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Crafting And Perfecting Your Trading And Investing Strategy
PART 2 of 5 Crafting And Perfecting Your Trading And Investing Strategy Our trading and investing strategy will rely to a large measure on technical analysis with the use of fundamental analysis to pick unquestionably solid stocks to trade in. Prior starting to develop our trading and investing plan, lets just identify a few terminologies used in these discourses. Options: These are investing devices which give you the right but not the duty to buy or sell a stock. There are 2 kinds of options: Call Options and Put Options. Call Options make money if the stock is rising in value. Put Options earn money if the stock is lowering in value. Covered Call: Selling a Call to initiate a position. You must hold the underlying stock before you can sell a covered call. Bear in mind that the upside is limited. You benefit from covered calls by squeezing out the time value and volatility values. Shorting a Stock: Selling a stock you do not own (large gamers do) or for our plan, buying Puts. Bullish: presupposing or laying a bet on the market going up. Bearish: The reverse of Bullish. Bull trap: Stock provides a bullish signal causing a lot of traders to buy, only to sharply switch position and turn downward causing them to scurry to get out of the position otherwise lose money. Bear Trap: Opposite of Bull Trap. Offers a sell indication only to turn around shortly after. Short Trading Strategies: Although in general stocks often go up longer than they go down, the downward travel is usually more speedy and violent than the move up. Can one discern when a stock is ready to pull back? Many times yes but only when it signals a reversal. Numerous specialists employ short trading strategies extremely successfully. Short Trading Techniques are adopted by aggressive investors in their investment approach. "Shorting a Stock" means selling a stock one doesn't own. This is generally a big boy's play but the little participant can still play it by means of options - Put Options. Hedge Strategy To Consider: 1) Whenever you buy a stock, you purchase a Put Option. If your stock goes up, you generate profits on the stock and lose on the put option. You buy a stock position and sell a covered call. You have to have 100 shares for every covered call you desire to sell. You only want to do that with volatile and heavily traded stocks. In addition, when selling a Covered Call, the Option must have a big share, or all of its worth as time value and volatility value. This sum loses it's worth over time and goes to nought upon expiration. 3) Diversification (more on that later) While this is not a lesson concerning Options(that's for another time), just bear in mind than they're counted among the methods that aggressive traders and investors use in their techniques for trading. Okay, Lets Continue To The Good Stuff, The Real McCoy The following are the specific steps you will take in developing your trading and investment approach. This is the process you will utilize in crafting your plan. An example of the outcome will be listed at the end of the last Part. The Steps you'll take in developing your Trading And Investing Strategy are the following: Step 1: State Your Classification of Victory What would you like? Is it to Protect, Conserve and/or Grow Your Assets? How much do you want to make for each year? Would it be 10%, 12%, 24% per year (put in the number you want to make but be practical). Do you want to parody the accomplishment of the S&P 500? Or do you aspire to beat it? Note: If you are a conservative investor, for instance, and you fix your goal at 6% per year, aim to generate at least 1.5% per quarter(every 3 months), i.e., one quarter of 6% every 3 months. You will actually make in excess of 6% per year because of compounding. Compounding is a powerful concept in investing as become familiar with afterward. 6% each year shouldn't be tough and you really should position it higher even if you are conservative. A suggested place to start to discover companies that meet your criteria would be to explore good companies which have been paying high dividends of 6% or more per annum. Buy the stock and sell covered calls. For each 100 shares, you can sell 1 Covered Call. In case you are a conservative investor and also you utilize Options as an investing strategy, the Options you should mainly use are Covered Calls. At least in the beginning. Options are known as "wasting assets" because a great chunk of their worth is accredited to volatility and time duration to expiration. The longer the time to expiration, the more time value that is built in. Also, the more volatile the stock is, the more volatility value that is built in. In other words volatile stocks with longer duration would have higher premiums than non volatile ones with shorter durations. Volatility value and Time Value go to zero at expiration. The buyer loses those values. The seller gains on those values. To check volatility of a stock, look at its Beta. The Beta is a coefficient that measures volatility in comparison to the S& P 500. A Beta of 1 signifies that the stock has similar volatility as the S&P 500. A Beta of lower than 1, e.g., .90, or .80 means than the stock is not as volatile as the S&P 500. A Beta of more than 1, e.g., 2, 3, signifies that the stock is more volatile than the S&P 500. The higher the number, the more volatile the stock is. Also, if you intend to play with options, make sure that there is lots of liquidity in the underlying stock in addition to the Option. Liquidity ensures the ability to get in and out at reasonable prices. Additionally, keep away from Options which have wide spreads between bid and ask. Wide spreads mean that you lose both ways. You lose going in and you lose coming out. Enough said on options here, lets move on. You need to track your performance quarterly, whether you're a conservative or aggressive investor, to ensure that you are sticking to and meeting you goals. Should you be a more aggressive trader, more aggressive strategies are listed below. Step 2: Trend Trading
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