Seeking Alpha

TechniTrader's  Instablog

TechniTrader
Send Message
Martha Stokes CMT is the CEO of TechniTrader a stock market educational company. She is a former Buy Side Technical Analyst. Since 1998 has co-created over 40 TechniTrader Stock and Option training courses for investors and traders. She has been a guest speaker for TradeStation, MetaStock,... More
My company:
TechniTrader
My blog:
Market Review Blog by Martha Stokes CMT
View TechniTrader's Instablogs on:
  • Illiquidity In The Stock Market

    Basics About Stock Chart Candlesticks And Volume

    Stock charts have a language all to themselves. They are always saying something about the balance between the buyers and sellers, and the various levels of Market Participant Groups in the stock. When you can read the stock chart and understand what it is revealing about the stock and the company, then consistency in selecting good stocks to trade will increase significantly.

    Questions

    What is wrong with the Stock Chart example below?

    What are the Candlesticks telling us about this stock?

    Answers

    The tiny Price gains per day and the very low Volume in the bottom chart window reflect illiquidity. It is very important to choose stocks that have strong liquidity. What I mean by this is that if very few shares are trading hands day to day, it will be more difficult to enter and exit a short term trade and get a good execution on the trade. Illiquid stocks tend to fill poorly meaning the buyer often pays more than they should when buying the stock, and get far less than they may think when selling the stock.

    It is a common problem for new beginner and novices retail traders to ignore Volume and Liquidity, and only focus on Price action. Sure this stock moved up, but how much did it actually move in terms of points in the entire month? There are insufficient points to make good profits on short term trades that have low Liquidity. The risk for the chart example is very high because there is no support nearby as it moves only 44 cents, so you could end up losing money if you entered this stock with a Market Order.

    Let's say you bought this stock because you saw it was running. You were executed with a Market Order. Even though the stock did move up if you had held it until the end of the month and sold it, you would have taken a loss even if you sold it at the high for the day because there are transaction fees that add costs to the trade.

    Summary

    Make sure when selecting stocks to always check the liquidity, by looking at the Quantity aka Volume of shares traded in the past few weeks. Volume is usually truncated on most charting software so you need to add 2 zeros. Clearly as indicated by the low Volume smart money was not trading this stock, and you should avoid trading stocks like this too.

    I invite you to visit my website at www.technitrader.com

    Trade Wisely,

    Martha Stokes CMT

    Chartered Market Technician
    Instructor and Developer of TechniTrader Stock & Option Courses

    Copyright ©2015 Decisions Unlimited, Inc. dba TechniTrader. All Rights Reserved.
    TechniTrader is also a registered trademark of Decisions Unlimited, Inc.

    May 21 7:56 PM | Link | Comment!
  • Part 3 - About Weekly Options

    The Advantages and Disadvantages of Trading Weekly Options

    In the last article Weekly Options Part 2 of this 3 part series the discussion was about the Sell Side Institutions, and the Buy Side Institutions for whom the Weekly Options were designed to assist. These giant lot investors used options as an "insurance policy" when they had a huge vested interest in a stock, and were concerned about mitigating the risk factors for that stock.

    (click to enlarge)

    The longer term options contracts were not ideal for this purpose. Weekly Options are considerably different due to the extremely short period before the contract expires. This is a better fit for the institutions using options contracts as insurance against an unforeseeable sudden price fluctuation of their stock.

    Weekly Options are also useful to the professional side for many other reasons. In addition it is important to understand the rule changes that have occurred with Weekly Options by the Securities and Exchange Commission SEC which governs stocks and options trading.

    Many retail traders do not know that Weekly and Monthly Options contracts fall under the European trading rules. One rule which can have a huge negative impact, is the Chicago Board Options Exchange CBOE proposed and gained approval from the SEC that Weekly and Monthly contracts will be subject to the "Automatic Exercise Procedures." Most retail traders who have used 3 month contracts for many years are not aware of this ruling, and or how it affects their options contracts.

    "Automatic Exercise Procedures" means that the Weekly and Monthly contracts for options would automatically be exercised at expiration. This would be without the opportunity of the contract holder to submit contrary exercise instructions, if prior to expiration the contract settlement amount exceeds a certain predetermined amount.

    Since the bulk of retail options expire worthless this ruling could create problems for the retail option trader, if they are unaware of this ruling or do not fully comprehend the effect on their options that are expiring.

    For the professional trader using options to leverage into the stock itself, this is a convenient method of exercising the option to take possession of the underlying security.

    Options strategies that were designed for 1-3 month contracts need to be modified and adapted for Weekly Options. The timeframe of the option contract requires specific changes to every option strategy that was intended and used for the longer options contracts. Shortening the timeframe alters how the strategy will perform. Since the Weekly is a very short period of time, strategies that worked properly for the longer option contracts will not perform the same way, and do increase the risk factors and conditions under which the option would be profitable.

    In addition the Weekly Option requires that the retail trader have far more substantial training on the underlying security. Guessing which stock will move sufficiently in a week time frame, or using news as a basis for trading a Weekly Option results in more risk and more losses for most retail traders.

    Changing from a 3 month hold period to a week is a major technical and tactical shift for any strategy. This will alter the overall profitability for options. It is recommended that before a retail trader employs Weekly Options, they first practice on a simulator the strategies they intend to use in the live options market until reaching at least a 75% success rate. Adapting to the much shorter time frame will be a challenge for most retail traders. Choosing the proper stock is a vital part of the process that needs to be altered for the shorter timeline.

    Additional training on how to adapt strategies for Weekly Options, selection of the optimal stock, and for example the chain will lower risk factors and improve the potential for success.

    Retail traders will find trading Weekly Options more demanding, more time consuming, and higher risk until they have gained significant experience with this new instrument. They also need to constantly remember that the Weekly Option was never intended for their use. Instead was created for the institutions and professionals of the market who have extensive experience, access to information the retail trader does not, and far larger capital bases which provide for more variables and opportunities.

    The underlying security or asset for the Weekly Option becomes far more important with the shorter timeframe. Ignoring the underlying security or asset increases risk exponentially. Therefore gaining experience in how the stock, index, or asset trends and reacts to various market Shifts of Sentiment™ and inter-financial markets is crucial for success.

    The most common reasons why retail traders fail when trading options of any time duration is the lack of understanding of how, what, and when various market activities, Market Participant Groups activity, news and events alter the trend of the stock, index, or asset.

    Another huge factor is the fact retail options traders assume that every option Market Participant Group has similar goals to their own. The truth is that each has a different agenda and purpose for trading options that is totally different than the retail trader. Often times retail traders are trading in opposition to the largest options traders, and inevitably their trades go against them.

    Summary

    It is important to understand the modern Market Structure, Market Participant Cycle, and how new technologies are providing new methods and tools for the professional side. In addition it is important how each financial market affects the other, and how that will impact the option contracts. These are the first steps to consistently profitable option trading, no matter which contracts are chosen.

    Addendum:

    Here is the link to Part 1 - About Weekly Options http://goo.gl/uzK9My

    Here is the link to Part 2 - About Weekly Options http://goo.gl/pJoW4c

    What are Options in general

    An option gives the buyer the right (but not the obligation) to buy the underlying asset at an agreed upon price within an agreed upon time frame. Options are a derivative, or secondary, market. Options can be based on stocks, indexes, ETFs, and more. That means that the ability to make profits in options depends upon a primary market. So in order to be successful at trading stock options, you need to have a solid understanding of how to determine when a stock is poised to move, which direction it is going to move, how much it will move, and how long.

    I invite you to visit my website at www.technitrader.com

    Trade Wisely,

    Martha Stokes CMT

    Chartered Market Technician
    Instructor and Developer of TechniTrader Stock & Option Courses

    Copyright ©2015 Decisions Unlimited, Inc. dba TechniTrader. All Rights Reserved.
    TechniTrader is also a registered trademark of Decisions Unlimited, Inc.

    May 21 1:18 AM | Link | Comment!
  • Bitcoin Pros And Cons

    Fringe Currency Without Laws Or Regulations

    It has been 6 years since Bitcoin was first created and it has evolved rapidly over that brief period of time. Bitcoin is a new form of currency not based on any government, bank, or third party central authority. Technically Bitcoin is a virtual base currency written in an open source with a public ledger. In reality it is an ideology conceived after the banking debacle, and promoted by a tiny minority of advocates for change in currency exchange.

    It is called "peer to peer" although that is a misnomer. It is a buyer to seller transfer of payment for something either a product, service, or a true currency such as the US Dollar, Yen, Yuan, or Euro. The original goal was to create an alternative to national currencies which were controlled by governments and big banks. The corruption of the banking systems around the world in 2008 caused huge distrust of big banks and many governments.

    Bitcoin is the brainchild of a "person" who's true identity remains undisclosed. The pseudonym used was Satoshi Nakamoto and many assumed was a Japanese national, but the internet address was located in Germany. Not much is known about this person, or even if it is a man or a woman as he or she disappeared off the internet.

    Many believe the original theories, brilliant programming and algorithms were done by a group of extremely talented coders who were trying to create a new type of currency that had no connection to big banks or government and would be free of fraud. Whoever created felt compelled to remain anonymous which in itself is worrisome. It suggests all kinds of speculation as to why. The World Wide Web inventors, Berners-Lee and Cailliau did not feel the need to hide their identity.

    The syntax used in emails was in perfect English. Some suspected that a group from Google started the project. For whatever reason whether this was a cyber-personality, one person, or a group has disappeared. Communication to followers stopped abruptly in December of 2010.

    But the Bitcoin revolution has continued and grown. There are now approximately 12,200,000 in circulation, a tiny fraction of any national currency. However the Bitcoin environment is fraught with corruption, criminal activity, and fractured infrastructure due to lack of leadership and oversight.

    Last year trading of Bitcoins enjoyed a huge popularity boost in China, with speculative trading of Bitcoins against conventional national currencies in particular the US dollar. This led to many investors and traders on the retail side wondering if this is some new form of trading instrument they should jump into.

    Bitcoins is a fringe currency used by a small number of programmers, consumers, and businesses who are seeking a new form of currency. Brilliant open source programmers are working beyond the scope of any regulations or oversights, using the internet as its base as there are no laws or regulations on the internet.

    The problem with this type of currency is there are no true controls other than the ledger which allows for false names and identities, and invites criminal activities. Silk Road was recently shut down by the FBI. With no oversight as was intended there is also no rules, laws, or any form of governance to make sure individuals are not scammed, ripped off, or stolen from in some form or another.

    Bitcoin users are almost a cult, and are full of young people eager to change the world. This is often how revolutions and major changes occur, but it is also the way that criminals can take control of areas of an economy for personal benefit.

    Bitcoin is ahead of its time, a theory and concept that eventually the world is likely to see some form of in the distant future. Change in currencies is exceedingly slow and the colossal problems facing this form of currency are just beginning to emerge.

    It is an ideology that is just beginning to face the realities of the world, human greed, corruption, and lack of control. It is one thing to think up something great and new, and another to make it work in the world of humans who easily corrupt free new concepts that are not controlled in some manner by the social constraints necessary to protect the innocent.

    It could be the next evolution of currencies far ahead of its time, but mass market acceptance is a long ways off. Right now it could be a massive network for criminal activities that escalates crime that is now rampant throughout the internet, and threatening to destroy the ability of the internet to function. It has recently morphed into the most speculative trading instrument in the world.

    Here is a brief overview of Bitcoins as they were intended to be used.

    (click to enlarge)

    The fact that pseudonyms are used creates a thriving environment for criminal activities, and the FBI and other agencies are chasing to keep up with this potential explosion of crime via Bitcoin as it takes off and is now trading as an instrument on currency markets.

    The conceptual releasing of new coins is problematic and could lead to explosive trading speculation which has the potential to ruin many individual investors, and even savvy institutions who risk this gamble.

    The Chinese are taking on risk they don't realize and are trading it at a level that speaks of the final peak of their 40-50 economic cycle. Rampant euphoric greed is a key element of all bubbles bursting spectacularly.

    The trading enthusiasts believe that this is something to invest in because it is not a stock, "it will go up, and up, and up." Bitcoin received a lot of retail side news and the currency took off, rising from 86 cents to a rate that is off the charts.

    In 2011 someone spent $272,329.00 to buy a pizza. This certainly can't be the goal of the original creators, to make a currency that is inflating at a rate not seen since 1930's Germany and we all know how that ended.

    Further it is becoming increasingly challenging to protect Bitcoins from being stolen, connections from being hacked, and crime is already rampant. The uninformed individual that buys or spends Bitcoins is at huge risk at this time, because there is no oversight or authority to protect them.

    Last year China went ballistic about trading the Bitcoin, trading at one Bitcoin against $1000 US dollars. The problem is that now that it is a speculative trading instrument somewhat legitimized by the US Senate, the original purpose of this new type of currency has been lost to greed and crime.

    It is a highly volatile and lacks any viable true value. It is not based on any sort of asset and it is not backed by any government or authority. In other words, buying a lot of Bitcoins in anticipation of getting rich quickly is a huge risk of losing a lot of real money from your investment or trading capital.

    Bitcoins original concept and goal has been lost in translation as speculators take this once good idea and turn it into something far more dangerous than Credit Default Swaps. In the end, what Bitcoin was intended to avoid, it has now become. It is extremely speculative, without any true value, or substance, and is prone to volatility that could wipe out a trader in seconds.

    So the original concept and ideology to create a new form of currency that was not controlled by big banks or governments is failing as an experiment. This will end badly for many uninformed investors and individuals using Bitcoins.

    However the ideology will eventually rise out of the ashes of the collapse of this new currency and years from now perhaps many decades, an international currency not based on any nation and not controlled by big banks may emerge that would be the new currency of a global community. Bitcoin is simply an idea and concept far ahead of its time.

    I invite you to visit my website at www.technitrader.com

    Trade Wisely,

    Martha Stokes CMT

    Chartered Market Technician
    Instructor and Developer of TechniTrader Stock & Option Courses

    ©2015 Decisions Unlimited, Inc. dba TechniTrader. All Rights Reserved.
    TechniTrader is also a registered trademark of Decisions Unlimited, Inc.

     

    May 14 12:23 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.