Any point that sees a shift in the market trend is a pivot point. The numbers that represent these pivot points are called points of support (if they under the trend line) and resistance (if above the trend line). The numbers are key markers in the market, because one says the market is bullish if the trend line is above the pivot point and bearish if it is below.

Experienced traders look at pivot points for indications of price movement and possible price reversals. The result of pivot point analysis gives you a leading — rather than a lagging — indicator of price movement. It therefore gives you in advance an idea of target levels which can often be identical to the actual highs or lows, or even both, during a given trading session.

Calculating the pivot point

The pivot point number is computed by adding up the high, low, and closing prices of the previous day and dividing the sum by three or P = (H + L + C)/3 where P=the pivot point, H=high, L=low, and C=close. This average becomes the basis for the other calculations in the pivot point analysis.

You typically need to calculate two levels each of support (S1 and S2) and resistance (R1 and R2) points. To compute for the first resistance point, R1, multiply P by 2 and subtract L — thus (P x 2) minus L. The second resistance point, R2, is equal to (P plus H) minus L.

To find the first support point, S1, multiply P by 2 and subtract H — thus (P x 2) minus H. The second support point, S2, is equal to (P minus H) plus L.

Essentially then, your pivot point analysis requires the calculation of five points. This can be applied on a daily basis and also to the figures for the week.

What the pivot point means

The Pivot Point number is viewed as the equilibrium price, because the experience suggests that price movements often revolve around the pivot. When traders talk of range-bound days, they are referring to expectations that the price of the share will fluctuate between the first points, R1 and S1. When the actual price breaches either one of these points, then the second points, R2 and S2, are then considered.

When you are trying to determine your entry and exit points, the pivot points considered along with charts, candlesticks and other indicators can be useful. Some traders think it is best to buy a share above the pivot point and never below. The experience is — and many studies support this conclusion — that running contrary to the pivot is the fatal flaw in 7 of 10 investment errors.

On the other hand, you may have noticed that many trading days are range-bound, i.e. moving within the R1/S1 range. For this reason, some other expert traders think it is better to buy into a share at support and to sell at resistance.

As you gain more experience in day trading, you will be able to set your own stops. And by the way, pivot points are equally useful whether you are in shares, forex, metals and other investments.

To get your free pivot point calculator, click here.

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You must have read or heard about how people have made tons of money from trading shares, forex or other forms of investment. There has been no end to advertisements on the web, in the papers, and over the radio, all talking about the profit potential of trading.

All the hype may have given you the impression that trading is as easy as having a computer, opening and funding an account, and that’s it: you start trading and voila, wait for the profits to roll in. It is not quite that simple. The decision to trade should be made dispassionately, with serious consideration of the facts, the risks, and the possibilities. Here are some things to consider:

High risk, high return
Trading in shares can indeed be very profitable, and some people have made huge amounts of money doing so. And, though many people acknowledge that not all of those who trade make money, they also see that it is possible to succeed.

The reality is that the majority of those who try trading do not make money. Statistics indicate that 90 to 95 per cent of traders see their capital evaporate within a year. Yes, many people lose their money from trading. Make no mistake about it: this is a high-risk high-return business.

Small capital requirement
There is the prevailing notion that you need only a small amount of money to begin trading. As a start, trading with a small capital is possible. The issue is not limited to starting, however; it also involves longevity. What is not always told to investors is that your odds of making money are closely and directly correlated with the amount of capital you start with. The bigger the amount you start with, the higher your odds of success.

Think of it as a business. The undercapitalised business is more likely to fail than the business with adequate capital. When starting capital is small, once you lose on a few transactions you’ll already be counted out.

If you have lost your job, what money are you going to use for trading capital? If there is only enough money to cover your living expenses or other important needs, that money should not be used for trading. You’re not only putting your money at risk, you’re also increasing emotional pressure on your trading, which could lead to bad judgments.

Commitment
Contrary to the popular notion, trading requires a lot of your time and commitment. To be even moderately successful, you need persistence and patience to develop your analytical skills to increase your odds for making profitable trades. Trading is not a pastime; it is a business. Like any business, nothing is sure about it and not everybody can do it. The upside is that success is possible.

The downside, however, is that you need to invest not only money but also a lot of your effort and commitment. It is as demanding as any business or any job you have ever gone into. You know what it takes to be successful in your business or career. That same discipline and commitment is important to trading.

Do you have what it takes?

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Aside from buying and selling shares, you can also write (i.e. sell) options. You gain additional income from premiums paid by the purchasers of option contracts. If you take this strategy, it is best to be aware that the upside potential is limited since the most money you can gain is the amount of the premium paid for the option.

You can write options either as covered or naked options. Covered options are written against an underlying stock that you already own. Naked options are written against an underlying stock that you do not own. Writing covered options is the more conservative method.

Writing covered calls (also known as ‘renting your shares out’)
You can increase income on shares that you already own by writing covered calls. This strategy is the same as a call option, except that you already own the underlying shares. Your take on the stock should be between neutral to mildly bullish.

To illustrate by way of example:

Let us assume you own 1,000 shares of XYZ stock originally purchased at $25 per share. Currently the going price for XYZ is $48 a share. You don’t want to sell the stock just yet, so you write call options (i.e. sell options to buy) on XYZ.

Since you have 1,000 shares, you can write 10 call contracts (100 shares per contract) with a strike (or execution) price of $50 per share and at a premium (the price of the option) of $2 per share, to expire in 120 days. You will thus receive $2 x 1,000 shares = $2,000 minus commissions for the contracts.

If XYZ’s stock price never reaches the $50 per share strike price before the expiration date, the buyer of the call option will not exercise the option. You, the covered call writer, will have $2,000 (minus commissions) in your account.

If the stock price does rise above the strike price, the buyer exercises the call option to buy the shares at $50 per share. Your total profit is thus $27 per share ($25 difference from selling price minus acquisition cost of the share plus $2 option premium). If XYZ share price rises much higher than $50, you will not enjoy the additional appreciation because your contract requires the surrender of the shares at the stated strike price.

Whilst writing covered calls can help your cash flow and possible income, it is best to write covered calls on shares which you think will not fluctuate very much upwards or downwards in price. If you consistently write covered call options against your stock, there will be less variability in the results of your portfolio from quarter to quarter.

The downside is that if there is a significant price decline during the option period, the buyer of the option will not exercise the call. If you decide eventually to sell the shares at the low price, you might lose money.

Put options
How do you protect shares you want to continue holding but you fear prices may go down? Buying a put option is a good way to protect the existing profits on your shares and/or limit the potential capital losses in your share positions.  You can make some money from buying put options when the price of the underlying shares drop lower than the strike price.

To illustrate, you feel a bit bearish on CDE stock that’s currently trading at $37 per share. You could buy a five-month put option at $35 per share strike price, let’s say, at a $2 premium or $200 on a contract for 100 shares. If the share price does drop lower than the $35 strike price, you can exercise the put option and sell the shares at the strike price. If the share price remains above the strike price at the expiration, you lose only the amount of premium paid to buy the option. This is the greatest amount you can lose.

The strategies described above are some ways you can increase income from your existing positions and protect your profits.

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Two types of news have repercussions on most financial markets: breaking news events and scheduled economic reports.

A news event — political, social, and military, etc. — may seem far removed from the economy but nonetheless can impact the markets quickly and firmly. The impact may be minor and fleeting, or major and enduring. By its nature, breaking news is hard to predict and may cause some surprise in the markets.

In contrast, volumes of economic data are published regularly in reports that come out on predictable schedules. These reports give you a better picture of the underlying currents that drive the economy. Reserve bank officials use these reports to detect signs of inflation or deflation, and to set interest policy. The direction of interest rates will have a bearing on whether the economy continues to grow or goes into a downturn.

Some of the most awaited regular reports on the US economic calendar are these below.

1. Consumer Price Index (CPI). This is one report you shouldn’t miss because it is the most widely followed indicator of inflation in the country. Government officials and traders around the world watch closely the numbers in the CPI because all of them know that rising inflation could trigger an increase in interest rates. This report is very important for the economy as a whole and for the financial markets in particular. The report comes out on the 13th of each month at 8.30 a.m. EST.
2. Consumer Confidence Index (CCI). This reports the results of a survey tracking the attitudes and perceptions of 5,000 consumers toward the current economic conditions. It can be helpful in forecasting shifts in the economy, thus giving a trader an idea about the direction it is taking. Only index changes of five points or more are likely to be significant. The report is released on the last Tuesday of every month at 10.00 a.m. EST.
3. Durable Goods Orders. This provides information on the strength of foreign and domestic demand for US manufactured durable goods (new or used items with normal life expectancy of at least three years). A rising index suggests demand is strengthening, which could cause increases in production and employment. The report is issued around the 26th of each month at 8.30 a.m. EST.
4. Gross Domestic Product (GDP). This is the broadest measure of aggregate economic activity within the US, covering consumer spending, business and residential investments and price indices. It is a good indicator of overall economic health. A good GDP growth rate is between 2.0 and 2.5 per cent (with unemployment rate at 5.5 to 6 per cent). The data comes out in the third or fourth week of every month at 8.30 a.m. EST.
5. Employment Situation. It gives a rundown on the number of payroll jobs at all non-farm businesses and government agencies, as well as the unemployment rate, average hourly and weekly earnings, and the length of the average workweek. The report attracts a lot of interest because of its timeliness, accuracy, and its barometric importance as an indicator of economic activity. It has a significant influence on the psychology of financial markets during the month.Existing Home Sales. This monitors the selling rate of pre-owned houses, which usually comprise about 84 per cent of all houses sold in the month (new home sales take up the balance). It is a fairly good indicator of housing sector activity, offering a glimpse of housing demand and economic momentum. People buy a house only when they feel confident financially. The report comes out on the 25th of each month at 10 a.m. EST.
6. Producer Price Index (PPI). The index measures the average wholesale price of a fixed basket of capital and consumer goods — which results in a clearer indication of underlying trends in inflation. It has three main categories: industry, commodity, and stage-of-processing. It is important to track the PPI for its monthly stability (after removing food and energy prices). The report is released around the 11th of every month at 8.30 a.m. EST.
7. Retail Sales. The index is probably the timeliest gauge of spending patterns at the retail level, and gives a sense of emerging trends across various types of retailers. The trends can give traders indications of specific opportunities. The data comes out around the 12th of each month at 8.30 a.m. EST.
8. International Trade. The report measures US export and import trends. The report is released on the 19th of each month at 8.30 a.m. EST.Purchasing Managers Index (Chicago PMI).  The index is the result of surveys on more than 200 purchasing managers in the manufacturing industry. The crucial level is 50 per cent: readings above that indicate expansion in the factory sector; readings below indicate some contraction. The report is released on the last business day of the month at 10 a.m. EST.

These reports are very relevant indicators of economic performance, but not the only ones. It always helps to read the fundamental announcements before starting to trade. There is usually some volatility in the financial markets before the release of regular economic reports.

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Many people have asked the question “Is there a certain type of personality for winning traders?” Ask a winning trader and he’ll most likely say, “No.”

There simply is no personality type that is better for trading than any other type. But among the things winning traders have in common, you will find that they have the ability to assess with total objectivity the effect their personality has on their trading.

They know that if you know your particular traits, you can develop a trading system that best fits your personality. This in turn increases your chances for trading success. In short, to become a better trader you need to find your trading personality.

As in many aspects about life, self-knowledge is the single most important determinant in trading success or failure. You can trade any product successfully, using any timeframe and methodology. Your success will hinge greatly on this: that you choose the trading timeframe that best fits your personality.

If you are the type who needs instant gratification, long-term trading will not suit you and you may find it more profitable to focus on making short-term punts using the technical charts. If you are the patient type willing to wait weeks at a time, you may be very comfortable doing long-term trading. Successful trading needs you to be in your comfort zone.

If you are not certain about the trading style that you’re most comfortable with, examine the record of your trading history over the most recent two-three months. Try to assess the types of trades that were apt to catch your attention. Look at your entry points; why do you think you bought into that particular share at the time? As you review the transactions, you are likely to find an underlying theme — a theme that ultimately is influenced by your personality.

Look at your record of gains and losses. Is there a revealing pattern? There must be one. There must be certain trading situations that give rise to the bulk of such gains or losses. Determine the trading styles that resulted in profits to you, and the ones that did not.

The next step should be obvious. Concentrate on doing better. Take the style that has given you good results and try improving it some more. Discard the trading style that does not work for you.

It is possible to transform yourself into a winning trader by becoming more finely attuned to your physical and psychological reactions to various trading setups. This way, your emotions will not be the basis of your reactions; rather, you learn to use your psyche to help map out your subsequent moves.

If you don’t do that, you might end up having your emotions controlling your trading moves. Don’t you think that by recognising how your personality reacts, you will learn to use your personality characteristics to develop trading patterns that make your trading activity more productive?

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There are many successful day traders making a living completely from trading the market. There are also a lot of traders that give up after making a few losses. So how can you become one of the successful people, and what would you need to do differently?

A lot of people do not take trading seriously enough; it becomes a hobby that they follow for some time until the losses add up. In fact, if you want to succeed in day trading, you will need to commit to yourself that you are now in a business that you need to take seriously.

If you are trading from home, how is your office setup? Do you have a clear space planned and everything organised? If your physical workspace is planned, then your mind will also be planning for successful trades. Make sure you have a stable, reliable and up-to-date computer, with a fast internet connection. There is nothing worse than having to close a trade but being distracted by computer issues!

Is your mindset prepared for your day trading? Losses can and do happen. Are you prepared to take a loss? Work out how you will deal with this loss before you place the trade. If you think the risk is too great, then consider an alternative strategy. There is nothing worse than having to take a massive loss (or leaving a trade open with a massive loss because you have gone into denial).

The best way to organise your mindset for trading is to set (and stick to) a clear trading plan. What is your stop loss on your trade? What is the required gain?

Day traders have the opportunity for large returns, but they certainly earn their money. Day trading requires constant research and review of the financial markets. You will either be tuned into CNBC on a regular basis or keeping a abreast of sites such as finance.yahoo.com, cnbc.com and earnings.com.

Do you think you are ready? Make sure you have sufficient education before you start day trading. Paper trading should be an ongoing process that will build up your confidence level. Good luck!

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With so many options out there, it can be a little daunting when it comes to decide what you should invest your savings in. At the end of the day, it is vital that you spend your time investing in something that both has a realistic return on your money and an area that you will enjoy.

Become aware of what you area of finances you enjoy researching the most. Do you like looking at real estate or would you prefer staying at home trading the market? What will you feel most confident doing? One of the most important lessons to learn is to not rush ahead unless you are truly confident with your decision.

If stocks and options that make you tick, make sure you conduct plenty of paper trading before you put real money on the table. You will also need to identify what type of investor you are: a day trader, short term trader or a long term investor. In order to make your decision, look at your current situation and breakdown how much free time you have.

If real estate is your direction, have you researched the areas that interest you to see which give you the best return? Will you become the buy and hold investor, waiting for the long term capital gains, or the buy, renovate and sell investor, where you add value to the property in the short therm?

I believe there is a balance between rushing ahead and making foolish decisions and letting opportunities pass you by. It is your job to do adequate preparation so you can act at the right time for you. For any decision you make, the amount of research undertaken will reflect the amount of confidence you will have in your decision.

Related articles

• Trader says buy and hold is dead . . . until it’s not (dailyfinance.com)
• Thinking Like a Trader (popdose.com)

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The word “options” is becoming more a typical term mentioned for the everyday investors, but how options actually work are still widely misunderstood by many.

Stock options are considered a contract that allows the buyer to buy or sell an underlying stock at a predetermined / fixed value. This however is only an option to do so, and there is no obligation whatsoever. The other aspect of an option is a time value. If the buyer does not take the opportunity to do anything with their option, at the end of the options life, it simply will expire worthless.

Options can be broken down into two distinct types:

Call options (locking in your buy price) – The value of a call option will increase in value as the stock climbs. If you own a call option, you are given the right to buy a certain stock at a preset price within the timeframe of the option.

Put options (locking in your stock sell price) – the value of a put option will increase as the stock falls. If you own a put option, you are given the right to sell your stock at a preset price within the timeframe of the option. This is therefore used as an insurance value for your stock.

If you do decide to buy options, you need to identify why you are doing so. Is it because you think a stock might skyrocket shortly, so you buy a call and lock in a buy price? Or do you own stock and are concerned about the stock falling overnight? Or are you simply trading the value of the option?

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One of the most important things about taking the step into developing your financial literacy is making sure that you are approaching life with a wealthy mindset.

Thinking ‘big’ is critical. Can you think of the overall picture of your life? Where has it currently taken you? What choices have you taken to bring you towards this path? What choices can change your path right now? What can you discontinue right now, and do differently?

We often set our self up for disappointment, even when we have the best intentions of bringing about a successful result. Take for example, a situation where you were not happy with the outcome, or perhaps a project that didn’t quite go as expected. As you were progressing towards this outcome, did you foresee this happening, and did you doubt yourself? (Concerned that it would come to fruition)?

To truly unlock our full potential, we need to be aware of our thoughts. Take the movie “The Secret” as an example. Some will agree, and others may disagree with the content covered in this movie. But there is one thing we cannot deny. That is: our emotions play a big part in our life. When we feel good, we believe that something in our environment has triggered us to feel that way, as do we feel the same way with negative emotions. They explain that most people’s emotions are on ‘autopilot’ allowing our emotions to be changed automatically. “The Secret” concept is about becoming aware of our thoughts. If we focus on changing enough thoughts, then our feelings naturally change too, then changing our perception of our environment.

If we are talking about wealth, we need to identify our negative and limiting thoughts about the manifestation of money. We need to think outside the box and leave the heard of the sheep behind. Two different people with totally different mindsets can assess the same situation and read completely opposite outcomes. Some people won’t even consider or think about potential pathways that others have taken. Some will let fear control them; others will be taken too far with greed. Control our thoughts & our feelings will alter. Do you have a healthy relationship with fear and greed? What can you do to change?

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The credit crisis has hit us. Homes are being foreclosed and the stock market is volatile as ever. Strong blue chip companies are hitting unprecedented lows – prices we have not witnessed for many years. Financial companies are going bankrupt and the crisis is now affecting other industries. Mutual funds, superannuation / 401k’s are losing value.

What effect has the credit crisis had on you? In one way or another, the majority of people have lost money. The question is, how have you coped emotionally with having to deal with a loss in your trading bank / your home or your retirement fund? Are you losing sleep? Have your stress levels increased? Is it putting pressure on your family?

It’s a difficult situation to deal with, but you aren’t the only one facing it. The most important thing you can do is not to let it become your primary focus. Yes it has caused you stress, but your health is far more important than money.

It’s time to refocus your mind. Take a break, focus on another part of your life that gives you joy. Perhaps it’s time to re-discover an old hobby, or spend more time with your friends/family. Remember, we cannot get back time, but money lost can always be made back. Perhaps this crisis can be your trigger for change and inspiration. What can you now do differently? It’s often when our daily comfort is threatened that causes people to change their situation for the better.

So next time you feel yourself becoming overwhelmed with concern and stress, turn it around. This can be the best thing to happen to you! There is always opportunity, regardless of the market condition or economy. So what opportunities are you going to seize, and what have you or will you achieve? Your comments are welcome.

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