delivery on July 14, 2010.

Futures can be traded 24 hours a day, for five and half days a week.

Future contracts on Crude Oil allow airlines to buy fuel for future delivery for a known price — the price they paid when buying the futures contract. This allows them to ensure they have fuel for their operations, and gives them control over their cashflow.

They can, if they choose, buy up additional contracts if they expect fuel to be more expensive in the future, and make profits trading the futures contracts.

So, what are Stock Index Futures?

They are contracts that can traded just like Crude Oil Futures contracts, except the underlying instrument is a Stock Index.

If you are bullish on DOW Stocks, you buy DOW Index Futures Contracts (say June 2010) today, expecting that the underlying DOW Index goes up before July 16, 2010, you can sell the Futures Contract you bought for a higher price.

Since you can not buy a stock index, you can use it’s futures contract to trade your opinion about the Indexes future direction and level.

Experience traders can use to positions in Futures Contracts as hedge against their stock portfolio.

The value of DOW Futures is directly related to the value of DOW Jones Industrial Average. Since DOW Futures can be traded 24 hours a day, and are also traded when Stock Exchange are closed, the price of Futures Contract can get ‘away’ from the level of the DOW Jones Industrial Average.

Every morning, a stock trader would look to see how much the DOW Futures have moved away from the previous closing level of DOW Jones Industrial Average – up or down – to predict where the DOW Jones Industrial Average is likely to open.

But, it is important to note that, even when the Stock Market is open for trading, the DOW Jones Futures can diverge from DOW Jones Industrial Average.

In subsequent posts, we will examine how a stock trader can use this information to guide their trading during the day.

What’s Planned for StockTrading4U?

Over the next few weeks we plan to add content to the site to help bring resources that help stock traders. There are many excellent resources available online, so, our plan is to identity and highlight the best them on this site.

The primary focus would be to empower visitors and users of this site to successfully trade stocks, and to grow their capital over time.

Trading Stocks successfully takes time, effort, and understading the mechanics of the market. There are no short cuts.

Critically important topics of discussion would include:

• Fundamental Analysis
• Technical Analysis
• Trading Strategies
• System Testing – Back and Forward
• Money Managment Strategy
• Psychology and Trading
• Books – Recommended Reading & Reviews