Trading knowledge I accumulated over the last couple of years
thinkery.me
thinkery.me
Most of it is technical analysis type stuff, with very little to nothing backing it up. The decent bits of advice that I can filter out are
> Concentrate on current investments, not past or future ones.
Good advice in general. A similar motto applies in poker - once your money is in the pot, it's no different from anyone else's money. Don't get hung up on sunk costs. However, you might occasionally give a thought to your future investments, especially if your current ones are somewhat illiquid (free cash is optionality).
> Always keep some cash for short term opportunities.
Decent advice, though it's questionable how many short-term opportunities you're going to spot if trading isn't your full-time occuptation.
> You don’t need to trade every day! You don’t need to trade every day!
In fact, if you're not a professional, the less you trade, the better.
> If a company publishes earnings and the stock doesn’t move much it might be that most people already own the stock. It could go down.
Or, more likely, the earnings figure was already priced in and it is as likely to go up as down.
> Stay away from penny stocks.
Very good advice. Stay the hell away unless you have some privileged information on the the company (and even then, stay away 90% of the time).
The very first thing, volume is the cause for price, is only true in 'normal' markets, until it isn't. When there's no bid, prices drop massively on no volume, see e.g. Russia this week.
Go read Schwager, John Train, Buffett, Graham, Bernstein, Malkiel.
I once found some numbers that relate frequency of trading to earnings for individuals, & was initially shocked by just how strong the inverse correlation is.
Though on further reflection, I'm not sure it's really counter-intuitive. The more money you spend on broker commissions, the more you have to profit just to break even.
You may not want to trade based on "privileged information" either... if it's insider information you can get in trouble. http://en.wikipedia.org/wiki/Insider_trading
The case I'm thinking about is the case of http://en.wikipedia.org/wiki/Karel_De_Gucht
Not saying that it is not illegal, but insider trading and even the definition itself is a huge gray area ( like when you talk to a friend at the pub about the new cool project you are working on, you are giving privileged information )
So although insider trading legislation are good, in practice they have less teeth than they should.
When investing, it is a safer approach to assume others have privilege information. Even in the case you have insider information, that is also better to assume others have better one, hence the GP advice to stay away from the peny stock even when you know someone.
Here is the interesting bit about De Gucht. ( He could be saying the truth or not, that's not my point, but under strict insider trading regulation this coincidence would not have passed )
"On 3 October 2008, his wife, Mireille Schreurs, and brother-in-law sold their shares in Fortis Bank after a governmental crisis meeting to deal with the precarious financial situation of the bank, hours before the public announcement that the Dutch arm of the bank would be nationalised and the partly nationalised Belgian and Luxembourg branches sold to BNP Paribas.[7] An anonymous complaint was received by the Belgian Banking, Finance and Insurance Commission alleging De Gucht's wife sold €500,000 worth of Fortis shares.[8] De Gucht acknowledges that his wife and brother-in-law sold their mother's shares in Fortis Bank on the date in question for a smaller amount than alleged, but they deny that any insider trading was involved. He also points out that he personally lost €85,000 as a result of the nationalisation and sale, and that his son, Jean-Jacques De Gucht, and mother kept their shares in the failing bank."
In the US, insider trading is typically charged as a civil offense, where the SEC doesn't need to prove anything. In civil cases the SEC is often only held to "preponderance of evidence" standard -- even lower than the "clear and convincing evidence" standard used in most civil fraud cases.
Only if the charges are criminal does the SEC have to prove their case.
So ultimately volume is a measure of interest, but for every bought share there was a sold share, so it's not a measure of performance. I would bet that higher volumes might mean lower bid/ask spreads, meaning you're paying a smaller penalty to get in/out of a position, but for most retail traders that spread isn't going to make or break you anyway.
If you are in technology for ex., I would have a look at tech shares, you will then have a slight information advantage at least.
Trading account: either just talk to your bank (most of them provide a trading account) or find a broker on comparison websites. ultimately the trading fee, if not exaggerated, is not that important if you only dabble once in a while.
For example, enter the market by writing Puts, earn a premium and if executed you then own shares at a discount. Then turnaround and write Covered Calls on the stock for out of the money strike prices. Earn a premium on your stock, and earn dividends, and capital gains. Protect your capital by using part of your Call premium to purchase a protective put on your stock (in line with your risk profile). If executed on the Call repeat by writing Puts.
Of course there is a lot you need to know, Google is your friend.
Problem with this is that sometimes the price might dip for irrational reasons(let's call it technical reasons), which is the good scenario.
However, sometimes price might dip because of fundamental reasons(let's say company announces that their CFO has misstated results for last 5 quarters).
Even worse is writing Covered Calls without any thought. There was that guy on Reddit who sold Covered Calls on his McDonalds stock. It worked great for a few months, collecting premiums while the stock stayed stagnant. Then the stock dipped in such a way that writing Covered Calls at the original strike price was not really worth it anymore, while writing at a lower price than purchase price was even worse. The protective puts(which he did not have) would not have been triggered either as the dip was not low enough.
So again, there is no free lunch.
With this strategy you have the chance to protect your capital (by buying protective puts) while earning an income (write premium) and capital gains (in the money Covered Call strikes and dividends). You can make money with this strategy when the market is going straight up, somewhat up, and sideways. You can protect your capital when the market goes somewhat down, but you will loose money if the market crashes.
Frankly there is much I've not said when it comes to trading that is do or die. Money management, position sizing, managing positions, emotional management, fundamental/technical/sentimental analysis just to name a few areas a successful trader should master or at the very least have a working knowledge of.
As I said in another comment, writing options covered or not is basically a bet against volatility.
That's why you look at historical volatility and other criteria when selecting a watch list.
Here's a concrete example. A stock is trading at $100 and you write a put on it struck at $90, earning a premium of (say) $5. Then the stock falls to $80 and the put is executed, so you buy the stock for $90.
You now have something worth $80 and a $5 premium, but you paid $90, so you are $5 out of pocket.
Now you write a covered call on the stock struck at $100, earning a $3 premium (because it's further out of the money the the put you wrote earlier). The stock goes to $110, so you sell it to the call owner for $100. That's nice, you've earned the $3 premium and you sold the stock for $10 more than you bought it for (a total of $13 up). But if you hadn't written the call, you could have sold the stock for $110, and been $20 up instead.
If you also buy a protective put (say for $1) then that's an additional loss you bear in this scenario, since you can't execute the put.
If you're writing options, you're basically betting against market volatility. You'll do alright in the short term, but you'll get absolutely creamed if there's a stock market crash or other crisis.
To put it another way, you make money when you buy, not when you sell. Therefore your purchase price is a margin of safety if done right. I carefully select the companies I trade by building up a 'conservative' price target based on a company's tangible book value per share (TBVPS). I try to write puts that offer a good risk/reward profile relative to the TBVPS. Even if I was caught in a market crash I'm as close to book value as I can get. Having done my homework I'm sure this company will outlast the extreme market sentiment. When such events occur I add to my position on the strength of my fundamental analysis. The market always overshoots and creates a wealth transfer opportunity.
Your advice of combining options and stocks is at best a little naive, and at worst will be a disaster for anyone who's not a sophisticated options trader.
https://news.ycombinator.com/item?id=5107045
Edit: specifically (in the UK?), http://www.timetotrade.eu
About a week ago there was additional discussion of their support for live trading:
The only thing I am risking at this point are my profits because that's how little faith one should have in penny stocks.
"A bull market is like sex. It feels best just before it ends."