NetTrade

• The Darvas Box

  The Darvas Box is a strategy in stock trading that was developed by Nicolas Darvas in 1956. What makes this quite a unique strategy is that it was developed, not by a financial or trading expert but by a popular former ballroom dancer. Yes, Nicolas Darvas was a former ballroom dancer who was famous dancer all over the world in the late 1950’s. But with his strategy, he was able to turn a $36,000 investment into more than $2.2 million in a span of three years.The Darvas Box involves buying stocks that are trading in new 52-week highs with corresponding high volumes. A Darvas Box is said to be created when a price of a stock rises higher from its previous 52-week high and then falls back at a certain price that is not high from the said high. When the price falls too much, then it may signal a false breakout. But barring any false breakouts, this trading technique sets the lower price as the bottom of the box while the high is considered as its top.

  Darvas started trading in stocks while still a famous dancer in the 1950’s. During that time, stock trading was not as convenient as it is today, with brokers being paid high commissions. That is why traders looked upon buying high quality and dividend paying stocks and considered it the most sound trading philosophy. But identifying what these stocks are may take some bit of technique.

  In order to identify good stock investments, Darvas looked into stocks from industries that he thought would do very well in the next 20 years. He also thought from previous knowledge that he will profit greatly if he can anticipate the next big thing in stocks. Darvas began to create a watch list of stocks from different industries. He focused on higher priced stocks because during that time, the cost of trading declined as the price of stocks increase.

  With the list, Darvas then looked upon the stocks on the list that are ready to move. He did this by looking at the volume being traded. When he saw a day when an unusual volume of stock from his list was being traded, he called his broker and asked for daily stock quotes. Darvas was interested on stocks that was trading on a narrow price range. The upper limit of the said range was the highest price that the stock has reached in its current advance that was not yet reached for at least three days. The lowest limit in the range was the recent three day low of the stock price that held for at least three days.

  When such a range on a stock has been found, Darvas then would contact his broker with a buy order just above the top of the trading range he set and a stop-loss order at somewhere just below the bottom range. Darvas saw that stocks set on his technique seem to pile up in boxes based on the narrow price range set. As these boxes pile up, a new box pattern is being formed as the stock price climbed higher. Each time a new box is formed, Darvas then raised his stop-loss order a fraction below the new bottom of their trading range.

  Posted in Trading Basics

  June 27th, 2008 / No Comments

• Trading With Biases

  In trading, there are some ways of thinking that determine a person’s trading decisions. Some of these way of thinking is based on several biases that they believe would increase their chances of profiting from their investments and trading practices. In market analysis, biases based on personal beliefs are used to help determine in which direction a trader plans to tread upon. But unfortunately, a lot of inexperienced traders seem to believe on a set of biases that may prove untrue if used in the field of trading.

  Lotto Bias
  One of the many biases that traders often use but mistake to be a good method in trading is the “lotto bias”. This bias is related to a person’s sense of control. In a lotto ticket, having the opportunity to pick off the right numbers seem to give a person a sense of control over his chances of winning the lottery. The fact is that no matter what the lotto player chooses, he still has that 1 in 13 million chances of getting the numbers right. What choosing the numbers give the person is just a false sense of control.

  With the lotto bias at work, a trader can make the mistake of believing that he can make it big in speculative trading just by picking the right numbers. Traders seem to take huge amounts of time trying to find the perfect trading system when in fact the likelihood of profiting from trading is largely dictated by chance. That is why it is important for experienced traders to listen to the markets instead of trying to impose one’s system of trading on the markets.

  Representation Bias
  A representation bias can be summed up as trying to judge something based on what it looks like rather than the probability of how the markets actually behaves. Traders seem to take some data that seem nonsense and try to make sense out of it, trying to think that it must represent something really essential and important. Representation bias presents a limitation on a person’s ability to be effective in the decision making process. It allows traders to look over what is not seen but may be happening in place of the obvious but that should not be considered as fact.

  Conservatism Bias
  This bias is based on one’s set of beliefs and personal opinion to determine trading decisions. It can even be considered as being hard-headed. This bias for standing out for what the trader thinks is right instead of what the market is showing can allow traders to make costly mistakes. Conservatism bias prevents a trader from looking at the market from a neutral point of view and with an open mind. Conservatism bias can prevent a trader to change his position when it runs contrary to belief. In trading, this bias makes traders take a look at the market in a way that they expect to see it.

  Posted in Trading Basics

  June 20th, 2008 / No Comments

• Introduction to the Commodity Market

  Trading involves many aspects. Trading in the commodity market is just one of the many other markets out there where traders actively try to practice their wares. The commodity market is basically a market where raw and primary products are being traded and exchanged. The commodity market is said to be one of the few areas of investment where traders with limited capital may have the opportunity to gain incredible profits in a relatively short period of time. Many people have become rich trading in commodity markets. But it may also be a case of easier said than done.

  History
  The roots of modern commodity markets today can be traced back to the trading of agricultural products in the past. Farm produce such as wheat, corn, and cattle were already considered as standard trading commodities in 19th Century United States. But the history of commodity trading can be traced way earlier during the time when cattle and other farm produce were being used as commodity money. Early Sumerians were using sheep and goats to trade for other goods while other cultures began using shell money. As this progressed, people sought a way to standardize this practice and trading commodities smoother and more predictable.

  The earliest evidence of standardizing the commodity trading practice can be found in ancient Sumer where small baked clay tokens in the form of sheep and goats were discovered. This has been considered as a crude form of using commodity money in trading. These tokens were found inside clay vessels with a number written on the outside. This was believed to be a form of commodity money which carries with it a promise of delivering a certain product or goods at a certain time and date. This early practice seem to be similar to the use of today’s futures contract.

  Advantages
  Trading in the commodity markets may have its own inherent advantages when compared to the other types of investment options. Trading in the commodity market, for one, may be the option for investors with limited capital. It takes quite less investing in the commodity futures than for one to start off trading in stocks.

  Another advantage of trading in the commodity market is that there are relatively lower commissions that investors have to pay. When compared to commissions on stock investing, the ones that investors pay for futures trading deal profit are way lower. What’s more, commodity trading may be relatively easier and simpler to evaluate than stock trading since there are only about forty futures markets to trade in as compared to thousands to choose from in stocks ad mutual funds.

  Posted in Trading

  June 12th, 2008 / No Comments

• How Traders Can Deal With Stress

  The trading market is just like a battle with warriors battling it out to get the best deals out there. And just like any battles, the warrior traders can be under a lot of stress most of the time. And in the trading battle, it is the strongest who always survive.Many traders have found themselves always stressed out eventually from the rigors on the trading floor. Most traders may not know it, but it is stress that is usually the biggest contributor to a substantial decrease in their performance which may further hamper their trading success. Being busy with all the work alone would not work at all.

  Sleeping only for less than eight hours daily would even eventually take its toll on the body. And the stress would pile up slowly until the busy trader begins to notice that he is getting tired and fatigued quicker and more frequently. Stress may then take its toll and affect trading performance. The longer the trader tries to delay dealing with stress, the worse the effects will be. Being able to cope up with the stress that comes with the job may do well to help traders keep their performance level up.

  The best thing that traders should do is try to understand stress and how it can affect an individual. First of all, stress generally affect everybody in a similar manner. There is always the stressor, which causes the stress reaction or response. There are two types of stressors- the negative and the positive. It is the negative stressor which usually can have a bad effect on the body. Negative stressors are always present in every trading market, with the positive ones following far behind.

  Dealing with the negative stressors may help determine how a trader may be able to cope with the effects of stress. There are various factors that may come into play. First comes the initial perception or reaction that a person has once a stressor or situation erupts. After that the stressor may then affect and display an emotional response to the perception. And once emotions come into play, the body becomes affected in reaction to the emotions displayed. Finally, the physiological reaction would bring about health consequences.

  Dealing with stress is all about the proper motivation and perception. And since the first reaction comes from the thought processes that come into play when one is faced with a negative stressor, so it is the ability to control what one is thinking that would help keep stress in check. Pushing positive thoughts would actually help keep stress from worsening.

  When in the trading arena, it is important that traders always try to psych up themselves before the start of the trading day. It can help toughen them up for the rigorous battle ahead. An idea of some relaxation techniques may also help a lot in dealing with the stress. The body may also require sufficient rest and the proper nutrition in order to help it cope better with the stress that comes with the job. There is no single answer to dealing with stress. It is always a combination of different things that would be effective in making the trader cope up better with it.

  Posted in Trading

  June 5th, 2008 / No Comments