Avoid the Pitfalls and Market Maker Tricks

After listening to several radio interviews of a few traders who used to work on Wall Street, I have a better understanding of the market and important pitfalls to avoid.  It is important to know that there are a lot of sharks in the water waiting for inexperienced an emotional traders to make irrational and quick decisions.  However, that does not mean that you can’t make any money in the market.  The opposite is true.  You can make a good living trading in the markets, you just have to be smart and know how and what to trade.  

One key piece of information I just learned from a guy who used to be on the NASDAQ was that market makers (the guy at your brokerage house) will watch people’s trades and look to see where most people place there stop loss price and some unscrupulous guys will move the price just beyond the point to where the majority of stop loss orders are and trigger the stop loss so they can take their commission.  For the trader who’s gone golfing and not watching his trade, he will lose money plus the commission he paid to the market maker.  

This just underlines the point that you can’t trade blindly and not watch your trades.  You also have be patient and wait for the proper setups so you don’t get caught waiting on the market to move.  The best way to engage this current market is to be either long term buying high yield dividend stocks or very short term, trading the market swings for only a day or so.  

There's another thing you have to watch out for as well and that's the penny stock sharks.  These guys will put messages all over the place about a particular stock that trades below one dollar.  They will talk about how this is the best stock of the year and it is going to go sky high.  However, they don't have any information that lets you know why.  What about this stock is so great that it is going to be the hot stock of the year?  The problem is that you can't get detailed information on many of these stocks because company data is harder to come by for penny stocks.  So just use common sense in these situations.  If someone tried to sell you something saying that it is the best thing in the world, but didn't have any information on the product, would you buy it?  I think not.

Market Update 6-21-12

Today’s just one of those days in the market.  Just ride it out today and wait and see how we open tomorrow.  The markets are selling off today, thankfully my trades are holding on to support levels and have actually bounced up.  That’s also an important lesson: buy well-known, reputable companies that are heavily traded and are vanguards in their industry.  These stocks always tend to hold up better during these big sell-offs.

If you have stop-losses on any stocks make sure you really want to keep them because days like today are usually an anomaly and stop-losses can actually go against you and end up costing you money.  It may be better to wait till tomorrow and see what direction the market takes.  

A great piece of advice I heard today was: “panic is not an investment strategy.” The point is when markets go down it’s a good time to buy some stocks that have been too expensive.  Just wait till they start to make an upswing or have flat-lined and gone horizontal.  You want to make sure you buy the actual bottom not buy on the way to the bottom.

Path to High Accuracy Option Trading - Chuck Hughes

Here are some of my notes from a great article by Chuck Hughes called Path to High Accuracy Option Trading

http://www.youtube.com/watch?v=Eljh8QEv7rI&feature=related

Step 1 – Use trend following systems to select stocks

Step 2 – Use historical price data to select time length with high accuracy

Step 3 - Purchase in the money options with low time value

Option Time Value Characteristics

•        Options consist of time value and intrinsic value
•          Options lose all time value at expiration and consist of only intrinsic value
•          The time value of an option is a wasting asset
•          In the money options have more intrinsic value
•          Out of the money options consist of only time value
•          Goal is to minimize time value and maximize intrinsic value

Advantages of In the Money Call purchases versus Out of the Money

•          In the money calls allow us to employ money management to limit losses
•          In the money calls contain less time value and more intrinsic value
•          Does not require large stock price increase to break even or profit
•          Helps prevent a total loss of investment
•          Less overall risk
•          Higher percentage of wining trades

Reduce risk by setting stop loss at 25% below premium

Check the 50 day and the 100 day moving average for areas of support

Check the 1 month and the 20 month moving average for areas of convergence

Trend Confirmation:

At any given time there can be hundreds of stocks in a price up trend

Trend confirmation indicators can help us narrow the list of eligible buys

•          Volume
•          New 52 week high/low
•          Industry grouping
•          Price level confirmation

On Balance Volume Line:

Need to see up sloping line to confirm trend is supported – buying pressure is exceeding selling pressure

Buying pressure must continue to exceed selling pressure in order to sustain a price trend

Confirmed up trend – stock price is trending up, volume increasing on the days the stock closes up, volume decreasing on the days the stock closes down.

A new 52 week high confirms the price trend