I have always wanted to do a site for fake trading stocks and options, but I get it started and just don't take the time to polish it up.

I recently found a site that does just that and has an excellent interface and layout. It is called The UpDown. Basically, you sign up and get a $1,000,000 of fake money and you can make trades. What makes this site different is the communication and analysis tools.

Why The UpDown Is Great

It almost feels like a real web brokerage with the various tools you can use to research the stock. It also allows you to post your analysis of the stock when you do a trade (or even if you aren't doing a trade). These short analysis articles by users are viewable by all and have a rating system. You can see the top rated ones for bullish and bearish perspectives. You also can see the other users' performance and portfolio values.

You Can Earn Real Money!

On the site, they describe how you can earn money fake trading. Basically, you have to outperform the S&P500 over a given time period and refer friends to use The UpDown.

I'm going to try my hand at it to see if I can learn more and maybe get paid out a few pennies here and there.

Areas Of Improvement

First of all, I live in Canada. I cannot trade any of the TSX stocks on there yet. Some of the stocks that are traded in both countries make it not a big deal (like the Nortels and the RIMs), but it would still make it a lot more useful.

Secondly, there are no options. This would be quite handy to test out more aggressive trading strategies.

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Well, I decided to get back to my stock picking exercises on a more regular basis to see how it goes. Lately, I have been playing with the StockScores method. You can read more about it in my StockScores and Analyzing Stock Picks article. I have yet to get it to work consistently by the way, but I haven't given it a fair chance yet either.

On August 24th, 2007, I picked Polar Resources on the Venture Exchange here in Canada. (VLR is the symbol). You can read about my reasons in the Polar Resources article. Basically, it fit criteria that I thought were a good fit for the StockScores method. This would be good StockScores, good chart pattern, and unusual volatility.

Anyhow, I am sad to say that, as of August 30th, it halted trading. The news release on the TSX website stated it was because of pending news, but that has not come out yet.

So this is definitely the worst paper trade I have had so far with this method. A full loss at this point as I cannot even sell the stock. The only thing worse is if they actually went off the market. I will wait and see where it goes. If there is positive news, then things might be all good.

Where Did I Go Wrong?

As far as using the technical indicators, I think it was still a good pick. Stockscores does not look at the fundamentals, but if I had, I would have noticed it has a negative earnings-per-share right now. But because of the positive technical indicators, it suggested perhaps a positive announcement was coming out.

I'll revisit this stock in a couple weeks or when it goes back trading once the 2 weeks now, pending news comes out.

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It has been a while since I did the stock picks, so I think I'm going to get back into it. I'm in the process of developing another side of my website that caters to this sort of thing. I find that paper trading is difficult to keep up with. An organizational scheme and a bit of automation should help with it.

Anyhow, I was playing with the StockScores website again and came across Polar Resources Corporation. This is a stock by the symbol of PLR that trades on the TSX's Venture Exchange.

If you remember my articles on StockScores, then you know that it takes certain criteria to make a stock worth picking in their system. I'm still trying to see if I can paper trade (fake trade) using this system and get some sort of steady results.

PLR has a signal score of 98 and a sentiment score of 73 at the end of today. This is worthy of taking a look when it has these scores. Looking at the graph, you can see that it recently broke through to a new high price on unusually higher volume of trading and has been increasing consistently over the past 6 months.

PLR

If I bought into the stock today, I would pay $0.265/share. I would also say it is reasonable to expect support at $0.17. If it falls below this, it would be time to sell the stock, no questions asked.

So let's pretend we purchased the stock and I will recap in a week and a month where it has gone.

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This is part of my recap series for stocks I selected based on the StockScores strategy. If you didn't read the original article, here it is.

Stock Picks for February 16th

I wrote another article on this strategy called StockScores and Analyzing Stock Picks. The basics are certain statistics being in the recommended zones and a good chart pattern. I wanted to prove this strategy for myself and try paper trading.

Recap of My Picks

If I sold everything from the 16th today I would have had an actual return of -14.6%. The markets have been brutal so read on to see why.

All my picks met the criteria of a StockScores Sentiment score of at least 60 and a Signal score of at least 80. These are two numbers calculated and provided free of charge by StockScores Analytics using there "secret" formula.

The first was ETG on the Toronto Stock Exchange (TSX). It broke resistance. Bought at $2.03 and put in a stop loss at $1.75.

Since Then: Last traded at $1.60. Nothing but down.

Action: I would have sold at $1.75 and taken a loss on the position.

Where Did I Go Wrong? There was resistance in November at a little over $2.00. This could have limited the gains. I think the biggest problem with this stock in the short term was a small upside in comparison to the downside.

T.ETG

Next up is TTH on the TSX. It had recently broke through some resistance and had dropped. I thought it was a good opportunity to buy a correcting stock and then ride it farther up. Buy at $2.20 and stop at $2.00.

Since Then: It did go up to $2.30, but has since dropped to $1.88.

Action: It was sold. Another loss.

T.TTH

Now for PTM. This trades on the TSX as well. It was classic. Broke out on high volume. Buy at $2.98 and stop loss at $2.55.

Since Then: Big drop shortly after my buy, but not too my stop loss. It is down to $2.58 right now.

Action: Hold on, but keep a watchful eye.

T.PTM

Last is CPX on the TSX. Broke resistance on volume. Buy at $6.83 and sell at $6.00.

Since Then: It has slowly dropped since it's big spike. Trading today at $6.14.

Action: Hold on, hold on, hold on.

T.CPX

Overall

Here are my overall numbers. We will assume I put $2,000 into each stock and paid $30 on commission when I bought and would pay the same if I sold. If I exited all my positions from the 12th today. Here are the numbers.

Stock	Purchased	Sold	Change	Profit After Commission
T.ETG	$2.03	$1.75	-13.8%	-$335.86
T.TTH	$2.20	$2.00	-9.1%	-$241.82
T.PTM	$2.98	$2.58	-13.4%	-$328.46
T.CPX	$6.83	$6.14	-10.1%	-$292.05
Total			-11.6%	-$1168.19

What a brutal set of picks. For your information though, the market has been dismal the last couple days. There has been turmoil overseas and the DOW had its biggest one day drop since 911 five years. When I factor in my commissions I would suffer a loss of -14.6%. Also, I would have only held on to 2 of the stocks, so I would have the leftover money from the sales to enter into new positions in the future.

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Okay, this is my first recap of my stock picks from February 12, 2007. If you did read that post, here it is.

Stock Picks for February 12th

Basically, I am trying a strategy I learned at a seminar put on by StockScores. Tyler Bollhorn was the speaker and it was a very interesting look at technical analysis. I wrote another article on this strategy called StockScores and Analyzing Stock Picks. The basics are certain statistics being in the recommended zones and a good chart pattern. I wanted to prove this strategy for myself and try paper trading.

Recap of My Picks

If I sold everything from the 12th today I would have had an actual return of -2.6%. Read on to see why.

All my picks met the criteria of a StockScores Sentiment score of at least 60 and a Signal score of at least 80. These are two numbers calculated and provided free of charge by StockScores Analytics using there "secret" formula.

The first was THR on the Toronto Stock Exchange (TSX). I said the stock looked like it was trending up. I purchased it at 11 cents and had a stop loss if it went below 9 cents.

Since Then: Last traded at 10 cents. It has gone as low as 9.5 cents but has not crossed the stop loss threshold. I would still be holding on to it and today it had a 72/69 Signal/Sentiment. It looks like it is ready to make a move in one direction in the near future.

Action: I'm going to hold onto it and we'll look at it again in the next review.

T.THR

Next up is HNT.UN on the TSX. It had recently broke through some resistance and things looked positive. I purchased at $2.74 and my stop loss was $2.40.

Since Then: It did get up to $2.80, but has gone back down to the $2.70 I purchased it at. The Signal/Sentiment is 63/67. It looks like it has leveled off for a bit after its burst through resistance.

Action: I will definitely hold this for a bit longer to see what happens.

T.HNT.UN

Now for RBO.UN. This trades on the TSX as well. It had broken through resistance on lots of volume just like a good stock is supposed to, so I had a buy at $9.35 and a stop loss at $9.00.

Since Then: It went a little bit higher after I purchased, but has slowly gone down since. Closed today at $9.10. Only 10 cents until my stop loss. The Signal/Sentiment has gone to 64/70 as well.

Action: Same as the rest so far. Hold on.

T.RBO.UN

Last is EMC on the TSX. It broke through resistance on a ton of volume on the 12th. I had a buy at $11.38 and the stop loss was $10.50.

Since Then: This has been the most interesting stock since then. It cleared $14 shortly after. It has dropped recently and is down to $13.05 as of today. This is still pretty good though (14.6% before commissions). However, what will happen next?

Action: Hmmm, this is a tough one. Can get out with money and feel like a real winner, right? Exit strategy was not taught by Tyler in the seminar. Signal/Sentiment is still 79/76, which is pretty respectable. I would be tempted to hang on, but it has dropped off pretty good of late. I am going to hold though. I think it has more room to grow.

T.EMC

Overall

Here are my overall numbers. We will assume I put $2,000 into each stock and paid $30 on commission when I bought and would pay the same if I sold. If I exited all my positions from the 12th today. Here are the numbers.

Stock	Purchased	Sold	Change	Profit After Commission
T.THR	$0.11	$0.10	-9.1%	-$241.82
T.HNT.UN	$2.74	$2.70	-1.5%	-$89.20
T.RBO.UN	$9.35	$9.10	-2.7%	-$113.48
T.EMC	$11.38	$13.05	14.7%	$233.50
Total			1.5%	-$210.99

Okay, before you scream out load. How is it possible I have negative profit but positive percentage change? Overall, my one gainer outweighed the three losers, but my commissions would eat into all those gains. With the puny little $2000 I am putting into these stocks, the commission eats up 3% of my initial purchase price. I calculate this by taking my stock costs (4 x $2,000 into each stock = $8,000) plus the commissions (4 x $60 = $240) for a total investment cost of $8,240 and dividing into it my gains/losses which are -$210.00. So my actual return is -2.6%

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Well, here are my picks for today. My first ones aren't doing so hot, but I will review them in more detail in a couple weeks. Give them some time to settle in to whatever trend they are going to show.

Picks For Today

T.ETG

Broke through resistance and large volume a few days ago. Buy at $2.03 and stop loss at $1.75. The upside looks like it could go as high as $3 so I'm thinking this is a good buy.

T.TTH

I'm breaking from my judgement here, but we'll see what happens. This has been on a good run and recently did a dip. I'm thinking it will continue its upward trend in the near future. Buy at $2.20 and stop loss at $2.

T.PTM

They broke up again on high volume. Buy at $2.98 and stop loss at $2.55

T.CPX

Big breakthrough today. Don't know what is going on. Buy at $6.83 and stop loss at $6.00.

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I'm trying to learn the StockScores techniques I learned at a seminar last week so this will be my new thing.

Every week I am going to pick a few stocks that I think will go up in the near future and keep track of them. I always same I'm going to do this, but end up quitting after a week. This will force me to keep track better. I am going to assume I put $1000 into each pick and the commissions will be $30 on a buy and $30 on a sell. I will post a summary periodically on what has happened.

I explain why I am picking each stock, I will "pretend" buy it for the last trade price and I will also set a "stop loss" price for each stock. If it ever gets to that price, I will have assumed that I sold it then. I will follow my stocks every week and pick and exit point whenever.

Note: These charts update every 15 minutes, so keep in mind the day of this post. Any chart activity after that day I would not have seen yet.

Picks For Today

Note: There is a recap of these picks and what happened in Recap of Stock Picks From February 12th 2007.

T.THR

Resource sector. Was gone down the past while, but is trending up. Rising bottoms look like they forming a penant. I would expect it to break through this week sometime. Buy at 11 cents and stop loss at 9 cents.

T.HNT.UN

A real estate trust. A few days ago it formed a penant chart pattern and broke through resistance on lots of volume. I am going to buy it at $2.74 and my stop loss will be at $2.40.

T.RBO.UN

Another trust. Broke through resistance a few days ago with lots of volume. I am going to buy at $9.35 and my stop loss is $9.00. Upside doesn't look like it could be as big as the downside, so I'm wary, but I will try it.

T.EMC

Broke through resistance with volume. I am going to buy at $11.38 and put a stop loss at $10.50.

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I recently attended a StockScores seminar here in Calgary. Was a very interesting presentation put on by Tyler Bollhorn. Basically, it is a sales pitch for an educational program he offers on teaching yourself to buy and sell stocks effectively.

I was very impressed with the seminar and I would recommend anyone to go check him out when he is in town. He does free seminars in Toronto, Edmonton, Calgary, and Vancouver.

His company has a website called StockScores.com. On this site you can utilize their instructional material and technical analysis tools.

Underlying Principles

There are some underlying principles that he outlines. You need to attend a seminar to here them in a clear manner. He gives good examples as well. Basically he outlines a couple of things that I agree with.

1. The Market Is Efficient - There are events that will happen to the business and the market will reflect these quickly and efficiently. If it is good, it will go up. If it is bad, it will go down.
2. Be Prepared to Lose - Set stop losses. Don't be afraid to get out of a bad stock. You should plan on losing on trades, but by a small margin.
3. The Market Is Not Fair - Yes. There are people out there with more privileges to information and can react before you can.

I especially like the last one because it reflects that you can't predict where a stock will go before everyone else.

Sentiment and Signal

There secret tool are two indicator values that are calculated for a stock every hour. The Sentiment and the Signal. Basically it is a formula that calculates the given Sentiment (market's mood toward a stock) and Signal (abnormal behaviour toward a stock). When these values pass 60 and 80 respectively, it indicates a stock to watch.

The Sentiment, in my opinion, was basically if the stock was rising in price and the Signal was if the stock has greater volume than normal. The Signal might indicate that people with more knowledge about the company are buying (or selling) the company.

Chart Patterns

If a stock hast he 60/80 values for Sentiment/Signal then it is time to look at the chart patterns. This is basic technical analysis. You can read about this in any technical analysis stock trading book or research it on the web.

Picking a Good Stock With Their Method

Referring back to the principles, the method basically tries to identify stocks that have just begun to react to events in the market and will be increasing over the near/long term. Then you must look at the stock and try to figure out the risk and reward. Is its upward possibilities going to be better than its downward possiblities.

I am not quoting him word for word, but as close to what I understood as possible. The criteria is as follows:

1. Sentiment Score is Greater Than 60
2. Signal Score is Greater Than 80
3. Good Chart Pattern
   • The price breaks through an "resistance" that it hasn't been able to overcome in the recent past.
   • The stock had low volatility in the recent past.
   • The was abnormal activity when it broke through resistance (high volume compared to normal).
   • There is optimism. The stock price is going up and the chart follows a recognizable pattern that indicates possible appreciation in value.
4. Reward Outweighs the Risk

   By looking at the chart, what is a reasonable expectation for the price to rise to and go down to. If the downside is greater than the upside, then you should walk away.

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I learned of this technique a couple years ago. It involves writing covered calls. A call is an option or derivative. If you don't understand what an option or derivative is, then do some more research online and/or read my article on options investing.

When someone says they are "writing a call", this means they are creating an call option contract and selling it to someone else who wants it. It is a contract between the writer and the buyer that guarantees the buyer, that the writer will sell him a set number of shares (100 shares per option) at a fixed price up until a specified expiry date if he chooses.

For example:

I can write/sell 1 March $25.00 call on Nortel shares for $0.15 a share. Since there are 100 shares in call that means the buyer would have to pay me $15 for it. I am guaranteeing him, that I will sell him 100 Nortel shares at $25.00 a share at any point until the end of March if he wants me to. If he never does, then the option expires at that point. So he is paying me $15 for that option.

The concept of how options works is sometimes confusing. I basically think of it as buying and selling a type of insurance on stocks. You may be willing to pay the price to buy the option of getting a stock at the price you want sometime in the future. A put is similar, but for selling.

The "covered" part of a call means that you already own the shares you are writing the call for. Not covered, or naked, means that you don't own the shares. If the buyer wishes to exercise his option, you will be forced to buy the stock at market price and then sell it to him at the option strike price ($25 in the example above). You also need to have "margin" available to cover the difference you might be out if the stock price goes higher and you will be forced to buy the stock at a higher price then you will be selling it to him. When you are covered you don't have this risk.

How Do I Make Money On This?

Your goal is this: you want the stock's price to not go higher than the strike price of you option. If it doesn't go higher than this, no one will exercise the option because it won't be worth any money. They can buy the stock for cheaper off the open market. This way, you pocket the money you sold the option for and you can then sell a new one.

The trick here is to sell an option that is in your comfort zone. If you are scared the whole time that the buyer will exercise on you because the strike price is too low, then don't bother. You will have sold it for more money, but if you don't want to be exercised than you shouldn't run that risk.

Why Would I Want to Do This?

You own a stock, you don't want to sell it right now, but you don't see it going up in the short term. Options can expire anywhere from 1 month to 6 months in the future. If some bad news has come out or for some reason you think the stock will stay flat or go down (like oil companies in the summer can sometimes do) then selling a call might be a good choice.

What Are The Risks

If the stock decides to go on a run then you will be forced to sell the stock or buy back your option for more money. You will be out either the appreciation in the stock minus what you sold your call for or you will be out the amount you had to buy your option back for minus what your call for.

My Thoughts On It

I have tried this technique and to tell you the truth, I haven't made any money on it overall. I had some Nortel shares I bought in 2001 that had gone down and look they would never go up so I was just selling covered calls on them. I would make money on most of them, but then Nortel would take a run and I would buy them back at a loss. Unfortunately that one loss was enough to offset the 4 gains I had before that.

I still believe this is a useful technique though, but there are few things to note.

• It requires that you pay very close attention and watch the markets frequently. If your stock takes a run and you don't notice for a few days you could be hurting.
• Don't be afraid to get out as soon as you are sitting at a small loss. Too many times people let their emotions get in the way and hold on because they don't want to take a loss on a option (or a stock for that matter).
• Don't mess around with volatile stocks unless you have the nerve. These are the ones that pay really well, but there is a reason for that. They are volatile, the risk and rewards are greater. This being said, if you do the math, these are usually the only stocks that give you decent returns if you want to use covered calls for a high rate of return. I would just be happy to make my $100 every couple months on a slow mover and be safe, but that is my opinion.
• If you think the stock is going to tank, just leave your call and sell your stock (if your trading account won't let you have uncovered calls you will need to buy it back). Most of your money is tied up in the stock and this is where your biggest loss will be, so sell it if you need to.

How Should I Start?

Read up some more. Here are some useful links.

• Montreal Exchange - This is the site the handles option trading in Canada. You can get quotes and such here.
• Investopedia's Options Basics - This site always has tidbits to teach you.
• Nothing But Options - I like there examples here. Helps to get the idea on how options work.
• Finance - Yahoo - There finance pages give you access to quotes for all the American stocks.

Paper trade for the first while. Pick a stock you own, look up the current price to sell a call for it, and write that number down. Also write down what your commissions would have been (check your brokerage's rates). Keep an eye on it to see how it moves. It will decrease in value as time decreases, but will also go up and down with the price of the stock. If the value of the option becomes worth less than what you sold it for by quite a bit then "pretend" to buy it back or you can let it expire if the stock price never goes above the strike price.

After you can paper trade and make money 4 out of 5 times. Think about getting an account approved for covered calls and try your hand on small amounts for awhile. After that, its up to you.

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Options are an investment vehicle that offer a bit more sophistication for the average investor. They can be hard to understand and I will try to explain it in more detail here.

What Is An Option?

An option is the right, but not the obligation, to buy or sell a set number of shares of a stock at a specified price (called the strike price) during a specific period of time.

A call option is the right to "buy" and the put option is the right to "sell".

Here is an example. I looked on the exchange today (Dec. 6, 2006). Nortel Networks (NT) was trading in Canada for $25.20/share. There was a call option selling on the options exchange for January 2007 with a $25.00 strike price for $1.60/share. What does this mean? If you buy this option contract it will cost you $1.60/share. One contract is 100 shares so you will have to pay $160.00 plus commissions to your brokerage. You then have the option to buy Nortel shares for $26.00/share between now and the the 3rd Friday of January (because it is a January contract).

Now you would ask, "Why would I want to do that? It is only $25.20 right now anyways." That is true, but what will it go to by the time it expires? You could buy the stock right now, but you would have to pay 100 X $25.20 or $2,520. That is a lot of upfront cash. The cost of the option is only $160. If the stock doesn't do anything or goes down, you are only aout $160. But if the stock goes up, you will have the option of buying the stock for the lower amount and then reselling it for the higher amount with only having to put down $160.

This illustrates the leverage your money has with options investing. With little money you can make quite a bit of money.

Please keep in mind that options have a value associated to them based on how much they are worth if you did exercise them. There are two components that make up the value of an option.

• Intrinsic Value

  This is the current value of the stock minus the strike price of the option. This represents how much you would make per share if you were to exercise you buy the shares at the strike price and sell them back onto the open market.

• Time Value

  This gives value to how much time is left before the option expires. The more time left, the more time value there is, because there is more time left for the stock to make a significant price move.

So since these options have a value before they expire, they can be sold to other buyers for their value. 99% of all option contracts are never exercised. If they go up or down you just sell/buy them, because it is more of a pain to then buy or sell the stock that goes with them. You can just do them both separately if you want to. I just explain them the way I do because it is easier to understand.

Call Options

If you purchase a call option, you are guaranteeing you will be able to buy a stock from someone at a specified price between now and the end of the option contract.

Put Options

If you purchase put option, you are guaranteeing you will be able to sell a stock to someone at a specified price between now and the end of the option contract.

Insurance?

You can also think of options as a type of insurance on stock prices. You are paying a fee to have the option to buy and sell you stock at a specific price. If you are holding a volatile stock or you are uncertain of the future, you can purchase options to guarntee your price in the future.

The Downside

The negative point about options is that you are buying something that isn't worth anything, really. You don't own the stock, you just own a time sensitive contract between someone else and yourself. If the stock price moves significantly higher (for a call) you will be in the money and the option will be worth something at that point, but before then it is nothing. Stocks rarely ever go to 0 and you can always hold on to them forever. They actually mean something tangible.

When Would I Want to Buy an Option?

There are lot of scenarios and some of them are very complex. There is also the topic of "selling" options. I will cover this more later and you can read about it in my article Making Money Writing Covered Calls. The scenarios I have seen for buying options are:

• You believe that the stock in a specific company is going to go up significantly, but you are lacking the funds or margin to buy the stock outright for yourself and you want to buy quite a bit of it. For a smaller price you can purchase call options. If the stock goes up, you can purchase the stock later for the more favorable price or you can even just sell the option contract because its value will go up.
• You currently own a ton of stock in a company. You are scared to hold onto the stock because it has become extremely volatile or bad news has come out, yet the price is still quite reasonable. You don't want to sell right now because it is the end of the tax year or you want to wait a few months for other reasons. You can buy enough puts to match the amount of stock you have. If the stock goes down significantly, it won't be a big deal, because you have locked in a price to sell it at.
• You think a stock will go up in the short term and you don't want to own the stock because you can buy 10 times more options with the same amount of money and have more leverage. You purchase call options
• You think a stock will go down in the short term and you don't own any anyways. You can buy put options which will go up in value if the stock price decreases significantly.

There are lots of other strategies and techniques, but I won't go into them here.

Another item to look at is technical investing. This is a huge strategy used by options investors. You can read volumes on these strategies so I won't even go near them right now.

Look for more options strategies in my blog in the future.

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