Online Trading Blog

The Week Ahead: The slowing economy and high oil prices are impacting companies hard especially General Motors whose stock hit a 53 year low. Its long term debt rating is now six notches below investment grade and may have to cut its dividend or raise cash. With that said, the auto sales report for June comes out Tuesday along with construction spending numbers and the ISM Manufacturing Index. Factories orders are due Wednesday, but Thursday's employment report ahead of a long holiday weekend is the one to watch.

Stocks to Watch: Anheuser Busch (BUD) unveiled a new growth strategy after rejecting InBev NV's hostile takeover bid of $65 a share, but can the stock maintain is current high price level? The weak economy has impacted apparel makers Christopher and Banks (CBK) and American Eagle Outfitters (AEO) both hitting 52 week lows as the former has a cautious outlook and the latter was downgraded. Office furniture maker Steel Case (SCS) is also weak as domestic sales dropped 9%. Finally, Vestin Realty Mortgage II (VTRB) suspends its dividend due to a gloomy real estate market.

Special Note: The Dow Industrials recent break below its January 2000 high now has the most broadly watched average in negative territory for the past 8 1/2 years. The other two (Nasdaq and S&P 500) have been and still are substantially negative over the same time frame. Another significant message the Dow may be sending is the break below the long term trend line connecting the 1982 low and the 2002/2003 lows and its subsequent failure to push back through this line twice at the two peaks in May of this year. Upside resistance now appears to be between 12,000 and 12,500 on any ensuing rallies.


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

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Long-short or long/short is a stock investing strategy followed by many hedge funds, portfolio managers and individual investors. The strategy was introduced in late 1980s. Long-short stock investing includes buying (taking long position) stocks which are assumed to perform high and selling (taking short position) stocks which are assumed to perform low, than early ones. Theoretically this is a risk-free investing strategy, as long as both positions are of same size.

With long-short investing strategy, irrespective of the market performance, the investor/fund will benefit as long as the stocks which he purchased outperform the stocks he sold. Although investors can buy any stock (doing well) and sell any stock, many follow a ‘paired trade’ model to limit risks. Often the pair involves same/related industry stocks. In this way investors can limit the risk to only their selection of stocks rather than industry/market performance.

In practice long-short investing strategy is a high-risk strategy, as a great amount of risk is associated with stock selection and short selling. Many funds and portfolio manages follow complex rules and strategies to evaluate individual stocks and companies, and to find good opportunities. Long-short strategy is favorable only to portfolios which are actively managed and frequently/seasonally readjusted.

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Fibonacci time zones are one other extensively used technical indicator based on Fibonacci numbers. These are used to forecast timings of major price changes. Fibonacci time zones are a series of vertical lines placed at increasing intervals according to Fibonacci numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, etc). They are useful for both upward and downward trends.

Fibonacci time zones favor long-term traders more because of the easy to plot lines and interpret them. First line is usually a day where there is a major move. Successive lines are placed on subsequent days correspond to Fibonacci numbers (1st, 2nd, 3rd, 5th,…days). Many swing traders also use Fibonacci time zones with shorted base time intervals based on hours rather than days. A modern approach is to find a base interval (time between 2 tops or bottoms) and then multiplying it with the Fibonacci golden ratio (1.618) to plot the lines.

Although hard to explain, Fibonacci time zones possess a high degree of predicting power (around 70%). Often these are time zones of trend reversals or large price changes in trend direction. Many forex and stock traders use these time zones to enter or exit trades. Remember there can also be major price changes between Fibonacci time zones. Many traders plot multiple time zones on same graph to overcome this issue.

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Beta value is a measure of a stock’s volatility with respect to market volatility. It is a popular indicator used by many traders and investors to facilitate their trades. The market volatility is taken as 1, and beta values of a stock are calculated as a measure of how much the stock price moved from this market volatility.

Beta value of a stock can take one of the following forms.

1. Negative Beta – This is a rarity, and means the stock is moving just reverse to the market.
2. Zero (0) Beta – This means the value of the stock stays same irrespective of market movement. Again a rarity.
3. Beta between 0 and 1 – This means the stock price swing less compared to market movements. Many blue chip company stocks and high-liquidity stocks have beta less than one. In a long-term prospective these stocks fall under low-risk low-profit category.
4. Beta of 1 – This means the stock price moves in the same relation with the market. This can be the case with many index-related products.
5. Beta greater than 1 – This means the stock price swings more compared to market movements. Many growing companies and technology companies have beta greater than one. Most of these stocks fall under high-return high-risk category. Also remember, beta at very high levels probably indicates high price volatility because of low-liquidity.

Beta value of stocks is important for traders following Capital Asset Pricing Model (CAPM). Many value investors ignore beta value. Beta values are based on past performances, may not accurate to predict the future, and market volatility and time period of beta are important factors to consider before making a trading decision.

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Both hedging and netting arbitrage are arbitrage strategies practiced exclusively by forex traders. Both are risk-free arbitrage practices, but are practiced less common because of the scarcity of (difficulty of finding) arbitrage opportunities.

Hedging arbitrage involves profiting from difference between roll over interest rates (SWAP) between two forex brokers. Here the forex trader simultaneously opens two currency positions for opposite currency pairs. Generally currency pairs with high SWAPS (like GPB/JPY) are selected. Trader opens a position for GPB/JPY at a broker who pays high roll over interest and a reverse position (JPY/GPB) at a broker who does not charge any interest rate. This way he will get profited everyday if the scenario stays same.

Netting arbitrage involves profiting from difference between cross currency pairs at different markets. But this scenario is a rarely and traders need advanced systems to find them. Here the forex trader opens three currency positions simultaneously including 3 different currencies. For example he buys one lot of EUR/USD at 1.5414, sells one lot of EUR/GBP at 0.789.7 and simultaneously sells 0.7897 lots of GPB/USD at 1.9525, profiting $48.125.

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The Week Ahead: Stock markets continue to be under pressure as oil surges and a spike up in commodity prices pinches consumer budgets. Now a possible military showdown between Israel and Iran could be looming. The Case Shiller Index for home prices and consumer confidence numbers are due out on Tuesday. The FOMC's decision on interest rates comes Wednesday in addition to the durable goods and new home sales numbers. The 1st Q final GDP is due Thursday while personal income and spending numbers are released Friday.

Stocks to Watch: Many regional banks were downgraded by Merrill Lynch including Wachovia Bank (WB), but some banks rallied when SunTrust Banks (STI) said its dividend would not be cut despite increased second quarter charge-offs. Western Union (WU) raised its long term growth target and boosted its stock buyback by $1 billion. Tenneco (TEN) shares dropped due to the slumping U.S. auto market, but may be reaching oversold levels. A major brokerage started coverage on Intrepid Potash (IPI), a relatively new fertilizer stock.

Special Note: An interesting technical formation on the Dow Industrials chart shows its lowest weekly close of the year as the DJIA attempts a retest of its January and March lows. A look at the other two major indexes in comparison indicates the DOW leading the charge down as the S&P 500 and especially the technology driven Nasdaq are not nearly as close to their respective lows for the year. A potential positive divergence could be setting up if the Dow breaks to new lows without confirmation by the other two.

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

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Insured asset allocation strategy is a fairly active portfolio management strategy which is ideal for investors with low-risk tolerance but who need active portfolio management. In insured asset allocation strategy investor establish a base portfolio value (often somewhere between 75% and 100% of total capital invested). Total portfolio value is not allowed to drop below this base value.

When the total portfolio value is above the base value, then the investor practices active portfolio management strategies, such as investing in high-profit high-risk instruments like equities to maximize the portfolio growth. But when the total portfolio value drops to approach baseline he/she moves to a passive mode by investing in low/no risk instruments and selling off risky instruments. Many times, when portfolio value approaches base value, it involves total changing of investment strategy by the investor.

There are two major approaches available for insured asset allocation, formula approach and portfolio insurance approach. In formula approach the investor buys more and more low/no risk assets when the portfolio is dropping to the base level. In portfolio insurance approach the investor use futures contracts and put options to insure the base capital. Insured asset allocation strategy is advantageous for investors who want to ensure a minimum standard of living after retirement and who want keep a minimum capital in hand.

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Fibonacci retracement is a charting technique based on Fibonacci ratios. It is widely used by traders of all types to find support and resistant levels, to find entry and exit points and to place stop losses. Fibonacci retracements come handy when prices of financial instruments retrace after noticeable up-trends. These retracements offer opportunities for traders to buy stocks/currencies/futures at low prices.

Fibonacci retracement technical indicator consists of horizontal lines plotted on trading charts. These lines are created as follows.

• First a trend line is created connecting two extreme points (highest and lowest points of a trend).
• Then retracement lines are plotted horizontally crossing the trend line at key Fibonacci levels (23.6%, 38.2%, 50%, 61.8% and 100%).

For a retracement trend these Fibonacci retracement lines is the most possible support level. The three key Fibonacci levels (38.2%, 50% and 61.8%) are considered most important levels. For the upward trend, this may occur after the retracement, these lines act as the resistant levels.

Most modern trading systems use Fibonacci retracements as a major technical indicator. Fibonacci retracements are also used in other indicators like Gartley patterns, Tirone levels and Elliot wave theory.


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Day trading includes quick response to changing market conditions. A day trader must look at various market factors to find a trading opportunity or to close a trade with minimum/no loss. Here are some factors which affect markets and stocks on a daily basis.

• Oversea market performances: The opening hour of American stock exchanges are heavily influenced by the market performances of Asian and European markets, which have already/almost ended their trading day.
• Overseas economic news and data: News regarding overseas individuals, policies, companies, industries and economies can affect stock prices at any time.
• First hour rush: The first hour of a trading day is often noticeable for higher trading volume as most individual and institutional traders try to react to news.
• Futures data and prices: Price changes of futures contracts, especially index futures, can be an indicator of stock market changes. Also futures trading starts before stock market trading.
• Company/economic reports, and analyst reports and ratings: These are the main factors which determine market/stock performances after the morning hour.
• Mid-day volume decrease: Often at afternoon, because of scarcity of new news, the trading volume decreases and stock prices decline.
• Position closing at afternoon: Many traders, especially day traders, start liquidating their open positions from afternoon in order to avoid/limit over night risks. This is more prominent in Friday afternoon.

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Take profit orders or T/P are orders just reverse of stop-loss orders. These orders are practiced by forex traders to close positions when a profit level is reached. Take profit orders includes a take-profit point, which is specified as the number of pips or exchange rate from the current trading price point. When take-profit point is reached the trade is closed locking the profit from the trade.

Take profit orders are practiced by traders when they are sure about market/price direction to a certain price level, but unsure beyond that price level. They also come handy when the trader is trading extensively on margin, and when the forex trader lacks time to monitor the trade. Some forex traders place take profit orders for fixed pips change for a currency pair, while others increase or decrease their pips range according to fundamental and technical analyzes.

For example, if a trader buys $1000 worth Yen when USD/JPY is at 104.668, which is 104,688 Yen and places a take profit order at 105.50, then if the USD/JPY touches 105.50, the order is executed for 105,500 Yen, with a profit of 812 Yen or $7.6969.

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Dynamic asset allocation is a highly active portfolio management strategy, which involves constant/frequent adjustment of investments with respect to market and instrument performances. Unlike strategic and tactical asset allocation strategies, dynamic asset allocation does not include any fixed investment ratio among investments.

Investors following dynamic asset allocation only look for more profitable instruments with respect to current market direction and performance. They diversify their investments on different financial instruments like equities, derivatives, mutual funds, index funds, fixed income securities, money market funds, etc. They constantly buy instruments which are rising and sell instruments which are losing. Investors and Traders following dynamic asset allocation strategy use fundamental and technical analysis tools to evaluate, confirm and predict trends of markets and instruments.

Advantages of dynamic asset allocation include (1) increased returns as more investments are done in rising instruments, (2) Reduced downside risk as investments are avoid on declining markets, (3) better exploitation of changing economic scenarios, and (4) benefit of diversification of investments. Disadvantages include (1) The need of active management of portfolio, (2) chance of loss because of wrong market interpretation and wrong investing decisions, and (3) high risk when compared to strategic and tactical methods.

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Wash sale rule or 30-day wash-sale rule is a tax rule imposed by Internal Revenue Service (IRS) on traders and investors. As per the rule a trader/investor can’t claim tax reduction for the loss of a trade if he purchases back the same instrument (replacement instrument) with in a wash sale period. Wash sale period includes 61 calendar days – 30 days before the sale date and 30 days after the sale date.

Wash sale rule mostly seriously affects traders and investors who trade stocks of a limited chosen companies and day traders who buy and sell different stocks in large numbers. Apart from prevention of tax deduction, wash sale rule has two other consequences.

1. Basis adjustment – Trader’s disallowed loss is added to the basis of replacement instrument. This preserves the benefit of disallowed loss on future sale of replacement instrument.
2. Holding period – Trader’s holding period for the replacement instrument includes the holding period of sold instrument. This prevents traders from altering long-term loss to short-term one.

Wash sale rule do not applies to financial instruments like futures and currencies. Many traders adopt different of strategies to minimize the effect of wash sale rule; as (1) calendaring the sales and purchase dates with minimum trading days involved, (2) buying replacement stock only after confirming the stock price is at bottom level, and (3) buying some other stock which has great correlation with original stock and then replacing that with original stock after completion of wash sale period.

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Fibonacci Fans are a charting technique based on Fibonacci ratios. It is widely exploited by traders to predict future support and resistance levels for a stock or other financial instruments and also to analyze the speed of a trend. Typical Fibonacci fan chart consist of 3 lines, but the trader can increase the number of lines if necessary. Like Fibonacci arcs, Fibonacci fans can be created for both short-term and long-term bullish and bearish trends.

Many advanced trading systems allow traders to plot Fibonacci fans in price charts. The idea is simple; first a trend line is created connecting two extreme points; usually connecting highest high and lowest low in a given period. Then an invisible line is plotted vertically from the second extreme point (vertically from highest high point for a bullish trend and from lowest low point for a bearish trend). Then three lines are drawn from the first extreme point intersecting the invisible vertical line at key Fibonacci ratios like 38.2%, 50% and 61.8%. The number of lines can be increased by using more Fibonacci ratios like 23.6%, 76.4%, etc.

Generally, when a trend crosses a Fibonacci fan the line becomes support level for bullish trend and resistance level for bearish trend and the next Fibonacci line becomes resistance level (bullish trend) or support level (bearish trend). Fibonacci fans offer better results when used in conjunction with Fibonacci arcs.

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Risk arbitrage, as the name suggests, is the arbitrage process which involves risk. Risk arbitrage differs considerably from market arbitrage, which is rare, risk-free and market maker friendly. Risk arbitrage is widely practiced by retail traders and market makers. Although it involves risk, the practice is still considered as a low-risk trading strategy.

There are 3 main risk arbitrage strategies available for retail traders,

1. Merger and Takeover arbitrage.
2. Liquidation arbitrage.
3. Pairs trading arbitrage.

Merger and takeover arbitrage is the most common risk arbitrage strategy in which the traders locate and trade undervalued stocks of companies, which are merged to or are being acquired by other company. The process requires quick response to news, and thus favors traders with Level II access.

Liquidation arbitrage exploits the price difference between current stock price of a company and its estimated liquidation value. The process involves estimating the company’s liquidation assets value.

Pairs trading arbitrage or relative-value arbitrage is less common. It includes finding a stock pair with good correlation. Traders wait for divergence from the correlation and take appropriate positions (long or short) according to it. Traders are profited when the pair returns to original higher correlation.
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There are many commodity futures markets with a variety of products are available to trade. But all of these markets and products are not suitable for beginner traders. Beginner traders should choose markets/products which satisfy certain requirements as follows.

1. Markets must be liquid.
2. Markets should show good trendy moves.

Traders should analyze the historical trends and behavior of the markets before taking a decision. It is a good practice to diversify the markets and the products one trades. Here is a list of most liquid or tradable commodity futures available, which are good for beginners.

1. Currency futures – Swiss Franc, Japanese Yen, Germen Mark and British Pound
2. Energy futures – Crude oil, natural gas and heating oil.
3. Food commodity futures – Coffee, sugar and orange.
4. Metal commodities – Gold, silver and copper.
5. Agricultural commodities – Oats, Corn, Cotton and Soybeans.
6. Interest rate futures – T-bonds and Eurodollars for short-term and long-term trading respectively.

Remember there is no guarantee that the liquidity and profitability of a market/product remains the same over the time. Also before trading any market or product the trader must consider many things like his account size, risk tolerance, familiarity with the underlying commodity or market or industry, other fees included, ultimate goal – whether to own the underlying commodity or not, trading strategies, etc.

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The Week Ahead: The price of oil had its biggest one day spike ever on the same day unemployment was reported to have the biggest one month increase in 22 years. A perfect storm of bad news for the economy. Important to watch will be Tuesday's trade balance and Ben Bernanke's keynote address on inflation in Boston. The Fed's beige book of economic activity will be released on Wednesday as will OPEC's oil report. Retail sales, jobless claims, and business inventories are due Thursday while the CPI report is released Friday.

Stocks to Watch: MGIC Investment Corp. (MTG) was downgraded again on a poor outlook for mortgage insurers for the next two years. Inspire Pharmaceuticals (ISPH) surged on news that a recent study showed treatment for cystic fibrosis improved breathing significantly. Focus Media (FMCN), A digital ad company in China, showed a 1st quarter loss versus a profit from a year ago and cut its 2008 revenue target do to the recent earthquake that has disrupted operations and hurt results.

Special Note: One divergence of note is the recent highs that were made in the Russell 2000 Index and Nasdaq indexes that have gone unconfirmed thus far by the Dow Industrials or the S&P 500. In fact lower lows are starting to be made in the latter two. Another technical observation is the CBOE Put/Call Ratio Composite which is a near term measure of market sentiment. This indicator is near the levels that it was at the October 2007 peak indicating another market peak may have passed with the potential for lower lows coming.


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


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Many traders, especially beginners try to predict the market and often face huge losses. Although most markets behave in a cyclical manner, this cycle isn’t that much predictable – especially for short-term traders. There are many things which influence the market performances and no single trader can consider all those at the same time. Here are important things/facts to consider.

• No trader can accurately analyze all the forces and factors which influence the market direction or the financial instrument price.
• There is always uncertainty in the market.
• A good trader determines the possibilities with most accurate information to which he has access; and makes a trading decision with regards to the greatest possibility.
• The trader then hedges against the other possibilities by using some strategies.
• He constantly monitors the market/product and recalculates the possibilities and changes his trades with regard to the change of possibilities.
• Inexperienced traders often calculate the possibilities correctly and start trading with respect to the greatest possibility like good traders; but they do not hedge against other possibilities.
• Inexperienced traders often stick with their first decision and do not make changes with regard to changing possibilities; and then suffer losses.
• Successful traders make right decisions at right time while inexperienced traders make delayed or early decisions.

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Both stop-if-bid and stop-if-offer are stop orders used to limit trading losses resulting from market uncertainty. Stop orders are excellent tools against high price volatility and low market liquidity. Both stop-if-bid and sop-if-offer orders are common in forex market, but remember not all forex brokers allow these orders.

Stop if bid orders are practiced in rising markets. These are orders to close a trade when the bid price touches or breaches a specified level. Stop if bid orders are usually employed to buy a forex position once a certain level is broken. For example if you sell GBP/USD for 1.9815 with a stop-if-bid at 1.9820, the position will be closed when the bid price touch/breach 1.9820.

Stop if offer orders are practiced in falling markets. These are orders to close a trade when the offer price touches or breaches a specified level. Stop if offer orders are used to sell a forex position once a certain price level is broken. For example if you buy GBP/USD for 1.9815 with a stop-if-offer at 1.9805, the position will be closed when the offer price touch 1.9805.

Using stop-if-bid orders to sell forex positions and stop-if-offer orders to buy forex positions can cause problems like closing of positions in low liquidity causing temporary spread widening.

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Fibonacci arcs are a charting technique based on Fibonacci numbers, used to predict the future support and resistance levels for a financial instrument. A typical Fibonacci arc consists of three curved lines; but traders can increase the number of lines with respect to Fibonacci numbers. Fibonacci arcs can be created for both short-term and long-term trends, and as well as for both bullish and bearish trends.


The procedure for creating Fibonacci arcs is simple and most advanced trading systems allow traders to draw them. First a trend line is plotted for connecting to extreme points – usually connecting the highest high and lowest low of a given period. Then Fibonacci arcs are plotted as three curves which intersect the trend line at key Fibonacci ratios 38.2%, 50% and 61.8%. Traders can extend the number of curves if necessary by plotting them at 100%, 132.8%, etc.

Usually when a trend cross a Fibonacci ratio curve (say 38.2%), the curve becomes support for uptrend and resistance for downtrend and the next Fibonacci ratio (50%) becomes resistance for uptrend and support for downtrend. Remember, the scaling of the chart can alter the accuracy of arcs; as with variation in scaling the points where curves cross price data will vary. For better results and accuracy many traders use Fibonacci arcs in conjunction with Fibonacci Fans.

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Day trading is the most active form of trading having maximum trading risk. It requires real-time news, quotes and charts. Day traders practice many complex strategies for getting profited from the market. Here are some simple tactics which can minimize trading loss of day traders, especially beginners.

• Concentrating on certain group of stocks or an industry. Specializing gives traders a chance to study deep and find more profitable opportunities.
• Using traders systems with hot/short lists. Then traders can find opportunities quickly and easily for stocks (or other instruments) they are trading.
• Modify and update your hot list and stock groups frequently.
• Avoiding trades when unsure about the market. It is better to keep capital for future opportunities than wasting it on uncertain positions.
• Concentrating on one opportunity at a time. This considerably minimizes trading risk and help in maximizing opportunities by increasing position sizes.
• Limit the number/frequency of trades. It is better to concentrate on one or two trades a day.
• Keep the risk minimum. It is ideal to keep the risk possibility less than 1% of your account size.
• Be careful with trading on margin. High margin trades are better when you are sure about price direction.
• Write down your trades. Note how you profited from a trade and why you made loss from another. And frequently go through them.

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The Week Ahead: A major consumer sentiment reading reached a 28 year low with soaring food and gas prices lowering the potential for other discretionary purchases. Look for the ISM Manufacturing Index and construction spending numbers on Monday. Auto sales and factory orders are due Tuesday. Oil and gas inventories along with the ISM non-Manufacturing Index are out on Wednesday. Chain store sales and jobless claims are released Thursday. Finally, Friday brings the all important employment report for May.

Stocks to Watch: Harris Corporation (HRS), according to the Wall Street Journal, has received preliminary bids in the low 70's for its shares and may entertain one of these bids if it can't get the $75-$80 it hopes to get. Penn Virginia (PVA) successfully tested for natural gas at its east Texas well while Goodrich Petroleum (GDP) was upgraded by a major brokerage as it will benefit from this same east Texas area natural gas find. Hexcel Corp. (HXL) signs a $4-5 billion contract with Airbus to supply carbon fiber materials.

Special Note: Computer and Telecom have been market leaders over the past week as investors bet on a more resilient economy. Technology has outperformed now for 7 straight weeks. With the markets down only 4-5% for 2008 despite consumer sentiment at deep lows, and 12 consecutive months of mutual fund outflows along with a quadrupling of short selling, many bulls see these as contrary indicators for a rising market ahead while bears may see these as the beginning of a larger downtrend.


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

To view all of NobleTrading's historical newsletters, click here.

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NobleTrading Direct Access Trading

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