Why Trade Options?
Infinite Possibilities:
You are already familiar with trading stocks, but did you know it is Options Trading alone that presents the widest range of opportunity to investors?
The power of options lies in their versatility. They enable us to adapt or adjust our position according to any situation that arises. This means that we can do everything from protect a position from a decline to outright betting on the movement of a market of index.
In 1999 there were about 507 million options contracts traded on US exchanges. By 2010, that number had grown to an all time record of more than 4 billion.
So, why the surge in popularity? Although they have a reputation for being risky investments, options are actually useful to the average investor – if you understand them.
1. Cost Efficiency – Options have great leveraging power!
2. Less Risk – Depending on how you are using them
3. Higher Potential Returns Than Stocks
4. More Strategic Alternatives – Options are so flexible!
5. Ability to trade successfully in any Market Condition
Recommended Stock Trading Reading List
Trading For A Living: Dr. Alexander Elder – this book is the first in a series of 3 great trading books – each come with study guide to fine tune your trading skills.
Trading In The Zone: Mark Douglas – Mark discusses the benefits of being in the right frame of mind when those trading opportunities are presented to us
Finding The Next Starbucks: Michael Moe – like a rich Grande Cappuccino this book is full of straight talking wisdom from a great entrepreneur, who talks about looking for the next growth opportunity.
Our NEW Customer Membership Site.. What it offers our customers..
It has been a busy summer for our Ideal Trading Lifestyle project team as they have completed the transition of all of our customers to our New Membership Site.
It has been our vision to have all of our membership trading tools and resources available to our customers on 1 site with the capacity to grow in the future to meet our customers trading needs.
The original MWA Membership was built in 2004 and though a remarkable site in it’s day, we needed to build a customer site on a new platform that would grow with our customers and offer them the needed trading capabilities.
The team has succeeded in building a customer friendly, service orientated trading platform.
Below are just some of the new capabilities of our new customer membership site:
- Weekly LIVE ITL Spotlight sessions that review the ITL picks for the previous week.
- Daily LIVE End of Day Market Review, 3:30 PM CDT for all our customers.
- Access to all recordings of LIVE and training webinars – if you cannot make the session it will be available on the site
- Online changes to your customer information – change your contact and credit card information automatically
- All course material including the prework for the courses that you have completed – you can go back and review anytime you like
- Community News that informs you at a glance of the location of our live events and courses available
- Access to both the MWA and ITL Memberships all from 1 platform
My thanks to the team for all their hard work and long hours and to the customers that took the time to share their feedback. GREAT JOB!!!
We have tried to make this transition to our new site as seamless as possible to our customers and your patience has been appreciated.
I do believe that our new memberships, trading tools and resources will help each of you on your journey to trading success!
When traders focus on technical analysis looking to confirm short-term moves in the market or for a particular company, in essence they are swing trading. One the more popular methods of stock trading, it is important to understand what in today`s financial markets what can impact the current direction of a stock for its seemingly normal rhythm.
Developing a routine that views a stock charts technical trend and looks to confirm momentum breakouts or trend support is a learned skill and requires time-tested seasoning. This approach also needs to consider other potential impacts that could ultimately alter a stock’s current trajectory.
The market declines of 2008 revealed the importance in building market sentiment as a precursor that can impact a stock’s current trend. The overall investing moods of the collective community can override a stocks seemingly predicative trend and needs to be considered prior to any short term position. Utilizing the Dow Jones or the S&P500 indexes as a market barometer is a typical method to assist in determining the overall market sentiment from a technical view. When identifying overall market support and resistance in conjunction with the appropriate technical indicators it becomes apparent with the trained eye if a market’s direction looks to change from its current trend. Seasoned traders will also consider the overall market volatility utilizing the VIX CBOE as an indication of potential extreme market moves.
Swing Trading also requires an awareness of some of the more relevant global events found to be impacting investor moods and often during extremely highly volatile periods it is important to be connected to the pre-market futures and how markets on the other side of the global are interpreting high-profile events. Rest assure that any time governments are intervening on any event that the politics has a tendency to create a rollercoaster effect in the markets.
When looking at a potential stock position other impacts to consider are upcoming quarterly or annual corporate earnings. In fact, it is highly recommended to stay clear of a short term position if an earnings release is to happen anytime within the next 10 business days. It is not only the stocks corporate earnings date that needs to be confirmed but also any bell-weather companies earnings dates could also impact your stocks ability to continue its current trend. Examples of a bell-weather company would be Apple or HP for the IT sector or General Motors for Automotive. The easiest way to determine this relationship is when a stock is viewed in Google or Yahoo Finance, associated companies are also featured that coincide with a stocks sector.
These are just some of the variables to consider when analyzing stock opportunities and reflect a single component to being a successful swing trader. At IdealTradingLifestyle our market trading experts have developed these lessons-learned and make this a part of their everyday strategy to providing clients with a unique and time-tested solution to trading profitably in these changing markets. To find out more about these and other key trading strategies, please refer to www.idealtradinglifestyle.com.
To find out more about how IdealTradingLifestyle fits into your day and how to take action to self-directing all or a portion of your personal financial portfolio, contact us direct at 1.888.942.0266 ext 01 or email direct to sales@idealtradinglifestyle.com.
Article by: Randy McMullin – MBA, ITM
I was listening to the weather reports today and it seems meteorologists are projecting a colder winter this year with temperatures falling several degrees below normal. It dawned on me how complicated the process must be to arrive at this forecast and the data elements that need to be in place to provide the metrics supporting this decision.
When you consider this for a moment, it is not unlike anything else that looks at future forecasting. I have been trading stocks since 2004 and if it were not for my background in Predicitive Modelling I am not convinced success could be forecast with any consistency. I realize that to be successful at anything, there is not only the initial knowledge development but continuous learning is required to stay on top of changing conditions.
The key to consistent positive results is to understand the metrics and the analysis process used to arrive at a decision. It is so important to rule out emotion and let a disciplined approach always be the determination. I also realized a second layer to this approach and it is an intuitive understanding that comes with a time of seasoning and lessons learned. That’s right even after following a logical process using data elements that when regression tested support positive outcomes, there is still the application of the “human element” that can take consistency to a whole new level.
At IdealTradingLifetyle our team of seasoned and experienced market traders understand the data elements and the analysis process necessary to interpreting stock and market momentum. A knowledge-base also exists with-in this team that has developed the intuitive skills necessary to understanding when changes will impact a data-models results.
Just like a cold-front coming in that disrupts a warm weather pattern or a change in a wind pattern, understanding the change of seasons in market trading is combined with what can be gathered in terms of data and what has been experienced over time.
IdealTradingLifestyle is a focus of providing a graduated learning program that looks initially at an expert-support process guiding clients with recommended momentum picks. These picks have been arrived at using time-tested and a refined predicitive modeling system. Then a team of seasoned market experts apply the intuitive-side of trading into each selection looking at elements that change market conditions to further enhance overall trading consistency and timing.
A comprehensive trading solution, IdealTradingLifestyle supports where you are today in terms of your time available. Let experts provide you with a fully-screened stock selection with a pre-defined buy/sell/stop-loss or build your own intuitive knowledge though the graduated trading courses and coaching offered to select from a larger selection of Daily List Picks.
To find out more about how IdealTradingLifestyle fits into your day and how to take action to self-directing all or a portion of your personal financial portfolio, contact us direct at 1.888.942.0266 ext 01 or email direct to sales@idealtradinglifestyle.com.
Our next article will focus on the “Strategies to Trading” and will discuss why expertise and a governed approach will lead to long-term success.
Article by: Randy McMullin – MBA, ITM
When it comes to investing, irrational behaviour abounds. Whether you manage your own money or have someone else manage it for you, usually the biggest drivers for decision making are emotion. Just like the excitement of feeling you know something in Wheel of Fortune when you buy a vowel, people make truly irrational decisions about how, where and when they put their money to work. That is why having a written investing plan is so critical for success. It will highlight what behavior you want to avoid by implementing a set of rules to circumvent irrational decisions.
Some Background
Before we analyze irrational investing behaviours and their outcomes it is probably necessary to define where this falls into place. We can look at irrational behaviour both from a managed and DIY (do it yourself) perspective. Both are equally damaging to your portfolio and certainly can be mitigated if not prevented. As Dick Davis, author of “The Dick Davis Dividend – Straight Talk on Making Money from 40 Years on Wall Street” states, ”We are predisposed to fail, but not predestined”. Meaning, our human characteristics make failure something that will occur but we can take steps to change our course and make better decisions.
The field that studies irrational behavior has a deep rooted history dating back to 1896. More recently, the idea of Behavioural Finance was introduced by two psychologists, Daniel Kahneman and Amos Tversky through their various studies beginning in 1973. Feel free to do your own reading.
http://en.wikipedia.org/wiki/Behavioral_finance
The most common conclusions about the behaviour of people are that they have a tendency to be overconfident and a desire to avoid regret. These characteristics manifest themselves in a variety of ways that often have a costly effect on our investment decisions.
Now Is The Time … I Just Know It
Greed and fear are two of the most powerful emotions that humans experience. William Bernstein, a retired neurologist, author and money manager explains that one of the reasons investors embrace risk (Globe & Mail April 20, 2010) lies in two tiny bundles of neurons called the nuclei accumbens situated just behind each eye. These neurons serve as the brains “anticipation centre”. He states that these neurons “light up whenever we anticipate something good happening. That something good could be food, social contact or making a lot of money in the market”. Bernstein states the problem is that recently, investors’ nuclei acumens’ are lighting up like Christmas trees because they see a 76% advance in the S&P 500 since the low of 2009. In other words, they have a heightened state of anticipation about “making money” and subsequently are much more willing to take on risk by getting back into the market.
If you look at recent (past 5 years) market activity, it would seem obvious that the worst time to get into the market was July of 2008 and the best time was two years ago in March 2009. The markets were at their respective top and bottom. Yet if you analyze inflows and outflows of money, especially within the managed world of equity-based mutual funds, you will find almost the exact opposite. Investors shifted about $200-billion out of U.S. equity funds between September of 2008 and March 9, 2009 when the the S&P 500 Index ultimately fell by 58 per cent from its peak. But that same money didn’t go back into the market before it rallied to 90 per cent of its original level. And that doesn’t even consider how much money went into the market from January of 2007 to September of 2008. I remember speaking with people in August of 2008 who had just been advised to put all of their RSP into equity-based funds only to see 40% of it evaporate within 4 months.
Bernstein goes on to say that “the primary mistake most investors make is they confuse the economic outlook with returns going forward. In fact, the best forward-looking returns are obtained when the economy looks the worst, and the worst returns are obtained when the economy looks the best”.
Quite the paradox, we buy at market tops and sell at market bottoms. To learn to do the opposite – or to override our own brains – would help us significantly, but alas we have thousands of years of evolution telling us differently. Historically we had to make split-second decisions for survival. However investing isn’t about the next 5 minutes. It’s about a much longer term and somehow our brains aren’t wired for that.
Behaviour #1 – Overconfidence
Confidence is a good trait. But overconfidence is an interesting dynamic. You have probably heard of the professor who asks his students “How many of you think you are above average intelligence?”, or “How many of you think you are a better than average driver?”. Of course the list can go on but the results are usually similar.
Somewhere around 75% of people believe they are better than average. Statistically that is impossible but in their reality it is a matter of perspective. In investing terms, it probably shows up in statements like “I have got a sure thing” or “This stock can’t go down”. Remember Nortel? How many people thought that at $200 it was still going to go up and, after repeated reverse splits, at $2 that it couldn’t go any lower? Ever watch people who gamble? How many people will actually collect their winnings when they are up? Obviously Las Vegas isn’t in business because the house loses. That gambling mentality is often pervasive with investors. It usually takes one of these forms:
- A particular outcome of a random event is more likely to occur because it has happened recently (“run of good luck”)
- A particular outcome is more likely to occur because it has not happened recently (“law of averages” or “it’s my turn now”) Translation – My stock will continue to go up, or I should get in now because it’s at the lowest point. Second translation – I didn’t sell when I should have and now I am down so I best just stick with it because eventually everything turns. You could look at the opposite in a similar light as well.
- A particular outcome is less likely to occur because it has happened recently
- A particular outcome is less likely to occur because it has not happened recently.
Although each of these statements may be true to an extent within a certain context they also tend to create overconfidence. Overconfidence usually leads to under-performance primarily because there wasn’t a good strategy to begin with to make the decisions. When it comes to your money, it would seem more important to apply good logical criteria with systematic and well thought out entry and exit points corresponding to the goals you have within your investing plan. Financial success is not just about the next decision.
Behaviour #2 – Hindsight Bias
A major cause of overconfidence is Hindsight Bias. Hindsight bias is a particular way of looking at things to make sense out of the world. We pretend something is more predictable than it actually is and when it occurs we say we knew it was going to happen. Kind of a post justification. However, this trait also tends to have us forget the bad decisions we make and subsequently we lose some of our perspective. Let’s consider the following. You have two options to work with your money.
1) Put all of your investments in the previous year’s best performing assets
2) Put all of your investments in next year’s leading asset class
This might be an extreme example but the results are interesting. Just because something was the best performing, does not at all mean it will continue to be. The mutual fund industry is a classic example of this. Most of the advertising that investors see is the “best performing” funds available to be purchased because in the investment business, one sells track record. Unfortunately, many of these funds do not stand the test of time and will eventually disappear or get merged because of poor results. But by then they have garnered widespread support because of the short-term track record and have accumulated hundreds of millions of dollars in people’s retirement money.
Consider this as well. During the past 30 years, the index from among the S&P 500, the TSX Composite and the MSCI World Index that has performed the best one year has only managed to take the top spot the next year less than half the time. Of course the contrarian approach didn’t outperform either. During that same timeframe, picking the worst performer among the three in anticipation that it would provide great returns the following year, only produced about 7% annually. Not bad but not exceptional.
So instead of an all or nothing approach, ensure you have a strategy that allows you some diversification, a decision-making process that takes into account good logic and a contingency plan when the world changes. (Just like it did again last week in Japan)
Behaviour #3 – The Herding Effect
The Herding Effect simply described is the tendency for people to follow the actions of a larger group whether good or bad. The Herding Effect is usually influenced by what is loud and in your face. Ever had to choose a new restaurant for the first time? There are many factors that could go into your choice. Quality of food, value for money, food preferences, location of the restaurant, etc., but what about how full the restaurant is? Many of us would assume that if a restaurant is full it must be good and therefore we should go to it. Although this may be true, it might not at all meet our other more sound criteria.
In the investing world, this herding effect can come across as “They know something I don’t so I should get on board”. Usually it is accompanied by overoptimistic and sometimes outrageous predictions. Remember the dot com era? How many people jumped into the market towards the end of the ‘90s and into 2000. The best money was made at the beginning (next years leading) of the cycle but because “everyone was buying tech stocks, you better too or you will get left in the dust”. By the time the average person hears about it, or wants to get involved, the investment is overheated and positioned for failure.
Even as recently as 2008 when the economy was booming, oil was $147 a barrel poised to hit $300, and energy, mining and agricultural stocks were at their premium. How many people jumped into specific stocks or mutual funds related to these sectors only to watch their money disappear faster than air out of a popped balloon.
Behaviour #4 – Aversion to Loss
No one likes to take a loss if they don’t have too. We all have been to that garage sale where someone has placed ridiculous prices on their old “junk” items. It’s a bit of an oxymoron. Clearly having a garage sale is to get rid of stuff you don’t want so why put prices on it that won’t let it sell? Dan Ariely in his book “Predictably Irrational” points out that our aversion to loss is a strong emotion that causes us to make bad decisions. He states that “as soon as we begin thinking about giving up our valued possessions, we are already mourning the loss”. In fact given two equal choices, one expressed in possible gains and the other expressed in possible losses, people would choose the former almost all the time. We perceive pleasure much more readily than we perceive pain.
If we look at our investment choices we tend to sell our winners because who doesn’t feel good about proclaiming victory (remember you knew it was going to go up). But we hold onto our losers because of our sense of pride and the offsetting feelings of regret (I made a mistake) and loss (it will come back to even). A well-defined strategy together with proper risk management and emotional control will go a long way to helping us make better decisions. The development and implementation of a plan will get you there.
Conclusion
Whether you chose to give your money to someone else to manage or take greater control and manage it yourself, understanding the impact of irrational behaviour will go a long way to creating better results. As Dick Davis points out:
- For every professional opinion about a stock, the market, the economy, interest rates, inflation, and so on, there will always be an exact opinion by someone equally or more knowledgeable.
- There is no such thing as an expert on the market. The market is perverse, contrary, illogical, random, enigmatic, and unfathomable. The market is not black or white but gray!
Your financial temperament will trump financial IQs. You don’t need to have a financial degree or be a financial professional to be a good investor.
15 Terms Every Investor Must Know
Ask: The lowest price a seller is willing to accept when selling a security (stock).
Bear: An investor who believes the market as a whole or a particular stock will decline. A bear is the opposite of a Bull.
Bid: The highest price a buyer is willing to accept when purchasing a security.
Blue Chip: A company that has a history of solid earnings, regular and increasing dividends, and an impeccable balance sheet. Examples: Coca-Cola, Berkshire Hathaway, & Gillette.
Book Value: The value of the company if all liabilities were subtracted from assets and common stock equity. The book value has very little relation to the market value. In industries in the technology sector, this number is almost always miniscule compared to market capitalization.
Broker: A person that buys or sells an investment vehicle for you (securities, bonds, commodities, etc.,) in exchange for a fee which is called a commission.
Bull: An investor who believes the general market or a particular stock is going to increase in price.
Dividend: A portion of a company’s income that is paid out to shareholders on a quarterly or annual basis.
Dow Jones Industrial Average: The Dow Jones Industrial Average (or DJIA for short) is by far the most popular and widely used gauge of the U.S. Stock Market. It consists of a price-weighted list of 30 highly-traded Blue Chip companies.
Market Capitalization: A company’s market capitalization (or “market cap” as it s frequently called) is calculated by taking the number of outstanding shares of stock multiplied by the current price-per-share.
NASDAQ: A stock exchange where mostly shares of technology companies such as Microsoft and Cisco are traded. An exchange is a place where options, futures, and shares in stocks, bonds, indexes, and commodities are traded. The most famous in the United States is the New York Stock Exchange.
P/E Ratio: How much money you are paying for $1 of the company’s earnings. In other words, if a company is reporting a profit of $2 per share, and the stock is selling for $20 per share, the P/E ratio is 10 because you are paying ten-times earnings ($20 per share divided by $2 per share earnings = 10 P/E.)
Spread: The difference between the Ask and the Bid.
Stock: Stock is ownership. A business is divided up into shares of stock and parts of the company (the shares) are sold to investors to raise money.
Yield: When a company pays a dividend the yield is the percentage of the stock price in relation to the dividend paid. In other words, if a stock is trading for $10 and pays a dividend of $0.50, the yield is 5%, because for every $10 you invest, you would receive 5% back annually in the form of a fifty-cent dividend.
50 Time Tested Classic Stock Trading Rules
1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rationalaction.
11. Limit your losses – use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious – not profits. Take advantage of every lossto improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control.Successful trading is difficult and frustrating. You are the most importantelement in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bullmarket has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out ifthe market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you mustfollow your program.
22. Expect and accept losses gracefully. Those who brood over losses alwaysmiss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% ofthem again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn’t so much native ability as itis discipline exercised in avoiding mistakes.
26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch donot talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A manbecomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget iteven quicker! Don’t let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, anotherdoor opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as herecognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.
34. If a market doesn’t do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don’t be overlyaggressive with the market. Treat it gently by allowing your equity to growsteadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgement if you expect to make aliving at this game.
39. In a narrow market there is no sense in trying to anticipate what the next bigmovement is going to be – up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrongand not taking the loss – that is what does the damage to the pocket book and tothe soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows aprofit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market’s reaction to new informationthan in the piece of news itself.
45. If you don’t know who you are, the markets are an expensive place to findout.
46. In the world of money, which is a world shaped by human behavior, nobodyhas the foggiest notion of what will happen in the future. Mark that word –Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit toosoon. Don’t torment yourself if a trade continues winning without you. Chancesare it won’t continue long. If it does, console yourself by thinking of all the timeswhen liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don’t pray – jump!
49. Lose your opinion – not your money.
50. Assimilate into your very bones a set of trading rules that works for you.
