Trading & Investing in Stocks & Options Department of Social Science & Policy Studies Worcester Polytechnic Institute Mich...
Outline Of My Talk <ul><li>Hierarchy of Stock & Options Price Movement </li></ul><ul><li>Some Basic Macroeconomics </li></...
Hierarchy of Stock & Options Price Movement <ul><li>Economy </li></ul><ul><ul><li>Actions of central bank(s) </li></ul></u...
Some Basic Macroeconomics <ul><li>Gurus: John Maynard Keynes, Hyman Minsky, Abba Lerner, Warren Mosler & L. Randall Wray <...
<ul><li>Capitalist economies have a trend & a cycle(s) </li></ul>Some Basic Macroeconomics
<ul><li>Trend due to self-reinforcing processes: </li></ul><ul><ul><li>Supply Side </li></ul></ul><ul><ul><ul><li>Populati...
<ul><li>Cycle (primarily) due to: </li></ul><ul><ul><li>Consumption Spending </li></ul></ul><ul><ul><ul><li>Since 1980, du...
<ul><li>Inflation/deflation and involuntary unemployment are the traditional evils that policymakers try to combat </li></...
<ul><li>Minsky’s Theory of the Cycle </li></ul><ul><ul><li>Investment spending  & its financing  is the key </li></ul></ul...
<ul><li>Central banks in capitalist economies are said to (implicitly) follow a Taylor Rule: </li></ul><ul><li>I t  = Inf ...
Some Basic Macroeconomics Economy of the Rest of the World U.S. Economy Private Sector Balance Gov’t Budget Current Accoun...
<ul><li>During the expansion phase of the cycle (fearing inflation) the Fed starts to raise the Federal Funds rate target ...
S&P 500 PE Ratio Moves Opposite of the Federal Funds Rate
<ul><li>But  fiscal policy  cannot be ignored! </li></ul><ul><li>Actually, the quantity of money in the economy is determi...
<ul><li>Levy-Kalecki Profits Equation: </li></ul><ul><li>Gross After Tax Profits (Includes Interest, Rent & Dividends) =  ...
<ul><li>Thus: </li></ul><ul><li>[Gross After Tax Profits – Investment Spending – Consumption Out of Profits + Saving Out o...
<ul><li>That is: </li></ul><ul><li>[Saving Out of Profits + Saving Out of Wages] - </li></ul><ul><li>[Budget Deficit/Surpl...
<ul><li>That is: </li></ul><ul><li>[Private Sector Balance] - </li></ul><ul><li>[Current Account Balance] = </li></ul><ul>...
<ul><li>Currently: </li></ul><ul><li>Private Sector Balance (+2% of DPI) - </li></ul><ul><li>Current Account Balance (-6% ...
<ul><li>Other Levy-Kalecki Profits Equation Relationships : </li></ul><ul><ul><li>The Unemployment Rate closely tracks the...
<ul><li>Thus, any private sector surplus (i.e., any accumulation of wealth by the private sector) coupled with any current...
Inter-Market Analysis <ul><li>Guru is John Murphy </li></ul><ul><ul><li>http:// stockcharts.com/charts/performance/Interma...
Inter-Market Analysis <ul><li>Three key relationships: </li></ul><ul><ul><li>U.S. Dollar & Commodities => Negative </li></...
Inter-Market Analysis Source: StockCharts.com
Inter-Market Analysis Source: StockCharts.com
Inter-Market Analysis Source: StockCharts.com
Inter-Market Analysis Source: StockCharts.com
Inter-Market Analysis <ul><li>Main idea: </li></ul><ul><ul><li>If you’re going to successfully trade stocks and stock opti...
Sector Rotation <ul><li>Guru is Sam Stovall of Standard & Poor’s </li></ul><ul><ul><li>http://www.businessweek.com/investo...
Sector Rotation Source: StockCharts.com
Sector Rotation <ul><li>Over the macroeconomic cycle, institutions move money out of certain sectors and into other sector...
Sector Rotation – Relative Strength Source: StockCharts.com
Sector Rotation – Relative Strength Source: StockCharts.com
<ul><li>Gurus are Greg Morris & John Murphy </li></ul><ul><li>Morris, Gregory L. 2006.  The Complete Guide to Market Bread...
<ul><li>Advance/Decline Indicators </li></ul><ul><li>New High/New Low Indicators </li></ul><ul><li>Up Volume/Down Volume I...
<ul><li>Not every close of the S&P 500 below its 200 day EMA signals a bear market, however every bear market starts with ...
Market Breadth 50 Day EMA 200 Day EMA
<ul><li>Weekly Moving Average Cross-Over System (from John Murphy) </li></ul><ul><li>13 Week EMA & 34 Week EMA </li></ul><...
Market Breadth False Signal (Quickly Corrected) Bull Bear 13 Week EMA 34 Week EMA See Next Slide
Market Breadth Convergence But No Cross Small Cross & Recovery
<ul><li>S&P 500 100 Day (20 Week) & 400 Day (20 Month) Exponential Moving Averages </li></ul><ul><ul><li>Closing below the...
Market Breadth Minor Bearish Bullish Major Bearish 100 Day EMA 400 Day EMA 400 Day EMA ProvidesSupport
Market Breadth Bullish Bullish Bearish 400 Day EMA Bollinger Bands +-2
<ul><li>Generally speaking, it’s better not to trade against the market </li></ul><ul><li>Bull market: Buy stocks & call o...
<ul><li>Select Your Style: </li></ul><ul><ul><li>Scalping </li></ul></ul><ul><ul><li>Day Trading </li></ul></ul><ul><ul><l...
<ul><li>Three Tools Required for Trading & Investing: </li></ul><ul><ul><li>A method for finding stocks & options to buy &...
<ul><li>Stock Shepherding </li></ul><ul><li>Stock Screeners </li></ul><ul><ul><li>Business Week (Free) </li></ul></ul><ul>...
<ul><li>Technical trading is nothing more than support & resistance! </li></ul><ul><ul><li>http://www.stockconsultant.com/...
<ul><li>Like the economy, individual stock prices have a trend & a cycle </li></ul><ul><li>Up-Trend: Higher highs & higher...
<ul><li>Must identify up-trend, down-trend, or no trend </li></ul><ul><li>Plotting stock price data </li></ul><ul><ul><li>...
<ul><li>Apply Well-Known Technical Indicators to the Stock Price Data </li></ul><ul><ul><li>Moving Averages & Trend Lines ...
Fundamental Investing <ul><li>Growth Investing </li></ul><ul><ul><li>Guru is Cramer (among many others) </li></ul></ul><ul...
Fundamental Investing <ul><li>P/E = “Multiple” = M </li></ul><ul><li>M * E = P </li></ul><ul><li>Find stocks that have a l...
Fundamental Investing <ul><li>But: </li></ul><ul><li>M * Expected Future (E) = Expected Future (P) </li></ul><ul><li>So, s...
Fundamental Investing <ul><li>Value Investing </li></ul><ul><ul><li>Guru is Warren Buffet </li></ul></ul><ul><ul><li>http:...
Method & Strategy for Executing Trades <ul><li>Broker </li></ul><ul><ul><li>Keys to selecting a good broker </li></ul></ul...
Example <ul><li>http://scansstaging.marketgauge.com/login.asp?reason=denied_empty&script_name=/Scans/OpeningRange.asp&path...
Options <ul><li>Derivative markets are exploding! </li></ul><ul><li>Options provide  leverage  (a small percentage move in...
Options <ul><li>Some options strategies only work if the underlying asset moves in a particular direction </li></ul><ul><l...
Options <ul><li>An option is a  contract  that gives the owner the  right , but  not the obligation , to buy/sell an under...
Options <ul><li>The writer of an option has the obligation (a  liability ) to buy/sell an underlying asset (e.g., 100 shar...
Options <ul><li>A contract has two parties: a buyer & a seller </li></ul><ul><li>Bullish </li></ul><ul><li>Max reward limi...
Options <ul><li>Time decay </li></ul><ul><ul><li>Ice cube melting on a sidewalk </li></ul></ul><ul><li>Options Valuation <...
Options <ul><li>Simple strategies </li></ul><ul><ul><li>Buy a call instead of the underlying stock </li></ul></ul><ul><ul>...
Options <ul><li>Free information on options: </li></ul><ul><ul><li>http://www.888options.com/ </li></ul></ul><ul><ul><li>h...
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Trading

  1. 1. Trading & Investing in Stocks & Options Department of Social Science & Policy Studies Worcester Polytechnic Institute Michael J. Radzicki, Ph.D. [email_address] http:// www.michaeljosephradzicki.com /
  2. 2. Outline Of My Talk <ul><li>Hierarchy of Stock & Options Price Movement </li></ul><ul><li>Some Basic Macroeconomics </li></ul><ul><li>Inter-Market Analysis </li></ul><ul><li>Sector Rotation </li></ul><ul><li>Market Breadth </li></ul><ul><li>Trading & Investing </li></ul><ul><li>Options </li></ul>
  3. 3. Hierarchy of Stock & Options Price Movement <ul><li>Economy </li></ul><ul><ul><li>Actions of central bank(s) </li></ul></ul><ul><ul><li>Fiscal policy </li></ul></ul><ul><li>Markets </li></ul><ul><ul><li>Currency Markets </li></ul></ul><ul><ul><li>Commodity Markets </li></ul></ul><ul><ul><li>Bond Market </li></ul></ul><ul><ul><li>Stock Market </li></ul></ul><ul><li>Sectors </li></ul><ul><li>Industry Groups </li></ul><ul><li>Individual Stock Prices </li></ul><ul><li>Individual Stock Option Prices </li></ul>
  4. 4. Some Basic Macroeconomics <ul><li>Gurus: John Maynard Keynes, Hyman Minsky, Abba Lerner, Warren Mosler & L. Randall Wray </li></ul>
  5. 5. <ul><li>Capitalist economies have a trend & a cycle(s) </li></ul>Some Basic Macroeconomics
  6. 6. <ul><li>Trend due to self-reinforcing processes: </li></ul><ul><ul><li>Supply Side </li></ul></ul><ul><ul><ul><li>Population Growth </li></ul></ul></ul><ul><ul><ul><li>Technological Innovation & Ideas </li></ul></ul></ul><ul><ul><ul><li>Capital Accumulation </li></ul></ul></ul><ul><ul><li>Demand Side </li></ul></ul><ul><ul><ul><li>Fiscal Policy </li></ul></ul></ul>Some Basic Macroeconomics
  7. 7. <ul><li>Cycle (primarily) due to: </li></ul><ul><ul><li>Consumption Spending </li></ul></ul><ul><ul><ul><li>Since 1980, due to consumer credit </li></ul></ul></ul><ul><ul><li>Investment and the dynamics of its financing </li></ul></ul><ul><ul><ul><li>Which includes speculation (a self-reinforcing process) </li></ul></ul></ul><ul><ul><li>Countercyclical Government Spending </li></ul></ul>Some Basic Macroeconomics
  8. 8. <ul><li>Inflation/deflation and involuntary unemployment are the traditional evils that policymakers try to combat </li></ul><ul><ul><li>Other evils exist too </li></ul></ul><ul><li>Capitalist economies are often “demand constrained” </li></ul><ul><ul><li>Which results in unused production capacity </li></ul></ul><ul><ul><li>In both the long and short runs </li></ul></ul>Some Basic Macroeconomics
  9. 9. <ul><li>Minsky’s Theory of the Cycle </li></ul><ul><ul><li>Investment spending & its financing is the key </li></ul></ul><ul><ul><li>Hedge Firms/Sectors </li></ul></ul><ul><ul><li>Speculative Firms/Sectors </li></ul></ul><ul><ul><li>Ponzi Firms/Sectors </li></ul></ul>Some Basic Macroeconomics
  10. 10. <ul><li>Central banks in capitalist economies are said to (implicitly) follow a Taylor Rule: </li></ul><ul><li>I t = Inf t * + r t * + a*(Inf t - Inf t *) + b*(y t – y t *) </li></ul><ul><li>I t = Target Federal Funds Rate </li></ul><ul><li>Inf t = Rate of inflation (measured by GDP deflator) </li></ul><ul><li>Inf t * = Desired rate of inflation </li></ul><ul><li>r t * = Real interest rate consistent with full employment (usually thought to be 2%) </li></ul><ul><li>y t = Real GDP </li></ul><ul><li>y t * = Potential real GDP </li></ul>Some Basic Macroeconomics
  11. 11. Some Basic Macroeconomics Economy of the Rest of the World U.S. Economy Private Sector Balance Gov’t Budget Current Account Federal Reserve System Open Market Committee Fed Funds Target Rate; Bond Purchases & Sales Taylor Rule, Current Account & Exchange Rates
  12. 12. <ul><li>During the expansion phase of the cycle (fearing inflation) the Fed starts to raise the Federal Funds rate target </li></ul><ul><ul><li>The term structure of interest rates responds </li></ul></ul><ul><li>Generally speaking, rising interest rates & fear of inflation: </li></ul><ul><ul><li>Drives bond yields up and thus bond prices down </li></ul></ul><ul><ul><li>Slows the housing market & thus household sector spending </li></ul></ul><ul><ul><li>Slows the economy (and thus slows earnings growth) [maybe] </li></ul></ul><ul><ul><li>Drives stock prices down </li></ul></ul><ul><ul><li>Drives commodity prices up </li></ul></ul><ul><ul><li>Can strengthen (or weaken) the dollar </li></ul></ul>Some Basic Macroeconomics
  13. 13. S&P 500 PE Ratio Moves Opposite of the Federal Funds Rate
  14. 14. <ul><li>But fiscal policy cannot be ignored! </li></ul><ul><li>Actually, the quantity of money in the economy is determined by fiscal policy </li></ul><ul><li>“ Monetary policy” simply consists of setting the federal funds rate </li></ul><ul><li>Lerner-Mosler-Wray story </li></ul>Some Basic Macroeconomics
  15. 15. <ul><li>Levy-Kalecki Profits Equation: </li></ul><ul><li>Gross After Tax Profits (Includes Interest, Rent & Dividends) = </li></ul><ul><li>Investment Spending + Consumption Out of Profits - Saving Out of Wages + </li></ul><ul><li>[Gov’t Spending – Gov’t Tax Revenue] + </li></ul><ul><li>[Exports - Imports] </li></ul>Some Basic Macroeconomics
  16. 16. <ul><li>Thus: </li></ul><ul><li>[Gross After Tax Profits – Investment Spending – Consumption Out of Profits + Saving Out of Wages] - </li></ul><ul><li>[Gov’t Spending – Gov’t Tax Revenue] - </li></ul><ul><li>[Exports - Imports] = 0 </li></ul>Some Basic Macroeconomics
  17. 17. <ul><li>That is: </li></ul><ul><li>[Saving Out of Profits + Saving Out of Wages] - </li></ul><ul><li>[Budget Deficit/Surplus] - </li></ul><ul><li>[Trade Deficit/Surplus] = 0 </li></ul>Some Basic Macroeconomics
  18. 18. <ul><li>That is: </li></ul><ul><li>[Private Sector Balance] - </li></ul><ul><li>[Current Account Balance] = </li></ul><ul><li>[Government Sector Balance] </li></ul>Some Basic Macroeconomics
  19. 19. <ul><li>Currently: </li></ul><ul><li>Private Sector Balance (+2% of DPI) - </li></ul><ul><li>Current Account Balance (-6% of DPI) = </li></ul><ul><li>Government Sector Balance (4% of DPI) </li></ul>Some Basic Macroeconomics
  20. 20. <ul><li>Other Levy-Kalecki Profits Equation Relationships : </li></ul><ul><ul><li>The Unemployment Rate closely tracks the Private Sector Balance </li></ul></ul><ul><ul><ul><li>When the private sector goes into deficit it reduces the unemployment rate but also accumulates debt </li></ul></ul></ul><ul><ul><li>The Value of the Dollar closely tracks the Government Sector Balance </li></ul></ul><ul><ul><ul><li>As the budget deficit increases, the value of the dollar falls </li></ul></ul></ul>Some Basic Macroeconomics
  21. 21. <ul><li>Thus, any private sector surplus (i.e., any accumulation of wealth by the private sector) coupled with any current account deficit must be offset by a government sector deficit and vice versa! </li></ul><ul><li>So, how loud should we applaud the federal budget surpluses during the late 1990s? </li></ul><ul><li>Government surpluses are deflationary and directly associated with the loss of private sector wealth </li></ul><ul><ul><li>Which is bad for stock prices </li></ul></ul><ul><ul><li>Which decouples the relationship between stock & bond prices </li></ul></ul>Some Basic Macroeconomics
  22. 22. Inter-Market Analysis <ul><li>Guru is John Murphy </li></ul><ul><ul><li>http:// stockcharts.com/charts/performance/Intermarket.html </li></ul></ul><ul><ul><li>2004. Intermarket Analysis: Profiting from Global Market Relationships . Hoboken, NJ: John Wiley & Sons, Inc. </li></ul></ul><ul><ul><li>1991. Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets . Hoboken, NJ: John Wiley & Sons, Inc. </li></ul></ul>
  23. 23. Inter-Market Analysis <ul><li>Three key relationships: </li></ul><ul><ul><li>U.S. Dollar & Commodities => Negative </li></ul></ul><ul><ul><li>Commodities & Bonds => Negative </li></ul></ul><ul><ul><li>Bonds & Stocks => Positive (Unless Deflation) </li></ul></ul><ul><ul><ul><li>Bond market typically leads stock market by 6-8 months </li></ul></ul></ul>
  24. 24. Inter-Market Analysis Source: StockCharts.com
  25. 25. Inter-Market Analysis Source: StockCharts.com
  26. 26. Inter-Market Analysis Source: StockCharts.com
  27. 27. Inter-Market Analysis Source: StockCharts.com
  28. 28. Inter-Market Analysis <ul><li>Main idea: </li></ul><ul><ul><li>If you’re going to successfully trade stocks and stock options, you have to pay attention to the bond, commodities and currency markets </li></ul></ul><ul><ul><li>Therefore, you also have to pay attention to the economy, fiscal & monetary policy, and to world events </li></ul></ul>
  29. 29. Sector Rotation <ul><li>Guru is Sam Stovall of Standard & Poor’s </li></ul><ul><ul><li>http://www.businessweek.com/investor/list/stovall_toc01.htm </li></ul></ul><ul><ul><li>1996. Sector Investing . McGraw-Hill. </li></ul></ul><ul><ul><li>1995. Standard & Poor’s Guide to Sector Investing . McGraw-Hill. </li></ul></ul><ul><li>Murphy & Cramer are into it too! </li></ul>
  30. 30. Sector Rotation Source: StockCharts.com
  31. 31. Sector Rotation <ul><li>Over the macroeconomic cycle, institutions move money out of certain sectors and into other sectors </li></ul><ul><li>Thus, a good investing/trading strategy is to follow the institutional money to the hot sectors </li></ul><ul><li>http:// stockcharts.com /charts/Carpet/ </li></ul>
  32. 32. Sector Rotation – Relative Strength Source: StockCharts.com
  33. 33. Sector Rotation – Relative Strength Source: StockCharts.com
  34. 34. <ul><li>Gurus are Greg Morris & John Murphy </li></ul><ul><li>Morris, Gregory L. 2006. The Complete Guide to Market Breadth Indicators . New York: The McGraw-Hill Companies. </li></ul>Market Breadth
  35. 35. <ul><li>Advance/Decline Indicators </li></ul><ul><li>New High/New Low Indicators </li></ul><ul><li>Up Volume/Down Volume Indicators </li></ul><ul><li>McClellan Indicators </li></ul><ul><li>Vix </li></ul><ul><li>Technical analysis applied to the main indices </li></ul>Market Breadth
  36. 36. <ul><li>Not every close of the S&P 500 below its 200 day EMA signals a bear market, however every bear market starts with a close of the S&P 500 below its 200 day EMA. </li></ul><ul><li>If the 50 day EMA of the S&P 500 crosses below its 200 day EMA the odds of a bear market increases </li></ul><ul><ul><li>Called a “death cross” </li></ul></ul><ul><ul><li>Opposite is called a “golden cross” </li></ul></ul>Market Breadth
  37. 37. Market Breadth 50 Day EMA 200 Day EMA
  38. 38. <ul><li>Weekly Moving Average Cross-Over System (from John Murphy) </li></ul><ul><li>13 Week EMA & 34 Week EMA </li></ul><ul><li>Works best on S&P 500 </li></ul><ul><ul><li>S&P crossed briefly & then recovered </li></ul></ul><ul><ul><li>NASDAQ has crossed </li></ul></ul>Market Breadth
  39. 39. Market Breadth False Signal (Quickly Corrected) Bull Bear 13 Week EMA 34 Week EMA See Next Slide
  40. 40. Market Breadth Convergence But No Cross Small Cross & Recovery
  41. 41. <ul><li>S&P 500 100 Day (20 Week) & 400 Day (20 Month) Exponential Moving Averages </li></ul><ul><ul><li>Closing below the 100 Day EMA is a minor sell signal (bearish) </li></ul></ul><ul><ul><li>Closing below the 400 Day EMA is a major sell signal (bearish) </li></ul></ul><ul><ul><li>400 Day EMA is major area of support </li></ul></ul>Market Breadth
  42. 42. Market Breadth Minor Bearish Bullish Major Bearish 100 Day EMA 400 Day EMA 400 Day EMA ProvidesSupport
  43. 43. Market Breadth Bullish Bullish Bearish 400 Day EMA Bollinger Bands +-2
  44. 44. <ul><li>Generally speaking, it’s better not to trade against the market </li></ul><ul><li>Bull market: Buy stocks & call options </li></ul><ul><li>Bear market: Sell stocks short & buy put options </li></ul>Trading & Investing
  45. 45. <ul><li>Select Your Style: </li></ul><ul><ul><li>Scalping </li></ul></ul><ul><ul><li>Day Trading </li></ul></ul><ul><ul><li>Swing Trading </li></ul></ul><ul><ul><li>Intermediate Position Trading </li></ul></ul><ul><ul><li>Long Term Position Trading </li></ul></ul><ul><ul><li>Investing </li></ul></ul>Trading Vs Investing As you move from micro scalping to investing, you hold your positions longer (thus tying-up your capital longer) & can earn more $ on each trade. But you must also know more about why a stock is moving [ Financial Economy (news, earnings, splits, fundamentals, etc.) & Real Economy (FDA approval, new products, mergers & acquisitions, etc.)]. Pattern Day Trading Rule Applies
  46. 46. <ul><li>Three Tools Required for Trading & Investing: </li></ul><ul><ul><li>A method for finding stocks & options to buy & sell </li></ul></ul><ul><ul><li>A trading platform for timing entries to, and exits from, trades </li></ul></ul><ul><ul><li>A method & strategy for executing trades </li></ul></ul><ul><ul><ul><li>Broker </li></ul></ul></ul><ul><ul><ul><li>Trading Plan </li></ul></ul></ul>Trading & Investing
  47. 47. <ul><li>Stock Shepherding </li></ul><ul><li>Stock Screeners </li></ul><ul><ul><li>Business Week (Free) </li></ul></ul><ul><ul><ul><li>http://prosearch.businessweek.com/businessweek/general_free_search.html?mode =advanced </li></ul></ul></ul><ul><ul><li>Short Term Stock Selector (Free & Cost) </li></ul></ul><ul><ul><ul><li>http://home.flash.net/~hesler/ </li></ul></ul></ul><ul><ul><ul><li>Neural net picks stocks to swing trade </li></ul></ul></ul><ul><ul><li>HotScans (Cost) </li></ul></ul><ul><ul><ul><li>http:// www.marketgauge.com / </li></ul></ul></ul><ul><li>Market Carpets & Heat Maps </li></ul><ul><ul><li>http://www.smartmoney.com/MARKETMAP/ </li></ul></ul><ul><ul><li>http://screening.nasdaq.com/heatmaps/heatmap_pmi.asp </li></ul></ul><ul><ul><li>http:// www.spdrindex.com/sectortracker / </li></ul></ul><ul><li>Top Ten Lists </li></ul><ul><li>News: e.g., CNBC & Bloomberg </li></ul><ul><li>Pundits: e.g., Cramer (Boo-Yah) </li></ul><ul><li>Value & Growth Investing </li></ul>Finding Stocks & Options to Trade
  48. 48. <ul><li>Technical trading is nothing more than support & resistance! </li></ul><ul><ul><li>http://www.stockconsultant.com/ </li></ul></ul><ul><li>Need a charting program to identify support & resistance levels & thus to time entries & exits </li></ul><ul><ul><li>http://www.marketbrowser.com/mbzzzq2.asp (Free) </li></ul></ul><ul><ul><li>http://www.bigcharts.com/ (Free) </li></ul></ul><ul><ul><li>http://www.tradestation.com/ (My Personal Choice) </li></ul></ul>Trading Platforms
  49. 49. <ul><li>Like the economy, individual stock prices have a trend & a cycle </li></ul><ul><li>Up-Trend: Higher highs & higher lows </li></ul><ul><ul><li>Bullish: Buy stocks; Buy call options </li></ul></ul><ul><li>Down-Trend: Lower highs & lower lows </li></ul><ul><ul><li>Bearish: Sell stocks short, Buy put options </li></ul></ul><ul><li>No Trend: Price just oscillates </li></ul><ul><ul><li>Neutral: Sell call options on stocks you own </li></ul></ul>Trading Platforms
  50. 50. <ul><li>Must identify up-trend, down-trend, or no trend </li></ul><ul><li>Plotting stock price data </li></ul><ul><ul><li>Line plots </li></ul></ul><ul><ul><li>Western bar plots </li></ul></ul><ul><ul><li>Japanese candle sticks </li></ul></ul>Trading Platforms
  51. 51. <ul><li>Apply Well-Known Technical Indicators to the Stock Price Data </li></ul><ul><ul><li>Moving Averages & Trend Lines </li></ul></ul><ul><ul><ul><li>Shows changes in trends </li></ul></ul></ul><ul><ul><li>ADX – Average Directional Index </li></ul></ul><ul><ul><ul><li>Shows the strength of a trend </li></ul></ul></ul><ul><ul><li>Oscillators </li></ul></ul><ul><ul><ul><li>E.g., RSI & Fast & Slow Stochastics </li></ul></ul></ul><ul><ul><ul><li>Shows over-bought & over-sold conditions – i.e., when a stock price will reverse </li></ul></ul></ul><ul><ul><li>An Indicator that Utilizes Elements of Both the Trend & the Cycle </li></ul></ul><ul><ul><ul><li>MACD – Moving Average Convergence Divergence </li></ul></ul></ul>Trading Platforms
  52. 52. Fundamental Investing <ul><li>Growth Investing </li></ul><ul><ul><li>Guru is Cramer (among many others) </li></ul></ul><ul><ul><li>http://www.thestreet.com/ </li></ul></ul><ul><ul><li>http:// www.cramerwatch.org / </li></ul></ul><ul><ul><li>Main Idea: </li></ul></ul><ul><ul><li>P/E = [Price ($/Share) / Earnings ($/Share)] </li></ul></ul>
  53. 53. Fundamental Investing <ul><li>P/E = “Multiple” = M </li></ul><ul><li>M * E = P </li></ul><ul><li>Find stocks that have a lower M and a higher historical growth rate of E than the average firm in the S&P 500 </li></ul><ul><li>PEG useful </li></ul>
  54. 54. Fundamental Investing <ul><li>But: </li></ul><ul><li>M * Expected Future (E) = Expected Future (P) </li></ul><ul><li>So, should try to predict future earnings growth too </li></ul><ul><ul><li>Conference calls </li></ul></ul><ul><ul><li>Analysts </li></ul></ul><ul><ul><li>New product introductions </li></ul></ul><ul><ul><li>Small debt </li></ul></ul><ul><ul><li>Better sales & margins, & lower costs than rivals </li></ul></ul><ul><ul><li>Secular or cyclical stock? </li></ul></ul>
  55. 55. Fundamental Investing <ul><li>Value Investing </li></ul><ul><ul><li>Guru is Warren Buffet </li></ul></ul><ul><ul><li>http://www.coattailinvestor.com/ </li></ul></ul><ul><ul><li>Main Idea: Analyze a company & determine its intrinsic value. When its share price drops below that value => buy. </li></ul></ul><ul><ul><li>Bible is Security Analysis by Graham & Dodd </li></ul></ul><ul><ul><li>Must know basic accounting </li></ul></ul>
  56. 56. Method & Strategy for Executing Trades <ul><li>Broker </li></ul><ul><ul><li>Keys to selecting a good broker </li></ul></ul><ul><ul><li>Cash & margin accounts </li></ul></ul><ul><li>Trading Plan </li></ul><ul><ul><li>Money management </li></ul></ul><ul><ul><ul><li>Risk-Reward Ratios </li></ul></ul></ul><ul><ul><ul><li>Order entry & exit strategies </li></ul></ul></ul><ul><ul><ul><ul><li>Order types </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Setting stops </li></ul></ul></ul></ul>
  57. 57. Example <ul><li>http://scansstaging.marketgauge.com/login.asp?reason=denied_empty&script_name=/Scans/OpeningRange.asp&path_info=/Scans/OpeningRange.asp&fid=8969 </li></ul><ul><li>Paper Trading: </li></ul><ul><ul><li>http:// simulator.investopedia.com / </li></ul></ul>
  58. 58. Options <ul><li>Derivative markets are exploding! </li></ul><ul><li>Options provide leverage (a small percentage move in the underlying asset means a large percentage move in the value of the corresponding option) & a way to manage risk </li></ul><ul><li>Options require a smaller outlay of capital </li></ul><ul><li>Many options strategies are quite simple; some are complex </li></ul>
  59. 59. Options <ul><li>Some options strategies only work if the underlying asset moves in a particular direction </li></ul><ul><li>Some options strategies only work if the underlying asset moves in either direction </li></ul><ul><li>Some options strategies only work if the underlying asset doesn’t move </li></ul>
  60. 60. Options <ul><li>An option is a contract that gives the owner the right , but not the obligation , to buy/sell an underlying asset (e.g., 100 shares of stock) at a particular price (the strike price) by a particular date (the expiration date). </li></ul><ul><ul><li>It’s an asset </li></ul></ul><ul><li>Two types of option contracts: </li></ul><ul><ul><li>Calls & Puts </li></ul></ul><ul><li>Two styles of options contracts: </li></ul><ul><ul><li>American style & European style </li></ul></ul>
  61. 61. Options <ul><li>The writer of an option has the obligation (a liability ) to buy/sell an underlying asset (e.g., 100 shares of stock) at a particular price (the strike price) by a particular date (the expiration date). </li></ul><ul><ul><li>This obligation will not need to be fulfilled unless the strike price is passed </li></ul></ul>
  62. 62. Options <ul><li>A contract has two parties: a buyer & a seller </li></ul><ul><li>Bullish </li></ul><ul><li>Max reward limited to premium received </li></ul><ul><li>Max risk = strike price – premium received </li></ul><ul><li>Bearish </li></ul><ul><li>Max reward limited to premium received </li></ul><ul><li>Max risk unlimited </li></ul>Write <ul><li>Bearish </li></ul><ul><li>Max risk limited to premium paid </li></ul><ul><li>Max reward = strike price – premium paid </li></ul><ul><li>Bullish </li></ul><ul><li>Max risk limited to premium paid </li></ul><ul><li>Max reward unlimited </li></ul>Buy Put Call
  63. 63. Options <ul><li>Time decay </li></ul><ul><ul><li>Ice cube melting on a sidewalk </li></ul></ul><ul><li>Options Valuation </li></ul><ul><ul><li>Time value </li></ul></ul><ul><ul><li>Intrinsic value </li></ul></ul><ul><ul><ul><li>ITM, ATM, OTM </li></ul></ul></ul><ul><ul><ul><li>Volatility </li></ul></ul></ul><ul><ul><ul><li>Other factors </li></ul></ul></ul>
  64. 64. Options <ul><li>Simple strategies </li></ul><ul><ul><li>Buy a call instead of the underlying stock </li></ul></ul><ul><ul><li>Buy a put instead of shorting the underlying stock </li></ul></ul><ul><ul><li>Buy/Write or Rent Your Stock </li></ul></ul><ul><ul><li>Write a (naked) put to purchase a stock you feel is currently over valued </li></ul></ul>
  65. 65. Options <ul><li>Free information on options: </li></ul><ul><ul><li>http://www.888options.com/ </li></ul></ul><ul><ul><li>http:// biz.yahoo.com/opt/education.html </li></ul></ul>

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