Index Options and ETF Options both provide you with an opportunity to use options strategies on a group of underlying stocks. However, there are some major difference between the Index Options and the ETF Options.

The most important difference is that Index Options are cash settled on expiry while the ETF Options are settled with the underlying instruments that is shares of that ETF. Since with an ETF Options, you can also own the underlying security, you can use various combination strategies.

Stocks have dividends that are paid out periodically to the stock holders. Dividends are an important part of the return that a stock gives over a certain period of time. Now when you are trading index options or ETF options both of them get affected by the dividend payments on the underlying stocks. You need to take this fact into account when calculating the values of puts and calls with an Options Calculator otherwise your investment returns may not be what you have been anticipating.

If you have traded stock options before, trading ETF Options should not be difficult for you. As said before, since ETF Options get settled with ETF shares, you can use the different options trading strategies on them unlike the Index Options that get settled in cash. This makes ETF Options a much superior instrument as compared to Index Options.

Now when trading ETF Options, you can use the famous Protective Put Strategy by combining long ETF with a long put. This way you can hedge against the downside risk with a small increased cost to the ETF. A Protective Put will limit the downside risk to the put strike price.

Similarly, you can use a Covered Call on ETF. A Covered Call is formed by taking combining long ETF with a short call on that ETF. The short call will give you some income in the shape of a premium and reduce the cost of the position. This will also slightly reduce the risk of the position. But on the other hand, a covered call will limit the upside profit potential. Your max profit now will only be limited to the call strike price.

Now, you can also use a Collared Position as well by combining a long ETF with a long put and a short call. This combination limits the downside risk to the put strike price with a slight increase in the cost of the ETF. This net increase in cost by taking a long put is offset with the premium brought in by the short call. On the other hand, the limited but high risk is turned into limited risk only.

What you need to do is first paper trade these strategies and master them. This way you will learn how to deal with unexpected risk. Options trading is risky in the sense that it has both time volatility as well as price volatility. Now, many traders trade options without getting good options trading education.

ETF options are always American Style meaning you can exercise them any time before the expiry. You can even use LEAP Options on ETFs. LEAP Options are long term options having expiry ranging from nine months to 21/2 years. Now just like stocks, not all ETF have options available for trading.

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A trading system might consist of a few indicators and a number of rules that tell when to enter the trade and when to exit the trade. Trading system is considered to be proven and tested if there is some date that supports its performance under live market trading conditions. However, it might not be possible to test a trading system quickly under live trading conditions. To overcome such problems, backtesting has been developed. Backtesting is done with the use of a software.

For this you can do back testing. Back testing is a method that uses historical data to test how well your indicators work in a particular market. You can use back testing software that enables you to look at the past market data and test how well the indicators and your trading system have worked in the past market.

Backtesting results are no guarantee that the trading system will perform well under live market conditions. Things that worked in the past might not work now. Similarly something that didn’t work in the past, may work now! You never know!There are many problems with historical data. There is no slippage in backtesting. Slippage is one of the most important problem that a trader faces while trading live. The other problem that the backtest ignores is the widening of spreads under volatile market conditions.

In other words, no two trades work out in exact the same way twice. SO you have to be careful when looking at the back testing results and take it with a pinch of salt. However, there are still some advantages of back testing a trading system.

Some markets are highly seasonal. For example, if you are a commodity trader and tend to trade agricultural commodities like the grain, seed or the livestock, these have a fixed planting and harvesting cycles.

For example, some markets especially the commodities market is highly seasonal and cyclical in nature. We can take the example of agricultural commodities like wheat, grains,corn, cotton, coffee and stuff like that. In case of the stock market, there is much talk of the January Effect. Well, it is there no doubt about it. Some years, it is highly pronounced and others it is not that pronounced. Similarly stock prices tend to rise at the end of each month and the first few days of the new months. The reason for this is that many institutional investors tend to put the new funds to work at the end of the month and the beginning of the new month! Now in other markets, you might not find any seasonal trends. For example, there is very little seasonality in curreny market or the bond market.

US Dollar Index trendlines might last for months to years. In other markets too backtesting can help you figure out important trends that lasts for last times. Backtesting can help you figure out how long a trend might last in a particular market.

There is no substitute for live trading results! To tell you the truth, backtesting can only give you a rough guess about the performance of the trading system under live trading conditions.

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As a trader, you are always looking for short term profit. While as an investor, you are willing to invest long term in a company or a security to make capital gain. In trading, you are always looking for making profit from the volatility in the market. Day trading has a short term time horizon of only one day. A day trader opens a trade and closes that trade in the same day to make a quick profit. Day traders need quick reflexes as well as a keen observation of the market volatility. Many people day trade successfully. However, on the other hand hand, many people have a long term time horizon of many months to years. They have a long term financial goal and this matches with their investment style.

An investor might have to wait for a long time before realizing a return on his or her investment. Many investors can learn a few tricks from day traders that can help them make a quick profit in a matter of days orn weeks instead of months or years. Now a company’s stock may have a good long term prospects supported by strong fundamentals. But the stock may stay still for a long time before it catches the attention of the media and the investing public before it’s price get’s bid up.

Many investors when they fall in love with their investments on the long run forget this cardinal rule of trading that you have to cut your losses. Market least care who you are and how long you have been in it.There is a general problem with so many investors. They fall in love with their investment after doing so much research and committing so much time for the position to work. Now, day traders are always hit and run types. They have developed an innate sense of discipline among themselves that teaches them when to commit money to a trade and when to cut and run.

When, there is momentum behind a security, it means that it’s price will continue to icnrease as long as it has got momentum. This way by investing in stocks having momentum behind them, you avoid the risk of getting stuck in stocks that might not move for months and months.

When investing, you try to buy low and sell high. In momentum investing, you buy high and sell even higher! One of the tricks that you can learn from day traders is momentum investing. In momentum investing, you look for securities that are expected to go up in prices accompanied by the underlying momentum. Now, when the price of a stock or security increases because of strong demand, it is said to have momentum behind it.

How to you find that a security has got momentum behind it? You can use these technical indicators like the MACD ( Moving Average Convergence and Divergence), RSI (Relative Strength Index) or the Stochastic. A swing trader is also looking to ride a trend as long as it lasts. A trend lasts as long as it has got momentum behind it. Momentum investing is similar to swing trading.

Momentum investing can also lead to bubbles like that happened in the dot com bubble in the last few years of 1990s. It is always a good idea to do some fundamental research on the companies before doing momentum investing.

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Knowing the major market cycles is important for you and your trading system. Each market cycle requires a different approach from your trading system. There are four major market cycles. Adapting to market cycles can improve your profitability.

So you need to understand how to determine market cycles if you want to become a successful trader. Lets discuss these market cycles now. The four major market cycles are: 1) Trending, 2) Consolidating, 3) Breaking out of a consolidation and 4) Corrective.

Remember the saying, Trend is your friend. Trending is when the market starts to move consistently in one direction either up or down. An uptrend means each higher high is higher than the previous high and each lower low is also higher from the previous low. Similarly for the down trend!

Consolidating is when the market is struck between two horizontal support and resistance levels. On a chart, it will look like a sideways horizontal line.

Now what is breaking out of a Consolidation? After the market has been consolidation for at least 20 bars Breaking out of a Consolidation is when there is a sharp increase or decrease in the price.

Corrective is a short sharp reverse in prices during a longer market trend. In addition to these four market cycles, many traders also use Elliott Wave Theory to determine waves which are also an indication of market cycles.

There are five Elliott waves and each one has its own relevance in determining the trading strategy. However, using Elliott Waves is somewhat advanced for most traders. You need to have a thorough understanding and ability to correctly determine which wave the market is in at that point.

Incorrectly identifying the market with either the four market cycles or by using the Elliot Waves can be a costly mistake. For example suppose the market is only in consolidation and you incorrectly determine that the market has entered a trend.

You might enter a trend trade and get immediately stopped out. Your best plan of action should be constant observation. Market experience is the best teacher and only overtime you will be able to correctly figure out the market cycle.

Right side of the chart is always an unknown quantity for the trader until it reveals itself. Hindsight is always perfect but trying to predict the markets can be an elusive and impossible endeavor.

The markets have four cycles just as there are four seasons in a year. You need to learn what the different market cycles are in addition to having a trading system. That means you should develop the skill of correctly identifying the different market cycles at the right time.

If you want to become a successful trader than you should be adapt at identifying the market cycle. Effectively identifying the market cycles is a skill that all successful traders have mastered. You need to learn how to adopt your approach to those cycles to remain profitable. For example in a choppy, sideways bracketed market, you need to adopt your system and rules so that you do not get whip sawed and stopped out a lot.

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The European Union consists of 15 member countries that include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.

Only 12 common currency countries out of these above 15 countries constitute the European Monetary Union (EMU). These 12 countries share a single monetary policy dictated by the European Central Bank (ECB). All these above countries share the common currency Euro except Denmark, Sweden and United Kingdom.

EMU has a highly developed and efficient fixed income, equity and the futures market. The EMU is the worlds second largest economic powerhouse after the United States. This makes EMU the second most attractive investment market for domestic and international investors.

US assets have had solid returns historically. United States absorbs something like 70% of the total foreign savings as a result. In the past, the EMU had difficulty in attracting foreign direct investment or large capital inflows. The primary reason was the United States. The present global financial crisis has hurt the US and EU economies deeply. It is expected that a major restructuring of the global financial system will take place eventually that makes EMU far more attractive.

However, with the EMU beginning to incorporate even more members in Eastern Europe, Euros importance is expected to increase. Induction of new members will further increase the size of EMU. The capital flows to Europe is expected to increase as well.

With foreign central banks expected to diversify their Euro reserve holdings even further, demand for Euro is expected to continue rising. EMU is in fact a trade driven and a capital flow driven economy. Trade is very important to the national economies within EMU.

EU exports comprise almost 20% of the world trade. While EU accounts for only 17% of the world imports! Because of the size of the EMUs trade with the rest of the world, it has significant power in the international trade arena. Unlike United States, EMU does not have large trade deficit or surplus.

Both EU and the United States are two very important members of the World Trade organization (WTO). United States is the largest trading partner of EU. The formation of EU allows individual member countries to group as one entity and negotiates on an equal playing field with the United States. International clout is one of the primary reasons in the formation of EU.

Leading export markets for EU are the United States, Switzerland, Japan, Poland and China. Leading import sources for EU are United States, Japan, China, Switzerland and Russia.

Large numbers of EU based companies concentrate their research, design, innovation and marketing part of the activity in EU while outsourcing most of their manufacturing to Asia. EU is primarily a service oriented economy. Services account for more than 70% of the EU economy while manufacturing, mining and utilities account for around 20% of the EU economy.

It is important for most of the countries to hold large amounts of reserve currencies to reduce exchange rate risk and transaction costs. Most international trade transactions involve the British Pound, the Japanese Yen and the US Dollar.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try Strignano’s Forex Signals free. Discover a revolutionary Forex Robot Trading System!

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As a forex trader you should always watch the news especially if you are trading Euro cross then any news or announcement relating to ECB. ECB publishes monthly bulletin detailing analysis of economic conditions. This bulletin can give important signals to changes in the monetary policy. Forex market participants widely watch the comments by the members of the Governing Council of ECB. These comments frequently tend to move the Euro.

All major euro crosses are highly liquid. Now EUR/USD cross is the most liquid currency. The movements of EUR/USD currency pair are used as the primary gauge to judge the health of both European and the United States health. Euro is also known as the anti-dollar since it is the dollar fundamentals that have dictated the movements in the EUR/USD pair from 2003-2008.

EUR/JPY and EUR/CHF are very liquid pairs too and are used to judge the health of the Japanese and Swiss economies. EUR/USD and EUR/GBP are great trading currencies as they have tight spreads, make orderly moves and rarely gap.

Euro is still a new currency. It was launched in 1999. Euro has unique risks. There are number of risks unique to the Euro. The most important is the exposure to the economic, political and social development of 15 member countries in the EU.

Although more countries are expected to join EMU, however, if a member country drops Euro and reverts back to its original national currency because it believes that ECB actions are not in its best interests, it could affect the stability of the entire region.

ECB has the power to determine monetary policy for its 15 member countries. However, we can say Euro is a currency without a country. With that comes the political pressure of 15 governments. This political pressure frequently tests the actions of ECB.

The present global financial crisis is unlike any in the past. However, the rapid response of ECB to the present global financial crisis in the shape of deep liquidity injections has transformed its reputation. The spread between 10 year US Treasuries and 10 year bunds can indicate Euro sentiment.

Another important interest rate that you must know as a forex trader is the Euro Interbank Offer Rate (Euribor). This is the rate offered from one large bank to another on interbank term deposits. Traders and investors tend to compare the Euribor futures rate with the Eurodollars futures rate.

Lower spreads make the European assets less attractive. Higher spreads between the two rates makes the European fixed income assets more attractive. Merger and Acquisition activities between US and European multinationals have important implications for EUR/USD pair. Large deals if in cash have often significant short term impact on EUR/USD.

Important indicators for Euro are Harmonized Index of Consumer prices (HICP), M3, German Unemployment, Preliminary GDP that includes France, Germany and Netherlands, German Industrial Production, Individual country budget deficit. The largest countries in EMU are Germany, France and Italy. Study of the economic data of these three large countries is also important.

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try Strignano’s Forex Signals free. Discover a revolutionary Forex Robot Trading System!

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