Day Trading

The market for gold is one of the most liquid out there. It offers a ton of opportunities for you to profit, no matter what the state of the market is like. If you want to learn how to trade gold online, there is also a plethora of guides to help you do this. Some people choose to actually buy the metal in its physical form and own it as a nest egg for the future.

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However, using gold trading on the stock market (GDL or GDX) to speculate about the future, equity and more allows you to gain leverage with minimized risk.

The value of gold isn’t a very stable one, as it fluctuates quite often. This can make trading quite difficult because there are many pitfalls that can cause a large loss in profits. The global markets in gold have a ton of different unique traits that can be utilized to your advantage, but it takes a lot of effort to actually learn this, and to keep up with the fluctuations in order to decide when to sell and when to buy stocks in the gold market.

One of the main reasons why people simply don’t trade in gold is the price. In order to invest in the gold market, a huge investment needs to be made. This can be tens of thousands of dollars. This opens up the gate to a large amount of risk as well. The smallest bad call could lead to massive losses that drain you financially and leave you broke.

Cheaper, Safer Alternative to Traditional GLD Trading

If you don’t want to take this type of risk, or if you simply want to be able to invest in the gold market without spending that much money, binary options is perfect for you. Binary options brokers usually offer the chance to trade in gold as a commodity. It is one of the trending assets for trades of any size because it is volatile and because it doesn’t get affected by most market factors that can impact the value of other assets. This makes it one of the safest to trade in, and is perfect for times when the economic stability of the world is in question as well.

The big difference in gold as a commodity in binary options is the cost. It can cust upwards of $10000 to trade in the metal in the traditional way, but with binary options this is cut down to hundreds of dollars instead. The margin for losses is also reduced significantly, making it far easier to deal with a single loss, learn from mistakes made and try again.

High Rate of Return and More Control

When trading in gold binary options, you gain a lot of control over just how much money you can win and lose. A return of up to 85% is offered by most brokers for wins. There are many ways in which the metal can be traded as well.

One of the most popular is the Touch/No Touch trade type. Typically, a traditional binary option trade would involve predicting that the value of the option would hit a certain upper or lower limit in a set amount of time. With this trade type, the value doesn’t have to touch the threshold. As long as the strike price and the direction of the value of the asset are correct, the win is granted to you.

While it is definitely true that gold is a volatile commodity, it is also one that can used very easily in the world of binary trades to your advantage. Make sure you get on a binary options broker and use it to earn some great profits!

Are you interested in learning how to trade stocks online and make some good money? The stock market is a system that is based on supply and demand, just like any business. People buy stock and hope that the company you bought stock in becomes more popular and in demand over time, so that you can increase the price at which you sell that stock to other traders, thereby making a profit.

If you have been reading up on stocks, you probably know that the price of a share theoretically increases with the value of the company and how it improves over time. However, there are many other reasons for share prices to change, and not all of them are known or fixed.

There is a lot to do in the complex art of trading stocks. You need to do your research and pick the right stock to invest in. You also have to get used to recognizing patterns in share prices. It is also necessary to invest in an online trading service to trade your stocks on the internet. Before engaging in anything, you also need to practice advanced skills, hone your instincts and educate yourself.

Better Alternatives to Trading Stocks

Stocks aren’t the only way for you to earn money by making trades, though. The risks of the stock market are many, and the return to your hand isn’t as much as it should be considering the risk and effort you’re putting into the industry. There are alternatives to the classic method of trading stocks.

One of the best out there is called binary options trading. This doesn’t have to replace your interest in the stock market, but can be used as a way to diversify your investment portfolio over time.

Binary options trading involves trading with stocks, currencies, indices and other assets, but in a simpler, different way to traditional stock trading. The first step is to open an account at a binary options broker. These are platforms and companies dedicated to enabling traders to trade better, wiser and with more benefits. There is a plethora of these companies out there, and they are available based on financial regulations in the area that you will be trading from.

How Does Binary Trading Work?

A binary options trading (you can see the best brokers here) is a trade that is made by taking a company, a division of a company, a currency pair or any other asset and predicting whether, in a set amount of time, its value will increase or decrease. In a way, this is very similar to the way traders work with normal stocks and shares. However, the difference lies in how the money works out. As a trader, you “bet” a certain amount of money on your prediction coming true.

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This means that you place an investment of, for example, $5 on the assumption that the value of Apple, Inc. stock will rise to a certain threshold in the next hour. After an hour has passed, if the value of the company has actually risen to this threshold, the option has finished in the money. Your investment is returned to you, along with a nice profit for winning the trade. If the value doesn’t hit the threshold, you are out of the money.

Typically, this would mean that you lose the $5 that you invested. However, some brokers offer a small return of about 5 – 15% of your initial investment even when you lose a trade.

There are actually many different types of trades that you can make, not just for stocks either. The traditional way of trading binary options is just one of many. Trading stocks online is pretty great, but binary options trading might just be the simple alternative we have all been looking for!

The Benefits of Binary Options Trading

If you’re interested in an alternative to traditional stock trading binary options trading may be worth considering.

Binary options trading allows you to diversify your investment portfolio and potentially earn money by trading stocks currencies indices and other assets in a simpler and different way.

To get started you’ll need to open an account with a binary options broker which offers platforms and services to help traders make informed decisions.

Binary options trading involves predicting whether the value of a particular asset will increase or decrease within a set timeframe.

You can place an investment on this prediction and if it turns out to be correct you’ll earn a profit.

Even if your prediction is incorrect some brokers offer a small return on your initial investment.

With binary options trading you have the opportunity to trade various types of assets not just stocks.

This simplicity and versatility make binary options trading an appealing alternative to traditional stock trading.

Probably not.  Day trading is extremely hard and computer generated algorithmic trades are making it tougher by the day.  Does that mean it can’t be done?  Absolutely not.  There are day traders today who make a good enough living to support themselves comfortably, and some do much better.  You may even consider some day traders to be rich.

The problem is that most people are not able to attain that level of success through trading.Over 90% of people who try to day trade for a living ultimately fail.  In fact, as the markets have become more electronic, and more computer algorithm driven, fewer traders have been able to trade for a living.  That doesn’t mean that they aren’t profitable, or that they don’t manage to have some big trades along the way.  The simple fact is that to do it for a living, over a long period of time, a trader needs to experience a lot of success month in and month out.

If you know that obstacles, you may be able to overcome them.  Read on to learn the biggest obstacles to day trading successfully enough to live off of, and learn how to give yourself the highest chance to succeed.

Obstacles To Making A Living

• The lack of discipline applying a strategy.  This is the number one cause of failure in the trading world.  People are often able to develop strategies that are profitable, or would be profitable if they were applied strictly without the trader straying from the system.  Unfortunately for a variety of reasons traders can rarely stick to a strategy.  Probably the biggest reason why traders are unable to adhere to a strategy involves a lack of patience.  Day trading is not as exciting all the time as some people would like it to be.  That doesn’t mean that it isn’t very exciting sometimes, but a lot of trading involves sitting around and looking for the right trade setup.  Depending upon your strategy, the right trade setups may come few and far between.  New traders have a very hard time sitting idle, waiting for the setups to come.  New traders think that to become successful, they need to make money every single day.  This is simply not the case.  Being highly successful on a low number of trades can make a trader rich.
• Developing a strategy that isn’t successful enough.  It turns out that it isn’t extremely difficult to create a strategy that is slightly profitable, but to create a highly profitable strategy takes some work/know-how.  New and experience traders often fall into a trap where they are making money, so they don’t want to change their strategy, but they are not really making enough money to live on.  A clearly defined successful strategy is the most important tool a trader needs to systematically make money over a long period of time.  Unless you are perfectly disciplined, you need a strategy with a big upside or a high winning percentage (or ideally both).
• Pressure to make money quickly.  If you want to become a successful day trader who can live off day trading profits alone, the one thing you can’t have enough of before you start trading is money.  This is not because you will necessarily lose a lot of money when you start trading (though you may), but because it can take time to get good enough at trading that you can pay yourself regularly.  If you are under pressure with low savings and lots of bills or a family to support, you will have a hard time trading successfully.  You almost certainly will struggle to maintain any discipline, and you will have a hard time sticking with trading long enough to get any good at it.  You need to be able to survive for quite some time without income if trading is your only source of income.  Even professional day traders go through a month here and there where they don’t make any money.
• The stock market is extremely competitive.  I would love to be able to tell you that anyone can become a day trader with a little hard work, but that is not reality.  The truth is that the stock market is very, very, very competitive.  Wildly competitive.  As a day trader, you will be fighting investment banks, hedge funds, trading algorithms, and all sorts of very smart people, institutions, and machines for the same profits.  If one person makes money, it means that someone else is losing money or giving up an opportunity to make money (opportunity cost).  People who consistently lose money do not survive for very long in the stock market.  To be successful as a trader you need to develop a niche, and become very good at what you do.  Equity markets are so competitive that they are very efficient at reflecting the “right” prices.  There is still opportunity, but there isn’t any “free money”.  Being profitable takes intelligence and hard work.
• Being unable or unwilling to adapt.  The stock market is always changing.  A strategy that has worked for a year or longer may suddenly stop being profitable.  Laws are changing, and the market has seen the invention of electronic markets, dark pools, and electronic market makers.  The way that the market moves will continue to change.  For a trader to make a living day trading, an ability to adapt is crucial.  Unless you can make a lifetimes worth of income before the market changes, you will need to adapt with the times.

The Keys To Succeeding At Day Trading

After hearing all the obstacles, you may be scared to try day trading.  Not day trading may even be the best decision you ever make.  Far more traders will lose time, money, and their sanity than than experience riches and success.  Even so, day trading is exciting and potentially very lucrative.  While fewer traders have been able to make a living in today’s fast moving electronic market, those who are able to make a living tend to do do very well.  The odds are against you succeeding at day trading, but if you are able to succeed you will probably be well compensated.

The biggest key to success in day trading is to avoid habits that lead to big losses.  Here are the important points to master if you want to earn your living as a trader.

• Develop a (winning) strategy in a demo account.  It is very important that you don’t waste money trying to figure out your strategy.  Keep a demo account that simulates real trading as closely as possible and test your strategy as thoroughly as possible there.  Only after you have confidence that it will make money systematically should you move to “live money”.  For help developing a strategy read our article about it.
• Adhere to your strategy perfectly.  By far, the biggest mistake that new traders make is that they are unable to stick to their strategy.  Trading has narrow enough margins without wasting money on imperfect trades.  Keep yourself profitable by keeping yourself disciplined.  A good way to do this is by tracking and reviewing every trade with a trading journal, and by reviewing your trade blotter every day.
• Manage your emotions.  Negative emotions lead to reckless trading, an inability to properly manage trade size, and make it easier to miss good trades.  To master trading you need to master your emotions.
• Adapt.  If your strategy no longer works, you need to go back to your demo account and either tweak it or develop a new strategy that will work.  The market is certain to change, it is up to you to change with it.

Ultimately if you are going to succeed at day trading enough to make a living you are going to have to go through a big learning curve.  Their are many resources, and many people willing to help you.  You will have to learn to develop your strategies, and learn to control your trading so you adhere to them without wavering.  You will need to spot opportunities, and be willing to act quickly and decisively to take advantage while they present themselves.  The best day traders are willing to aggressively pursue any opportunity.  Any day trader will tell you that the trade setup will not last for long, and if you wait, you will lose your chance.

If you want to make a living day trading you need to be aware that you have a long road ahead of you, but the rewards can be very sweet.

Key Factors for Success in Day Trading

While day trading can be a challenging endeavor there are several key factors that can increase your chances of success.

First and foremost it is essential to develop a winning strategy and thoroughly test it in a demo account before risking real money.

Adhering strictly to your strategy is crucial as straying from it can lead to losses.

Additionally managing your emotions is paramount as negative emotions can result in reckless trading and missed opportunities.

It is also important to adapt to changes in the market and be willing to tweak or develop new strategies when necessary.

Finally it is vital to have the dedication and determination to continually learn and improve your skills as a day trader.

By focusing on these key factors you can increase your likelihood of making a sustainable living through day trading.

Software is extremely important when you trade.  There is not necessarily one software that is “best” but there certainly are software programs that are better than others.  There are a few points to keep in mind when a trader chooses a software program to trade with, or chooses a brokerage based upon their trading platform.

Low Latency

Every trader wants a trading software or a trading platform that is “low latency”.  This is a fancy way of saying that all of the quotes and information displayed by the software is extremely up to date, calculated to the microsecond.  This is crucial for traders because the markets move so quickly.  A trader needs the most up to date information possible, if they are to trade effectively.  This is more true every day, as more and more computer algorithms make up a bigger and bigger percentage of the total trades.  Computers act fast, and if a trader has a software that is not up to date, they will struggle, especially on short term trades, where pennies can make the difference between a profit and a loss.

At How We Trade we also recommend that you use the lowest latency software possible.  We would not want a trader to have any disadvantage, as trading is hard enough by itself.

Simple Design

It usually makes a trader more effective if the software has a simple user interface.  This is not to say that the software should be unsophisticated, or be lacking in formation or features.  The key here is that the design of the software allows a trader to navigate intuitively.  Not only does this allow a trader to move more quickly with less thought about how to interact with the software, but it also goes a long way to prevent user errors, popularly termed mistakes like “fat finger” trades.

At How We Trade we prefer a simple design.  Good software programs for day traders include platforms like Tradestation, Thinkorswim, or Sterling.  We also trade with Tradorax when we trade binary options, because they have a clean professional interface with their software.

Whatever choice you make regarding your preferred software, remember that it needs to be something that you are comfortable with, that you can navigate with ease and that you will not make order entry mistakes with.  Remember, accurate orders are a trader’s best friend.

Your Software Should Have Advanced Charting Features

Depending upon your strategy, you may use advanced charting features when you trade.  If your strategy depends upon charting moving averages, MACD indicators, Fibonacci signals, stochastic indicators, or something similar, you need to make sure that your software includes this.  Software and online platforms from many companies do include these indicators today, but if you use one or more of these in your trading, or you think you may incorporate them into your trading at some point, you should have software with advanced charting elements included.

Alternately, you could also use a third party trade indicator software if this is more effective for you.  There are a few of them out there.  Most do require you to pay a separate fee, which may be worthwhile if they are profitable.  As with any indicator, the key is in learning when it is effective and when it is not effective, because not all signals will be profitable and you will have to develop additional rules to using the indicators in most cases.

Eye Pleasing

This may sound a little silly, but trading is very emotional. When you trade, you want to be focused and in an upbeat mood.  Using a software with eye pleasing colors, layout, or a good looking scheme can help keep you in the right frame of mind for trading.  When emotions play such a big role in determining your ultimate success or failure, every edge counts, just like every edge in your trading strategy counts.  In fact we consider superior mastery of your emotions an edge when it comes to making profits.  Remember, when you think successful thoughts you have a higher chance of achieving your goals.  Software can play an important role in this area.

Most Software Packages Are Sufficient From A Mechanical Perspective

Today, most trading software and trading platforms are technologically advanced enough to provide trader with sufficient features and reliability to access the markets efficiently.  What this means is that most software can “get the job done”.  The best software packages do more than this though.  To succeed, you want your software to be lightening fast, eye catching, have elegance in its sophisticated yet simple design, and to have the tools you need to consistently profit from the markets!

You don’t need the stock market to go up to make money.  There are a number of ways that you can bet on an individual stock or the stock market as a whole to go down.  While this is a speculative strategy (as opposed to an investment strategy) it can provide a useful hedge if you have other long positions, or it can be a great way to make money when conditions are not favorable for a bull market.

When you are betting on an asset to decline in value, your position is known as a “short position“.  You may also see a trader who has a “short position” referred to as “being short” or “shorting”.  The most common ways to do this are by selling a stock short, by purchasing Put Options, by writing Call options, or by purchasing a Put binary option.

Ways To Profit From Short Positions

Purchasing A Put Binary Option

This is perhaps the easiest way for the average trader to take a short position.  A binary option is extremely simple (it pays out a pre-set amount if the trade is in the money, or expires worthless if the trade is out of the money).  Binary option accounts are easy to open, can be funded with a credit card, and do not require any special “margin privileges” like a traditional brokerage account that is option eligible.

High Risk High Reward

The trader takes a short position by purchasing a Put option contract and entering the dollar amount that they want to risk on the trade.  The “strike price” is determined by the price of the security at the moment the trade is entered.  The trade has a pre-set payout amount (usually between 60% and 90% of the amount risked).  If the option expires in the money, the trader wins their money back plus the payout percentage designated for the trade.  It does not matter how far in the money the option contract expires, the payout is always the same.  If the trade expires out of the money, the trader loses 100% of the amount that they risked.  In this way a trader can potentially make a lot of money from their short position, but they also will lose their entire position if it expires out of the money.

By using binary options, a trader can purchase put options for different time frames to place a bet that will pay if an asset declines in value.  This is a viable way for an average trader to profit from a stock, a market, or other assets falling in price.  There are various lengths of time available for binary option trades, usually ranging from 1 minute up to a period of a month or months.

Selling a Stock Short

This is the most common way that traders and investors, and especially day traders, can profit from a decline in prices.  A short sale involves selling a quantity of an asset (usually a stock) that the trader does not actually own.  The trader will sell at the current market price to the open market, and their brokerage will provide the shares to the purchasing party.  The trader is effectively being loaned the shares from the brokerage.

The trader’s account is credited with the value of the sale.  The trader is usually charged interest from the brokerage daily for the shares that are loaned to the trader.

When the trader decides to close the position, they purchase the shares back from the open market.  If the price of the security has fallen, the trader will purchase the shares back (to payback the loaned shares to the brokerage) for less than what they were sold for.  The trader can then keep the difference between the price it was sold for and the price it was bought back for.

Limitation On Profits And High Potential Risk

The highest amount of money that a trader can make from selling a security short is 100%.  A 100% profit would be realized if a security becomes completely worthless (the trader would not need to pay back the loaned shares to the brokerage because they have no value). Most assets which are shorted do not go to a price of 0 though.  In fact a decline in price of 20% for the most commonly traded securities would be considered significant.

It is important to note that if a position is out of the money when it is closed, the trader does not need to necessarily lose a lot of money.  A position which is closed out for a slightly higher purchase price than the sale price, for instance, will result in a very small percentage loss.

That being said, there is no maximum to the amount of risk that a trader is exposed to.  While their maximum return is 100%, the price of a security may double, triple, quadruple, or even go up higher in price.  While brokerages have risk controls in place in the form of “margin calls”, this is not a perfect system and it does not necessarily limit the risk effectively.  If for instance a security closed one day below a level which would result in a margin call, and opened the next day significantly above the price which would incur a margin call, the trader is responsible for paying the brokerage any losses, without limit.

Selling Short Takes More Capital

Because a short sale of a security typically provides the lowest expected return compared to the other ways discussed here to profit from price declines, it takes the most capital on the trader’s part to make money.  Short selling can also only happen in a margin approved account, which has minimum balance requirements.  While many day traders do engage in short selling, and some are very profitable from it, there are limitations and benefits unique to this form of short position.  It is important for every trader to understand this completely before choosing their method of taking a short position.

Purchasing A Put Option (or Writing a Call Option) Using Traditional Options

A traditional stock option works by giving the owner the right to either buy (a Call option) or sell (a Put option) a security at a future date, for a specified price.  The option has a value because it provides this right to the owner at a future date (and prices may change between the purchase time and that future date), and it may have a value because it is either above or below the strike price when the option contract is purchased.

Purchasing a Put Option

If a trader owns a Put option, it gives that trader the right to sell shares of that particular stock to the option writer for a specific price on a specific date.  If the price is below the strike price, the trader will execute the option.  This means that they will buy shares at the market price, and sell them for the higher agreed upon strike price.  By owning a Put option the trader is making a bet that the price will decline, and that they will be able to purchase the shares on the open market for below the strike price (which the option writer is obligated to pay).

Returns are Potentially High and Risk is Capped

The benefit of a Put stock option is that they rewards are potentially very high, the highest of each of these methods.  A trader has the ability to make multiple times the money that they purchase the option for.  If the option expires out of the money, the option expires worthless, capping the risk to the trader at the amount they spend on the option contract(s).  Some view purchasing traditional stock options as the most beneficial risk/reward profile of any type of position, for trading purposes.  The caveat is that while the risk is capped, an option that expires even slightly out of the money has no value.  An option that expires slightly in the money will have a small value, so while the upside has a lot of potential, the expected return may not be high enough to compensate a trader for the risk of losing the entire trade amount.

Option Decay

Every option has a time value, otherwise known as Theta.  This is the value in the amount of time left between when an option is purchased, and when it will expire.  Time has value because the price of a stock can move over time.  The more time remaining, the more potential a stock has to move further into a profitable position for the option.  Even if the price of a stock or underlying security doesn’t move, the time until the option expires is constantly reducing.  As time passes, the time value of the option lessens.  This reducing time value is known as option decay.

Writing a Call Option

A trader can also profit from a decline in an assets value by writing Call options.  The trader sells the call options that they write on the open market, and if the price drops below the strike price, the trader will keep 100% of the money he earned by selling the options. If the option is executed in the money, the writer will be obligated to sell shares to the option owner at below market value prices, potentially resulting in a loss on the position.

No Cap On Risk

Because the price of a stock hypothetically has no limit to how high it can rise, the potential exists for very large losses when writing Call options.  As an example of how writing a Call option can turn out especially poorly, let’s say a trader writes a Call option (100 shares) for stock XYZ at a strike of $50.  Let’s say that the trader sells this option for $2 (taking in $200 of revenue).  If the price of the stock rises to $60 when the option is exercised, the trader must sell the owner of the option 100 shares at $50.  Because it costs $60 per share to acquire the shares, the trader will lose $8 per share ($10 a share on the price difference minus the $2 a share in revenues from writing the option).  This position loses $800, and it only had a maximum potential gain of $200.  Writing options can result in unfavorable risk/reward profiles in some circumstances, and traders should have extensive option knowledge before writing any options of their own.

The Best Method Depends Upon the Trader

There is no “best” method for profiting on a decline in prices.  There are unique benefits and risks to each style.  We use Binary Options because there is a high payout no matter how far in the money the option contract expires.  This allows us to precisely control our risk/reward profile.  It is also well suited to traders who do not want to put up substantial amounts of capital (as the other methods require).

The highest potential payout is using traditional Put options, but there is option decay, and an option that is executed a little bit in the money will only provide a small return to the owner (who also took a significant risk by purchasing the option and possibly losing 100%).

It is important for every trader to understand the workings of each type of short position, and to thoroughly understand their chosen method.  For simplicity and for the predictable payouts on all winning trades, we use binary options.  If you would like to become a binary options trader and you need to open a binary option account of your own please sign up for an account today.

Volume weighted average price (also abbreviated VWAP) is a formula used to calculate the average price a stock trades at, weighted by volume transacted at each price level.  Normally traders are concerned with the volume weighted average price over a 1 day trading period, but some may be interested in longer or shorter term periods.

Day traders may track VWAP because this calculation is very significant to the trading of many mutual funds and most pension funds.  When the current intra-day price varies significantly from the VWAP, there may be pressure for the price to move towards the VWAP.

This calculation is important to large passive institutional investors who are simply trying to match their average transaction price to the average price transacted over the course of a trading period.  By matching the VWAP as closely as possible, they may reduce their market impact costs, which are the costs incurred by large traders whose trades are so large they move prices.  They also reduce the risk that incorrect market timing will result in their average transaction value being significantly worse than what the market as a whole received.

How Volume Weighted Average Price is Calculated

Volume weighted average price is very simple to calculate.  One takes the total value traded over the time period being analyzed, and divides by the total quantity traded.

VWAP =   Quantity of  Shares Bought at Each Price * Price of Each Transaction / Total Volume

Or more simply

VWAP= Total Value of All Transaction / Total Volume

Here is a simple example.

Transaction 1 = 100 shares at $10

Transaction 2 = 300 shares at $10.20

Total Value = (100* $10) + (300*$10.20) = $1000 + $3060 = $4060

Total Quantity = 100 + 300 = 400

VWAP = $4060 / 400 = $10.15

Practically speaking a trader could not keep track of VWAP in real time without computer calculating assistance.  Many charting software packages do include VWAP tracking capabilities.

Exchange Traded Fund (or ETF)

An exchange traded fund, abbreviated ETF, is a fund that trades like a stock, and tracks an index, an asset class, a commodity, or basket of commodities.  Like a stock, an exchange traded fund will transact throughout the day, and does not necessarily trade at it’s intrinsic value, or net asset value (NAV).  This is unlike a mutual fund, which only trades on market close exactly at the net asset value.

Unlike a mutual fund an ETF is not actively managed, meaning its performance is meant to mimic the underlying asset(s) tracked as closely as possible, either on an intra-day or long term period, depending on the ETF.  Exchange traded funds typically have much lower expense charges than mutual funds, making them attractive to some investors.  ETFs are also attractive to day traders, who can trade an index or commodity with an equities trading account, rather than a futures or commodities account.

Some exchange traded funds are meant to trade double or even triple the volatility of the underlying index or asset tracked.  These funds are solely for the purpose of day trading, and never should be held long term as they have considerable decay in their net asset value.  The reason for the decay is the use of leveraged products to create the extra volatility.  Recently these funds have come under more regulatory scrutiny because by design, they will all eventually be worth $0.  They also create extra volatility in the market as a whole as the funds must rebalance their own assets during the trading day.

While an exchange traded fund is not necessarily required to trade at a share value which would correspond exactly with the true NAV, any significant deviate would qualify as an arbitrage opportunity, and any inefficiencies in pricing are typically rooted out very quickly by high frequency traders.

ETF volume accounts for hundreds of millions of shares of market volume daily, and these products have become very popular amongst both investors and traders.  The most popular ETFs include: SPY (S&P 500), EEM (emerging markets), GDX (gold miners), VXX (S&P 500 VIX), and XLF (Financials).

Sometimes an ETF may be useful to a trader acting on sector specific news, when the trader is unsure how one particular asset within the sector will be affected.  An example is when the US Government decided to increase capital holding requirements of banking institutions.  Without a full analysis of each bank, a trader would not know how significantly each would be affected.  Instead knowing that the industry as a whole would likely decline in price on the news, the trader may have decided to short the XLF (Financial Sector)

Traders and investors alike should educate themselves on exchange traded funds as they provide a useful alternative to other assets.

Market Order

A market order is an order that a trader enters that does not specify a specific price to execute.  A market order will seek liquidity at progressively further prices from the current bid and offer until the order is completely filled.  The purpose of the market order is to ensure that the transaction is completed instantly.  This can be very useful to traders in a fast moving market because they are assured of the order executing.  A market order is the opposite of a limit order, which is an order that must execute at a certain price or better.

A market order can be a buy or a sell order.  If the order is a buy order, it will first remove liquidity from the offer.  If this does not completely fill the order, the market order will continue to seek liquidity at progressively higher prices until the fill is complete.  Conversely, if the order is a market sell order, it will remove liquidity from the bid and progressively lower prices until the order is completely filled.

The obvious benefit of the market order is the speed and surety of execution.  A market order will always fill, and it will always fill almost instantly.  If a stock is very quickly changing prices and it would be difficult to take the time to enter a specific price a market order can be extremely useful.

This works very well for traders if the order is small, or if there is a lot of liquidity posted in the stock.  This type of order can potentially be very dangerous for traders as well.  Because price is not specified, the order can legally transact at whatever price is necessary to complete the order.  If a trader enters a very large market order relative to the liquidity available in the stock, he risks moving the price significantly away from the current bid and offer.  Because high frequency trading programs can remove posted liquidity so quickly, there is always a risk that the programs will remove liquidity before the market order is even able to access it, resulting in an even worse execution for the trader.  Traders should always be aware of how large their order size is in relation to the available posted liquidity for a particular stock.  All stocks are different in this regard, and the same stock can be different during different days or even during different times of the day.  This is yet another reason why traders must always watch the book of a stock while trading.

It should be noted that using a market order in the dark pools can access more liquidity than can be seen on the books.  Sometimes this can result in a much better fill for a trader, other times the light pools will pull orders when a large market order is entered into the dark pools.  If you have access to a sweep order that will seek both light and dark liquidity it is most beneficial to trader entering the market order.

A market order is simply one more tool in a traders toolbox.  It is useful in fast moving markets with ample liquidity.  Used at the right time it can be tremendously useful, used at the wrong time it can cost a trader a lot of money.  Traders must always be aware of the circumstances when deciding between using a market order or a limit order.

What Is A Stocks Volume

Volume is the total quantity of shares which have transacted in a given time frame.  Traders use volume as a measure of a stock’s volatility or potential volatility.  Higher volume will generally signify that a lot of parties are interesting in trading the stock, and the stock is likely to move as a result.  Volume measurements are also used as a signal of liquidity of a security, so a trader can judge his ability to enter or exit a position at current market values.

Higher volumes are generally favorable to traders, but may only be beneficial to a point, or may not be beneficial depending on the exact strategy. A trader may also look at average volume at a daily level, or may even break this down in smaller increments of the day to judge when he may best employ a strategy.

Volume does not double count transactions, meaning if a trader purchases 100 shares from another seller it results in 100 shares of volume, not 200.

Typically in charting software volume is displayed below the price chart.  Volume is normally displayed for every price bar, so that if a chart is displaying 1 minute price bars volume will display for each minute.  The chart and volume together typically will look something like this:

This is a daily chart of GE, with the volume displaying for each price bar directly below the bar.  In general it can be noted that days with lower volume also have a smaller range in price.

Volume is NOT an indication of price direction by itself, it simply is a signal that traders use to judge if a stock is likely to move.  Often times traders will watch screens displaying the stocks with the highest volumes, or displaying sudden spikes in volume, which is can be a sign that news was released, or at least that the stock will be moving.

Traders who are relatively new and are working on refining their strategy will be well served to watch how volume impacts trading.

What are the Stock Market’s Trading Hours

The stock market’s regular trading hours are from 9:30 a.m. to 4:00 p.m. Eastern Standard Time.  There are is also a pre-market session every day from 4:00 a.m. to 9:30 a.m. EST and a post-market session from 4:00 p.m. to 8:00 p.m. EST  Check the NY Stock exchange’s website for hours and holidays.

The regular trading session from 9:30 a.m. to 4:00 p.m. is the typical market session that most people refer to as the “day’s trading session”.  This is when the vast majority of the day’s volume transacts and when most market participants are active.  Because there is more volume posted to stock’s books during the regular session it is arguably more predictable and a safer time for day traders to be involved due to the higher likelihood of having liquidity available to execute orders.  Some day traders prefer pre-market or post-market sessions however and only trade these times.  Generally it is recommended that only experienced traders participate in the extended hour’s sessions however due to the possibility of extreme volatility.

Some stocks are very active in the pre-market and post-market sessions, and some have no activity at all.  The spread will often widen significantly at non regular session hours and it can be very difficult to enter and exit large positions.

It is very important for a trader to understand the stock they are trading and the likelihood of liquidity being available after the closing bell.  If a trader accidentally does not exit a position by 4:00 p.m. it can be very tough to exit after the close, and with a wider spread significant price slippage can occur.  This can needlessly cost a trader a lot of money.

Only experience can give a trader a feel for the differences; but it is crucial to understand the differences between sessions and the differences between how particular securities trade during these times.  Always trade a light position until you understand the risks and movements of the hours you are trading.

What is A Share of a Stock?

A share of a stock represents ownership in the company that the share is issued for.  Share ownership entitles the investor to share in the profitability of the company (or lack thereof) as well as a say in company matters put to a vote of investors.  Stock investors purchase shares issued by corporations in hopes that the company will become more valuable through increased profits and business prospects.

One share of a corporation may represent different percentages of total company ownership based on the number of shares outstanding for each particular corporation.  For instance, if there are 10,000 shares outstanding for a given corporation, one share represents ownership of 1/10,000 of the company, and the shareholder has 1/10,000 of the total vote in shareholder votes on company matters.  If a shareholder owns 5,000 out of 10,000 total shares, they would own 50% of the company and have 50% voting rights.

Shares bought and sold on the stock market represent true ownership of a corporation, and entitles owners to the benefits and pitfalls of ownership.  A nice perk for investors of publicly traded corporations is that while they are entitled to share in the upside if company profits soar, an investor can not lose more than his or her investment if the company goes bankrupt.  In other words, owners of shares are not required to pay back company debts personally if the corporation can not meet its debt obligations.

Some people think of a share as something intangible that goes up and down in price almost randomly.  The reality is this is far from the truth. The price of shares is based on buying and selling, most of which is is performed by large institutions like hedge funds and mutual funds.  They decide to buy and sell based on exhaustive research and financial modeling of all available information on a corporation’s current profitability, current and project future asset values, and future profitability estimates and potential.  The price of a share, and the value represented by the share is no arbitrary matter.

The ability to break a corporation into many shares which can be sold to many investors has allowed owners of large companies to sell their companies, which would otherwise be too large to purchase for any single investor.  It has allowed average citizens to partake in the benefits of company ownership when they otherwise would not be able to, and this investment propagates economic growth, allowing companies to use investor money to expand operations and hire additional workers.  When a company first breaks itself into publicly traded shares, it is said to have an IPO or initial public offering.  When a company issues additional equity to the public after an IPO this is known as a secondary offering.

A trader should never lose sight of the fact that while their ownership may be short term, the instruments they are trading represent real tangible value, often in some of the world’s largest corporations.

What Is A Stock Trade

A stock trade is actually a transfer of ownership in a publicly traded corporation. The trade refers to the exchange of money for ownership rights, which are denoted in shares of stock.  In common parlance, the term trade has come to mean a shortly held position taken with the intent of capitalizing on near term volatility.  Those who do this for a living are known as day traders, but many people will buy or sell stock in shortly held positions with the hopes of making a lot of money.

An example of how this is done:

A trader buys 1000 shares of stock ABC at $50.  The stock price moves up to $54 dollars after a positive earnings announcement creates buying interest. The trader sells his 1000 shares at $54 and makes $4 of gain per share on the position.  Total earnings are 1000 x $4 = $4000.  The trader made $4000 in a short time period, or an 8% gain on his investment of $50,000.  Traders will also use some tools such as margin buying power and options to create leverage, and magnify the extent of their gains.  Caution must always be taken by the trader however as losses are also magnified by leveraged positions.

Generally speaking short term trading is discouraged by the government, both for the safety of the trader’s capital as well for general healthy functioning of capital markets, since trading increases volatility.  Let’s not forget that the purpose of capital markets are for corporations to access public wealth so they may make investments in their businesses, and for the public to invest in corporations that they believe will make money for them, so that their personal wealth will grow.  This relationship is beneficial to both parties and it is why capital markets are such positive drivers of economic growth.  The value of having short term traders involved in these markets is always up for hot debate, especially with the explosion of high frequency algorithmic trading.

No matter which side of the issue you are on, you should always understand what you are doing when you place a trade.  Always understand what exactly you are trading, the maximum amount of money you can lose, and how you can be most effective in placing your orders.  This includes understanding how your broker works, how much you pay for commissions, the types of orders you are placing, and how you are determining that a particular moment is the best time to place the trade.

What Is A Day Trader

A day trader is someone who buys and sells securities, usually equities but possibly bonds, derivatives, futures, currencies or options, with the intent of taking advantage of short term price movements to create profits for their account.  Day traders may occasionally hold securities overnight, but normally close all positions by the end of the day, hence the term “day trader”.

A day trader works to establish a trading strategy that will result in the trader either only taking trades with a higher probability of being profitable than not, or with the probability of a winning trade creating profits such that over time the profits will be greater than the losses, even if there is a higher probability of the trade ending in a loss. Once developed a trader’s goal is to adhere to the strategy as strictly as possible, gradually using greater and greater trade sizes in order to increase their profits over time.

Strategies for equity traders may including reading a stock’s tape and order book to spot large buyers or sellers, going with price momentum during times of high volume or rapid price movement, or reacting to technical or algorithmic signals.  Some day traders work exclusively by writing algorithms, often times ones that operate on extremely short time frames, taking advantage of small inefficiencies in the market.  The trader will then let their algorithm work throughout the day, usually monitoring it constantly and adjusting it in response to changes in market conditions.  If you have the ideas but don’t have the computer skills to program your own algorithm, Cyborg Trading offers traders a fantastic resource by taking the need to know programming languages out of the equation for the trader.

Day traders may work for a proprietary trading firm, such as WTS, T3 Trading, or Bright Trading, or they may trade their own accounts with a retail brokerage such as TD Ameritrade or Interactive Brokers.  A trader will work with a proprietary trading firm to get increased leverage and more professional trading tools, or a retail brokerage in order to keep 100% of their profits.  A proprietary trading firm may have lower commission charges than a retail brokerage, but may require the trader to pay for some monthly costs such as software and ECN access, and will generally keep a percentage of the trader’s profits.  A proprietary firm will provide a trader with firm capital, however, and may increase a trader’s total profits significantly.  The right choice is an individual decision for each individual.

A day trader is a participant in the markets, always working on their strategy to predict short term price movements in order to create profits for their account.

What Is Trading On Margin

Trading on margin is the ability to buy or sell more of a security than you would normally be able to with your account equity.  It is basically a loan from the brokerage provided as a service to clients.  By law you cannot have more margin value loaned to you than you have in equity.  Put another way, you can borrow up to 50% of the value of your purchase.  You are also free to borrow less if you wish.  Some brokers will require a higher percentage of account equity of the total margin purchase.

This applies to retail accounts, and accounts must be specifically given privileges as margin eligible accounts.  A broker will require an affidavit from the account owner stating that they understand all risks associated with trading on margin, and are in a strong enough financial position to assume those risks.  Margin accounts require a minimum deposit of $2,000, and some brokers will require a higher deposit.

Traders use margin in hopes of magnifying their gains.  If they are buying a position that is twice as big as the equity in their account, the hope is that they will make twice as much money from it.  This is sometimes the case, but unfortunately there are no guarantees.

Buying on margin is risky by nature.  When you have twice as much equity invested in the position than equity in your account, every price increase or decrease will have double the effect on your account equity.  This is very good if the position goes in your favor, and will at least double the damage if the position moves against you.  A trader should only use margin if they fully appreciate the risks and rewards.

Margin is also not free.  It can be thought of as a loan from the brokerage, and like all loans there is an interest rate attached.  The interest rate will vary amongst brokerages but will often be indexed to an established rate, for example the rate may be libor+ standard markup, or the rate could just be a flat rate.  Either way every day you are using margin, you are obligated to pay interest.  The interest is deducted from your account, and it usually behooves the trader to only hold positions on margin for short time periods.

If a trader is holding a security on margin, and the value of the position declines substantially, a trader may be subject to a margin call.  A margin call is a call made by the broker to add more funds to an account when the equity declines to a certain percentage of the total position value.  This happens to help assure the brokerage that they will not lose their own money on the position.  Different brokerages may have different standards for when a margin call is placed, but if funds are not added in time the brokerage will liquidate the position to a point where the account equity is an acceptable percentage of the position value.

Trading on margin can be beneficial for day traders as long as they have controlled risk parameters, but essential to understand the full consequences of using it.

Stock Market Terminology: Volume Share Stock Trade Day Trader Trading on Margin

Volume is an important concept in stock market terminology.

It refers to the total quantity of shares that have been traded within a given time frame.

Traders use volume as an indicator of a stock’s volatility and liquidity.

Higher volume signifies increased buying and selling interest which can result in price movements.

Traders often monitor stocks with high volumes or sudden spikes in volume as it can indicate significant market activity or news releases.

Shares represent ownership in a publicly traded corporation.

When investors purchase shares they become partial owners of the company and have a say in company matters put to a vote of shareholders.

The percentage of ownership is determined by the number of shares outstanding.

Shareholders can benefit from the company’s profitability as well as participate in growth opportunities.

A stock trade involves the buying or selling of securities such as stocks or bonds with the intention of capitalizing on short-term price movements.

Day traders in particular aim to take advantage of these short-term fluctuations to make profits.

They typically close all their positions by the end of the trading day.

Traders study market patterns order books and technical indicators to identify potential opportunities for profitable trades.

Trading on margin allows traders to buy or sell more securities than their account equity would typically permit.

It provides leverage by borrowing from the brokerage but it also increases both potential gains and losses.

Traders should use margin with caution and fully understand the risks involved.

Interest is charged on margin accounts and failure to meet margin requirements can result in margin calls and liquidation of positions.

Understanding these terms is essential for investors and traders in navigating the stock market.

Volume and share information help assess market activity and liquidity while knowledge of stock trades and day trading strategies empowers traders to make informed decisions.

Awareness of the risks and rewards of trading on margin is crucial to managing investments effectively.

A common term amongst traders is capitulation.  This term has meaning outside of the trading world, which is basically giving up or surrendering completely.  Applied to trading, this is a common observation during a period of selling, both in long and in short moves.  Simply defined, capitulation occurs when a significant amount of long positions are abandoned, creating a sharp period of selling and price decline.  Capitulation is actually a very intuitive concept, especially when one considers the emotional aspects of capital market trading.  Periods of capitulation also offer one of the most excellent inefficiencies in the market which can be exploited by savvy traders.

Capitulation can mean two ways to make money to a trader who successfully can identify the moments it is taking place.  The shortest term traders understand that taking a short during this period of time is about as close as trading gets to “free money”.  The selling is often so rapid and so fast, that a trader only needs the courage to take a position short, and often the position will quickly be in the money, and remain in the money until the end of the selling.  These traders must understand the moment the selling is over though, because to longer term traders this moment signals an excellent opportunity to buy at an “inefficiently cheap” price. Capitulation most often marks the bottom, or very close to the bottom of a decline in price.

Here is an excellent example of capitulation in GE.  Capitulation occurred on March 4th of 2009.

True capitulation is marked by an extreme increase in volume as sellers are scrambling to exit positions, and not enough buyers are present to control the pace of selling.  Notice the massive spike in selling volume on March 4th, 2009. Notice as well how this marked the exact bottom of the decline in price.  From this point GE went on to more than double in price in only 2 months!  This is obviously not a “day trade” but imagine how much money was made by some traders who identified this final push down as the capitulation point.  The volume uptick coupled with the sharp decline provided a very clear signal that many long positions were selling out.

As more sellers paniced out of their positions, it created more downward pressure on price.  This had the effect of both forcing other long positions to realize their loss before it got even bigger, and making potential buyers step out of the way as the downward pressure was so hard.  The lack of buying meant sellers had an even greater effect on price than they would have during other periods.

At some point the panic selling stops, and buyers realize that the price has moved far from its rational value.  Timed correctly, buyers often have large gains when rational behavior returns and prices move back to more efficient levels.

While this is an example on a very large scale, capitulation can be seen intra-day at points when many traders and trading algorithms are forced out of their positions at the same time by a large seller, and the price falls quickly accompanied by sharp volume to inefficient levels.  For those who identify the move as capitulation it can provide excellent trading opportunities.

Identifying Capitulation: Trading Opportunities in Market Panic

During periods of market capitulation traders can capitalize on the panicked selling and price declines.

Capitulation is characterized by an extreme increase in volume as sellers rush to exit their positions overpowering any buyers present.

This surge in selling pressure creates an opportunity for short-term traders to profit by taking short positions.

The rapid and intense selling often leads to sharp declines in price making short positions profitable.

However it is crucial for traders to identify the end of this selling frenzy as it marks an excellent opportunity for longer-term traders to buy assets at inefficiency cheap prices.

Capitulation typically marks the bottom or near-bottom of a decline in price.

By carefully monitoring volume price movements and historical market data traders can successfully identify instances of market capitulation and navigate these periods to their advantage.

The relative strength index of a stock is a technical indicator that is used to calculate whether a security is currently in an overbought or oversold state.  This is a very important and fundamental indicator that has been used by traders since it was developed in 1978 by J. Welles Wilder, Jr., an American mechanical engineer who is known for his groundbreaking work in technical indicator development.

Calculation

Relative strength index, or RSI for short, is calculated as follows:

RSI = 100 – 100/(1+RS)

RS= the average of x up days closes (AU)/the average of x down day closes (AD).

AU= sum of previous x days up closes value (SU)/x

AD= sum of previous x days down closes value (SD)/x

X normally is set to a 14 period but users can most often edit this is charting software.

An up day value is calculated as follows:

Current close – previous close= up day value

down day value is assigned as 0 on an up day

A down day value is calculated as follows:

previous close –  current close = down day value

up day value is assigned as 0 on a down day.

Example

Over the previous 14 trading days, stock ABC has a sum of up day values of 20.  During the same 14 day time period the sum of down day values is 10.

AU = 20/14 = 1.4

AD = 10/14 = .7

RS = 1.4/.7 = 2

RSI = 100 – 100/(1+2) = 100- 33 = 77

As you can see a higher relative up day average results in a higher RSI value, while the opposite is true of greater relative down day averages.

A longer time period will result in a calculation that is less sensitive to moves and is more likely to result in RSI values closer to 50, while a shorter time period will result in a more volatile indicator which is more likely to show extreme values.

* It should be noted that current calculations of RSI often use exponential moving averages for AU and AD values.  The math for this is even more complex but essentially results in higher weighting being placed on more recent values.  If you understand this framework the logic behind using exponential moving averages is not hard to grasp, even if the actual calculations are.  It is rare that a trader would actually have to calculate a relative strength index by hand since it is included on almost any charting software.

Application as an Indicator

After obtaining a value from the relative strength index calculation, normally the value is plotted on a graph which is either superimposed over a price chart or placed underneath.  Due to the construct of the RSI formula, values are bound between 0 and 100.  Normally a value of 30 or lower is considered oversold,   while a value of greater than 70 is considered overbought.  Sometimes the thresh hold level is adjusted to 25-75 or even 20-80 to increase the rarity of the indicator threshold being met.  A trader may use the meeting of the indicator with a top threshold to mean a short or sell signal, while the meeting of a bottom threshold may be used as a buy indicator.  Let’s take a look at how an RSI appears on charting software.

The S&P 500 has been trending steadily up over this time period, but you can see that even in this strong uptrend oftentimes when the upper 70 level threshold is met short term selling has followed the majority of the time.

While it may not be the only technical indicator a trader uses for entries and exits, every good trader is aware of RSI levels as they are a tried and true method of identifying overbought and oversold conditions.

A stock option is a contract between the seller and the buyer of the option which gives the buyer the right to purchase or sell the stated amount of shares in the future at an agreed upon price.  The buyer of the option is not required to exercise his right to purchase or sell the actual shares from the seller of the contract.   If there is no advantage to exercising it the contract will normally expire worthless.

What does this look like in the real world?  All option contracts bought and sold through brokerages are for 100 share lots, and are sold at various price increments (known as strike prices) depending on the underlying symbol.  The contracts being sold expire at various time periods in the future, which are standardized and normally fall on the third Friday of the contract month.  A buyer may buy either put or call options, and the distinction is very important.  A trader can see the full list of options contracts available to trade on what is known as an options tree.

A call option gives the buyer the right to purchase shares of stock in the future at the designated price.  A buyer will purchase a call option contract when he believes the price of the stock will increase to more than the strike price plus the cost of the option.  If the price increases, the value of the contract is likely to go up with it.  If the stock at the end of the expiration date has a higher price than the option price, the owner can then purchase the stock for the option price and if he wishes immediately sell those shares in the open market at a higher value.

A put option gives the buyer of the option the right to sell a stock security at an agreed upon price in the future.  A buyer of a put option believes that the price of a stock will fall below the strike price of the option plus the cost paid.  If on the expiration date of the option the stock is trading at a lower price than the exercise price, the owner may purchase shares from the open market at the lower price and then sell them for the agreed upon option price to the seller of the contract, and will profit the difference (minus the original cost paid).

Option contracts give traders a way to increase their profits in a trade over simply buying or shorting shares on the open market.  How do options do this?

As an example let us say that a particular stock is trading at $48.  The trader believes that by the option expiration date, the stock will be trading at $52.  Currently $50 call options are being traded at .50 per share, or $50 for the contract.  If a trader buys the contract today for $50, and he is right and the stock goes to $52 at expiration, he has now made the $1.50 difference $52 market value – $50 strike price -.50 cost paid.  So the $1.50 multiplied by the 100 shares in the contract means the trader has profited $150 on his $50 investment, a return of 300%!

If the trader invested the same $50, well $48 dollars, to buy the stock on the open market, he could have bought 1 share, and his profit would have been $4, a return of 8.3%.  The same investment in an option in this example resulted in a profit of $146 more!

The caveat to this is that option contracts do not necessarily end up being worth any money.  If the price on the expiration date was $50 or less, the contract would be worthless and the trader would lose 100% of his investment in the option.

Because there is a potential to lose 100% of your investment (investment used loosely as options are used more for short term trading) brokerages typically will require the trader to be sophisticated enough to understand how the contracts work before they will give you privileges to actually trade them.  There are also varying degrees of option privileges as more sophisticated traders are also allowed to sell option contracts, which can expose the trader to enormous amounts of risk.

I should also mention that options are used by sophisticated investors as a way to hedge risk.  If they are long a position they may also purchase put options to provide protection should the price fall dramatically, as the put options will increase in value to offset the decline on the principal investment.  Call options can also similarly be used as hedges.

There are many options trading and hedging strategies, which can become very complex.  The most important factor for a trader new to options to understand is that they increase leverage, which magnifies gains and potentially losses.  It is crucial that the trader understands how the option he purchases will change in price in various scenarios, both upon expiration and before.