Sunday

What Are Hedge Funds?

With Strategies Designed to Produce Positive Absolute Returns, hedge funds have become attractive members of the investment world. However, hedge funds carry the same investment risks as traditional investments, so it’s crucial to know your way around hedge funds to avoid making a big investment mistake.

Hedge funds are similar to mutual funds in that they consist of funds pooled by a collection of investors, and fund managers make money on the stock market using a specific investment strategy. However, unlike mutual funds, Hedge Funds don’t attempt to produce relative returns by outperforming market indexes; they seek positive absolute returns, regardless of how the overall market is performing. While mutual funds engage only in long positions, hedge funds employ speculative strategies, such as short selling and derivatives trading.

Hedge funds are aggressive, engaging in many active investment strategies to maintain a constant profit. In the long/short hedge fund strategy, short positions offset potential losses if the market declines, while long positions yield profits if the market trends up. Arbitrage hedge funds tend to engage in straight forward price exploitation strategies, such as purchasing a futures contract when current prices are low, translating to an immediate profit. These hedge funds are considered to be fairly low-risk, comparatively speaking, but they are not risk-free, and their low-risk approach means only moderate returns.

One of the more aggressive hedge fund strategies monitors current events that are likely to affect the Marketplace. Managers for these hedge funds may react to an acquisition, a distressed company or small, inefficiently organized companies. Hedge funds may buy up shares of a company in anticipation of marketplace reaction, or they may buy a large chunk of ownership in a small company and use the position to force changes. These hedge funds are difficult to predict, and their agenda may not always be transparent.

Since Hedge Funds aim for a positive return in all conditions, that ambitious goal comes at a price. To get into a hedge fund, you need to be willing to invest a high amount up front, sometimes as much as $1 million. There are hedge funds for investors who don’t have as much cash on hand, and funds of hedge funds are also an option, but many hedge funds are for big-league investors only. Then, once you are in, many hedge funds charge a high 2% percent fee and 20% percent of profits, so, even if you enjoy a good return on a hedge fund, not all the money will find its way into your pocket.

Hedge Funds and The Bear Market

While mutual funds may outperform hedge funds in a Bull Market, hedge funds are a popular investing strategy in a Bear Market. Because hedge funds focus on absolute positive performance, successful hedge funds may be one of the few ways to show a profit during a bear market. For example, hedge funds that engage in long/short strategies may be better insulated from overall market performance. But they’re still a risky investment, so keep hedge fund risk management in mind when you’re shopping around for a bear market investment vehicle.

Funds of Hedge Funds

Because hedge funds themselves are subject to volatility depending on market conditions and Investment Strategies, investing in funds of hedge funds has become a way to offset some of that volatility. With funds of hedge funds, investors come together to invest in a pool of hedge funds—anywhere from a few funds to dozens of hedge funds. By investing in many hedge funds instead of a single fund, investors minimize volatility and risk through diversification. However, if funds of hedge funds invest in too many hedge funds, performance is likely to be comparable to overall market performance, and that defeats the purpose of investing in hedge funds.

When looking at funds of hedge funds, be aware that these funds are basically subject to a double fee structure. The underlying hedge funds charge a management fee and a portion of the profits to every investor, including investors from funds of hedge funds. You then have to pay the fund of the hedge fund’s management fees and any profit sharing—which are already high—so you’re basically paying fees twice.

The Risks of Hedge Funds

Hedge Funds are lauded as a sound investment strategy even during a bear market, but the reality is that hedge funds carry just as much risk as any other investment vehicle. While many hedge funds have traditionally turned modest profits even in times of market decline, the 2008 economic issues and stock market volatility made a drastic impact in Hedge Fund performance. Some hedge funds showed a loss of over 17% in 2008, and, while that number isn’t necessarily out of proportion to overall market performance, it’s a far cry from the modest profits that hedge funds boast even in a bear market.

To Practice Effective Hedge Fund Risk Management, look for funds whose investment style is relatively low-risk. Overly aggressive hedge funds that engage in risky market strategies are more likely to cause investment losses. Because hedge funds are pools of private investors, hedge fund regulation is pretty much nonexistent. Hedge funds are not required to report to the Securities Exchange Commission (SEC) or produce any of the normal performance-related documentation required from other investments. You may not be able to get an accurate idea of hedge fund performance, and some hedge funds are reluctant to reveal fee structures and investment strategies. This is one area in which funds of hedge funds are beneficial; like mutual funds, many funds of hedge funds are registered with the SEC and provide investors with an annual prospectus and quarterly reports.

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To Your Online Investments Success,
A Professional Stocks and Forex Market Trader
Dan A.

Online Trading: Is It Art or Science?

Does the average trader just need to backtest and automate a strategy to find that golden road to the land of profits? I doubt it, but there’s something there for the new trader to consider.

I’ve encountered many traders with all different approaches. Some are rules-based traders who want to see conditions A, B, and C in place before they act with orders 1, 2, and 3. Other traders seem to have no written Trading Rules, but they do very well consistently with their instincts. Take my good friend Wes across town, for example. He’s day traded for over a decade, spending countless hours watching tickers and order flow. He’s a high-volume scalper who frequently will trade 200,000 to 300,000 shares daily. He watches only a few of stocks, trades each of them many times a day and does quite well. That’s trading that can’t be taught. That kind of trading is an art.



So Where Should One Begin?

While I am not a proponent of backtesting Trading Strategies and retro-fitting the past to the future, I do think that trading by way of specific rules early in a trading career is a good idea. When a trader is first getting into the markets, there’s so much to see and learn and do. You have no instincts. Everything you read seems like a great idea and should quickly become your new approach. Having a bad day at the office must mean you need to make a drastic change, right? Surely there’s something out there that works ALL the time! No. Not even close.

The reason I like the idea of following a game plan, especially early on, is that only by being consistent can you truly measure your results accurately. Suppress those urges to fade a rally or buy a selloff, and stick to your rules. Only when you are taking the same kinds of trades consistently can you truly know over time if they are working or what needs to be adjusted vs. thrown out the window entirely. One day does not a trend make! Therefore, one day does not make or break a Trading Approach. In the beginning, it’s important to go slow and learn which approaches can prove valuable and which approaches will prove useless for you. In short, the beginning trader ain’t seen nothin’ yet, and those gut feelings he thinks he has are nothing but indigestion.

As Time Goes By, your trading style will evolve. Gut feel gradually becomes a part of your approach. You learn when to follow your rules and when to break them. It’s a matter of patience and experience, and learning to let your intuition play a role. No longer does that rally ahead of the economic release mean you should get long. Something just seems to tell you to watch for a sell-the-news reaction. That’s gut feel. It doesn’t mean that once you have it, it’s always right. Quite the contrary. Learning to trust your instincts means letting them play a legitimate role in your decision-making process, while not letting them take over and dominate.

So, take inventory of where you are. Have you done well during all kinds of markets? Have you been around long enough to know when to break your rules? If not, hang in there and follow your Trading Checklist for now. Start with making it a science, and you'll develop the feel that makes it an art. You’ll get there eventually, but trying to take shortcuts will be costly. Just remember, capital preservation is the key from day one, so starting with an approach that is quantifiable is a good idea!


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To Your Online Trading Success,
A Professional Stocks and Forex Market Trader
Dan A.

Wednesday

The Way To Understand The Oil Trading Market !!

Oil Trading is an Opportunity for People to Make Money Behind the Computer Screen! Investing in oil takes place through one of the oil brokers, who provide the trader with trading software and market analyses. Although the oil market may look like a very complex market, there are ways for you to learn the market by heart. We will explain some simple ways to look at the market, so you get a better understanding of the basics.

You Trade Against The USD! Oil Trading is buying or selling oil contract with US dollars. In fact you are doing the same when standing at a gas station, and you trade fuel for money. But in order to buy barrels of crude oil, you need mediation from Oil Brokers. They will supply you with the virtual oil contracts so you can make a trade.

You want to become a profitable trader. Winning traders know what they are doing and always have a trading plan in mind. The most important thing is that you can forecast market highs and lows. Oil brokers can help you analyze the market and make probability estimations of the future direction of the market. In general it is wise to follow the trend, and Gain Profits from movements in the market.

You will be paying commissions for every trade. Even winning traders have to pay a price for their trading, you have to pay a premium on every trade executed. Oil Brokers will offer a slightly different price between buying and selling, which is their profit margin. This is one of the facts you will have to except as these brokers are not established to make you money. They are their to make a little money themselves and they do it by trading commissions.

You will have loosing trades. Oil trading is by some considered gambling. This is for the simple reason that you can never be a hundred percent sure which way the market will be heading. For this reason you will have to accept that there will be loosing trades, but this is not a problem as long as your winning trades offset the loosing trades. Financial management is important, and you can ask your oil broker to help you manage your funds.

Remember that this is a global market. The Oil Trading Market involves a large number of countries worldwide, if not all. Lower oil prices will lead to cheaper production prices, thus cheaper selling prices. For this reason every trader influences the global economy, but you should especially keep an eye on the bigger ones out there who can influence markets significantly. Ask your oil broker who the bigger players in the market are, and ask them for up to date economic releases.

The Oil Market Prices are just one of the determinants of the state of the global economy. Lower oil prices will lead to economic growth, which will lead to higher prices on the oil trading market. Profit from those movements via your oil broker and you might become a millionaire overnight.



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To Your Oil Trading Success,
A Professional Stocks and Forex Market Trader
Dan A.

Techniques for Advanced Online Forex Trading !!

FOREX is a Potential Platform for Earning Substantial Profits! In fact it is one of the largest trading markets of the world. Featuring an average daily trade of $2 Trillion USD and above, this market is best known for its high scale trading volume and intense liquidity. Adding to this, today with the advancement of technology it can be done from anywhere of the world. Backed up by world-wide web, you can easily trade in the forex market at the comfort of your own home. However, it is important to understand that FOREX Trading is based hugely on speculation. You must be smart enough to guess exactly when the rate of a certain currency pair will rise and go down, and then buy or sell based on that. Indeed it is said that if you learn to study the speculation of this market, you will have a better chance of getting profit.

Today, it is more advanced and turned into an active investment arena, where only a factual understanding of the intricacies and complexities can make your capital grow every day. Moreover, like any other business, it also involves some amount of risks. There is no short FOREX Trading technique for success in the currency trading market, but there are some well-known techniques that can assist you formulate a good advanced foreign exchange trading strategy.


Here Are Few Essential Techniques that Can Help You Cut Your Losses and Increases Profits:

Forex Scalping:

It is a latest technique of trading where profits are taken after relatively small moves in the forex market. It is a technique where trading is done over small time frames, and smaller profits are taken more frequently. As the position exposed to the market is shorter, it automatically reduces the risk of adverse market events causing the price to go against the trade. It is a different approach to most other Forex Strategies, but still requires you to analyze the market to ensure that the set up for a trade is present. This type of trading greatly appeals to day traders and those who look to reduce the risk involved in trading currencies.

Forex Hedging:

It is a technique that helps in reducing some of the risk involved in holding an open forex position. It decreases the risk by taking both sides of a trade at once. If your broker allows it, a simple way to hedge is just to initiate a long and a short position on the same pair. Advanced traders sometimes use two different pairs to make one hedge, but that can get very complicated.

It is important to understand that much of the risk involved in holding any forex position is market risk; i.e. if the market falls sharply, your losses may escalate dramatically. So if you have an open Forex Position with fine projection but you think the currency pair may reverse against you, it is advised to hedge your position.

Forex Position Trading:

Forex position trading approach is yet another trouble-free technique to boost your position size without increasing your risk. This trading tactic is very effective with mini lots. The major highlight with this technique is that - with forex position trading your exposure to the market is less and so therefore is no need to monitor the market continuously. Moreover, you may even earn profit with negligible loss that can further boost your trading confidence. For Example- you might make a short trade on EUR/USD at 1.40. If the pair is ultimately trending lower, but happens to retrace up, and you take another short at say 1.42, your average position would be 1.41. Once the EUR/USD drops back below 1.41, you will be back in overall profit.

Today Forex Trading is all about watching your options when you make a trade. Aside from using effective risk management and extreme vigilance, advanced trading can be an alternate way to make profits and control losses. Nevertheless, these above mentioned advanced trading techniques are more about using the market behavior to your advantage. Utilizing these advanced techniques can give you the edge from other average trader.


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To Your Forex Trading Success,
A Professional Stocks and Forex Market Trader
Dan A.

Stock Market: Restricted Stocks Are Better Than Stocks Options !!

Many companies are concerned by the Financial Accounting Standards Board (FASB) recommendation that Stock Options be shown on the company's expense sheet. Especially high-tech and start-up companies are concerned because they fear losing one of their great motivating tools. They needn't worry. There is already a better compensation choice, Restricted Stocks Options.

Motivation Through Restricted Stocks Issuing restricted stock is a better motivating tool than granting stock options for two reasons. First, many employees don't understand stock options. They don't know that they have to take action to realize any gain. It is far easier for them to understand a vesting period on restricted stock. Second, restricted stock can't become worthless like stock options. Even if the stock price falls, restricted stock retains some intrinsic value.

A Stock Option grant with a strike price of $10 has no value when the stock trades at $8. Restricted Stock awarded when trading at $10 is still worth $8. A stock option has lost 100% of its value. The restricted stock has only lost 20%.

Employee Ownership Through Restricted Stocks

One of the advantages restricted stock has from a management perspective is it is better at motivating employee to think and act like owners. When a Restricted Stock Award vests, the employee who received the restricted stock becomes an owner of the company. He or she has to take no further action to make it happen. The employee is now part owner and can vote at the annual meeting.

Actual ownership of part of the company is a powerful motivating tool in trying to get employees to own the company's objectives. This makes them more focused on meeting goals.

Stock Options, on the other hand, do little to instill a sense of ownership. They are viewed by most as a high risk gamble that has a potentially great reward. An individual may very well invest a couple of years helping a company grow and prosper when compensated for that time by stock options. However, their loyalty is to raising the stock price so the can cash out and make a bundle. They have no loyalty to the company and its goals. Often, they will choose actions which raise stock price in the short term, thus increasing their potential gain, rather than taking a longer-term view that will help the company.

Restricted Stocks Supporters

The LA Times reports that Microsoft plans to replace stock options with restricted stock grants. Amazon.co.uk notes that all their employees are allocated a number of Amazon.com restricted stock units when they join. The Altria Group, Inc., points out in their annual report that "in 2003, we made equity awards in shares of restricted stock rather than fixed-price stock options". Dell Computer Corp., Cendant Corp., and DaimlerChrysler AG are also reported to be moving toward restricted stock in lieu of stock options.

Manage This Issue

Restricted Stocks awards are a better tool for motivating employees than stock options. Restricted stock awards are better than stock options for motivating employees to think and act like owners. Restricted stock awards are better treated on the financial statements than stock options. That makes restricted stock awards better for the employees, management, the investors, and the regulators. There is no reason to not make that choice.

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To Your Online Trading Success,
A Professional Stocks and Forex Market Trader
Dan A.


Stock Market: What Are Mutual Funds?

­A Mutual Fund is a company that pools investors' money to make multiple types of investments, known as the portfolio. Stocks, bonds, and Money Market Funds are all examples of the types of investments that may make up a mutual fund.

The Mutual Fund is managed by a professional investment manager who buys and sells securities for the most effective growth of the fund. As a mutual fund investor, you become a "Share Holder" of the mutual fund company. When there are profits you will earn dividends. When there are losses, your shares will decrease in value.

­Mutual Funds are, by definition, diversified, meaning they are made up a lot of different investments. That tends to lower your risk (avoiding the old "all of your eggs in one basket" problem).

Because someone else manages them, you don't have to worry about diversifying individual investments yourself or doing your own record keeping. That makes it easier to just buy them and forget about them. That's not always the best strategy, however -- your money is in someone else's hands, after all.

Since the fund manager's compensation is based on how well the fund performs, you can be assured they will work diligently to make sure the fund performs well. Managing their fund is their full-time job!

Mutual Funds can be open-ended or closed-ended. But many people consider all Mutual Funds to be open-ended, while putting closed-ended funds in another category.

"Open-Ended" means that shares are issued in the fund (or sold back to the fund) whenever anyone wants them. With closed-ended funds, only a certain number of shares can be issued for a particular fund, and they can only be sold back to the fund when the fund itself terminates. (You can sell closed-ended funds to other investors on the secondary market, though.)

Load refers to the sales charges added to a mutual fund when you purchase it. The load charge goes to the fund salesperson as a commission and payment for their research services. Load charges can be up to 8.5% percent of the selling price and can be figured in as a front-end load (meaning you pay it when you buy the mutual fund) or a back-end load (meaning you pay when you sell the mutual fund).

Many Mutual Funds are no-load funds. Yes, that means there is no sales fee charged and the fund is direct-marketed so you can buy it without the help of a salesperson. With the wealth of information on the Internet today, it is certainly easier to make smart choices yourself to save money.

In addition to "No-Load Funds", there are also funds that charge up to 3.5% percent as a sales fee. These are called low-load funds and can still be a good deal.

Mutual Funds Fall Into Three Categories:

Equity Funds - are made up of investments of only common stock. These can be riskier (and earn more money) than other types.

Fixed-Income Funds - are made up of government and corporate securities that provide a fixed return and are usually low risk.

Balanced Funds - combine both stocks and bonds in the investment pool and offer a moderate to low risk. While low risk may sound good, it is also accompanied by lower rates of return-meaning you risk less, but your investment won't earn as much. You have to decide how much risk you're willing to take on before you invest your money.

If you have invested in a College Savings Fund (529 Plans - ­Next to saving for retirement, your biggest financial challenge is probably saving for your kids' college education.) or a 401k Account (In 1978, Congress decided that Americans needed a bit of encouragement to save more money for retirement! The plan got its name from its section number and paragraph in the Internal Revenue Code - section 401, paragraph K), chances are good that already own a few Mutual Funds. Mutual Funds are great for long-term investments like these. You can also buy mutual funds directly from a mutual fund company.

Most of these offer 'No-Load Funds' (or sometimes low-load funds). You can find lists of mutual fund companies on the Internet and purchase shares by simply filling out an application and mailing a check. Once you are a shareholder, you will receive statements telling you how the fund is doing as well as how much your own investment is growing. You can also set up monthly bank transfers to automatically buy more shares every month.

Remember to do your research and select a Mutual Fund that fits the level of risk you are willing to take with your hard-earned cash. Then just sit back and hope for the best!

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To Your Online Trading Success,
A Professional Stocks and Forex Market Trader
Dan A.

Tuesday

Introduction to Commodities and Futures: What are Commodities?

The terms “Commodities” and “Futures” are often used to describe commodity trading or futures trading. You can think of them as generic terms to describe the markets. It is similar to the way “Stocks” and “Equities” are used when investors talk about the stock market. To be more specific, this is what they really mean: Commodities are the actual physical goods like Corn, Soybeans, Gold, Crude Oil, etc. Futures are contracts of commodities that are traded at a futures exchange like the Chicago Board of Trade (CBOT). Futures contracts have expanded beyond just commodities; now there are futures contracts on financial markets like the S&P 500, T-notes, Currencies and many others.

Examples:

Commodity: Grains

Many of the grain commodities have been trading on futures exchanges have been around many decades and they are some of the most active markets to Trade. They tend to be most volatile during the summer months as whether can be a big market mover.

1. Corn
2. Soybeans
3. Wheat

Commodity: Energy

Used to power and fuel the country, the energy commodities are very popular futures markets to trade as many witness their uses and prices daily.

1. Crude oil
2. Gasoline
3. Heating oil
4. Natural gas

Commodity: Metals

The metal commodities maintain a couple of roles. The precious metals are used as an inflation hedge. They are also used for industrial purposes, construction and even photography.

1. Gold
2. Silver
3. Copper

Commodity: Softs

The soft commodities consist of many food products and also some industrial materials.

1. Coffee
2. Cocoa
3. Sugar
4. Cotton

Commodity: Livestock

The livestock commodities consist of meat agricultural products. They can often develop some reliable trending patterns as breeding and herd statistics give you a good idea of production numbers months in advance.

1. Cattle
2. Hogs

Futures Contract:

December 2007 Corn, which is a contract of 5,000 bushels of corn that trades at the Chicago Board of Trade with a contract expiring in December 2007. A hypothetical price for this contract might be $3.60 per bushel.

How do Futures Work?

Futures are standardized contracts among buyers and sellers of commodities that specify the amount of a commodity, grade / quality and delivery location. Commodity Trading with futures contracts takes place at a futures exchange and, like the stock market, is entirely anonymous.

For Example: the buyer might be an end-user like Kellogg’s. They need to buy corn to make cereal. The seller would most likely be a farmer, who needs to sell his corn crop. They create a contract of December Corn futures at the current market price. A contract of corn at the CBOT consists of 5,000 bushels. Therefore, the farmer would have to deliver 5,000 bushels of corn to Kellogg’s in December at a designated location.

Making Money in Futures!

A speculator is someone who invests in a business with the goal of turning a profit. In the case of commodities, speculators are traders who try to buy futures low and sell them high to Make Money. The reason why speculators can do so with futures is that traders aren’t required to hold the futures contracts for the duration of the contract; they can buy or sell anytime they want. So, to use the Kellogg’s example above, a speculator could buy the corn contract from the farmer at a certain price, then wait for the price of corn to go up before selling the contract to Kellogg’s, even if the contract won’t come due for another couple of months, turning a Profit in the process.

Players Involved in Commodities Trading!

There are three different types of players in the commodity markets:

Commercials: The entities involved in the production, processing or merchandising of a commodity. For example, both the corn farmer and Kellogg’s from the example above are commercials. Commercials account for most of the trading in commodity markets.
Large Speculators: A group of investors that pool their money together to reduce risk and increase gain. Like mutual funds in the stock market, large speculators have money managers that make investment decisions for the investors as a whole.
Small Speculators: Individual commodity traders who trade on their own accounts or through a commodity broker. Both small and large speculators are known for their ability to shake up the commodities market.

How to Start Trading Commodities?

In Order to Trade Commodities, you should educate yourself on the futures contract specifications for each commodity and of course learn about trading strategies. Commodities have the same premise as any other investment – you want to buy low and sell high. The difference with Commodities is that they are highly leveraged and they trade in contract sizes instead of shares. Remember that you can buy and sell positions whenever the markets are open, so rest assured that you don’t have to take delivery of a truckload of soybeans.


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To Your Online Trading Success,
A Professional Forex and Stock Market Trader
Dan A.

Monday

Lights of the Stock Market!

There Are Red Lights, green lights, blue lights and spot lights. There are orange lights, pink light and flash lights. There are search lights and micro lights. And the one you must obey is the stop light.

If you don’t stop when the light is red you could easily have an accident and lose everything you have, even your life. These different types of lights alert us to possibilities and dangers. Is there a light that goes on that tells us whether the Stock Market is going up or down; one that is green to invest or red to sell? They aren’t very obvious, but they are out there. You only need to become aware and learn when the signal flashes.

It doesn’t take long to learn to drive an automobile, but it does require much more skill to handle an 18-wheeler. The professional driver has taken to time to learn his profession. He knows what all the lights mean. Not only the red and green, but the yellow and blue as well. There are also many light signals inside the cab that he must be aware of all the time if he is to have a safe passage.

Stock Market Signals may not be red or green or any color at all, but they are there and are obvious to one who wants to learn. The one who wants to learn is the investor who wants to protect his capital from loss and to make enough money to retire in a comfortable life style.

The most obvious signal is the 200-day moving average! You can find one of the best market signals printed every day in the Investor’s Business Daily Mutual Fund Index. When the index is above the 200MA line you are in the green and should to be invested. When it is below the 200MA line you the red light is on and you want to be in a Money Market Fund. When those signals flash and you learn to act you will become very wealthy over the next 10 to 20 years. You will not lose your money when the market is going down.

It you take the time to go back in history, say 20 years and treat the S&P500 Index as a dollar value you will quickly see that buying and selling on this simple method would have made you a ton of money. No, there is not very much trading involved. You will only be buying or selling about once each year. It will not take much of your time and you will sleep better, especially when the market is crashing and your money is safely tucked away.

Currently the green signal is on to be invested according to the IBD Mutual Fund Index. The red signal will come on that tells you it is time to sell when the index plunges below the 200MA line. Pay attention to the signals. You don’t want to lose everything!


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To Your Online Trading Success,
A Professional Stocks and Forex Market Trader
Dan A.

Sunday

Day Trading Risk Management !!

Not Risking Too Much Money on any given trade is essential to succeeding as a day trader. Unfortunately, when most people start Day Trading, they do not think about the risk that they are taking - only about the potential rewards. Every day trading strategy must take into consideration the maximum percentage of the total trading capital that should be risked in any one transaction.

In fact, a day trader's ability to limit his losses is just as important (or even more important) as his success in managing winning trades. Think about it. If a trader losses a small amount on every transaction, won't he stay in the game a lot longer? Taking huge losses is one of the primary reasons why so many traders don't survive in this business. Why do traders commit financial suicide this way, you may ask? If all big losses start small, shouldn't it be easy to prevent a small loss from becoming unmanageable? The answer is ""YES.""

Limiting losses when day trading involves a lot of common sense. To begin with, no trader should risk more than 2 to 5% of his trading capital on any given trade. Why? If a trader sticks to a 1% to 2% maximum loss rule, his chances of succeeding are greatly increased because it will take many consecutive losses to wipe him out and he will have more opportunities to make winning trades. If a trader would be trading a $10,000 account, he should not lose more than $100 to $200 (1% to 2%) on every position taken. Using the same reasoning, if we are dealing with a trading account that's $100,000 in size, the maximum allowable losses can be increased to $1,000 or $2,000 per trade. Based on these percentages and on the amount the price can move against the trader (determined from the charts), he can calculate the maximum size his position should have. This becomes much clearer with an example:

Position Sizing Example using Currencies:

Assume that an investor can trade a lot of 100,000 USD with a 2,000 USD deposit (50 to 1 leverage) and that he has $10,000 in an account. With this account size, he can trade a maximum of 5 lots (5 x 2000 margin deposit = 10,000), but is this a wise thing to do? Let's look into this a little further. Let's say that based on his Trading Strategy, the day trader analyzes the chart and determines that in order for him to take a long position with a potential reward of $800 per lot, he must be willing to lose $200 per lot. He realizes that if he takes a 5-lot position and all goes well, he could have a gain of $4000 or 40% (5 lots x $800 per lot = $4,000).

Using a position size of 5 lots would also require that he be willing to lose $1,000 (5 lots x $200 per lot = $1,000). Should he take the trade? Not with 5 lots! A loss of $1,000 represents 10% of his Trading Capital! How long will anyone be in business after a few consecutive 10% loses? In this example, his maximum position size should only be one lot. With one lot, he would be risking $200 (2% of his account size) to make $800 (8% return). While it might be tempting to try to make the $4,000 in one trade, it is not a smart thing to do so. Trading is all about your probability of survival. To survive, you cannot risk more than you should. Risking too much is not smart money management.

* In general, day traders with less than $10,000 should consider trading with a mini account. A forex mini account can be opened with as little as a few hundred bucks.

Position Sizing Example using Stocks:

(remember that to day trade stocks you need at least $25,000 in your account by law, so I will use an account size of $30,000 in the example below)

Assume that an investor has a $30,000 account to Day Trade Stocks. He wants to trade Intel (INTC) stock, which is at $30 a share. Based on his strategy, he determines that the stock can appreciate $1.00 during the day, but to take advantage of the appreciation, he must risk $0.50. Since he has an intraday margin of 25% (4 to 1 leverage) he can take a $120,000 maximum position in INTC with his $30,000 (4 x 30,000 = 120,000). Should he do it? Let's do the numbers. With $120,000, the trader can buy 4,000 shares of INTC (120,000 / 30 = 4,000).

If INTC moves up 1 point, the trader gains $4,000. If it drops $0.50 (his stop loss), he loses 2,000. A two thousand dollar loss represents 6.7% of his trading capital - much too big a risk for him to take. Consequently, a 4000-share INTC position is too large for his account size. Based on a 1% ($300) maximum loss, the Day Trader should not buy more than 600 Intel shares (300 / 0.50 = 600). Based on a 2% ($600) risk, the maximum trade size becomes 1200 shares.

Risk in Day Trading (or in any other form of speculation) must be controlled. One effective way of managing risk in trading is by not taking on a position larger than an account of a given size could handle. While some authors and ""experts"" have complicated ways of determining position size, these methods tend to confuse traders and slow them down. The 1 to 2% rule will keep traders out of trouble and it is simple to apply. It is common sense more than anything else. Don't become another day trading statistic - limit your losses all the time with protective stop orders!


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To Your Online Trading Success,
A Professional Forex and Stock Market Trader
Dan A.