Author: Online Trading Academy

Stock Market Gains Without Stock Market Risk

Sound too good to be true? Think again, think different…

Investors worldwide have most of their investment and retirement capital in the stock market. This means your financial well-being and, therefore your quality of life, ebbs and flows with the rise and fall of the stock market. On the other hand, Wall Street Pros profit whether the market goes up, down or sideways. One group profits, the other group doesn’t… One group gets to live the life they choose, the other doesn’t.

You can enjoy stock market gains with zero stock market risk to your capital, here is how it’s done. Instead of putting your investment capital in the stock market, you can put it in bonds or a bond fund that is high yield, short maturity and very safe. Then, take the interest you generate and use that to buy options on the stock market. Call options go up in value as the market goes up. In the diagram below, that’s exactly what I did.

Using bonds as part of a lucrative investment strategy.

I used interest from a bond fund, bought call options at demand, where banks are buying, and profited nicely when the market rallied from demand. Poof… Stock market gains with no stock market risk to my capital. There is no stock market risk because your capital isn’t in the stock market. The only risk is if bonds default, but we can keep that very safe. So, when the market goes up you make money, when it goes down your investment capital loses nothing.

Wall Street wraps heavy fees around this, steep surrender charges, long lock up periods and more fees, calls it an annuity and sells it at a premium. Anyone can do this on their own without all that, it’s actually quite simple. Wall Street won’t want me writing about this but I don’t answer to Wall Street…

Free Trading WorkshopThe key is to stop thinking and acting like a novice investor and start thinking like a Wall Street Pro. Before I got involved in trading and investing, I thought financial professionals were smarter than everyone. When I then worked on that side of the business, what I realized is there aren’t any complicated strategies that the average investor can’t do on their own. Email me with any questions.

Live the life you choose.

Sam Seiden – sseiden@tradingacademy.com

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Using a Moving Average with Core Strategy

Here at Online Trading Academy, we follow a strict rule-based core strategy. Most other forms of education today tend to focus on traditional theories of technical analysis, whereas we focus on price alone. Price is dependent on the laws of supply and demand, which in turn helps us to build an understanding of what institutional order flow is and how it works across the Forex markets. When you can recognize buying and selling activity and you know what its picture looks like on a price chart, you will understand what the true areas of supply or demand look like. A focus on price allows me to keep my trading simple, yet there are times when technical indicators can also be used as a filtering tool. My personal choice would be the Moving Average, also known as the MA.

What is the Moving Average?

Free Trading WorkshopThe MA is a simple tool which measures the average price of an asset over a set period of time and is one of the earliest tools found in Technical Analysis studies. They are fairly useful too, and can be used in the following manner:

  1. To define a trend
  2. For entries and exits
  3. For a trailing Stop Loss
  4. To highlight when markets are overbought and oversold

Like any technical tool though, we must understand that there are always pros and cons to using the moving average. Understanding what supply and demand looks like on a price chart before using any other analysis too is key, as pure price action always comes first. If we do respect price though, there is no reason why we can’t use a moving average to aid us in our trading. Let’s take a look at these four uses in a little more detail.

What is a moving average?

In this example I have used a 50-period moving average.

The 50-period moving average is a good setting to use when attempting to define a trend in the marketplace. Can you see how prices on the candlesticks are clearly trading above the Moving Average? This confirms the upward trend. With the trend confirmed, the trader can then focus on buying into this trend. However, what the moving average won’t tell you is when that trend is going to come to an end, as we can see on the right-hand side of the picture. That is why you have to understand what a supply zone looks like and a demand zone looks like, because they are the areas where the trend would likely reverse and the moving average will always be too late to give us this information.

how to use moving averages

Some people use the Moving Average as a kind of dynamic support and resistance area to enter trades long and short when the price touches the MA. This approach does not use price as the primary decision-making tool, however, and can give many false signals along the way, especially in a ranging market like the one above. While this technique can be used from time to time in a trending market, a smarter approach would be to isolate an entry using supply and demand zones with a Moving Average as backup only.

Moving average should not be your main trade planning tool.

One of the things I like about moving averages, is that they can be used when you’re already in a trade as a fantastic tool to maximize your profit potential. In the above example, we can see how after taking a trade at one of our supply zones, we then used the moving average to trail the stop technically. The rule employed was to close out the trade when the candlestick closed above the moving average. Using this technique in a rule-based trading plan can be a very objective method to take profit. As we all know, taking profits can be a real challenge for many traders, making them question whether they should get out or stay with the trade when it is working out for them. By using the moving average, this takes the thought process out and relies instead upon a simple objective rule, thus eliminating the emotions.

The moving average can help you plan your exit strategy

Finally, the MA is a great way to measure conditions in the market when prices are overbought and oversold. In the above example, we can see prices moving in a parabolic fashion away from the moving average. Notice how steep the rise is in the candlesticks? The moving average is trading well behind the candles themselves with the distance increasing between the moving average line and the bodies of the candles. This shows us an overextension in price or an overbought situation. The reverse would be true in a downward trend.

The further the candlestick moves away from the moving average, the more likely that  this price trend is unsustainable. Prices are moving at a far greater rate away from their average than is sustainable. During these market conditions we would expect a currency pair to reverse at a sharp rate when confronted with a major level of supply or demand. The moving average helps in showing us when markets are going parabolic and when this movement is difficult to maintain.

In conclusion, I would like to stress once again that if you decide to use a technical indicator in your trading toolkit, then make sure that you use the indicator in an objective way. One of the many reasons why I like moving averages is because they provide us with many different functions, all of which are not reliant on giving buying and selling signals. For that, I have price and supply and demand. I hope you found this useful.

Trade well and all the best,

Sam Evans – sevans@tradingacademy.com

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Using Puts vs Stop-loss Orders to Protect Stock Positions

You probably know that Put options can be used as an insurance policy on a stock position. Buying a Put option gives you the right to sell your stock position at a fixed price, no matter how low the market price of the stock may drop. But a stop-loss order also will get you out of a stock position if and when the stock’s price drops below your designated stop-loss price.

What are the pros and cons of using puts vs. stop-loss orders?

First, let’s examine the way a stop-loss order works. To use one, you place an order to sell your stock if its price drops below a certain level. There are two possible order types used – the Stop Market order, and the Stop Limit order.

Does a put option or stop loss offer better protection for your stock positions?

Stop Market Order

The Stop Market order is triggered when there are one or more trades at or below your stop-loss price. When that happens, an order is released to the exchange to sell your stock at market. This means that the order is to sell the stock at whatever price other investors, traders or market makers are willing to pay at that time for the stock. It is possible that your order may have significant slippage, which means that the price of the stock could fall much further than your stop-loss price before your order is filled. Your order will be in line behind all other market orders that were sent before yours was.  In normal markets and with widely-traded stocks, slippage is not much of an issue. But in the type of market where you really need to dump your position, many other people will be doing the same.

For example, let’s say you had a position consisting of 100 shares of SPY, worth about $29,000 at today’s prices. You place a stop-loss order, let’s say, 10% below the current price, at 261. I’m using 10% just as a convenient round-number example. You could, of course, place your stop-loss at any lower price you want.

The market drops hard on some sort of terrible news. A trade is printed at $261.00 and your order is triggered. In the best case your Stop Market order will be filled at a price just a few cents below $261.00. But it might not. It could be that at that time there are no buyers willing to pay anything near $261.00. Your order might be filled at $258, or even lower. In a really bad scenario, the bad news might come while the markets are closed. When they open, the price of SPY might be much lower. In that case, your stop market order might be executed at a dramatically lower price.

Stop Limit Order

The other type of stop-loss order, called a Stop Limit order, doesn’t avoid the problem of gaps – in fact, it may give a worse outcome. With a stop-limit order, you specify a stop-loss price to act as a trigger, as in the Stop Market order. But when that trigger occurs, the order that is sent is not a market order to sell, but a limit order to sell at or above a specific limit price.

For example, one could set a Stop Limit order with a Stop price of $261.00 and a Limit price of $260.00. If triggered by a trade crossing the tape at or below $261, a Limit order to sell at no less than $260.00 would be sent. The problem here is that no one is required to buy from you at $260.00. And no one will if the price of SPY has gapped down to a price lower than that. What could happen is that the order will be triggered and simply not be filled, as SPY continues to drop – in effect you have no stop-loss at all. So, Stop Limit orders are not a good choice as protective (stop-loss) orders.

The good thing about stop-loss orders is that there is no charge to place them.

Put Options

Now let’s compare the use of a Put option as protection.

Free Trading WorkshopAt this writing, SPY was at $289.33 per share, or $28,933 for 100 shares. A Put on SPY at the 265 strike that expired in six months was available for $491. To buy that put, we would need to pay $491 in cash. We would then be guaranteed that we could sell the SPY stock at any time in the next six months for no less than $265 per share, or $26,500 for the 100 shares. In that worst-case scenario, the total drop in our net worth would be the decrease in value of the SPY shares of $2433 [$28,933 – $26,500], plus the cost of the put [$491]. So worst case, our loss from here would be $2,433 + $491 = $2,922. This is just about exactly 10% of the current value of $28,933. And it could not possibly be any worse than this, even if SPY should drop by 50%, as it did in 2000 and again in 2007.

Stop Loss order vs. Put Option

So, here is the comparison of the puts vs. the stop-loss order (I’m comparing a stop-market order since using a stop-limit order for protection is never recommended for the reasons described above):

The stop-market order placed 10% below the current price:

  • Costs nothing.
  • Will almost always work as expected and liquidate your position at or near the specified stop-loss price. In that case, your loss would be around 10%, about $2,893.
  • Is not guaranteed to work as expected. In fact, your loss could be far greater and have no actual cap.

The put option with a strike price a bit less than 10% below the current price:

  • Costs money. In this case, $491, which is 1.7% of the current value for six months’ worth of protection.
  • Has a maximum loss that is about the same as the 10% stop-loss order. (10% was chosen somewhat arbitrarily here. Varying levels of protection can be purchased by selecting puts at other strike prices. The more protection they provide, the more expensive the puts are.)
  • Puts a floor under your portfolio such that your loss can never be more than that maximum loss, no matter how far the market drops and even if that drop comes in the form of a massive gap that would make a stop-loss ineffective.

So there you have it, stop-loss orders can limit your losses, but possibly not as much as you planned, at no cost. Put options can insure your portfolio absolutely, but at a cost. Which is preferable is a personal decision, and the decision you make should be an informed one.

The use of options is not limited just to insurance. Options can do much more. There are other strategies that you can use to generate short-term income, from mild to wild in terms of leverage. When done properly, option trading can be very profitable. For more information, contact your local center about our Professional Options program.

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The 5 Best Ways to Consolidate Debt

For many of us, debt is just a common part of our day-to-day lives. However, not all debt is created equal! Before we begin looking at consolidating debt we must first answer the question of, “Do I need to consolidate debt?”.The first step is to prioritize debt by interest rate. You should all have a list of ALL of your debt (credit cards, auto loans, home loans etc.) then rank the debt with the highest rate at the top of that list, lowest at the bottom. How much of that debt is being charged at rates over 20%? 10%? 5%? Understanding this will help you answer the question of debt consolidation.

What are the best ways to consolidate debt?

Once you have your list of debt created and prioritized you will have a greater understanding of how much consolidation you need to do and your payoff priority. The following debt consolidation strategies will help get you started on the path to financial freedom:

Change your Spending Habits

There is a reason that you’re having debt problems to begin with! Most people will focus on debt consolidation, which will in theory drop the amount of money they will be paying in interest on debt they already have. While this is true, reports show that those who seek consolidations don’t actually get out of debt! They simply reallocate debt which lowers their payments, giving them the illusion that they have more money to spend!

Focus on High Interest Rate Debt

While not necessarily a debt consolidation method, you should focus on paying the minimum balances on your low-interest debt, and put as much money as you can toward your high interest debt. This method, also called the “Snowball” method, will enable you to get rid of the high interest debt quickly, allowing more money to be allocated to other debt. We offer financial calculators which will give you a better idea of how quickly you can pay off your debt using the Snowball method vs. the way you usually pay.

Utilize Teaser Rates (Balance Transfers)

As we teach in our class on credit, it’s important to keep revolving credit balances low in order to avoid negative marks on your credit report and score. If you have high balances on high interest rate cards, you can utilize balance transfers to move from one card to another. Here’s an example: let’s say you have a Visa card with a $20,000 limit and you are using $15,000 worth of that credit. You are currently making the minimum payments on that card and being hit with a 20% rate on the card. OUCH! That adds up to over $3,000 in interest a year! If you use the teaser rates, you can move that balance over to another card and pay 0% interest for 12-18 months. Essentially using that $15,000 for free for over a year. There will be a balance transfer fee involved, normally 2-3%, but that is far better than 20%. Just remember to pay it off before the 0% period ends!

Get a Line of Credit

Access Free Financial EducationIf you have done the math and know exactly what rate you’re being charged on average, it may make sense to get a line of credit and pay off your high-interest debt! Lines of credit are not cheap, but if you’re saddled with debt it may save you a lot of money! For example, say you have 3 credit cards that are maxed out with balances totaling $20,000 and an average interest rate of 17%. Shop around and see if you can find a good line of credit for $20,000 with a rate that is lower than 17%. While rates for a line of credit are not going to be cheap, they will be much better than your credit card rates. If you found a $20,000 credit line with 8% interest, you could pay off your high rate cards and save yourself 9%. That’s a lot of savings! On top of that, your credit score will increase because your credit card balances are no longer maxed out, in fact, they are at zero! Now keep them that way!

Refinance Your Home

While we understand that many may not own their homes, we would be remiss if we didn’t add it to the list. Home mortgage rates are historically low and should be taken advantage of. If you do own your home, you may want to look at refinancing your house and taking some of that money to pay off your debt. Rates right now for 30-year fixed mortgages are running around 4%. Some simple math will drive home the savings. Let’s revisit our example of a Visa card with a $20,000 limit where you are using $15,000 worth of that credit. You are currently making the minimum payments and being hit with a 20% interest rate on the card. That adds up to over $3,000 in interest annually! If you used some of the money from your home, refinanced at 4%, you would be paying a little more than $600 a year in interest. I’m not the smartest man in the world but I’m pretty sure you would be much happier with an extra $2,400 in your pocket every year!

The overwhelming key here is to understand how you got into debt to begin with. Consolidating and paying down your cards is important, but what good will it do if you just dig yourself deeper into debt. Benjamin Franklin was once quoted as saying “Rather go to bed without dinner than to rise in debt.” While we are definitely not saying to go without dinner, we have to understand how all our purchases will impact our net worth, debt load and credit score. In our credit class, we focus on many ways to not just pay down your debt but to understand how to build up your credit score, giving you access to the cheapest rates available.

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Staging a Home: To Do or Not To Do?

If you have taken our fix and flip program, you know staging a home is part of our curriculum because we feel it is key to the sales process.  We’ve seen the research and have experienced first-hand the added value staging brings to a property.  As a fix and flipper, the goal is to purchase the property using an off-market strategy such as pre-foreclosure and then fix up the property to its maximum ARV (After Repaired Value) and market it to the masses.

Free Real Estate Investing WorkshopStaging helps Mr. and Mrs. Buyer see the possibilities of the property. It helps them easily visualize living in and loving the home.  A good stager knows how to emphasize the positive aspects of the property and downplay the negatives.  For example, if there is open green space directly outside the living room that is visible by a slider or french door, a good stager will use the space to bring the outside in, not block it with furniture, which will make the living room feel larger.

Why staging a home is so important.

NAR – National Associations of Realtors conducted a survey that provides some interesting insights to the direct benefits of staging.

Why Staging a Home for Sale Matters

  • 49 percent of surveyed Realtors who work with buyers believe staging usually has a direct effect on the buyer’s view of the home.
  • Only 4 percent of Realtors said staging has no impact on buyer perceptions.
  • 81 percent of Realtors who work with buyers said staging helps buyers visualize the property as a future home.
  • Buyers are 46 percent more willing to walk through a home they saw online when staged.
  • 45 percent of Realtors said the way a stager decorated positively impacted the property’s value.
  • 34 percent of Realtors utilize staging on all homes they list.
  • 13 percent of Realtors tend to stage only homes that are difficult to sell.
  • The median cost to stage a property nationally is $675.
  • 62 percent of the time staging is considered a service to sellers by the listing realtor.
  • 39 percent of the time the seller pays for staging before listing the property.


Realtors representing both buyers and sellers agreed on two major points in the report. One was which rooms should be staged, they ranked the living room as the number one room to stage, followed by the kitchen. Rounding out the top five rooms were the master bedroom, dining room and bathrooms.

The second point realtors agreed on was the change in dollar value a buyer is willing to offer for a staged home compared to a similar non-staged home. Many realtors believe that buyers offer 1 to 5 percent more on the value of a staged home, where some believe it’s closer to 6 to 10 percent.

For more resources on staging a home there are two good sites:

  • Home Staging Resources has several good videos like, The secret to getting the phone to ring or Website Check list.
  • RESA (Real Estate Staging Association)

Good Fortune,

Diana D. Hill – Diana@OTARealEstate.com

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Is Volatility Important in Trading?

In the last several weeks there has been lots of talk (at least among traders in my orbit) about the small intraday ranges in the S&P 500 e-mini futures contract.  Yes, volatility in the stock index futures has been subdued lately, largely due to the fact that three of the major averages (S&P 500, the Nasdaq and Russell 2000) recently breached their all-time highs.

Generally, an upward trending market suppresses volatility as markets tend to move at a slower pace to the upside than they do to the downside. In fact, studies have shown that the stock market falls three times faster than it rises. There are two main reasons attributable to the faster movement of the stock market falling; namely that, fear is a much more powerful emotion than greed and the majority of participants in the stock market own shares, and thus, when they begin to get scared and start selling the result is a steep decline as there are few buyers left to prop up prices when the selling begins to accelerate. A basic understanding of market dynamics, where every order has to be matched explains this phenomenon.

Futures trading in a volatile market.

Traders use various indicators to gauge volatility, but the most popular is (appropriately named) the CBOE volatility index, or VIX.  This index is simply a measure of the implied volatility for options (puts and calls) in the S&P 500 that will expire in 30 days. Some on Wall Street also refer to this index as the fear gauge as it can be a good measure of how investors are feeling about risk.

If investors are feeling risk averse they will buy put options, which give them the right to sell their shares for a predefined price at a predetermined date. These act essentially like an insurance policy for their holdings. So, as the market declines the demand for puts increases, and that in turn pushes the VIX higher.

Historically, levels under 15 in the VIX have indicated a general sense of complacency since premiums are very low suggesting that investors do not feel the need to pay for insurance. On the flip side, readings over 40 historically come after lots of selling and when fear is rampant.  This is where the demand for put options is the heaviest and premiums are very inflated.

One of the many misconceptions of the VIX index is that a low reading in this index implies that the market is due for a big selloff.  Conversely, many traders have been conditioned to think that a VIX above 40 implies that a bottom is near. The fact is that since this index was introduced in the early nineties, there have been many instances where the VIX spent many months in the low double digits and the market continued in its upward trajectory.  This has been the case in the last 9 years.

Free Trading WorkshopIn the height of the financial crisis, when we were on the precipice of a financial meltdown and the S&P was down over 50%,  all the previous high readings in the VIX were shattered as the index hit a jaw-dropping high of 89.53 on October 24 2008. Incidentally, even after such a high reading in the fear gauge, the decline in the market continued until March 9th of 2009 when the S&P 500 finally bottomed.

For traders focusing on the stock index futures, the lack of volatility simply means that they have to be more patient in picking their spots of entry because the profit margins (the distance between supply and demand levels) are generally smaller in this type of environment.  The beauty of trading futures, however, is that there are plenty of other markets that are non-correlated and have little to do with the volatility of the stock market.

So, does volatility matter?  I guess the answer is yes in one respect and no in another. On one hand, the more volatility in a market, the bigger the moves and the greater the opportunities. On the other, less movement means smaller profits and more patience.

Another way to look at volatility is that for the skilled trader, one that has the discipline to execute a low-risk proven strategy, big movement in the market looks like opportunity.  For those that don’t have discipline, or a viable low-risk strategy, trading in a volatile market can be disastrous.

The question for you as a trader reading this article is:  Does volatility conjure up emotions of fear and uncertainty, or does it open up the possibility for plenty of profit opportunity?

Until next time, I hope everyone has a great week.

 

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