Think From Your Goals

Goals are important because they motivate us to push ourselves and achieve our full potential as human beings. There is abundance of literature discussing the process of goal setting and various techniques one can utilize to stay on track and committed until a goal is achieved. While knowing all this is crucial for your success it is also as essential to be prepared and have a plan what you are going to do once you achieve the goal. 

Don’t become so focused on the goal that you forget to expand your horizon and consider what you are going to do once you achieve it. It is great that you have boarded the train and are travelling at lightning speed to your destination, but remember that every destination is only the starting point for another journey.

Thinking from your goals is vital because this keeps you committed on the path of achievement. It is very easy to become complacent and develop bad habits when you don’t have strong enough motivation to propel you forward. Don’t be one of these people who want to make money but quickly fall back to where they started because they never prepared how to handle financial success. Keep pushing forward and constantly reflect on the next great thing you can do with your life. The opportunities for the realization of your potential are unlimited.

One reason that most people don’t think from their goals is because very few people have clear specific goals that they persistently pursue in the first place. It is critical to decide what you want to accomplish and to resolve to pay the price. A desire for something to happen is simply a wish. For the wish to become a goal you need to channel your energy and efforts into fuelling your passion to achieve what you want.  It is impossible to think what you will do at the destination if you don’t even know where you want to go and don’t believe in yourself that you will ever get there.

Develop detailed plans what you will do once you achieve a goal. This makes the goal believable and adds more reasons for you to achieve it. The more reasons you have and the more detailed the plan, the higher the chances you will bring the goal into reality faster. Trust the process and do your part. Take care of what depends on you and allow the universe to bring the opportunities and events that will facilitate you on the path to personal achievement.

Trading Stocks 101 – Markets Crash Faster Than They Rise

It is much easier to destroy than to create. It takes seconds to blow up a building and years to erect it. Similar behaviour is observed in financial markets. They take years to reach their highs, but when uncertainty rises and panic and fear consume the markets, they tend to crash with the speed of light. Hence the saying “the bulls need to walk up the stairs but the bears jump out the window”. It is important to keep this in mind as this knowledge may help an investor better estimate the duration of his trades.

    S&P Futures 2002-2012

The chart above portrays the S&P 500 futures between 2002 and 2012. Notice how it took 5 years to reach the highs of the bull market in the middle of 2007 and only 18 months for the market to completely collapse and reach even lower levels from the levels it started in 2003.

Stock Trading 101 – The Dangers of RSI Technical Indicator

Relative Strength Index (RSI) is a technical indicator that signifies oversold and overbought levels. It is relatively easy to as values below 30 signify oversold levels while values above mean overbought levels. It is tempting for the novice investor to jump on this indicator and start using it to predict price movement as it offers a simple strategy that is easy to follow. The danger is that used on its own RSI can lead to poor trading decisions.

Let’s inspect the price movement of Bank of America (BAC) from December 2011 to June 2012. You can see how the stock entered an upside trend and crossed the RSI 70 level on Jan 12^th at around $6.50. From there you can see how the price kept moving up and the RSI moved even higher and stayed above 70 for extended periods of time on several occasions. By March 19^th when the price peeked around the $10 (50% move from the date when RSI crossed the 70 level) RSI has moved above the 70 level 4 times and has stayed above for a total of around a month in the three month period Jan-Mar 2012.

It is better to use RSI as a confirmation of what you observe with other indicators and always keep in mind that markets tend to overshoot which may keep RSI in overbought or oversold territory for a significant amount of time.

FCX Contracting Price Channel

While I was thinking of writing an article covering some of the dangers of using blindly the RSI indicator and searching for a chart to demonstrate this, I came across the 5 year chart for FCX.

    FCX Contracting Price Channel 2009 - June 2012

      FCX Zoomed in July 2010 - June 2012

One thing that is interesting here is that the price seems to be forming a collapsing price channel so the stock might show some break out action in the coming months. You can see how the stock was unable to break the $28.70 resistance level in July 2010 and then in October 2011. At the same time a downward trend was gradually formed in the beginning of 2011 which led to the green bearish trend line you can see in the charts above. It will be interesting to see what the stock decides to do as this price channel keeps contracting.

Stock Trading 101 – Avoid Illiquid Instruments

One of the important properties of any financial asset is its liquidity or how quickly you can dispose of it and turn it into cash. The ability to convert illiquid assets into cash it not the only limitations such assets have. If you have an illiquid financial instrument and are holding a large position in it, your risk is not only that you are unable to sell it to anyone else, but when doing so you will move the entire market. If you are forced to sell a stock to limit your losses for example, you will only increase the magnitude of such losses because you will start moving the market yourself and create the selling pressure you would like to avoid which drives the price further and further down.

In trying to evaluate an instrument’s liquidity it is important to understand the overall liquidity of the market you are in. Your liquidity requirements will depend on the size of your position and the speed with which you want to be able to most efficiently unload it. If you want to buy only 1,000 shares, almost any stock that has a 1,000,000 daily volume (maybe even less) will be sufficient. If you want to acquire a position in the millions and still be able to close this position within minutes or hours, this same stock is probably not the right choice if you want to achieve the best possible exit.

Illiquid instruments are also characterized by potentially wider spreads in their bid and offer prices. This wider spread arises because of the lack of competition and the limited number of sellers and buyers that are interested. This adds additional pressure to the investors who need to dispose of an asset in this category and who still want achieve optimum closing price for their position.

Stock Trading 101 – The Tools You Need

Information is too much to be able to digest every little piece of news that takes place in financial markets and evaluate how prices would react to it. In Why Day Trading is Dangerous we discussed the implications of high frequency trading (HFT) and automation on the markets. In this article I would like to list some of the tools that I find extremely useful in helping me reduce market noise and to be able to quickly spot opportunities that fit my trading style.

1. StockVision PowerScan – whether you are swing trader, active day trader, or a buy and hold investor this tool must be part of your arsenal. This is a real-time scanner and it tracks 3,000 US and UK stocks at present. Most similar services don’t even come close to this powerful software and  use  subscription based model where you pay every month or quarter. You pay a one off lifetime fee of $239 for StockVision and then you receive all future updates. This is peanuts and money that you can easily make from a single successful trade the tool can help you identify once you start using it.

The power of StockVision is that it allows you to create your own filters by combining technical indicators, candlestick patterns, and stock components (high, low, volume, etc). By using this tool you will be able to answer the following type of questions:

Which stocks that trade on average 3,000,000 shares are 5% away from their 52 week lows?

Which stocks whose RSI is below 20% have gapped down and have a volume increase of 3 times their standard volume?

Now this is power! To be honest, I was thinking of designing a similar software myself at some point, but once I found StockVision it was totally unnecessary to do so and I was able to spend more time trading and doing research.

2. ThinkOrSwim Paper Trading - it is critical to spend at least 1-2 years paper trading before jumping in the markets. Develop the discipline to be patient. Remember that trading is a long-term business and the same way that you cannot finish high-school and become a dentist, you need to put the hours in that will give you the confidence that you are prepared to start your journey as a trader or investor.

ThinkOrSwim is a broker recently bought by Ameritrade famous and winning multiple awards for its advanced powerful trading tools. Using ThinkOrSwim allows you to trade the stock, currency, futures, and options markets (of course do your own research to see if the commission structures they offer suit you). What is great about ThinkOrSwim that they offer a paper version of their trading software which you can use to experiment with trading strategies and improve your knowledge about various technical indicators. Most of the charts on this blog are generated using ThinkOrSwim. They also offer a mobile app which you can install on iPhone or Android device so you can track things on the go if necessary.

3. Zecco Trading Email Alerts – If you don’t have the time to constantly track the markets, but still want to be made aware when stocks reach critical levels or major moves in the market take place, you can use Zecco’s email alerts. I myself have setup alerts for several stocks and I receive emails when they move by 10% up or down or they approach multi year lows from which the stock has bounced in the past. This can be sufficient information for me to do some analysis of what is currently taking place in the markets if I have been busy running my other businesses and was not able to dedicate sufficient time to tracking the latest developments. You can of course customize the alerts you want to create to fit your own trading style and needs.

Stock Trading 101 – Why Day Trading is Dangerous

Traders with short timeframe horizon need to be aware of some of the pitfalls of day trading that influence the markets now and will have a lasting impact on trading in the long-term.

You are not a machine.

In recent years high volatility has become the norm and when this happens the market goes wild leading to large moves within seconds. If you are a day trader and you need to react immediately cut losses, take profits, or simply enter new positions it will be very challenging to do so if you are a manual trader. The speed limitations of actually entering the prices you want is not the only constraint here. The inability to fully quantify what is taking place when markets move quickly can distort judgement and emotions may overpower trading discipline.

The last decade has seen the rise of algorithmic trading in all markets. This is an extract from Wikipedia providing more details on the subject:

In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders, with 60% predicted for 2007. American markets and European markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets also have active algo trading (about 25% of orders in 2006).^[6] Futures and options markets are considered fairly easy to integrated into algorithmic trading,^[7] with about 20% of options volume expected to be computer-generated by 2010.^{[dated info][8]} Bond markets are moving toward more access to algorithmic traders.^[9]

Friends who are building algorithmic engines for major investment banks have shared how their trading platforms suffer from the miniscule delay that takes place because their servers are not deployed at the exchange from where prices are communicated to the rest of the world. Many hedge funds do exactly this to gain a competitive edge. So think twice whether you are at a disadvantage when day trading manually. You simply cannot compete with the billions of dollars that the big players pour into hardware, software, and human capital. Of course, there will be some traders who will continue to be successful day traders, but the question is for how long and whether they can grow their operation dramatically.