All about investment

Charles Hammer

Investors that want to buy stock but don't want to pay the full price can leverage their purchase by buying on margin. first the investor needs to set up a margin account with a broker, sign a margin agreement, and maintain a minimum balance. Once an investor dose this they can borrow up to 50% of the price of the stock and use the combined funds to make their purchase.

Investors that buy stock on a margin pay interest on the loan portion of their purchase, but they don't have to repay the loan itself until they sell the stock. Any profit that is made is all theirs. They don't have to share it. lets say for example you wanted to purchase 200 shares of a stock that is selling for $40 a share, the total cost of this purchase would come to $8,000. By buying on a margin you would only need to put up $4,000 and borrow the remaining $4,000 from your broker.

If the price of the stock rises to say $60 and you decide to sell the stock then you would make $12,000. Then you pay back the $4,000 you borrowed and you would pocket the remaining $8,000 minus the interest and commissions. That would amount to almost a 100% profit on your original $4,000 investment. Had you used all of your own money and laid out the $8,000 yourself to make this purchase, you would have only made a 50% profit: a $4,000 return on an $8,000 investment.

If an investor wants to leveraging their stock investment they do this by investing with money that is borrowed at a fixed rate of interest in hopes of earning a greater rate return. Leverage lets its users exert a lot of financial power with a small amount of their own cash. Companies use leverage or trading on equity when they issue both stocks and bonds. Their earning may increase simply because they have expanded their operations whit the money that they were able to raise by the bonds. However, they must use some of those earnings to repay the interest on the bonds.

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source:users.search-o-rama.com

by Markus Heitkoetter

In my opinion backtesting can be a very powerful tool if used correctly. The problem is that many trader over-use the functions provided by the different backtesting software packages and think more is better. Many so-called system developers try to imply that the longer you backtest the better and more robust your system will be. That's not always true. Let me use the e-mini S&P as an example.

In 2000 the average daily range was 100-150 ticks per day; in 2004 it was only 40-60 ticks per day. If you backtest any trend-following daytrading system in the e-mini S&P you will see that it worked perfectly until 2002 and then suddenly fell apart. It seems that there are no more intraday trends. That's not surprising as the daily range of the e-mini S&P decreased by more than 50%. What happened? There are a couple of reasons. Probably the most important one is the introduction of the Pattern Day Trading Rule in August and September 2001by the NYSE and NASD: If a trader executes four or more day trades within a five business day period then he must maintain a minimum equity of $25,000 in his margin account at all times. Because of this rule made traders stopped online daytrading equities and started trading the e-mini S&P future instead. Look at the sudden increase in volume in the e-mini S&P in the beginning of 2001: Many of these stock daytraders used methods to scalp the market for a few penny. Using the e-mini S&P they suddenly had a much higher leverage, paying less commissions, and their methods were extremely profitable. Unfortunately, these scalping methods kill an intraday trend almost instantly, making almost every trend-following approach fail.

Another reason for the dramatic change of the market was the introduction of the automated online daytrading strategy execution in TradeStation. In 2002 TradeStation's customers who were using this feature increased by 268%. Overbought/Oversold strategies became very popular and when the market made an attempt to trend these online daytrading strategies immediately established a contrary position. Conclusion When backtesting you need to know these things. It's not enough to just run a system on as much data as possible; it's important to know the underlying market conditions. In non-trending markets like the e-mini S&P you need to use trend-fading systems, and in trending markets like commodities you should use trend-follwing methods. And that's when clever backtesting helps you: If your backtesting tells you that a trend-following method worked in 2000-2002, but doesn't work in 2003 and 2004 then you should not use this strategy right now.And vice versa: When you see that a trend-fading method produced nice profits in 2003, 2004 and 2005, then trade it. I haven't yet seen an online daytrading strategy that works in all market conditions: trending and non-trending. Usually a strategy works very well in ONE market condition (e.g. trending) and produces small losses in the OTHER market condition. That's why you need to alter daytrading strategies. And THAT'S where backtesting can help you.

About the Author

Markus Heitkoetter is a 19 year veteran of the markets and the CEO of Rockwell Trading. For more free information and tips and trick how to make consistent profits with online daytrading , visit his website www.rockwelltrading.com