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Best Online Trading Strategies: Financial Mathematics You Must Know

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By James Glisson


The discipline of mathematical statistics and the measure of volatility of investments are example concepts that have a tendency to scare the average investor. The standard deviation based on the rate of return of an investment is a measure of the volatility of the investment and is a good representation of risk found in stocks and options. It is said in Wikipedia that Karl Pearson, Fellow of the Royal Society, established the discipline of mathematical statistics. Karl Pearson first used the term "Standard Deviation" in writing in 1894 subsequent its use in his lectures. Standard Deviation is considered vital when used for financial issues.

A large standard deviation indicates that the data points are far from the mean and a small standard deviation indicates that the data points are clustered much closer to the mean. When investing, standard deviation serves as a measure of uncertainty. Designated standard deviation of a group of repeated measurements should give the precision of those measurements.

When deciding whether measurements agree with a theoretical prediction the standard deviation of those measurements is of critical importance. There is practical value to be gained when online investing by understanding the standard deviation of a set of values and in appreciating how much variation there is from the average (mean) of stocks, options or the market indices.

In addition, Standard Deviation gives a very good representation of the danger associated with an offered security such as a stock, option or even a portfolio of securities. To effectively manage your investment portfolio, it requires a great handle on the associated risks. Risk is such an important factor because it determines the variations on the returns of the portfolio and gives investors a mathematical foundation for investment choices regarded as mean-variance optimization. Since risk will increase, the anticipated return on your portfolio will increase and the uncertainty of the return will also boost. Standard Deviation offers a quantified approximation of the uncertainty of your long-term returns.

Great trading strategies are enhanced by standard deviation and online investing with options make it even more critical that traders understand and use tools such as standard deviation and Bollinger Bands. Stock options include risks that are not appropriate to all traders making these concepts even more dynamic.

For example, if we are looking for a stock to write a covered call on we will look for a stock with a low standard deviation history. If we are looking to buy puts then we will seek a stock with a high standard deviation. The larger the variance in standard deviation, the larger the risk the security will have. Many technical analysts prefer to use an analysis tool called "Bollinger Bands" which were invented by John Bollinger. This tool is used to measure the highness and lowness of price relative to previous trades in the industry.

Bollinger Bands consist of a middle band being an N-period (usually the simple moving average), an upper band at K times an N-period standard deviation above the middle band, and a lower band at K times an N-period standard deviation below the middle band, where N and K are usually 20 and 2 respectively.The use of these Bollinger Bands are very helpful in recognizing patterns and comparing price actions of stocks and therefore are very useful for making systematic trading decisions. When used with other tools and data, Bollinger Bands are a very effective management tool that has a practical use of standard deviation and its use in making decisions for your online investing.

Wall street considers standard deviation a common concept that all traders need to use regularly. If you are a beginning investor then please consider starting with a complete understanding of these and other investment tools and concepts.

Start your online investing with safe trading. Since traders are at a great loss for education when it comes to both stocks and options, it is a good idea for investors to consider an easy preventive measure. Desiring to be successful with online investing, that measure is to start off your trading with FREE VIRTUAL STOCK TRADING and stay away from shedding any dollars at all until you are at ease with your experience level of trading. This will allow you to practice trading all types of risky trades to get experience before you put your real cash on the line.

Good Luck with your Online Investing!




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