Economic Collapse Update September 1, 2009 The stock markets lost over 2% on Tuesdays trading session. We are now seeing signs of a possible top with the VIX showing signs, the volume of trade today, September usually being the worst month in stocks along with this being the time the prophecies have for hard times. Is this casino game of buying equities going to trap many long positions where they will see the dealers 21 leaving the trader to sigh at the results in aggressive manner? Regardless of the fact, the stock market is only a casino which most people in this world play and it is not the leading or top indicator to the economy. Even the USA dollar index is not a great indicator to be used when tracking the dollar collapse. This is because this index compares other currencies. Inflation and money supply are good ones and they both are showing great increases. The bailout money most likely was used to help prop this casino market higher, and if money is created that easy then DOW 6 trillion is not hard to do. People are waking up to the truth around them more and more. This is my leading indicator now for the spark that will set the dollar collapse to higher levels later this year and into 2010. Thank you for reading/watching Derek trade-technicals.blogspot.com
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Back Testing Your Trading System-Know These Shocking Limitations
A trading system might consist of a few indicators and a number of rules that tell when to enter the trade and when to exit the trade. Trading system is considered to be proven and tested if there is some date that supports its performance under live market trading conditions. However, it might not be possible to test a trading system quickly under live trading conditions. To overcome such problems, backtesting has been developed. Backtesting is done with the use of a software.
For this you can do back testing. Back testing is a method that uses historical data to test how well your indicators work in a particular market. You can use back testing software that enables you to look at the past market data and test how well the indicators and your trading system have worked in the past market.
There are many problems with historical data. There is no slippage in backtesting. Slippage is one of the most important problem that a trader faces while trading live. The other problem that the backtest ignores is the widening of spreads under volatile market conditions. So backtesting results are no guarantee that the trading system will perform well under live market conditions. Things that worked in the past might not work now. Similarly something that didn’t work in the past, may work now! You never know!
What we can say is that no two trades are exactly alike. So when you look at back testing results, you should look at them with scepticism. But it doesn’t mean that backtesting is entirely useless!
Some markets are highly seasonal. For example, if you are a commodity trader and tend to trade agricultural commodities like the grain, seed or the livestock, these have a fixed planting and harvesting cycles.
For example, some markets especially the commodities market is highly seasonal and cyclical in nature. Now in other markets, you might not find any seasonal trends. For example, there is very little seasonality in curreny market or the bond market. In case of the stock market, there is much talk of the January Effect. Well, it is there no doubt about it. Some years, it is highly pronounced and others it is not that pronounced. Similarly stock prices tend to rise at the end of each month and the first few days of the new months. The reason for this is that many institutional investors tend to put the new funds to work at the end of the month and the beginning of the new month!
US Dollar Index trendlines might last for months to years. In other markets too backtesting can help you figure out important trends that lasts for last times. Backtesting can help you figure out how long a trend might last in a particular market.
But to tell you the truth, backtesting can only give you a rough guess about the performance of the trading system under live trading conditions. There is no substitute for live trading results!
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ETF Options Investing Secrets
Index Options and ETF Options both provide you with an opportunity to use options strategies on a group of underlying stocks. However, there are some major difference between the Index Options and the ETF Options.
ETF Options are settled with the underlying instruments that is shares of ETFs. This gives you the chance to use various combination strategies with ETF Options that you cannot normally use with Index Options.Now trading ETF Options is somewhat different than trading Index Options. Though both track almost similar indexes but Index Options are settled in cash at expiry.
Now when you are trading index options or ETF options both of them get affected by the dividend payments on the underlying stocks. You need to take this fact into account when calculating the values of puts and calls with an Options Calculator otherwise your investment returns may not be what you have been anticipating.
As said before, since ETF Options get settled with ETF shares, you can use the different options trading strategies on them unlike the Index Options that get settled in cash. This makes ETF Options a much superior instrument as compared to Index Options. If you have traded stock options before, trading ETF Options should not be difficult for you.
Protective Put is a famous options trading strategy that portfolio managers use to hedge their stock positions. Now when trading ETF Options, you can use the famous Protective Put Strategy by combining long ETF with a long put. This way you can hedge against the downside risk with a small increased cost to the ETF. A Protective Put will limit the downside risk to the put strike price.
Another options trading strategy is often used is the Covered Call. Covered means that you are covering the call with the stocks that you own and on which you have written the call. You can use a Covered Call on ETF. A Covered Call is formed by taking combining long ETF with a short call on that ETF. The short call will give you some income in the shape of a premium and reduce the cost of the position. This will also slightly reduce the risk of the position. But on the other hand, a covered call will limit the upside profit potential. Your max profit now will only be limited to the call strike price.
Another combination strategy that you can use with an ETF is forming a Collared Position. A Collared Position is formed with a long ETF and a long put combined with a short call. A Collared Position limits the limited but high risk to a limited risk only. The downside risk is now only limited to the put strike price. The premium paid in taking a long put position is offset somewhat by the premium that you get by writing a call.
Options trading is risky in the sense that it has both time volatility as well as price volatility. Now, many traders trade options without getting good options trading education. What you need to do is first paper trade these strategies and master them. This way you will learn how to deal with unexpected risk.
An important fact that you need to know is that not all ETFs have options written on them. This should not surprise you as there are many stocks that don’t have options written on them. Another important fact that you should know is that ETF Options are always American Style. American Style options can be excercised anytime before expiry. You can even trade LEAP Options on ETFs. LEAP Options are long term options having expiry of more than nine months to less than two and a half years.
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