Crafting and Perfecting Your Trading and Investing Approach
By Winston Duke
Our stock trading and investing strategy shall rely to a large measure on technical analysis with the use of fundamental analysis to pick undeniably sound stocks to invest in.
Prior to starting to develop our trading and investing plan, lets just define a few terminologies used in these discourses.
Options: They are trading devices which provide you with the privilege but not the obligation to purchase or sell a stock.
There are two kinds of options: Call Options and Put Options.
Call Options earn money if the stock is increasing in value.
Put Options make money if the stock is decreasing in price.
Covered Call: Selling a Call to originate a position. You have to be in possession of the underlying stock before you can sell a covered call.
Bear in mind that your upside is limited. You profit from covered calls by wringing out the time value and volatility values.
Shorting a Stock: Selling a stock you don't hold (big gamers do) or for our plan, buying Puts.
Bullish: Believing or making a bet on the market to go up.
Bearish:The opposite of Bullish.
Bull trap:Stock provides a bullish signal causing a lot of traders to purchase, only to sharply reverse position and turn down causing them to hurry to get out of the position otherwise lose capital.
Bear Trap: Reverse of Bull Trap. Offers a sell signal merely to turn around abruptly after.
Short Trading Strategies: While normally stocks tend to go up for a longer time than they go down, the downward travel is usually more rapid and wild than the move up. Can one identify when a stock is ready to pull back? Many times yes but only when it indicates a turnaround. Countless experts apply short trading methods extremely efficiently. Short Trading Approaches are employed by aggressive investors in their investment strategy.
"Shorting a Stock" means selling a stock one does not hold. This is generally a big boy's game but the small player may still participate it by means of options - Put Options.
Hedge Strategy To Consider:
1) Whenever you purchase a stock, you purchase a Put Option. If your stock goes up, you make money on the stock and lose on the put option.
2) You buy a stock position and sell a covered call. You have to have 100 shares for every covered call you intend to sell. You only intend to do this with volatile and heavily traded stocks.
In addition, when selling a Covered Call, the Option must have a large portion, or all of its value as time value and volatility value. This sum loses it's worth over time and moves to nought upon expiration.
3) Diversification - While this is not a lesson concerning Options, just remember than they're counted among the tools that aggressive traders and investors use in their approaches for trading.
Ok, Lets Continue To The Good Stuff, The Real McCoy
The following are the actual procedures you will take in developing your trading and investment strategy. This is the process you'll use in designing your plan.
The Measures you'll take in developing your Trading And Investing Plan are the following:
Step 1: State Your Meaning of Success
What do you want? Is it to Shelter, Preserve and/or Grow Your Capital?
Just how much do you desire to make per year? Would it be 10%, 12%, 24% per year (put in the number you desire to make but be realistic).
Do you wish to parody the performance of the S&P 500? Or do you wish to exceed it?
Note: If you are a conservative investor, as an illustration, and you set your objective at 6% per year, aim to generate a minimum of 1.5% per quarter(every 3 months), i.e., one quarter of 6% every 3 months.
You will really make greater than 6% per year because of compounding. Compounding is a robust concept in investing that gets more powerful with the passage of time as you will learn later.
6% each year shouldn't be hard and you really ought to place it higher even if you are conservative. A suggested place to start to locate companies that meet your specification would be to explore high-quality companies which are paying high dividends of 6% or more per annum.
Buy the stock and sell covered calls. For each 100 shares, you can sell 1 Covered Call. You not only get paid the dividends, you get to benefit from the covered call and there may even be some price appreciation in the stock. If you are a more aggressive trader, more aggressive strategies are needed.
In case you are a conservative investor and you utilize Options as an investing strategy, the Options you should mainly use are Covered Calls. At least in the beginning.
Options are known as "wasting assets" because a large chunk of their worth is attributed to volatility and time duration to expiration. The more time the time to expiration, the more time value that is built in.
Additionally, the more volatile the stock is, the more volatility value that is built in. In other words volatile stocks with longer duration would have higher premiums than non volatile ones with shorter durations.
Volatility value and Time Value go to zero at expiration. The buyer loses those values. The seller gains on those values.
To check volatility of a stock, check out its Beta. The Beta is a coefficient that measures volatility in comparison to the S& P 500.
A Beta of 1 signifies that the stock has similar volatility as the S&P 500.
A Beta of lower than 1, e.g.,.90, or.80 means than the stock isn't as volatile as the S&P 500.
A Beta of more than 1, e.g., 2, 3, means that the stock is more volatile than the S&P 500. The higher the number, the more volatile the stock is.
Also, if you intend to play with options, ensure that there is plenty of liquidity within the underlying stock in addition to the Option. Liquidity ensures the ability to get in and out at reasonable prices.
Additionally, keep away from Options which have wide spreads between bid and ask. Wide spreads mean that you lose both ways. You lose going in and you lose coming out.
By the way, you don't have to use options. In fact, if you are just starting out, avoid them altogether until you gain some experience and confidence in what you are doing or unless you are a really aggressive trader or investor. Sufficient said on options here, lets move on.
About the Author:
You should track your performance quarterly, whether or not you're a conservative or aggressive investor, to ensure that you are sticking to and meeting you goals. GO
HERE FOR MORE INFORMATION. Winston Duke is the creator and author of several web sites including
Tobagosite.com /. Winston has extensive knowledge and proficiency in the Financial Markets. He started trading in the Commodities Market since the mid 1990's and has since become very active in the Stock Market. He has many interests and has indulged himself in a multiplicity of sectors but his true and enduring love is in dealing in the Financial Markets.
|
