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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Futures market is a highly regulated market with the CFTC responsible for its regulation. Buyers and sellers don’t come in direct contact with each other. In between is the Central Clearing House that enforces the contract reducing the risk of party default! Futures contract as the name implies is a binding contract between two parties for the delivery of a commodity or an asset or even a financial instrument at some future date between the buyer and seller of that contract.

Futures market is the backbone of the whole sale and retail commodity market ranging from oil, wheat, corn, heating oil, meat, cattle, soybeans and other foodstuff. So you can well imagine the importance of the futures market. Futures market serves the purpose of hedging and speculation.

These contracts get regulated through a central clearing hours so the risk of one party backing out of the contract is minimal. This limits the time and risk exposure experienced by hedgers and speculators. Now, futures contracts are by design time bound and expire at a fixed date.

In the last decades, electronic trading has become highly popular among the traders. This includes futures as well. So, now you can easily trade these contracts by opening an account with a FCM brokerage and deposit an amount to start trading these contracts on margin. The minimum amount with most of the brokers is something like $5,000 but it can less too! Brokers allow leverage upto 10:1 when you trade on margin. Compare this to the leverage of 2:1 allowed by stock brokers.

In US, open outcry trading still takes place during the official hours at the different futures exchanges. However, most of these futures contracts also get traded electronically. GLOBEX allows electronic trading of most of these futures contracts 23 hours each day. Electronic trading provides a more level playing field, more price transparency and lower transaction costs.

The popular contracts that get traded on GLOBEX are the E-minis like the S&P 500, NASDAQ 100 and Dow. You can also trade E-mini gold futures as well as crude oil futures on GLOBEX. CME, NYMEX and CBOT are the three most important Futures Exchanges. GLOBEX allows you to trade most of the contracts that get traded on these exchanges.

Now, GLOBEX trading continues during the night after the official close of CME, CBOT and NYMEX at 4:15 PM EST. However, overnight trading can be thin and highly volatile as compared to the official hours. You can find GLOBEX quotes on CNBC and Bloomberg!

These quotes are real time. Futures trading can be highly profitable but risky as well. Before you dabble in them, you should paper trade these contracts for at least a month just to get a feel of how to do it. There are many contracts that you can trade and the possibilities of making money in futures trading are immense. Imagine the prices of crude oil going up again just like what happened in the summer of 2008!

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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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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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Using this method will be a way that people will know how and when to invest in the right stocks. Which will offer the best chance at profits, and how well they have done in the past will be figured into that strategy.

People who use this method are not forecasting what will happen but they are following a trend and using it. This method will use three main components. Current price of stock, equity level and current market volatility. How much you buy or sell will be determined prior to buying of the stock and be based on volatility.

This type of method will be used only after the stock has established a trend. In other words not on a new stock that hasn’t yet established any type of trend to it. Price will be one of the main considerations in this method. A person who trades through this method may use indicators to figure out which way the stock will go next.

Also how much will be traded during the trend will need to be figured out as well. If the market is at high volatility though trading will most likely be reduced in order to cut the losses on the trades. If you use trend following indicators, price and time are always going to be very important.

The following questions will be able to be answered when you use this type of method. Shares that will be traded during the trend, how to enter the market and at what time. Risk to be taken on each trade, cutting of unprofitable stocks, and how to get rid of profitable stocks.

Find more on ETF trading system and ETF trend trading.

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Short ETFs are also known as Inverse ETFs or Bear ETFs. During the past few years, the number of Short ETFs has risen dramatically. Short ETFs not only cover the major stock indices like the S&P 500 or the DJIA but also different sectors like the energy, utilities or technology. You will even find Inverse ETFs on currencies now.

Most of the ETFs are designed around some market index. ETF shares trade like ordinary stock shares. You can buy them. You can sell them unlike the mutual funds that can only be sold at the end of the day. The ProShares UltraShort Dow 30 ETF (DXD) rises 2% when the DJIA falls by 1%. So you can even find leverage short ETFs. A leveraged short ETF gives the trader leverage without the use of margins.

Over the years, short ETFs have risen in popularity with the investors and hedge funds. Short ETFs give you an excellent opportunity to profit from the volatility in the market and the major indices.

Before the introduction of short ETFs, a trader had to actually short sell stocks to take advantage of a market drop. Short ETFs are a great product as they have created new opportunities for traders.

Traders are not allowed to sell short stocks or ETFs in their retirement accounts. In the past if the market was dropping, the trader had to go against the trend and buy or else move into cash or fixed income. Short and leveraged ETFs provide traders with new opportunities.

Ever wanted to trade international stocks? Emerging markets give a higher rate of return as compared to the mature economies. China is one example that garners a lot of attention. The Shanghai Index in China rose 100% in 2007. In the first quarter of 2008, the Shanghai Index was down 35%. ETFs also provide you with the opportunity to take advantage of the global market swings.

In the past, traders who wanted to benefit from the fall of Chinese stocks could only short Chinese stocks that were traded in US Stock Exchanges. The ProShares family of ETFs introduced the Ultrashort FTSE/Xinhua China 25 ETF (FXP). Now if you want to trade the fall of Chinese stocks, you can trade FXP ETF.

Assume you have a portfolio of $100,000 composed of 75% stocks and 25% money market fixed income. As a long term investor you can take advantage of short ETFs to hedge your portfolio position.

As a long term trader, you are interested in the long term forecast for the market but still do worry about the short term trend in the market as it has the potential of wiping out your portfolio. The forecast of the market for the next six months is not good. But you are reluctant to sell your stocks due to tax reasons. Suppose the market falls by 10%. Your stock portfolio falls by 7.5% assuming the same ratio between the market and your portfolio.

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So how do you cater for this fact that markets keep on changing all the time. For that, you will need to develop a diversified trading system consisting of a set of trading systems that can be used as a basis for a specific trade tactics at any given moment.

Such a diversified trading system can be used according to a trader’s free choice and considering the individual situation. Trading systems based on these principles can be complex and adjustable.

Such a diversified trading system can be optimized for current market condition and the trader’s resources at any given moment. This optimization can provide an effective evaluation of market shits and trends at any given time.

The only thing necessary is to find the tools for the probability evaluation for the trading system with maximum accuracy and minimum time. The optimal solution could be a diversified trading system based on the natural market features and regularities. A trading system needs to be evaluated by calculating its win ratio over let’s say at least 100 trades.

Mechanical trading is good in the sense that it helps you avoid emotions in making your trading decisions. Emotions are your biggest enemy in trading. Fear and greed will always force you to make wrong trading decisions. Developing a mechanical trading system with a set of trading rules that you can apply rigorously in making your trading decisions in any market condition should be your goal. Have you ever heard about the turtle trading experiment?

If you have a good trading system, you can become a highly successful trader. Turtle trading experiment was conducted to demonstrate the fact that it’s not the trader that matters; it’s the trading system that matters.

You must have played different sports in your life. As a young person you must have learned that just by observing good players play their games you could improve your level of playing tennis, golf, badminton, swimming or for that matter any type of game. Just by looking and observing at good players, you can improve your game. What you need to do is learn from successful traders and try to copy their trading systems.

The same principle applies in trading. Have you heard about the Surefire Trading Challenge? Surefire trading challenge is held after every few months. The winner gets a cash prize of $5000. In every tournament thousands of forex traders take part from all over the globe. The most interesting thing is that most of these traders are part time traders and not professional traders. The top traders have an ROI of almost like 2000-3000% in one month. You need to take a look at these 25 forex trading systems that had emerged on the top of more than 5000 traders who had taken part in a recent forex trading championship. The best forex trading system had an ROI of almost 3000% in one month. By observing the trading systems of successful traders you can also develop your own highly successful trading system.

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George Soros is a famous name in the world of investing. He had always believed in contrarian investing. Contrarian investing means doing exactly opposite of what the crowd is doing. George Soros had this intuition that the Bank of England would be forced to devalue British Pound. So he bought call options on German Marks and put options on British Pound. He made a bet of $10 Billion by leveraging all the assets in his hedge fund.

Bank of England had made a number of public statements regarding its intention of staying within the EMU. When George Soros made his bet on the intrinsic weakness of British Pound, other currency speculators followed suit and placed their bets too. This build up an immense selling pressure on the British Pound! Bank of England was brought to its knees as it was unable to sustain the immense selling pressure on the British Pound within a few days of the speculative attack on the British Pound. Bank of England was forced to devalue British Pound in a few short days.

In a matter of a few days, George Soros made a cool $1 Billion profit on his bet. Can you make such a bet? Maybe not but this one example show the immense power options have if used correctly. Options are risky; there should be no doubt about it.

Trading options has become hot in recent years especially after the recent stock market crash. What are options? Options derive their value from the underlying asset or security on which the options contract is based. Options contract give you the right to buy or sell an underlying security like stocks, futures, commodities or currencies at a price before a certain date. This price is known as the Strike Price. This date is known as the Expiry Date. However, in European Style options you can only buy or sell on the expiry date not before that. Most people who trade options lose money, plain and simple.

Trading options without training is risky. You need to learn the Options Greeks. One of the important things that you need to learn while trading options is the importance of time factor. Time factor is very important when valuing an option. Further out the options contract is from expiration, you will have to pay a higher premium. As the options contract approaches the expiration date and if it is out of money, it loses its value very fast.

LEAP stands for long term equity anticipation. Have your heard about the LEAP options? So what are LEAP options? It basically means that the option is much like the regular option except that the timeframe to expire is greater than 1 year. LEAP options are basically long term options. Leap options can help you profit over the long haul. You can use LEAP options in options strategies like the covered calls, straddles, spreads and so on.

LEAP options can be incredibly profitable if used correctly. However, LEAP options are risky because the option writer usually demands a hefty premium for taking on the long term risk. The buyer of the LEAP options has the right to exercise the option prior to expiration should the price of the underlying stock move in the money. Long timeframe means that the possibility of the LEAP options moving in the money is always high hence a high LEAP options premium.

LEAP options can be a great trading vehicle for swing traders as they mitigate some of the time decay that is inherent in short term options. See, closer the out of money option is to expiration, faster its value drops. What this means is that the buyer of the options loses the premium that was paid for getting the right to buy or sell the underlying security.

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You will realize the necessity of switching over to the systems trade in order to lower the psychological pressure experienced when making every market transaction. You will find most of the trader using a trading system approach to trading. Some of them may use a discrete trading system while others prefer a mechanical trading system.

Once you have a mechanical trading system you can easily develop it into an automated trading system. The mechanical trading system set of rules may be translated into a computer program for automated trading. However, the mechanical trading system lacks fundamental analysis capacity.

The trading system then generates trading signals that can be used by traders having access to the trading system. The creator of such a mechanical trading system then becomes just another user of the trading system monitoring the computer generated signals.

Developing these automated forex trading systems is the name of the game these days. These automated forex trading systems are also known as forex robots. These trading systems may be taken as grey and black boxes. Their prices might vary from a few hundred dollars to hundred of thousands of dollars. Many traders over their trading careers develop their own trading systems. Besides the traders using their own trading systems, there are now many actively developed trading systems for sale as computer programs.

One way is to develop these forex trading systems and use the trading signals generated by them in your trading. The most significant thing about these programs is that the traders should be able to accomplish transactions in accordance with the signals generated by the trading system. The other solution is to completely automate these forex trading systems. Sometimes theses trading systems are developed for big banks and corporations.

However, it is very difficult for a mechanical trading system to cope with different market conditions. Majority of the successful individual traders use self developed mechanical trading systems.

Change of market behavior leads to negative results from a previously effective trading system which obviously would require replacement. For example, many trading systems that are satisfactory in trending conditions become highly ineffective in nontrending environment. How do you deal with the challenge of changing market situations? This is the most serious challenge that automated forex trading has to solve. One way is to use a diversified forex trading system.

The most common disadvantage of these trading systems is the negative balance between the profitable and unprofitable trades. Many trading systems now depend on complex mathematical formula which is not understandable by the trader if the trader is not the author of the trading system.

What you need is a forex trading system that is profitable in the long term. In other words, it gives more winner than losers. Obviously the trading system can only be profitable in the long run if the ratio of the profitable trades is higher than the non-profitable trades. In other words the average profit of each profitable transaction is greater than the average loss of each unprofitable transaction.

The trader must accurately and unconditionally follow the trading system without making any attempt to adjust it to the market conditions. Making correction in any mechanical trading system in the process of the trade is almost impossible.

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Suppose you are using the RSI technical indicator that is giving a crossover sell signal. All signs are pointing towards to at least a small pullback. You feel that the stock ABC is overvalued at $60 and at some point in the near future the market will make a correction.

You place an order to short 1000 shares of ABC stock at $60. 1000 shares of stock ABC are sold at $60 and $60,000 is placed in your account. Over the next week, you are jittery as the stock ABC instead of going down climbs to $65.

However, you have catered for this eventuality by placing a stop loss at 10% of your account. This comes out to be $6,000. So the stop loss is not triggered and you are still in the market hoping for the price to stop going up.

You are prepared to lose $6,000 in anticipation of a stock price tumble as your technical indicators are giving you the sell signals. If the price goes up to $66, your stop loss will be triggered and you will be out of the market.

Suddenly on the release of a disappointing earnings report, the stock price tumbles 20% in one day. Now most earnings mishaps last a few days. So you wait and don’t cover your short position for the next few days.

You decide to cover your short position, stock ABC price falls to $45. You need to buy back the 100 shares of ABC that were sold short earlier at the market price of $45 in order to close your position.

With this simple example, you should be able to understand the mechanics of short selling stocks. You pay $45,000 to buy back 1000 shares of stock ABC and return them to your broker. So your net profit in this case is $60,000-$45,000= $15,000.

In reality, you paid $45 per share to buy ABC stocks and sold them at $60 per share giving you a profit of $15 per share. Assume that you had bought the stocks for $45 per share and sold them at $60 per share, the same profit would have been made.

The goal of buying a stock is to sell it at a higher price in the future. When you short a stock, the goal is to sell it at a higher price but in the case of short selling stocks, selling takes place first instead of buying.

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