A Shockingly Simple Stocks Momentum Indicator

Following a trend is great. But if the trend is moving quickly, you want to know that so that you can get ahead of it. If the rate of change of the trend is going up, rising prices are going to follow quickly.

Momentum was the velocity multiplied by the mass of the object. Now first what is a momentum? You must have read about the momentum in high school physics.Velocity was the rate of change. Now. a simple way to calculate the momentum of any security price is to divide the closing price today by the closing price ten days back and then multiply it by 100! So when we talk of momentum in trading, we are talking of the rate of change of any security prices.

This gives you the momentum indicator. If the prices didn’t go anywhere momentum indicator will be 100. If the prices went up, the momentum indicator will be greater than 100 and the prices went down, the momentum indicator will be less than 100. Now, a trend is expected to continue if the momentum indicator is greater than 100.

Momentum is a leading indicator. It tells you what is likely to happen in the future not what happened in the past. Momentum trading is done with some attention to the fundamentals. When key business fundamentals like the sales or profits are accelerating at the same time the security price is going up, momentum is likely to continue.

However, in momentum investing, you search for stocks that have rising prices that are expected to continue for sometime. So you buy high and sell even higher within a few weeks making a decent profit. You can use that profit to do more investing. As said before, instead of investing in a security or a stock you can do momentum investing. When you are doing ordinary investing, you are waiting for its price to appreciate to give you a capital gain. This price appreciation might take from a few months to even years tying down your capital in that investing.

What a momentum investor is looking for is a security that is going to move big. But this move big is going to happen on a long term horizon instead of a few days. The expectation is to make money on the longer term. The thought is that if the security is starting to go up in price, it will keep going up in prices unless something dramatic happens to change. In the meantime, you can make a lot of money.

There are many way to do momentum investing. One is the price momentum that we have talked above. The other can be Earning Momentum. If you are a long haul investor who keeps an eye on the financial statements of different companies and you find that the quaterly earnings are going up steadily from one quater to another. What this means is that the stock price will also accelerate and follow suit.

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What Is Shorting Stocks?

When the market is falling, investors sell short a stock with the goal of profiting from the fall in the price of that stock. Many beginning investors get confused when they realize that it is possible to make money when the stock falls in price. In practice, shorting a stock is as easy as buying stocks once you get hang of it.

When you short a stock, you borrow it from you broker and sell it with the intention of buying it back at a lower price in the near term future and returning it to your broker. The difference between the selling price and the buying price in case the price goes down is your profit.

You are anticipating further fall in the price of the stock when you short a stock. When the price of a stock goes down, you make profit. However, if the price of the stock instead of going down starts to go up, you get a loss.

Theoretically a stock price can go up and up making your loss as big as infinity. So shorting a stock without proper risk and money management is not wise. However, before that happens most probably you will receive a margin call from your broker that leads to a forced sale before your losses reach unmanageable proportions.

In the stock market crash of 2008, many financial companies went bankrupt due to the short selling of their shares by the speculators. Some people are against the strategy of shorting stocks. A temporary ban was put on shorting for sometime during that period.

Swing trading is all about looking for making a quick profit by riding the trend in the market for a few days to a few weeks. In swing trading, we are simply looking to profit from the ups and downs of stock prices. When the price of a stock goes down, short selling is the best swing trading strategy. However, the goal of short selling is not to drive the price of a stock to zero and put the company out of business.

One reason why swing traders love short selling is due to the velocity of the moves! Negative news like poor earning, credit rating downgrade or a poor product launch can bring down a stock price in a matter of minutes and wipe out the steady gains made in months.

Shot selling can be a good hedging strategy for long term investors too. So if you a long term investor, you can lessen the impact of the sharp price drop on your portfolio by using a short selling hedging strategy. Swing traders always look for big winners and this brings them to the short side of the market. When the price of a stock starts to fall, chances are it will fall more before the market stabilizes and the price starts to rise again.

Mr. Ahmad Hassam has done Masters from Harvard University. Try This Cash Printing Forex Signal Service From Heaven! Learn Swing Trading! Click here to get your own unique version of this article with free reprint rights.

Backtesting Explained (Part I)

Backtesting any trading strategy allows a trader to simulate its expected performance using historical price data. With Backtesting, traders can actually test their trading strategies and know how well they would have done if executed in the past.

Now an important question that comes to anyone’s mind is what type of a trading strategy can be backtested? Any trading strategy that does not have any ambiguity in its rules can be backtested effectively. Example of a simple trading strategy that can be backtested can be as follows.

When the DMI+ is above DMI- and the MACD histogram has crossed above the zero line, go long when the 5 period moving averages has crossed above the 20 period moving averages.

When the MACD histogram has crossed below the zero line and DMI- is above DMI+, sell short when the 5 period moving averages has crossed below the 20 period moving average.

However, using the past price data to simulate future results often misleads traders into thinking that their backtested results will also give similar results in actual real time trading. This one example is just meant to illustrate that any trading strategy having clear cut rules can be backtested with the historical data.

There is much difference between live trading performance and the backtested trading performance. Many potential factors can and will make hypothetical performance and actual performance differ significantly. So you should not fall into the trap of thinking that Backtesting may be a perfect method for identifying the most profitable trading strategies.

Market fundamentals keep on changing. This makes a trading strategy that may have worked very well over the past three years work in an entirely different manner for the next three years as the market changes and evolves. One of the most important facts that you should always keep in your mind is that market changes considerably overtime.

Do you know that often technical indicators that have been giving profitable signals in the past are subsequently unable to replicate their performance in the future? This may frustrate you. But this is exactly what makes trading a challenging endeavor.

Secondly, a trading strategy in real time may be much different from the way the trading strategy behaves on Backtesting in term of trade execution. These differences can potentially skew the results.

However, you should still not underestimate the benefits of Backtesting. Backtesting can provide a trader with a reasonable expectation of the trading strategy’s potential worth and usefulness. Backtesting is still the best available method for evaluating a trading strategy without actually trading it in real time environment.

Now let’s discuss how to do Backtesting. Backtesting can be done by using two methods. The first one is the automated Backtesting. This is the most popular method. Automated Backtesting entails using a specialized program. The trader inputs the specific rules and criteria for the trading strategy into the Backtesting program.

The software than automatically applies those rules to the past price data and tallies the past hypothetical profits, losses and other information. An entire picture of the past performance is created.

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Futures Trading (Part II)

Trading E-mini futures has become popular with many individual investors. Apart from professional traders and speculators, futures trading is done by most of the people like you and me who are interested in making money in the markets. Buy low and sell high, is the basic premise in futures trading as it is in stocks.

What is different in futures trading from stock trading? The fact that you can trade futures with leverage on either long or the short positions introduces an additional element of risk not present in the stock market.

Another major difference that you need to know between futures trading and stock trading is that there is no uptick rule in futures trading. This means that you can easily enter into a position to capture a downward move in prices with no restriction unlike that in the stock market where you cannot short every stock. Thus, it is as easy to sell short as it is to buy long.

How do you manage to survive at futures trading even when you are not particularly good at it? How do you become good at futures trading? The answer is simple. You should have the money first to open a margin account. Then you should have the ability to develop a trading plan that enables you to keep making money in the market long enough to capitalize your next big move.

In simple words, it means if you dont have enough money, you wont be able to trade futures. And if you dont have a good trading plan, you wont last long in the market. Your money will quickly disappear.

You must know this thing that only 5% of the futures traders succeed and 95% of the people trading futures lose money consistently. You need to have at least $25,000 in your account in order to start trading futures. However, $5,000 is the minimum with which you can start trading futures.

Make sure that you go into trading futures contracts with realistic expectations and you understand the risks involved when you start trading futures. You can take advantage of the managed futures accounts if you are not sure how to handle the risk involved in futures trading.

In short, you need money, patience, knowledge and technology to be able to trade futures contracts. Trading futures contracts is truly a hybrid that uses both fundamental and technical analysis.

You need to know the futures contract specifications and seasonal tendencies of the markets. The fundamental side of futures trading involves getting to know the industry in which you are making trades. You should also know the important report that you need to keep an eye on.

The technical side of futures trading tells you what the market will do in response to the fundamentals. You will need to develop your own trading style whether it is momentum trading, scalping or swing trading.

Once you know your trading goals, establish a trading plan for getting there. Learn technical analysis. Dont try to conquer every type of analysis at once. Instead, focus on mastering one item at a time”maybe concentrating only on chart patterns such as the candlestick patterns for instance. Candlestick charting can be a good tool in your technical analysis arsenal.

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading futures and currencies. Trade Dow Futures and S&P Futures!

Are You A Futures Trader? (Part I)

Many small investors have lost their lifetime saving in the stock market crash of 2008. The first choice for many investors was and is the stock market. After getting their fingers burnt during the recent stock market crash, many small investors are looking for new avenues. Investors have many choices for investing their money today.

What about futures trading? Many individual investors make a living day trading futures. However, futures trading is not for you if you are among those who take a look at their mutual funds portfolios only once a year and wonder about the returns. Risk and uncertainty goes hand and hand in money making opportunities. No gain without pain.

You will have to get out of the buy and hold investment mentality if you want to take on futures trading. Those who cant shake off the preconceived notions and discover to make money as the market rise and fall are not successful at futures trading. What it means that those who can embrace the inherent volatility of the world and the markets and use it as a wealth building tool are more successful at futures trading.

Futures trading is for the 21st century. Although futures markets began in the United States in around 1850s, futures trading didnt have global significance until the 1980 when companies and governments embraced futures trading as financial management tools for hedging.

Today individuals trading futures are on a level playing filed with professional traders and institutional investors. Technological advances especially the internet has transformed the futures trading landscape.

E-mini products have been created specifically to appeal to the individual investors and are now standard among exchange offerings. Now most futures contracts are electronically traded with online order entry and execution.

Futures contracts are highly leveraged and marked to the market daily. There are many ways that individuals can use futures for trading and portfolio diversification. Futures industry is well regulated and has superior financial safeguards in place to ensure trading integrity.

There was an uptrend in the stock markets that lasted many decades. There were some minor downtrends but the overall trend had been upwards for many decades. The chances for sustainable trend that last for decades like that happened in the stock markets during the 1980s and 1990s are less likely. Good services and basic materials will probably undergo major price swings, up and down during the next two to three decades. The volatility of the markets is only going to increase.

The todays world calls for a more active and even speculative investor. The new world calls for a trader and futures trading offer one of the best opportunities to make money by trading in volatile times. The past investors could afford the luxury of buying and holding stocks and mutual funds for the long term (this is what Warren Buffet did in building his fortune) but not now.

However, trading futures contracts requires active participation. You will have to work at it or you will be out of the game very quickly if you want to change from a couch potato to a futures trader. You need to know the futures market intimately. You should know that trading futures contracts is a risky business. Developing a winning futures trading plan can help you achieve success!

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading futures and currencies. Trade Dow Futures and S&P Futures!

S&P Futures Explained (Part III)

E-mini S&P futures contract are quarterly like all futures contracts. The monthly identifiers for the E-mini S&P futures contracts are H for March, M for June, U for September and Z for December. The E-mini S&P futures contract trade almost 24 hours per day. However, there is a 30 minute maintenance break in trading from 4:30 to 5:00 PM daily.

In case you lose at the end of the day you are likely to pay in a big way. If you are a new E-mini trader you be careful as traders are expected to pay for the difference between the margins for the entry and exit points. The day trading margin is less than the margin to hold an overnight position in S&P 500 E-mini Futures contract. The margin requirements for E-minis are much less than the normal contract.

All futures contracts are settled daily. At the end of the trading day they are assigned a final value price. The values of all positions are marked to the market each day after the official close based on the settlement price. Based on how well your positions fared in that days trading session, your account is then either debited or credited. In other words, cash will either come into your account or leave your account based on the change in the settlement price from day to day as long as your positions remain open.

It is this mechanism that brings integrity to the marketplace. As losses are not allowed to accumulate without some response being required, this system gives futures trading a rock-solid reputation for creditworthiness.

Leverage: Because futures markets are highly leveraged, the effect of price changes is magnified. With stocks, you typically pay the price in full (i.e., without leverage) or on margin (50 percent leverage). If you speculate in futures and the market moves in your favor, leverage can produce large profits in relation to the amount of your initial margin. However, if the market moves against your position, you also could lose your initial margin and then some.

Suppose you have decided to put $10,000 into a futures account and you buy one E-mini S&P 500 index futures contract when the index is trading at 1000. Your initial margin requirement for that one contract is $3,500.

Each one-point change in the index represents a $50 gain or loss because the value of the futures contract is $50 times the index. You could realize a profit of $2,500= (50 points) ($50) if the index increases 5 percent, to 1050 from 1000. Conversely, a 50-point decline would produce a $2,500 loss. The $2,500 increase represents a 25 percent return on your initial investment of $10,000 or a 71 percent return on your initial margin deposit of $3,500.

Thats the power of leverage. Conversely, a decline would eat up 25 percent of your original $10,000 or 71 percent of your initial margin. An increase or decrease of only 5 percent in the index could result in a substantial gain or loss in your account in either case.

Indeed, leverage is the key distinctive aspect of futures trading as compared with stock trading. It makes your money work harder and produces more in a shorter period of time when everythings going your way, than if you paid for everything in full, up front. In such a situation leverage can be a beautiful thing.

But there is a dark side to leverage, too. For example, assume you use $5,000 in your account to buy an E-mini S&P 500 contract worth $50,000. Instead of going up, however, prices fall by 10 percent and the contracts value drops to $45,000. Your $5,000 is completely gone. Unless you get out of the position with an offsetting sale when your maintenance margin level is violated, youll be obligated to put up even more money if the market keeps moving against you. Leverage is the one ingredient that can produce either horror stories or happy endings. To get the happy ending, it is extremely important that you fully understand the power of leverage and how to manage it well.

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading futures and currencies. Trade Dow Futures and S&P Futures!

S&P 500 Futures (Part II)

Regular trading hours for S&P futures contracts are from 8:30 A.M to 3:15 PM. S&P futures contracts are another example of how 24 hours a day trading enables traders to respond to economic news releases in pre-market and after-market sessions. S&P futures contracts are valued in ticks worth 0.1 index points or $25.

Individual S&P futures contract holders are limited to no more than 20,000 net long or short contracts at any one time. The evening session starts at 3:30 PM (15 minutes after the close at 3.15 PM) and continues on the Globex until 8:15 AM overnight.

A procedure is set in place to halt trading if the index experiences major declines or increases beyond certain limits. Circuit breakers are triggered if these price limits are crossed. The limits are set on quarterly basis. A price limit is how far an S&P futures contract can rise or fall in a single trading session.

Collar Rule: What the collar rule does is limit the chance of huge gains or losses as a result of futures trading. The collar rule limits the traders from piling buy or sell orders in an attempt to exaggerate the gains or losses of the market. It addresses price swings related to program trades that move the Dow Jones Industrial Average (DJIA) more than 2% by requiring index arbitrage orders, or orders that bet on the spread between the futures and the cash of stock indexes to be stabilizing.

Overnight or pre-market trading can be thin and dangerous especially during slow seasons in the stock market such as summer, fall and around the winter holidays. Once you have mastered futures basics such as the performance bond margins, the mark to market requirements and the account specifics, its time to learn how a futures contract ticks.

CMEs most actively traded contracts are Eurodollar futures and S&P futures including the E-minis. Hundreds of futures contracts trade on the federally regulated futures exchanges in the United States. Each of these exchanges trade contract that are somewhat unique to it.

E-mini S&P Futures contracts: The E-mini S&P futures contracts (ES) are the favorites of the day traders because of its high intraday price volatility and major price swings on a daily basis. The E-mini S&P futures contracts (ES) are among the most popular stock index futures contract because they enable you to trade the markets trend with only one fifth of the requirement.

The value of the E-mini S&P futures contract is $50 times the value of the S&P 500 stock index. One tick on E-min S&P futures contract is equal to 0.25 of the index point or $12.50. The E-mini S&P futures contract can be very volatile and can move even more aggressively during times of extreme market volatility.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading futures and currencies. Trade Dow Futures and S&P Futures!

S&P Futures Explained (Part I)

S&P Futures are the most popularly traded stock index futures contract. S&P futures contracts are traded on the Chicago Mercantile Exchange (CME). The S&P 500 stock index is a market valued weighted index of 500 large capitalized stocks traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and Nasdaq National Market Executive System (NASDAQ).

The S&P 500 is made up of 400 industrial companies, 40 financial companies, 40 utilities and 20 transportation companies offering a fairly diversified view of the US economy. The S&P index introduced in 1957 is currently the investment industrys standard for measuring portfolio performance.

The original S&P 500 futures contracts were valued at $500 times the index in the beginning. As the stock market began to surge higher in those days, the index more than doubled in three years. The value of the S&P futures contract neared $500,000. A 10 point change on the S&P 500 index was worth $5,000 with the index approaching the 1000 level.

Many traders were ruled out of the futures market with the margin requirements for that sized contract. So in order to make the S&P futures contract more accessible to traders, CME introduced an S&P futures contract that was worth $250 times the value of the index in 1997 halving the original valuation of the contract. Now, a move of a full point is now worth $250. Suppose the S&P 500 index value is at 1250. The value of the S&P futures contract will be ($250) (1450) = $312,500.

Earlier in that same year another mini S&P futures contract worth only $50 times the S&P 500 index was introduced by CME and the value of this new E-mini S&P futures contract brought the initial margin requirements down to around $4,000 at that time.

With the S&P futures $250,000 contract, the rising stock market put the initial margin at $15,000. This was keeping the S&P futures contract out of the reach of many individual speculators even with a margin requirement of only about 6 percent of the contracts value. By introducing the E-mini CME put the S&P 500 Index within the capabilities of many individual accounts. E-mini S&P futures contract in fact revolutionized trading. Today many individual traders make a living by day trading E-mini S&P futures.

But the real innovation was letting small orders of this new E-mini market trade entirely on an electronic platform and not in the traditional open-outcry pits. CME officials decided that trading orders could take place entirely on a trade matching computer with no human intervention, giving traders direct access to the market without going through an order handler.

Electronic trading became the mainstream market for the E-mini S&P futures contracts as the allowable number of contracts was increased over time. E-mini S&P futures contracts would no longer be limited to after-hours trading or to supplement the primary pit contract.

CME also decided it might as well keep the market open almost 24 hours a day as long as trading was all computer-based. The radical move caught the wave of online trading and day trading that was revolutionizing the stock market at the same time.

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading futures and currencies. Trade S&P Futures and Dow Futures!

Dow Futures (Part II)

Stock-index futures are by far the largest category of futures contracts traded as a percentage of the total number of futures contracts traded. Stock index futures like the Dow Futures are traded for speculation as well as hedging purposes. The dominance of index futures clearly speaks of the major role that stock-index futures play in risk management for the entire stock market.

Stock index futures like the Dow futures are a better option than trading individual stocks. There are other advantages of trading stock index futures like the Dow Futures. Some of these advantages are gains in the futures markets are taxed at a lower rate than the stock market capital gains.

Globex is a 24 hour electronic trading system for a wide variety of futures contract. If something happens on the stock market overnight when it is closed and you want to hedge your risk, you can trade Dow Futures on Globex. Many futures brokerages offer lower commission rates as compared to stocks.

You are betting on the direction of the Dow Futures contract value, in this case DJIA and not on the individual stocks that make up the index when you trade Dow Futures or for that matter any other stock index futures.

In a sense by focusing on the value and the general trend of the stocks as a group, you are blocking out a good deal of the noise that is often associated with the daily gyrations in the prices of the individual stocks.

Stock index futures like the Dow Futures are guaranteed to move in response to the economic indicators. You can simply speculate with the futures contract like the Dow Futures just by using technical and fundamental analysis. You can setup positions with both futures and options as you wait for the news to hit the wire.

Stock indexes move when economic news of fundamental nature is released. For the past many years, the monthly NFP employment report which is issued the first Friday of every month at 8:30 AM EST has been an excellent mover for stock index futures like the Dow Futures.

You just need to find one or two stock index futures with which you’re comfortable -the ones that enable you to implement your strategies. You don’t need to trade every major index futures contract in the world to be successful.

The better off you are, the more you know about a particular type of a contract. So the best way to trade futures contracts is to become a specialist in one type of the contract like the Dow Futures or the S&P 500 Futures or NASDAQ-100 Futures.

You can get an idea when the Dow Futures contract is likely to turn around by using technical analysis. You can use your knowledge of technical analysis to figure out how many days the Dow Futures contract tends to spend rising or falling using Bollinger Bands or Moving Averages. So by becoming a specialist in trading Dow Futures you can make a lot of profit daily from the daily movements in DJIA. This way you can become a Dow Futures swing trader. Every time profiting from a turn in the DJIA!

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Trade Dow Futures. Learn Swing Trading!

Learning Market Timing

Have you ever thought of market timing? There is always a bull market somewhere if you look hard. In other words if you look around you will always be able to find a market that is trending up or down that you can use to make money. Market timing maybe the trading method of the 21st century!

Power and influence is spreading to more places around the world. The world is moving from a North American and Eurocentric world view to one that includes Asia, South America especially China, India, Brazil and Russia.

Internet has ushered in a revolution in the global financial system. Money gets transferred around the globe at the speed of light. This is enough to create opportunity for market timing.

Successful market timing is more dependent on trading techniques. It also depends on your ability to establish positions early on in the trend and maintain those positions as long as possible to let time work for you. This is the new world where the ability to move faster in and out of trading positions and to trade markets that are rising or falling profitably is becoming increasing important to the long term investors. Dont forget the hedge funds when we talk of long term investors. Hedge funds have the skills and resources for market timing around the globe. The buy and hold investing strategy is losing its appeal. Does buy and hold work in todays market? If you are a traditional buy and hold investor you have been conditioned to hold to your portfolio forever. This is what Warren Buffet does. Did he take a beating in the recent stock market crash? Yes he did.

Whether it is stocks, options, futures, bonds, commodities or currencies around the globe, market timing is the act of entering or exiting trades at the most opportune times in any market.

Now if you can make money when the market is going up and when the market is going down, you have twice the opportunity to make money. Your goal in using market timing is to maximize your profit potential.

Many people try to confuse market timing with day trading. Market timing is not day trading. Market timing is about recognizing opportunities early on in any market. Moving into positions with well planned strategies and monitoring the progress on a frequent basis.

Market timing is about seeing the intermediate term trend which lasts for weeks or months. Market timing is close to swing trading and position trading. It can last as long as the trend continues in the market and getting out when your profit targets have been met.

Investors who can adapt to this new world are the ones who will have the best chances of success. What makes market timing one of the useful trading methods is that you can use the techniques to time stocks, bonds, mutual funds, futures, options, currencies, commodities or exchange traded funds!

Market timing is as much a state of mind as it is a combination of trading methods. It requires knowledge of fundamental and technical analysis. With market timing, you can diversify your investment opportunities.

Market timing also helps you decrease your exposure to risk. With market timing, you want to stay with the dominant trend. You want to swim with the tide by buying stocks in a rising market and selling or shorting in a falling market.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Know These Candlestick Patterns. Learn Candlestick Charting!