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Peter R. Bain |
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How To Make A Full-Time Income Trading Less Than Part Time
Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of commodity trading rules, a currency trading strategy, stock market successful trading strategies, or information on how to use commitments of traders data. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!
Shows you how FAST you can make money when the BIG DOGS make their move - by shamelessly copying this winning group . Even I am STILL surprised by how much power they have over ALL markets - not just commodities futures, currencies, and stocks.G Newsletter: Terms This information is provided in support of the TradingSmarts Newsletter, which caters to those traders in search of commodity trading rules, a currency trading strategy, and stock market successful trading strategies. If you haven't yet subscribed, you can do so by going to www.tradingsmarts.com and accepting the invitation when you click away. Alpha: When you hear the expression that a portfolio manager is trying to generate "alpha," it means he is trying to generate a positive excess return over and above what one might ordinarily expect relative to a benchmark, given a certain level of risk. Beta: Less volatile stocks are known as 'low-beta' stocks. Boiler Rooms: Also known as "pump and dump" operations: they take an illiquid penny stock, generate buying interest by cold-calling naive investors, and then tantalize more suckers by flashing the resulting higher prices at them. Sure enough, after all the dumb money has been lured into the trap, the organizers soon begin to "dump" (unload) these securities after they have reached unsustainable levels. Everyone but the first in and first out end up holding worthless stocks. Contrarian Indicator: The put/call ratio is generally regarded as a contrarian tool, on the basis of the public buying an inordinate number of calls or puts at exactly the wrong time. A coincident indicator would have us adopting a strategy in line with the general trend in the market, as in heavy volume presumably denoting "smart money" buying or selling. Convertible Debentures: These are bonds issued by companies that want to reduce their cost of borrowing. Investors buy the debt at lower interest rates i.e., lower rates that if the companies issued traditional corporate bonds in exchange for an equity kicker. Cyclical Bull Market: A rally that eventually fails, and occurs within a longer period, when stocks are little changed or declining. Such a descriptor is being applied to the post-1999 STOCKWRECK and its ensuing rally starting in 2003. Some would call it one thing, and some another, but it has all the markings of a bear market rally as at January 19, 2004. December Effect: This theory posits that the winners tack on further gains in the last five trading days of the year, as the supply of stock available for sale shrinks. This reduction in selling pressure on winners possibly accounts for them earning a return of about 1.8% in the last five days of December. It is wise to sell winners in January, instead of December. This is because, by waiting those few extra days, you can defer payment of taxes by almost one year. It is difficult to trade the 'December Effect,' as it is hard to pick the right stocks. Delta: This is a derivative of the option pricing formula that tells you how much an option should rise or fall, given a $1 move up or down in the underlying stock. An option pricing calculator will give you the delta of any option. Here's one: www.me.org/accueil_en.php Click the 'options calculator' listed under trading tools on the right side of the page. See 'ESP' below. Dividend Yield: The dividend divided by the stock price. Duration: Measures a bond's price sensitivity to changes in interest rates over time. An investor can cut duration by buying shorter-term debt, which typically carries lower yields. ESP (Equivalent Share Position): The underlying number of shares multiplied by the option's delta. In the case of 2,000 shares with a delta of 0.56, this translates into a position that is equivalent, in terms of risk, to holding 1,120 share of the underlying stock. See 'Delta' above for an explanation of its meaning. ETFs: See www.tradingsmarts.com/newsletteretfs.htm www.tradingsmarts.com/newsletterasiaandindia.htm www.tradingsmarts.com/newsletterintletfs.htm EV/EBITDA: The ratio of enterprise value, or market capitalization plus debt, to earnings before interest, taxes, depreciation, and amortization. Hedge Funds: Have the potential to offer absolute returns. Unlike "long-only" investments, like mutual funds, they can short stocks and use leverage. Thanks to "structuring," hedge funds are available for any sized portfolio. A hedge fund, or fund of hedged funds, can be structured as an exchange-listed closed-end fund, or they can be linked to a note. In the latter case, the bank guarantees the principal, not the return. The note allows for low minimum investments ~ $5,000 or less with no requirement to apply the "accredited investor rules." The structure offers more tax-efficient access to fully taxable investments. The structure and guarantee blanket don't come free, but are well worth the extra cost. (Accredited Investor Rules: The investor must certify they are "accredited" before investing. The rules encompass a means test income of ~ $200,000 or investable assets greater than $1-million. Such rules are necessary because hedge funds are typically only available without the comfort of a regulator-approved prospectus.) Inflation Indicator: The gap between inflation-adjusted treasuries, known as TIPS, and regular 10-year notes. As at December 19, 2003, it is narrowing. It has shrunk by about 10% in the last few months signaling DECLINING rates of inflation ahead. Intrinsic Value: According to Warren Buffett, this is "the discounted value of the cash that can be taken out of a business during its remaining life." January Barometer: This indicator claims that the first month of the year in stocks portends the likely outcome of the year as a whole. It has a 90.7% accuracy rate, with only five major errors, as at January, 2004. A variation on this theme is the 'early warning indicator,' which is based on the first five trading days of the month. However, where it is not confirmed as the full month unfolds, this is all the more foreboding. January Effect: Funds traditionally sell losing stocks to take losses for tax purposes. This hits smaller, less liquid stocks harder than others, and primes the market for the 'January Effect.' That is the tendency of small stocks to outperform the large cap indexes in the first few weeks of a New Year, as the selling subsides, and the stocks are bought back. Companies that were stripped from the Russell 2000 index on June 30 suffered the largest declines, the greatest amount of tax-loss selling, and the largest January "bounces." Junk Bonds: These are high-yield bonds issued by companies with credit ratings below investment grade. As rates on safe investments like money market funds tumble, investors shift to lower-quality bonds in a desperate quest for yield. Late Trading: Uses stale price not available to other traders, and is illegal. LEAPs: An acronym cooked up by marketing departments to make these securities appear to be different. They are nothing more than long-term options (i.e., more than nine months to expiry). Time decay is what makes them unique. Most of the time value in an options price erodes in the last couple of months prior to expiry. Long-term options experience little time value erosion, which is one of the major disadvantages of buying short-term options. Matrix: When a trader says he is trading $6,000 matrix, that means that for every $6,000 in the account, he will trade one bond, as an example. If there is $20,000 in the account, he will trade three bonds, until he gets to $24,000 when hell trade four. Momentum Investing: Buying a stock because others are. Momentum traders buy high and sell even higher, unlike value investors who buy low and sell high. Momentum traders are less concerned with valuation, and more concerned with earnings growth rates, positive news, and speculation Securities: Fancy way of saying stocks and bonds. SOX: Philadelphia semiconductor index Contains the stocks of the 18 biggest U.S. chip makers, including Intel, Advanced Micro Devices, Micron Technology, and Motorola. This index is often used as a proxy for the health of the tech sector, since chips power the industry. The SOX is more volatile than the Nasdaq, and prone to making larger, quicker moves given that it is comprised of only 18 member stocks, as compared to more than 3,300. However, the two do track each other remarkably well. Style Investing: Investing in different size companies. Support and Resistance: In the currency world, a support level for a particular currency is defined as an exchange rate at which past trading patterns suggest that traders were willing to buy the currency. Resistance, therefore, means just the opposite. It is a zone at which traders were all set to sell the currency. These terms apply to all markets. Technical Indicators: Indicators used as a part of technical analysis in making trading decisions. Perhaps the most favored are moving averages and their derivatives as well as momentum. However, nothing is more important than price pattern. A combination of momentum analysis and pattern recognition is a safe bet. Tick: Whatever time frame you are trading in, each bar is equal to one tick. For example, on a daily chart, each bar would represent one day. Tracking Stocks: These are a separate class of shares, known as trackers. Trackers are issued by companies in response to irrational enthusiasm on the part of investors for certain sectors during bull markets. They are used to exploit market exuberance, and their utility soon dissipates when such craziness is trumped by more intelligent and rational investing. Holders of trackers have an ownership stake and voting rights in the parent company, which gets to keep full control of the unit and avoid hostile takeovers. Quadruple Witching:
When four different types of options and futures contracts all expire at the
same time - eg., December 20/03. The expiration of stock options, index options,
index futures, and single-stock futures can cause volatility spikes and dips
in the market as investors either exercise their positions, or roll them
forward at the last minute.
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