What Are ETFs (Exchange-Traded Funds)?

By Nicholas Swezey

Exchange-Traded Funds, or ETFs, are basically like mutual funds that trade on stock exchanges, with a few important differences. This gives them many of the benefits of stocks while removing some of the disadvantages that mutual funds have.

Purpose of ETFs
Have you ever wanted to trade shares of an index like the Dow Jones Industrial Average or the S&P 500? Well, you can't do that directly but you can do it indirectly through ETFs. The managers who run ETFs usually invest in the same stocks or futures that make up an index or commodity in an effort to make the ETF's value per share track a certain index or commodity up and down. This allows anyone with access to stock trading the ability to easily trade indexes or commodities indirectly.

Example: SPY - SPDR Trust Series I:
One of the most popular ETFs, its goal is to track the price and performance of the S&P 500 index. It will not be the same price as the index but its chart should have the same shape as the index, within one or two percent most of the time.

Example: QQQQ - PowerShares QQQ Trust, Series 1:
The goal of this fund is to track the Nasdaq-100 index by issuing and redeeming shares of all the stocks that make up the index.

Example: EEM - iShares MSCI Emerging Markets Index Fund:
This ETF seeks to track the price and performance of the MSCI Emerging Markets index, which tracks performance of international stocks. This fund is actually non-diversified, which means it is not as safe as other funds because it is focused on a specific sector.

Example: USO - United States Oil Fund LP:
This commodity ETF attempts to track the price and performance of oil prices, West Texas Intermediate light, sweet crude oil, to be exact. This is accomplished by continually trading futures contracts for oil, natural gas, and several other things. It is also non-diversified but a very convenient way to make trades based on oil prices.

Benefits of ETFs
The main benefits of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.

What are ETFs
ETFs are somewhat complicated to explain, but they are funds that can be structured in a few different ways. They are usually passively managed, which means the managers do not have to constantly decide which investments need to be bought and sold in order to increase the value of the fund. Instead, the managers simply have to make sure the fund tracks a certain index or commodity as closely as possible, which can be as simple as owning the stocks that make up an index and adjust the shares accordingly so that the price follows the index's chart.

Where to Find Them
Many financial websites, including brokerages, offer a free stock screener, along with an ETF screener. Yahoo! Finance has a good one that lets you view a list of the best performers in several different categories.

Nicholas Swezey is the creator of the free stock game at http://www.HowTheMarketWorks.com

Article Source: http://EzineArticles.com/?expert=Nicholas_Swezey

Note: An original use of an ETFscreen for leveraged ETFs is provided at StockMarketStudent.com.

Stocks Volume As a Trading Indicator

By William Braddford

Introduction

Stocks volume is an often ignored metric in a stocks performance. You might say aren't we only concerned with the price of a stock and its movement? Yes our final concern is price but we want to find indicators of how a price is going to change before it does. Volume is such an indicator. A stock's trading volume is the amount of stock traded or changed hands during the specified period of time. Generally we refer to daily or weekly trading volume. Now the price of a stock is just like the price of anything else we pay money for in that its value is determined by supply and demand. This is how volume gives us indicators of coming price changes, it tells us the levels of supply or demand for a particular stock. Read on and I will explain exactly how that happens

Stocks and Supply and Demand

Highly successful investor William J. O'Neil noted that "stocks never go up in price by accident - their must be a large buying demand. When demand for something increases and supply remains constant the price increases. Conversely when the supply of something increases and the demand remains constant its price decreases. This is the law of supply and demand and it is a fundamental economic concept. A stock since it is paid for in cash in a free market functions according to this law. When there are more buyers than sellers demand increases and the price eventually increases as well. When there are more sellers than buyers the supply increases and the price eventually decreases. This is just like the housing market. When less are buying houses for whatever reason the cost of houses goes down. What we are going to do is find ways of using the trading volume of a stock to measure its supply and demand levels. Let's talk about how we can do that.

Evaluating Supply and Demand

The first thing to look for is whether a stock has more buyers or sellers. IN investing terms if a stock has more buyers we say it is being accumulated and if it has more sellers we say is being distributed. To measure whether a stock is being accumulated or distributed we look at the daily trading volume closing price. If the stock closes at a higher price than the previous day on larger volume it's a signal of accumulation. If it closes at a lower price on higher volume it's a sign of distribution. With both directions the greater the volume more significant the action is. This is why low volume selling doesn't necessarily mean you need to sell a because it is being distributed. However if you have multiple days for closing down in price on above average volume you stock may be getting ready to turn or already has.

A rough gauge of accumulation and distribution can be arrived at by looking at a daily stock chart for the stock in question. Count the days where the stock closes up in price on above average trading volume and compare that to the number of days it closes down in price on above average trading volume. This gives you a general indication of whether it is being accumulated or distributed. If you subscribe to a financial paper you may have access to more detailed metrics for accumulation and distribution. Investors Business Daily has an accumulation/distribution rating does a similar count but in much greater detail and it gives A to D scale telling you to what degree a stock is being accumulated or distributed. This can be a big time saver in determining a stocks supply and demand.

Strength of a Breakout

Stock breakouts do not always succeed and instead of blasting to new highs they can't seem to make it past a point and drop back down. This may happen over the course of one day or it may take multiple days. You can judge the quality of the breakout based on the volume level on the day or days in breaks out. If a stock breaks out on 50% or more above average volume your its likely a breakout that will succeed. Conversely if it's significantly below average the stock may bounce back after a few days. What is happening is there is a fast increases in demand and a shortage of sellers. Keep in mind that when buying off of a breakout you want to buy when the stock is emerging from a properly formed chart base or area of price consolidation.

Price consolidation

To identify stocks that are getting ready to breakout you want to look for areas of price consolidation. This is a time during which large buyers (institutional buyers) are gradually building their positions in a stock. This takes a few days to a few weeks. During this time there will be multiple days of high volume trading where the stock closes up in price but not with a significant price advance. This is also referred to as tight trading. Once the institutional buyers have a good position they will start making large buys to trigger others to buy the stock on the obvious advance. The increases demand will shoot the price up but the institutional buyers will hold there position thus not adding to the supply. This is not the only way breakouts happen but it is an example of a common one. This brings us to the next question of why do these large institutions have such a sway on the price of a stock?

Institutional Buying

By far the biggest source of accumulation and distribution is large institutions such as mutual funds and pension funds. William J. O'Neil points out how significant the buying power of institutions is. "If a single fund has $ 1 billion in assets and wants just a 2% new position in a stock, they must buy $20 million worth of it. That's 500,000 shares of a stock selling at $40 per share! Funds are just like elephants jumping into a bathtub. They are simply so big the water rises and splashed all over the place." This means that you want to be buying stocks which institutions are buying to benefit from the momentum they carry. When they trade their will be massive adjustments to the supply and demand of a stock.

We talked about earlier how when an institution wants a position in a stock it does not do it all at once. It builds up over the course of a few days or weeks to try and buy into it without increasing the price significantly. This gradual buy will show up as accumulation on the stock charts. Even in small amounts institutional buying is hard to hide. For more intermediate trades you want to identify these areas of accumulation so you can buy into stocks before they breakout. However accumulation is also beneficial when holding a stock for a longer period of time. Institutions don't turnover their portfolios as often as individual investors do. This means that a stock that institutions are buying is more likely to have sustained result and stability than one without it.

One way to spot to accumulation over a longer term is to see what better performing institutions already own or have purchase recently. Institutions are required by the SEC to disclose their purchases. You can view these purchases in the ownership section on financial sites like Google finance. If you read Investors Business Daily or another financial paper you have access to a sponsorship rating which does this research for you. They may also tell you the percentage change in ownership of a stock over the past few quarters. This gives you an indication if more funds are buying in or selling out. William O'Neil says that "if none of the better performing funds has bought a particular stock, I would stay away."

How to Track Volume

The value of a stock's or an index's trading volume is not meaningful unless we compare it to the previous periods to see it's change over time. The Wall Street Journal and other financial papers list a stocks trading volume for the day. This works but it can be cumbersome to mentally track a stocks trading volume over a period of time. Investors Business Daily's stock tables have a helpful feature which is listing the stocks daily trading volume as a percentage of its 50 day average volume. Using this you can quickly glance through the stock tables and see which stocks are being accumulated.

Stock tables scan a lot of stocks for erratic changes in volume but they don't help you track a stocks volume changes or seeing past movements. The best way to do this is by using stock charts. Charts show you price and volume action over time in intervals of days or weeks and make it easier to identify accumulation, distribution and areas of price consolidation. Charts are available at free financial sites like Google and yahoo finance.

Conclusion
That is a good introduction on using trading volume as an stock indicator. To successfully utilize this in your investments I would recommend reading Investors Business Daily(IBD). IBD is an great way to get professional level data and research and not have to spend hours of your time or a significant amount of money to get it. A determined person could probably pay for the cost of an annual subscription in just a few weeks of trading with it. If you are interested in subscribing click through this link for discount of up to 80% off the price of the print edition.
If your interested in an opportunity to learn from great investors check out Investors Quotes Daily. They send out a daily quote from successful investors such as Warren Buffett, Peter Lynch and William J. O'Neil. Sometimes it's one of their investing strategies and other times a piece of sage wisdom. It's a great way to get a daily does of what it takes to be a great investor.

Article Source: http://EzineArticles.com/?expert=William_Braddford

Note: An interesting technical analysis based stock volume indicator is the Klinger Oscillator, calculated as the difference between a fast Exponential Moving Average (EMA) and a slow EMA. The Klinger Oscillator is also known as the Klinger Volume Oscillator.

E-Mini Trading: Channel Trading, Bollinger Bands, and Reversion to the Mean Theory

By David S. Adams

As I mentioned in earlier articles, I am an enthusiastic channel trader, which flies in the face of what most e-mini traders consider prudent trading. Most e-mini traders avoid trading in channels because they can be unpredictable and unprofitable. Reversion to the Mean Theory

has certainly had its abuse over the years by purveyors of stocks and bonds. It is not uncommon for unscrupulous stockbrokers to tell a potential client that a stock is overpriced because it is trading over its yearly mean price. There is no correlation between eminent price movement in a
stock and its distance from the mean price. This use of the Reversion to the Mean Theory is a misrepresentation of how stock prices fluctuate.

On the other hand, the theory holds great value for trading in the short term, especially when used in conjunction with Bollinger bands. I generally set by Bollinger bands at 2 standard deviations from the mean and use a setting of 10 time periods. There are other settings, which may be 14 or 18, that give satisfactory results under unusual market conditions; but I find 10 to be the most dependable setting for my personal e-mini trading.John Bollinger, in his article, "Bollinger Bands-The Basic Rules," states that closes outside the Bollinger bands are continuation signals not reversal signals. In nearly all cases, closes outside the Bollinger bands tend to be continuation patterns, with certain exceptions.In reasonably symmetrical continuation channels the Bollinger bands tend to define the highs and lows of the channel. As a quick aside, symmetrical continuation channels refer to

channels where the price action is ricocheting off the top line of the Bollinger band and moving in a direct line, with little retracement, to the mean line or the bottom Bollinger
band line. These channels are a delight to trade as they are usually very low volume formations and occur during the stand down period (from 11 AM CST to 12:30 PM CST with some daily
variations). During the stand down period the market is often dominated by smaller traders. This is especially true on the YM e-mini contract. In a typical trade, the smaller traders
will try to push the price action outside the Bollinger band and typically fail. It is at this time that I fade the failed breakout back into the channel.

With very few exceptions, the price action in the above-described scenario will revert to the mean average at the center of the Bollinger bands. I have used this technique for several years and can assure you that continuation channels seldom breakout or breakdown. A more likely scenario for this price action is a reversion to the mean centerline of the Bollinger bands or a move to the lower Bollinger band. (Or an exactly the opposite, depending on the direction of your trade.) The tendency for continuation patterns to revert to the mean defies many investment theorists judgment, but it is true, just the same.It is important to understand that this principle I have outlined works only in continuation channels and is a disastrous principle to implement in a trending market, or even a choppy market. Its sole use is in a flat continuation channel. It's also important to use a fairly tight stop should the market action choose to actually breakout or breakdown.In summary, I have described a unique scenario in e-mini trading where Bollinger bands and Reversion to the Mean Theory can be utilized to initiate frequent and profitable trades. It

takes some time and experience to learn as technique, but continuation channels tend to revert to the mean.

Real Live Trading Doesn't Lie. Spend 3 days with me, in my trading room, and see if you are one of the many that can profit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here.
http://EzineArticles.com/?expert=David_S._Adams

Note: other types of trading channels not mentioned in this article include linear regression channels such as Breakout Standard Regression Channel, Classic Standard Regression Channel and Raff Regression Channel.

McClellan Oscillator - NYSE Advancing Issues And Declining Issues

By Tom Markelson

The McClellan Oscillator combines market breadth data to create an overbought/oversold oscillator. The McClellan Oscillator uses two moving averages of the market breadth calculation (Advancing Issues on the NYSE [New York Stock Exchange] - Declining Issues on the NYSE).

Advancing issues is defined as the number of stocks on the NYSE that made positive gains for the day. Likewise, the declining issues value is all stocks on the NYSE that had losses for the day.

Generally, overbought is defined as above 70 and oversold is defined as below -70. When the moving average of the Advancing Issues - Declining Issues is above zero, this generally is considered bullish. When the McClellan Oscillator is below zero, this is considered bearish. However, at the extremes, 70 and -70, the McClellan Oscillator could be used as an overbought and oversold indicator. Traders often look for a price correction downward when the McClellan oscillator is above 70 and look for a relief rally when the McClellan Oscillator is below -70.

The McClellan Oscillator is a great addition to a traders' technical analysis arsenal. Rather than relying on price data from one stock, the McClellan Oscillator helps a trader get the big market picture, whether it be bullish, bearish, or neutral.

Another popular market breadth indicator is the TRIN or Arms Index. This indicator combines advancing and declining issues with advancing and declining volume. See Arms Index (TRIN) for more details.

Remember, trading involves serious risk. Only trade with discretionary funds you can afford to lose. Past performance is not indicative of future performance.

Tom Markelson is a contributor to the website OnlineTradingConcepts.com and trades stocks, futures, and options.

A chart showing the McClellan Oscillator is located at the following link: McClellan Oscillator.

Article Source: http://EzineArticles.com/?expert=Tom_Markelson

Article Source: http://EzineArticles.com/562865

More information on McClellan Oscillator theory and Summation Index can be found at StockMarketStudent Encyclopedia.

Market Breadth - Top 5 Things You Should Know

By Alexander Ache

Market breadth is defined as the number of advancing issues compared to the number of declining issues in a given market.

This gives traders and investors a unique view of the underlying strength or direction of a market move. For US equity markets, market breadth can be applied to any index,
exchange, or customized list of issues. For example you could apply market breadth indicators to a particular sector or industry that you are following. There are several methods for
measuring market breadth, of which the most common is the advance/decline line (A/D line). Other indicators make use of ratios, oscillators, moving averages, and momentum of the
breadth. Some methods also include new highs and lows and volume studies. Whatever method you choose, you must keep the following points in mind:

1. Pick Two or Three Indicators - There are many breadth indicators and variants, many of which are redundant. Pick at most two or three that you prefer and watch them daily. Avoid analysis paralysis and focus on learning only a few.

2. Price Is King - Regardless of which breadth indicator you use, it should always be confirmed with price movement of the underlying asset. Look for divergences of the
price and breadth to help signal possible opportunities.

3. Smooth Out Your Indicators - Don't get sucked into the noise that typically accompanies daily breadth signals. Utilize moving averages, point and figure charts, or even
weekly data to help draw out a valid signal.

4. Back-test - After you have found a breadth indicator you prefer, invest some time and effort into back-testing its performance. Manually back-testing is the recommended method so you can become more intimate with the indicator, identify gaps in your rules, and build overall
confidence.

5. Confirm Data Integrity - Not all data sources are accurate when it comes to basic information of advancers and decliners. Cross reference your data to make sure you are
getting an accurate feed.

Display your market breadth on a polo shirt. Visit http://www.BullandBearPolo.Com
which provides active traders and investors with professionally looking shirts embroidered with a tactful bull or bear logo to display daily market sentiment.

For free access to common market breadth charts and indicators, visit http://stockcharts.com/index.html.

Article Source: http://EzineArticles.com/?expert=Alexander_Ache

More information on Market Breadth theory and Market Breadth Indicators can be found at StockMarketStudent.

Main Stock Market Investing Myths

By Van Beek

Stock Market Investing is a great way for anyone to make money without having the usual overheads and headaches of owning and running a business. However, one needs a certain amount of skill, business acumen, and a lot of proper information to make money with stocks and funds. Wrong information or misinformation is one of the reasons that people, especially newbies, lose money in the market. Here are the main stock market investing myths that people need to be wary of when they trade in the stock exchange.

1. Only rich people and stock brokers can make money in the market

The stock market is a place where anyone can make money as long as they know how. The Internet has leveled the playing field even more, by providing access to data and research tools that were previously available exclusively to brokers. Therefore, even ordinary folk with a tiny capital can start small and build their portfolio consistently to earn huge profits.

Individuals also have the freedom to aim for long-term gains, whereas stock brokers do not have that luxury. Most of their investments need to perform well even in the short-term. Therefore, individual investors are at a greater advantage when it comes to making money over the long-term.

2. What goes down must come up

Stocks are not physical objects and they are not obligated to obey the law of gravity. When a company performs well and as long as market conditions are conducive, a stock could keep increasing consistently. There is no reason whatsoever for it to come down when there is no other opposing force acting on it. When a stable company with great products or services is run by efficient managers, its stock prices can keep growing steadily. The overall market trend often prevents that however. And companies that are poorly managed and have a declining stock price, may go bankrupt and never recover.

3. Investing in the stock market is very similar to gambling

While people totally ignorant about the share market can be excused for having that opinion, investors and even novices in the market should never entertain that idea. Gambling is an activity where everything is left to chance, but investing in stocks is done by careful analysis of a company's performance, market forces, and several other factors that can influence the prices of stocks. Therefore, stock market investing is not a leap in the dark, but rather a careful strategy based on solid rules, analysis and a certain amount of intuition gained over years of experience.

There are a lot of other myths on stock market investing. Learning the truth can set everyone free and help them invest wisely and see consistent profits in the stock market.

To grow your savings with sure and simple stock market investing, visit the Stock Trend Investing website.

There you learn about a simple Trend Following approach and system that takes less than one hour a month of your time. At the site you can also sign up for a free long-term investing newsletter.

Article Source: http://EzineArticles.com/?expert=Van_Beek

Article Source: http://EzineArticles.com/6737772

Understand the terms Appraisal Ratio, Non-systematic Risk and Alpha before embarking on the stock investing journey.

Stock Trading System Development

Most people invest in the stock market but only a very few go to the effort of designing their own stock trading system. By "system", I mean a piece of software that automatically tells the trader when to buy and sell stocks. There are several advantages to mechanical stock trading systems. One of the big advantages is that it removes the emotion from the trading activities. Or should I say, a mechanical stock trading system should remove the emotion from trading.

In fact, most system traders tend to seek the highest possible return on capital without accounting for the emotions experienced when real money is on the line. As a result, many traders make fundamental mistakes including underdiversification, undercapitalization and overtrading.

One significant issue that novice system developers face is the assumption that live performance of a trading system will mimic system backtest performance. It is very unusual to achieve similar performance live as was achieved in simulation. A good rule of thumb is to expect 50% of the profit and 50% higher drawdown in live trading as opposed to backtest simulation.

Inevitably, a mechanically traded stock system will produce a fairly significant drawdown. This is where emotion comes into play. It is very easy to study a backtest simulation and come to the conclusion that you can tolerate a 25% drawdown. It is a completely different situation when you are down 25% with real money invested. In this situation traders typically begin to question whether their system still works. With enough stress the trader will liquidate his (or her) holdings. This is how traders end up buying high and selling low. It complete cycle is greed and fear. Greed comes into play because too much capital is put into the stock positions initially. Fear comes into play when the positions move against the stock holder. The root cause is typically deployment of too high a percentage of one's trading capital on non-diversified positions. This is often compounded by use of capital that one cannot afford to lose.

Before embarking on the design of your own personal trading system you should first assess your personality, lifestyle and financial means. There is no point in putting a great deal of effort into a trading system that is ultimately unsuitable for your life's situation.

Steve Auger is the author of the blog Stock Market Student. Always strive for the highest Alpha when developing a stock trading system.

Stock Liquidity

When buying or selling shares in a company, most traders want to ensure they are doing so at a fair price. In many cases novice traders fail to get a fair price because they don't understand stock liquidity and a factor called slippage.

What is slippage?

Slippage is the difference between the last trade price and the price realized by the next order. Typically, slippage occurs when there is a significant imbalance between demand and supply. For example, if a stock trader wants to buy 10000 shares of a stock but the average daily volume shares traded for that stock is 5000 shares, then there will likely be a great deal of slippage in acquiring the stock. The act of buying the stock will drive up the share price because there are not enough willing sellers.

One method of preventing slippage is to use limit orders instead of market orders. But there is a downside to this. Quite often the stock trader does not acquire the best stocks with limit orders because the price moves up too fast. Or the trader will get filled on a miniscule number of shares and has to chase the stock by moving up the limit price to acquire more. Neither of these situations are desirable.

Stock Liquidity

When developing a stock trading system, it is good practice to determine the minimum stock liquidity for your needs. For example, if a stock trader starts with $100K trading capital and plans on holding 20 different stocks then he will typically be buying $5K worth of stock at a time. To avoid major slippage problems the stock trader will likely set certain minimum stock liquidity requirements to filter out low liquidity stocks.

Average Trading Volume

Many novice traders will filter out low liquidity stocks by examining the stock average trading volume over the previous 20 days. 20 days is generally not sufficient as a large volume spike on one or two days can skew the average trading volume. You can end up holding a stock with volume dying off rather quickly. So it is better to a longer averaging period such as 60 days.

Average Dollar-Volume

An issue with examining the average daily trading volume is that it is not necessarily the right factor to monitor. For example, For example, some stocks on publicly traded exchanges have extremely high valuation, $1000 or more. The stocks can be quite liquid and one share can easily be bought. So you can see that trading volume is actually irrelevant. What is important is average dollar-volume. In other words, concentrate on the $$$ turned on an average trading day, not the volume of stocks traded.

The minimum stock liquidity for stocks the trader is interested in buying should be based on trading capital and number of stocks held. For the case mentioned above the trader has $100K trading capital and wants to hold at least twenty stocks. On average each position will be $100,000 / 20 = $5,000. When you buy a stock, a good rule of thumb is to buy no more than 1% of the 60 day average daily dollar-volume. For this trading example, the minimum stock liquidity level should be a minimum $500,000 daily average traded for a particular stock.

Market Capitalization

Now the average dollar-volume is fine for acquiring a stock position but what about exiting? When a sell signal comes up the trader will have to sell regardless of the average dollar-volume. In preparation for selling a stock, consider using market capitalization as a filter before buying the stock. The idea is that if the market capitalization is too low then stock liquidity is likely a problem, even if the dollar-volume is high. This provides some buy side filtering for consideration of ultimately selling the stock.

Stock Price

The final parameter to consider is the current stock price. It is a good idea to avoid stocks trading under $3. There is too much speculation/manipulation for these stocks and they tend to be less liquid.

Conclusion

To avoid having excess slippage when entering trades, make sure you consider the stock liquidity (average dollar-volume), market capitalization and stock price. If you want to trade more than 1% of the stocks average dollar volume then consider breaking the trades into several different orders to manage slippage.

Steve O. Auger is the author of the blog Stock Market Student and Stock Market Encyclopedia.