Online Trading Blog

Dollar Cost Averaging (DCA) also known as Constant Dollar Plan or Pound Cost Averaging is a method of profiting from stock or any other similar market for a long-term. In DCA, the investor constantly buys the stock/unit for a fixed amount per month, increasing his/her trading asset.

Dollar cost averaging is considered as a method to overcome market downfalls as it let the investor to buy more number of stocks when the market is falling and buy lesser number of stocks when market is on high. The profit really comes from the long-term performance of stocks, which is nearly 11% per year for US stock markets irrespective of economic ups and downs.

The greatest advantage of dollar cost averaging is it is independent of market timing. One can buy stocks irrespective of market condition. This type of stock investing is also helpful eliminating the risk of investing large amounts at a wrong time. DCA investing strategy is best suited for investors who can spend a part of their monthly earning to set-up a trading portfolio step by step. The success level is determined by the price of equity at the time of selling.

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Finding quality stocks and mutual funds is a difficult job, especially for long-term investors who want to secure their future by investing in a quality stocks or fund. One way of doing so is to compare the price and growth rate with an already estimated benchmark.

Although any stock or index can take as a benchmark it is better to choose one with reasonably steady growth and is liquid enough to trust. The best option is the S&P 500 index; it is old and is growing every year with a reasonably constant speed, around 11% annually and around 100% in every 10 year. By taking this index as a benchmark you can classify stocks and mutual funds in to 3 main groups as those performed better than the S&P 500 index, those performed worst than S&P 500 index and those which are unstable to fit in any previous groups. Now the options before a trader will be much more clear, only look for stocks which outperformed the benchmark consistently.

It is better to put money on firms or funds which are old enough to compare and also consider periods of market recession and the stability of these stocks. This method of using benchmark to find stocks usually benefit long-term investors only.

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The Week Ahead: The markets will obviously be watching many significant economic reports this week after one of the most turbulent weeks ever on Wall Street. For the President's stimulus package to work, investors need more data to see if its too little too late. Durable goods numbers along with the consumer confidence data are due on Tuesday. An expected interest rate cut by the Fed and the 4th quarter GDP will be announced on Wednesday. Personal income and spending numbers are reported on Thursday, and a highly anticipated employment report will be released on Friday morning.

Stocks to Watch: Besides the important economic reports, this week brings hundreds of earnings releases from a diversified list of large companies. Significant ones to watch include: Google (GOOG) and Yahoo! (YHOO) in the tech sector; Proctor and Gamble (PG) in the consumer discretionary sector; Eli Lilly (LLY) and Merck (MRK) in the pharmaceutical area; Exxon Mobile (XOM) and Chevron (CVX) in the oil patch; Others include: Amazon (AMZN), (UPS), Boeing (BA), 3M (MMM), Dow Chemical (DOW), JetBlue (JBLU), and CVS Caremark (CVS).

Special Note: The Dow Jones Industrials 850 point trading range this past week was highlighted by both a selling climax that tested the 2000 high of 11,750 for the first time and a surprise interest rate cut by the Fed that eased investor anxiety helping lift prices for a positive close by weeks end. As mentioned here last week though, the market has already approached the resistance zone between 12,500 and 13,000 indicating that the bulk of the upturn has already occurred. Look for a retest of the lows followed by another rally.


Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Relative Strength Index or RSI is a popular momentum indicator, which can be used for figure oversold and overbrought positions for a give stock. RSI was developed by J. Welles Wilder in 1978. Relative strength index follows a simple mathematical calculation for finding market momentum, of which value ranges from 0 to 100. The formula employed is,

Relative Strength Index = 100 – [100 / (1 + RS)]

RS is the Relative Strength for a specific time period. Its value is determined by the formula

RS = Average gain / Average loss

Both average gain and average loss are calculated for a time period, the standard one is 14 market days. As the value for average gain increases the RS value increases, so does the RSI; and as value of average loss increases RS and RSI value decreases. Relative strength index is a running process and the market understanding improves with time, because of more accurate and detailed data.

As said earlier the most important use of relative strength index is to figure out oversold and overbrought positions. When the RSI is 70 or more the stock is considered as overbrought and when it is below 30, considered as oversold. 50 is the cross-over point which some traders use to confirm bullish or bearish trends. RSI offers better results are obtained when it is combined with other market research tools.

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After the first symptoms of recession of US stock and other financial markets, many investing firms and funds have changed their focus to emerging markets of Europe and Asia. Decoupling theory is postulated in this context for assisting the firms to reap from these emerging markets, but the validity of this theory is arguable.

Decoupling theory, as the name suggests, decouple emerging world markets from US markets. The followers of this theory believe that “because of the strong GDP growth of many developing countries, especially of China and India, their markets will remain bullish even at the time US recession.” The theory was pretty right till the end of last year, but things have changed considerably in this year. Most Asian markets are now on big recession after the crash of Dow John’s. Indian, Chinese and Hong Kong markets fell considerably in the last one week or so with around 10%, 18% and 3% respectively.

The major drawback of Decoupling theory is that it not considered the multiple economic relationships and globalization trends. Although the trades among Asian countries grown tremendously, the major trading partner for all major Asian countries is still United States and any recession in its economy will lead to recession in all these countries, although the effect may vary.

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Online Forex trading is the most competitive market on this globe for traders. One must be vigilant and talented to capitalize on every opportunity that comes in his way. He must have a winning plan and must have the resources and courage to implement the plan. Here are some tips for planning successful Forex trades online.

• Trade on average unit sizes; increase the number of units to some extent when you currency is on almost sure upward move and decrease the number when opposite happens.
• Know your position and never predict any thing; in other words respect the unpredictability.
• Exit trades when you feel uncertain; it is always the wise decision to save your money.
• Look for consistency; it is good to analyze your success by taking days or weeks as unit, never individual trades.
• Never add daily episodes to your failures; it is better to stay off when you are getting troubles in a row.
• Be loyal to your trading style; scalping, day trading, investing, swing trading, etc; overlapping simply means confusion and loss.
• Never be disappointed; celebrate all your victories and learn lessons from your failures. Success is sweetest when it comes after many failures.

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