Saturday, February 7, 2009

Index Fund Trading Using Technical Stock Market Analysis

Index Fund Trading Using Technical Stock Market Analysis - What Every Trader Should Know
By: Rockford Tapscott

Index Fund trading using technical stock market analysis can be one of the most profitable...or most costly exercises you will ever undertake.

While trading a basket of stocks has it's advantages, such as removing the risk of any single company you own going bust and taking all of your money with it, stock indexes (on which index funds are based) can tend to be highly volatile, especially the smaller ones.

The S&P 500 is probably one of the worlds best know stock indexes, and it has a long history of strong trends that have made and lost traders fortunes over the years. By trading a managed fund that tracks the index, options over the index, futures contracts over the index or Contracts For Difference (CFD's), we can participate in the movements of the market.

The easiest way to do this (and the system that many mom and dad investors use) is to simply buy a managed fund like the Vanguard 500 Index Fund. This works fine when the trend is up, but what about when the trend is heading in the other direction? There are several mutual funds that trade inversely to their respective index. One of these can be used to trade the downside when prices are falling, as they do from time to time, sometimes quite spectacularly.

The problem with most of these funds is you have no leverage. This is why many traders move on to index fund trading through derivatives such as futures contracts as an alternative to simply buying and holding mutual funds. While the margin for the full S&P 500 futures contract is too high for the average trader, a smaller contract is available called the S&P Emini; which mirrors the larger contract, but is only 1/10th the size. This allows anyone with an adequate account to safely trade this liquid, often strongly trending market.

The S&P Emini futures contract gives you tremendous leverage to movements in the underlying market. Of course, if you have no idea how to trade, this leverage is a double edged sword (and you'll most likely get cut). Index Fund trading means you MUST have a good understanding of technical analysis and have clearly defined trading rules to make it work. It can be very profitable, but you have to learn how to do it right.

This is why learning how to trade profitably is far more important than the vehicle you use. You must possess the skills of profitable trading before the Emini futures market or any other financial product is going to help you create wealth. This is especially true when the concept of leverage is introduced, as it is with futures contracts.

The solution? Make it your goal to find a mentor with a successful track record as a trader who can teach you what he (or she) knows, and you will be in a position to trade profitably. You need to know the difference between trends and counter trends - and then only trade trends. Once you have this training you will know, with a high degree of certainty, what the trend is and how to trade it. The lessons apply equally to both stocks and indexes, and will give you a good grounding in how to trade trending markets

By understanding trends (and understanding technical analysis will teach you this), you will be in a position to enter and exit trades with a high probability of success in any futures market or stock index you choose to trade.

Some of the common mistakes and attitudes that uneducated traders and investors make are:

* Not knowing where to start in trading or investing

* Holding losing trades, hoping they will go back up so they can get out without a loss

* Buying on rumor, tips or gut feel - always a great way to the poor house

* Continually trying to land a 'home run' to make back previous losses

* Closing out positions early as soon as they start to become profitable

* A feeling that the market is against you. The market has no memory; it doesn't know or care about you

* Buying expensive software analysis programs that don't work

All too often, people jump into index futures trading head first without a thorough understanding of exactly how they are going to approach the market. The result is usually nothing short of disastrous. A successful trader treats trading as a business. The first step in the process of becoming a profitable trader is to construct a business plan, much like one that you would use for a conventional business.

A business plan to a trader is known as a trading system, and like a business plan it is used to define the exact strategy of actions that are used to create a profit. The key to successful trading is a properly implemented strategy, not subjective decisions based on your opinion of the market or the news of the day. The three key ingredients to becoming a successful share trader are:

1. A proven trading system; look for RESULTS not hype when choosing a coach or mentor to teach you how to trade. Personal one-on-one coaching is best, so search out a coach who will be there for you

2. The tools to implement the system; don't reinvent the wheel. Use the proven tools your mentor shares with you and get started the right way

3. The ability to implement the system. Profitably trading, especially trading the Emini futures contract, requires a mindset that only a good teacher can install. Without this mindset, you will most likely fail to make it as a trader in this fast paced market.

Learn these three things and you have a wonderful opportunity to build a profitable Emini trading business. Without them, no matter whether you are trading index funds, options or futures, you'll always struggle to make it as a trader.

Monday, February 2, 2009