Well maybe that's overstating it a little, but it's certainly one of the most important.
It is…(drum roll please)… “the need to be right”!
Now that probably wasn't what you were expecting. You might have thought it was going to be something like not picking the trend or putting too much money on a single trade or one of a dozen other things.
But I can assure you, from bitter experience, that this one attitude causes more problems than most other things you might do as a trader. And it's worse for men! Something to do with ego or testosterone…
You see our whole society is based on the importance of being right. The need to be right.
Your parents rewarded you when you are right and told you off when you were “wrong”. They probably still do this now that you are grown up!
>From your earliest days at school you are taught that being right is the most important thing. Isn't that what tests teach you? And this is reinforced through the rest of your life. Your boss probably reminds you of this just about every day!
But some of the best things occur when we aren't right. Like the time you take a wrong turn. Either in your travels or in your life. And you end up at this amazing place or with this amazing person that you never would have, had you done the “right” thing.
Plus there's not a lot of point beating yourself up when you aren't “right”. Because, as we all know, it's going to happen pretty regularly!
Coming from Australia, I don't know a lot about baseball. But I do understand that batters get paid a lot of money to miss hit the ball an awful lot! Think about that. Top baseballers step up to the plate every day knowing that they are more than likely not going to get it “right”. Yet they are confident and successful because they know that over a season they are going to get it right often enough.
Don't Beat Yourself Up or the Market Will join In!
I went to a speed-reading course many years ago. I didn't learn how to read faster (!) but I did learn an attitude that has stuck with me ever since. It is - “Focus. No attachment to the outcome.”
This guy was telling us about how he taught elite sportsmen to achieve their best (hope he was better at that than teaching people how to read fast!). He explained that the trick was to get them to keep taking the shot (or making the jump or whatever) without getting upset with themselves if they got it wrong.
The key was for them to focus on what they had to do in that moment, not on the outcome.
Maybe I have lost you? But the point I'm trying to make is that you need to go into each of your trades with your focus - not on being right - but on following your trading system.
And then the key is to not beat yourself up if you “get it wrong”. Because if you have followed your system and you know the system works over time, you have done the “right” thing.
Once you have confidence in your trading method your only focus is on following the signals.
“Focus. No attachment to the outcome.”
By the way, try this approach in other areas of your life. It really works! My golf was much better once I stopped getting angry at myself for every lousy shot.
Deadly Attitude in the Market
In the stock market you can't afford to hold onto the need to be “right”!
When trading, you cannot be right 100% of the time. In fact, you can be right only 50% of the time and still make lots of money. But this means you have to be wrong an awful lot!
The market will do what the market will do - no matter what your opinion might be. If you are holding a stock and you expect it to go up in price but it starts to go down, what happens?
If you are like me, a little voice inside says something like “…but this wasn't meant to happen!…it can't do this to me!… I know I'm right - it's just a temporary set back; it will come right, I'll just wait it out…
This “voice of reason” is your ego. You can't bear to be wrong, so you justify your decision to yourself. You must be right! You tell yourself that you know what's going to happen…the market's just confused…it's just got it wrong! (totally illogical reasoning - the market can never be “wrong” - but it makes sense at the time!).
This deep-seated, primordial need that we have to be right can destroy you in the stock market. It will make you put too much money on one trade. And it will make you hold onto stocks that you should have sold days or even weeks ago.
It will mean you will miss opportunities you should have taken because your view was the opposite of what actually happens. And you can miss getting extra profits from a trade because you were convinced that “…it couldn't possibly go any higher…”
By being aware of this “need” you can overcome it - over time! You need to get to the point where you “want what the market wants”. Not what you want.
Just remember.
“Focus. No attachment to the outcome.”
Author: David Chandler
http://www.stockmarketgenie.com
Wednesday, April 11, 2007
The Easy Secrets To Determine Stock Market Position Sizing
When trading in the stock market, position sizing is where all the tools of money management come together. It`s perhaps the most important part of your stock market money management rules. Position sizing is simply deciding how much you are going to put into any one stock market trade. You can calculate your position size using the other tools of stock market money management, your maximum loss and your stop loss.
However, many stock market traders believe that they`re doing an adequate job of position sizing by simply having a stop loss in place. While this will tell them when to get out of a stock market position, and will, with a maximum loss, determine how much capital they`re risking, it doesn`t answer the question of how much or how many units they can buy.
If you have already calculated your maximum loss and your stop loss, you can take these values, and plug them into a formula that will calculate how many shares you can purchase without exceeding your maximum loss. Although it is simple, the formula I`m about to give you is extremely powerful. The number of shares for your position is equal to your maximum loss divided by your stop loss size.
You`re already familiar with what a maximum loss is; but may not be recognize the term stop loss size. A stop loss size is the difference between your entry price and your stop loss value. If you were to enter the stock market with a one-dollar trade and set your stop loss at 90 cents, the stop loss value would be the difference between your entry price and your stock price, ten cents. Once you`ve entered these values into the formula, you can calculate how many shares you should buy so that you never risk more than your maximum loss.
Let`s look at how the formula works in practice. If your trading float was $20,000, and you were risking 2%, your maximum loss would be $400. If your stock market entry price was one dollar, and your stop loss value was 90 cents, your stop size would be ten cents. Now, the number of shares is equal to your maximum loss divided by your stop size. In this example, you can purchase 4,000 shares. If this stock reaches your stop loss, and you have to exit the position, you know you`re not going to risk or lose more than 2% of your float, which is $400.
This formula ensures the safety of your trading float. A little finessing that some of my clients like to do is to class their brokerage fee as part of the maximum loss. You could do this by subtracting the stock market brokerage fee from your maximum loss. If the stock market brokerage fee was $40 for your return trip, subtract 40 dollars from your maximum loss. Instead of entering $400 into the formula, you`d now enter $360. Once this is computed out, you can determine how many shares you`d buy, and know that you had included brokerage as part of your maximum loss.
By setting your position size so that you follow the 2% rule, you`re using a strategy that will limit the size of your losses during losing streaks. When you experience a winning streak, your position sizes will grow in a similar manner. By changing the amount of capital you`re deciding to risk, you`ll change the characteristics of your risk to reward ratio. All of your stock market money management rules will work together to make your trading system as profitable as possible.
Author: David Jenyns
http://www.ultimate-trading-systems.com/stocks.htm
However, many stock market traders believe that they`re doing an adequate job of position sizing by simply having a stop loss in place. While this will tell them when to get out of a stock market position, and will, with a maximum loss, determine how much capital they`re risking, it doesn`t answer the question of how much or how many units they can buy.
If you have already calculated your maximum loss and your stop loss, you can take these values, and plug them into a formula that will calculate how many shares you can purchase without exceeding your maximum loss. Although it is simple, the formula I`m about to give you is extremely powerful. The number of shares for your position is equal to your maximum loss divided by your stop loss size.
You`re already familiar with what a maximum loss is; but may not be recognize the term stop loss size. A stop loss size is the difference between your entry price and your stop loss value. If you were to enter the stock market with a one-dollar trade and set your stop loss at 90 cents, the stop loss value would be the difference between your entry price and your stock price, ten cents. Once you`ve entered these values into the formula, you can calculate how many shares you should buy so that you never risk more than your maximum loss.
Let`s look at how the formula works in practice. If your trading float was $20,000, and you were risking 2%, your maximum loss would be $400. If your stock market entry price was one dollar, and your stop loss value was 90 cents, your stop size would be ten cents. Now, the number of shares is equal to your maximum loss divided by your stop size. In this example, you can purchase 4,000 shares. If this stock reaches your stop loss, and you have to exit the position, you know you`re not going to risk or lose more than 2% of your float, which is $400.
This formula ensures the safety of your trading float. A little finessing that some of my clients like to do is to class their brokerage fee as part of the maximum loss. You could do this by subtracting the stock market brokerage fee from your maximum loss. If the stock market brokerage fee was $40 for your return trip, subtract 40 dollars from your maximum loss. Instead of entering $400 into the formula, you`d now enter $360. Once this is computed out, you can determine how many shares you`d buy, and know that you had included brokerage as part of your maximum loss.
By setting your position size so that you follow the 2% rule, you`re using a strategy that will limit the size of your losses during losing streaks. When you experience a winning streak, your position sizes will grow in a similar manner. By changing the amount of capital you`re deciding to risk, you`ll change the characteristics of your risk to reward ratio. All of your stock market money management rules will work together to make your trading system as profitable as possible.
Author: David Jenyns
http://www.ultimate-trading-systems.com/stocks.htm
Stock Market Myths
1. You can tell if a Stock is cheap or expensive by the Price to Earnings Ratio.
False: PE ratios are easy to calculate, that is why they are listed in newspapers etc. But you cannot compare PE’s on companies from different industries, as the variables those companies and industries have are different. Even comparing within an industry, PE’s don’t tell you about many financial fundamentals and nothing about a stock’s value.
2. To make Money in the Stock Market, you must assume High Risks.
False: Tips to Lower your Risk:
· Do not put more than 10% of your money into any one stock
· Do not own more than 2-3 stocks in any industry
· Buy your stocks over time, not all at once
· Buy stocks with consistent and predictable earnings growth
· Buy stocks with growth rates greater than the total of inflation and interest rates
· Use stop-loss orders to limit your risk
3. Buy Stocks on the Way Down and Sell on the Way Up.
False: People believe that a falling stock is cheap and a rising stock is too expensive. But on the way down, you have no idea how much further it may fall. If a stock is rising, especially if it has broken previous highs, there are no unhappy owners who want to dump it. If the stock is fairly valued, it should continue to rise.
4. You can Hedge Inflation with Stocks.
False: When interest rates rise, people start to pull money out of the market and into bonds, so that pushes prices down. Plus the cost of business goes up, so corporate earnings go down, along with the stock prices.
5. Young People can afford to take High Risk.
False: The only thing true about this is that young people have time on their side if they lose all their money. But young people have little disposable income to risk losing. If they follow the tips above, they can make money over many years. Young people have the time to be patient.
Author: Cory Bain
http://www.choose-to-be-rich.com
False: PE ratios are easy to calculate, that is why they are listed in newspapers etc. But you cannot compare PE’s on companies from different industries, as the variables those companies and industries have are different. Even comparing within an industry, PE’s don’t tell you about many financial fundamentals and nothing about a stock’s value.
2. To make Money in the Stock Market, you must assume High Risks.
False: Tips to Lower your Risk:
· Do not put more than 10% of your money into any one stock
· Do not own more than 2-3 stocks in any industry
· Buy your stocks over time, not all at once
· Buy stocks with consistent and predictable earnings growth
· Buy stocks with growth rates greater than the total of inflation and interest rates
· Use stop-loss orders to limit your risk
3. Buy Stocks on the Way Down and Sell on the Way Up.
False: People believe that a falling stock is cheap and a rising stock is too expensive. But on the way down, you have no idea how much further it may fall. If a stock is rising, especially if it has broken previous highs, there are no unhappy owners who want to dump it. If the stock is fairly valued, it should continue to rise.
4. You can Hedge Inflation with Stocks.
False: When interest rates rise, people start to pull money out of the market and into bonds, so that pushes prices down. Plus the cost of business goes up, so corporate earnings go down, along with the stock prices.
5. Young People can afford to take High Risk.
False: The only thing true about this is that young people have time on their side if they lose all their money. But young people have little disposable income to risk losing. If they follow the tips above, they can make money over many years. Young people have the time to be patient.
Author: Cory Bain
http://www.choose-to-be-rich.com
The Stock Market Report That Wall Street Does Not Want You To Read
The best way to maximize your profits is to be prepared to give some back to the Stock Market. When most traders first hear this, they are a little taken back. Why would you give any of your profits back to the Stock market; because you are never going to be able to exit right at the peak of the Stock market trend. But, you can still stay with the trend as it develops, and let your profits run in the Stock market. Then, when the price turns, you can exit.
Traditionally, an inexperienced trader will exit a position once they see a little bit of a profit in their trading account. They want to crystallize that profit immediately. People don`t like to lose, and they believe that those profits, made in the Stock Market, are their profits, and once they have them, they don`t want to risk giving them back to the Stock market.
Is the Stock market strategy written about in this article doomed to failure, since it breaks one of the cardinal rules of trading; to let your profits run? It is always wise to implement cardinal rules like this, but how do you implement this in the Stock market? Well, after you`ve defined your trading float, set your maximum loss, calculated your stop losses, and also calculated your position sizing – you can determine how to handle profits.
Once you`ve set your initial stop loss, you`ve ensured a mechanism to cut your losses short. Now you need to introduce a rule that allows your profits to run. By simply setting these two rules, you can control two important variables - whether or not you make a profit, and how much profit you`re going to make.
Of the two types of exits you use in the Stock market, hopefully it`s the ones we`re about to discuss now that you`ll get to implement more often, as these are the ones that are implemented once you`re in a profitable situation. Trailing stop losses will allow you to follow a trend as it develops in the Stock market, and exit the position at the point where you can realistically maximize your profits.
A simple example can illustrate the importance of a trailing stop loss. If you received a buy signal and purchased XYZ, and set your initial stop loss, you`d be sure to keep your losses small. But, your initial stop does not move. What happens if, after purchasing XYZ, the asset runs up a few hundred percent?
Unless you have a way to lock in the profit, you could keep that position until the share reverts all the way back down to your stop loss, where you would exit the trade. You would end up losing money even though there`s potential for some fantastic gains.
Obviously, you need to have a way to keep a situation like this from ever happening, and that`s exactly what a trailing stop does. This form of stop is adjusted on a periodic basis according to a mathematical formula that keeps it moving upward as the price moves upward.
After the first day of trading, if the price moves in your favour, or even if the shares volatility shrinks, then the trailing stop is moved in your favour. If the Stock Market then moved against you enough for your stop to be triggered, you would still take a loss, but it would not be as large as your initial stop loss.
The key to the trailing stop loss in the Stock market is that you need to adjust the asset continually to make sure that the stop is moved in your favour. A trailing stop loss is calculated in a way that is very similar to the way we calculated our initial stop loss. The only difference being rather than calculating our trailing stop loss from the entry price, we`re calculating our stop loss from the highest price since entry.
With a trailing stop loss in place, you will be able to let your profits run, and let your trading system deliver the maximum profit in the Stock Market.
Author: David Jenyns
http://www.ultimate-trading-systems.com/stocks.htm
Traditionally, an inexperienced trader will exit a position once they see a little bit of a profit in their trading account. They want to crystallize that profit immediately. People don`t like to lose, and they believe that those profits, made in the Stock Market, are their profits, and once they have them, they don`t want to risk giving them back to the Stock market.
Is the Stock market strategy written about in this article doomed to failure, since it breaks one of the cardinal rules of trading; to let your profits run? It is always wise to implement cardinal rules like this, but how do you implement this in the Stock market? Well, after you`ve defined your trading float, set your maximum loss, calculated your stop losses, and also calculated your position sizing – you can determine how to handle profits.
Once you`ve set your initial stop loss, you`ve ensured a mechanism to cut your losses short. Now you need to introduce a rule that allows your profits to run. By simply setting these two rules, you can control two important variables - whether or not you make a profit, and how much profit you`re going to make.
Of the two types of exits you use in the Stock market, hopefully it`s the ones we`re about to discuss now that you`ll get to implement more often, as these are the ones that are implemented once you`re in a profitable situation. Trailing stop losses will allow you to follow a trend as it develops in the Stock market, and exit the position at the point where you can realistically maximize your profits.
A simple example can illustrate the importance of a trailing stop loss. If you received a buy signal and purchased XYZ, and set your initial stop loss, you`d be sure to keep your losses small. But, your initial stop does not move. What happens if, after purchasing XYZ, the asset runs up a few hundred percent?
Unless you have a way to lock in the profit, you could keep that position until the share reverts all the way back down to your stop loss, where you would exit the trade. You would end up losing money even though there`s potential for some fantastic gains.
Obviously, you need to have a way to keep a situation like this from ever happening, and that`s exactly what a trailing stop does. This form of stop is adjusted on a periodic basis according to a mathematical formula that keeps it moving upward as the price moves upward.
After the first day of trading, if the price moves in your favour, or even if the shares volatility shrinks, then the trailing stop is moved in your favour. If the Stock Market then moved against you enough for your stop to be triggered, you would still take a loss, but it would not be as large as your initial stop loss.
The key to the trailing stop loss in the Stock market is that you need to adjust the asset continually to make sure that the stop is moved in your favour. A trailing stop loss is calculated in a way that is very similar to the way we calculated our initial stop loss. The only difference being rather than calculating our trailing stop loss from the entry price, we`re calculating our stop loss from the highest price since entry.
With a trailing stop loss in place, you will be able to let your profits run, and let your trading system deliver the maximum profit in the Stock Market.
Author: David Jenyns
http://www.ultimate-trading-systems.com/stocks.htm
How Stops Help You To Make Money In The Stock Market
To make money in the stock market, setting stops is an imprecise science and involves a lot of trial and error, but it is an integral part of being a successful trader. A good analogy is to compare stops to buying insurance for your business. Should you avoid insurance altogether just because you’re not sure exactly how much you need, or because it will cost you a little money? No. Instead, you estimate and do the best you can, and in the end it will be well worth the effort.
Where insurance limits risk of loss through disasters, stops limit your risk of loss on bad trades. Stops make it possible to take small losses and get out when a stock goes against you, protecting your capital. Yet, some traders find that they are unwilling to take a loss on any stock. They don’t want to admit that they made a mistake.
Another key to make money in the stock market, what often separates a good trader from a bad one is the ability to take small losses. Your goal, as a successful trader, is to take small losses and make big gains. If you do this, you’ll be profitable. But, you ask, what if you stop out of a stock you still want to trade? Well, you can always buy it back later, and likely at a better price, if the trade still has potential.
Besides limiting risk and helping you take small losses, stops are valuable because they protect profits on winning trades. As I discussed in a previous article, you must lock in your profit when you trade, or you can lose it. You can ensure that you keep your profits by using trailing stops. A trailing stop is a stop order you place below the current price of a long position, progressively moving it up as the price of the position increases so that the stop follows the position up. For a short position, to make money in the stock market you set a stop above the current price and then move it progressively down, following the position as it trends downward.
This means that once you have a profit, you move your stop nearer to the current price so you’ll stop out with most of your profits intact if the position moves against you. If the stop executes and you decide you want to trade the position again, you can buy it back at a better price than you sold it for and then ride it up again. That’s how a good trader makes and keeps money, make money in the stock market by taking small profits multiple times, rather than risking too much waiting for a big win.
Author: David Jenyns
http://www.ultimate-trading-systems.com/stocks.html.
Where insurance limits risk of loss through disasters, stops limit your risk of loss on bad trades. Stops make it possible to take small losses and get out when a stock goes against you, protecting your capital. Yet, some traders find that they are unwilling to take a loss on any stock. They don’t want to admit that they made a mistake.
Another key to make money in the stock market, what often separates a good trader from a bad one is the ability to take small losses. Your goal, as a successful trader, is to take small losses and make big gains. If you do this, you’ll be profitable. But, you ask, what if you stop out of a stock you still want to trade? Well, you can always buy it back later, and likely at a better price, if the trade still has potential.
Besides limiting risk and helping you take small losses, stops are valuable because they protect profits on winning trades. As I discussed in a previous article, you must lock in your profit when you trade, or you can lose it. You can ensure that you keep your profits by using trailing stops. A trailing stop is a stop order you place below the current price of a long position, progressively moving it up as the price of the position increases so that the stop follows the position up. For a short position, to make money in the stock market you set a stop above the current price and then move it progressively down, following the position as it trends downward.
This means that once you have a profit, you move your stop nearer to the current price so you’ll stop out with most of your profits intact if the position moves against you. If the stop executes and you decide you want to trade the position again, you can buy it back at a better price than you sold it for and then ride it up again. That’s how a good trader makes and keeps money, make money in the stock market by taking small profits multiple times, rather than risking too much waiting for a big win.
Author: David Jenyns
http://www.ultimate-trading-systems.com/stocks.html.
Is Investing In The Stock Market Like Going To Las Vegas?
Some people say that there is no difference between investing in the stock market and gambling in Las Vegas. This is a happy fiction for casino owners, but unfortunate for casino gamblers. It means you might be tempted to "invest" in blackjack or poker, instead of stock or bond mutual funds. In this article, we compare the similarities and differences between casino gambling and stock market investing. Make up your own mind if they are the same kind of investment.
What casino games have in common is that the gambler has a very small chance of winning any single hand, be it roulette, blackjack, or slot machines. For instance, there are 38 numbers on a roulette wheel, and, if you bet on a given number, the rough odds of winning a single game is, 1 in 38, or 2.6%. This means, of course, that the casino has a whopping 97.4% probability of beating you! This is great for the casinos but not so great for attracting gamblers.
Fortunately for the casinos, the likelihood of winning or losing in the short term is not that clear at all. Wins and losses in any casino game follow a random sequence of winning streaks or losing streaks, which cannot be predicted in advance. A long sequence of losses (a losing streak) can bankrupt a gambler, while a long sequence of wins (a winning streak) can generate huge gains.
When a gambler gets on a losing streak, he attributes it to bad luck. But something in human psychology needs to attribute a winning streak to superior gambling skill, instead of just good luck. In reality, they are neither skill nor luck. Winning and losing streaks are demonstrably random, unpredictable events.
To understand this, consider a simple coin toss game, where everyone knows that there is a 50% probability of getting either heads or tails with each coin toss. But many people would be surprised to find that if they tossed the coin many, many times they could get a lucky streak of say, nine heads in a row. It’s hard to believe, but it’s true, and you can try it for yourself.
Toss a coin many times and write down the outcome; you will see that 4 to 9 successive heads or successive tails will occur pretty regularly. These sequences are a graphic demonstration of "streaks". If "heads" represent a win and "tails" a loss, we can see winning streaks and losing streaks even in a simple coin-toss game.
So you can see that there is a way to beat the casino if a gambler hits a "winning streak" of 4 to 9 consecutive wins, leaves the table, cashes out and runs. But if he gets on a "losing streak" he’d better pack it in, accept the loss, and leave the table immediately before more damage can be done.
Gambling is fine for someone who wants to play with cash for the entertainment value, but it is not for the investor who wants to make some serious money.
The odds of winning in the stock market are incredibly more favorable. During a bull-market of rising prices, your odds for making money on any given day are 66.7%! Contrast that with the 2.6% probability of winning at roulette! On the other hand, during a bear-market when prices are dropping regularly, you are likely to lose money 66.7% of the time. So even during a bear-market you are losing less than you would in a casino.
And just like in casino gambling, there will also be winning and losing streaks with many consecutive days where the money comes pouring in, and many consecutive days where the money just seems to evaporate.
But if you knew ahead of time the periods when a bull or bear market is likely, then you could make adjustments in how you invest, so that you could maximize earnings or conserve money and prevent losses.
For instance, if a bull-market is likely, you would invest in stock mutual funds, and then sit back and watch the 66.7% odds of success pull the portfolio higher. Conversely, if a bear-market is likely, you would pull the money out of the stock market and into the safety of Money Market funds, then sit back and watch the market get hammered with the 66.7% odds of losing.
This system works because Market Timing Indicators (see website listed below) can be used to predict whether the environment is favorable or not for future stock market gains. This is unlike casino gambling where there are no indicators and every round is unique, so that the odds of winning are unknown,
Author: Dr. Sanjoy Ghose
www.PredictableInvesting.com.
What casino games have in common is that the gambler has a very small chance of winning any single hand, be it roulette, blackjack, or slot machines. For instance, there are 38 numbers on a roulette wheel, and, if you bet on a given number, the rough odds of winning a single game is, 1 in 38, or 2.6%. This means, of course, that the casino has a whopping 97.4% probability of beating you! This is great for the casinos but not so great for attracting gamblers.
Fortunately for the casinos, the likelihood of winning or losing in the short term is not that clear at all. Wins and losses in any casino game follow a random sequence of winning streaks or losing streaks, which cannot be predicted in advance. A long sequence of losses (a losing streak) can bankrupt a gambler, while a long sequence of wins (a winning streak) can generate huge gains.
When a gambler gets on a losing streak, he attributes it to bad luck. But something in human psychology needs to attribute a winning streak to superior gambling skill, instead of just good luck. In reality, they are neither skill nor luck. Winning and losing streaks are demonstrably random, unpredictable events.
To understand this, consider a simple coin toss game, where everyone knows that there is a 50% probability of getting either heads or tails with each coin toss. But many people would be surprised to find that if they tossed the coin many, many times they could get a lucky streak of say, nine heads in a row. It’s hard to believe, but it’s true, and you can try it for yourself.
Toss a coin many times and write down the outcome; you will see that 4 to 9 successive heads or successive tails will occur pretty regularly. These sequences are a graphic demonstration of "streaks". If "heads" represent a win and "tails" a loss, we can see winning streaks and losing streaks even in a simple coin-toss game.
So you can see that there is a way to beat the casino if a gambler hits a "winning streak" of 4 to 9 consecutive wins, leaves the table, cashes out and runs. But if he gets on a "losing streak" he’d better pack it in, accept the loss, and leave the table immediately before more damage can be done.
Gambling is fine for someone who wants to play with cash for the entertainment value, but it is not for the investor who wants to make some serious money.
The odds of winning in the stock market are incredibly more favorable. During a bull-market of rising prices, your odds for making money on any given day are 66.7%! Contrast that with the 2.6% probability of winning at roulette! On the other hand, during a bear-market when prices are dropping regularly, you are likely to lose money 66.7% of the time. So even during a bear-market you are losing less than you would in a casino.
And just like in casino gambling, there will also be winning and losing streaks with many consecutive days where the money comes pouring in, and many consecutive days where the money just seems to evaporate.
But if you knew ahead of time the periods when a bull or bear market is likely, then you could make adjustments in how you invest, so that you could maximize earnings or conserve money and prevent losses.
For instance, if a bull-market is likely, you would invest in stock mutual funds, and then sit back and watch the 66.7% odds of success pull the portfolio higher. Conversely, if a bear-market is likely, you would pull the money out of the stock market and into the safety of Money Market funds, then sit back and watch the market get hammered with the 66.7% odds of losing.
This system works because Market Timing Indicators (see website listed below) can be used to predict whether the environment is favorable or not for future stock market gains. This is unlike casino gambling where there are no indicators and every round is unique, so that the odds of winning are unknown,
Author: Dr. Sanjoy Ghose
www.PredictableInvesting.com.
Newton’s Laws of Stock Market Trading
Read the oldest stock market wisdom from the world renowned physicist.
This revelation had me surprised too. I was idly flipping through my old physics textbooks yesterday when it suddenly struck me. I was amazed to realize that Sir Issac Newton’s laws of physics points to so many profound and important rules in the stock markets today.
So, here we are… the physics of the stock markets.
Newton's First Law of Trading
“A Stock at rest tends to stay at rest and a Trending Stock tends to stay in trend unless acted upon by an equal and opposite reaction or an unbalanced force.”
This law teaches us the same thing the old commodity traders will… that the trend is your friend. If a stock is trending sideways, it tends to stay sideways until a powerful enough market force takes it out of its trend. If a stock is trending up or downwards, it will tend to stay moving up or downwards until drastic changes happen to the company or the market at large creating an “equal and opposite reaction”. We should therefore always trade in the direction of a trend and always be vigilant for signs of an ”equal and opposite reaction” or the “unbalanced force”. Such a force may take the form of a drastic change in the market sentiment at large or drastic change in the performance of the specific company in question.
Newton’s Second Law of Trading
“The acceleration of a stock as produced by a market consensus is directly proportional to the magnitude of that consensus, in the same direction as the consensus, and inversely proportional to the mass of the stock.”
This law teaches us that a stock moves up or down into a trend due to a force created by market consensus. How much a stock moves up or down that trend is determined by the magnitude of the market consensus and how “massive” a stock is. By “massive” we are talking about the price of a stock. The more expensive a stock is, the more well established the company has been and the lesser in percentage you will make out of the same move in absolute dollar versus a smaller, less massive stock.
The force of the market consensus is directly proportionate to the event that spurred it. If a company produces a breakthrough product on a worldwide patent, it creates an extremely strong market consensus that is likely to take a stock very far. If a company merely scores a marginally higher earning this quarter, it is unlikely to produce a market consensus that will go very far.
Newton teaches us to not only look at what the news is but also how well established the company is in order to determine how much momentum it will produce in a given trend. The same breakthrough that drives a small company’s shares up by hundreds of percentage points may perhaps move a big company’s shares only by a fraction of that percentage.
Newton’s Third Law of Trading
"For every action, there is an equal and opposite reaction."
No need to explain this one in much detail, do I?
For every buying or selling, there must be an equal amount of buyers or sellers on the other side. The stock market is a zero sum game. For every buyer, there must be a seller and for every seller, there must be a buyer. The real question is, who is profiting from each of their buying and selling. There is really no such thing as more buyers today than sellers or vice versa. Every trader needs to understand that you can be on the wrong side of the table at anytime and only a sensible portfolio management system can help you go in the long run.
I have traded actively in the stock markets for over a decade and survived with ancient wisdom such as what you have read here. There is indeed wisdom to be found in every corner of our life and if we care to look carefully, we will never be in a lack of guidance.
Author: Jason Ng
http://www.MastersoEquity.com.
This revelation had me surprised too. I was idly flipping through my old physics textbooks yesterday when it suddenly struck me. I was amazed to realize that Sir Issac Newton’s laws of physics points to so many profound and important rules in the stock markets today.
So, here we are… the physics of the stock markets.
Newton's First Law of Trading
“A Stock at rest tends to stay at rest and a Trending Stock tends to stay in trend unless acted upon by an equal and opposite reaction or an unbalanced force.”
This law teaches us the same thing the old commodity traders will… that the trend is your friend. If a stock is trending sideways, it tends to stay sideways until a powerful enough market force takes it out of its trend. If a stock is trending up or downwards, it will tend to stay moving up or downwards until drastic changes happen to the company or the market at large creating an “equal and opposite reaction”. We should therefore always trade in the direction of a trend and always be vigilant for signs of an ”equal and opposite reaction” or the “unbalanced force”. Such a force may take the form of a drastic change in the market sentiment at large or drastic change in the performance of the specific company in question.
Newton’s Second Law of Trading
“The acceleration of a stock as produced by a market consensus is directly proportional to the magnitude of that consensus, in the same direction as the consensus, and inversely proportional to the mass of the stock.”
This law teaches us that a stock moves up or down into a trend due to a force created by market consensus. How much a stock moves up or down that trend is determined by the magnitude of the market consensus and how “massive” a stock is. By “massive” we are talking about the price of a stock. The more expensive a stock is, the more well established the company has been and the lesser in percentage you will make out of the same move in absolute dollar versus a smaller, less massive stock.
The force of the market consensus is directly proportionate to the event that spurred it. If a company produces a breakthrough product on a worldwide patent, it creates an extremely strong market consensus that is likely to take a stock very far. If a company merely scores a marginally higher earning this quarter, it is unlikely to produce a market consensus that will go very far.
Newton teaches us to not only look at what the news is but also how well established the company is in order to determine how much momentum it will produce in a given trend. The same breakthrough that drives a small company’s shares up by hundreds of percentage points may perhaps move a big company’s shares only by a fraction of that percentage.
Newton’s Third Law of Trading
"For every action, there is an equal and opposite reaction."
No need to explain this one in much detail, do I?
For every buying or selling, there must be an equal amount of buyers or sellers on the other side. The stock market is a zero sum game. For every buyer, there must be a seller and for every seller, there must be a buyer. The real question is, who is profiting from each of their buying and selling. There is really no such thing as more buyers today than sellers or vice versa. Every trader needs to understand that you can be on the wrong side of the table at anytime and only a sensible portfolio management system can help you go in the long run.
I have traded actively in the stock markets for over a decade and survived with ancient wisdom such as what you have read here. There is indeed wisdom to be found in every corner of our life and if we care to look carefully, we will never be in a lack of guidance.
Author: Jason Ng
http://www.MastersoEquity.com.
7 Stock Market Tips You Can't Live Without
Every day there are a dozen new HOT stock market tips that guarantee your financial success. Every day there are hundreds if not thousands of people that jump on the bandwagon, and every day, each of those people are disappointed.
When it comes to popular stock market tips, there is no golden ticket to striking it rich. So I'm going to show you how to make your own HOT guidelines that will ensure you stay on the right course-the one that leads to success.
Stock Market Tip #1: Play Your Game
Develop a set of rules that you can follow. Whether they include some of the tips in this article or are strategies you've always lived by, STICK WITH THEM. An inconsistent, but more importantly an undisciplined trader will never make a profit. Chasing stock market tips won't make you money. Your rules are your money. Again, there will always be hot stock market tips that ensure success, but if you continue to whole-heartedly practice your own tips, you'll see profits in no time.
Stock Market Tip #2: Control Your Risk
There are many adventurous traders out there…and those are the ones that loose their fortunes. If you always look out to protect your capital base you'll ensure your financial safety. Now one of the most important stock market tips I can give you is to continue to let that capital base grow. That way, even if all of your investments fail, you won't be jeopardizing your previous profits. As a general stock market tip, never risk more than 3% of your portfolio on any one trade.
Stock Market Tip #3: The High Road in Cutting Your Losses
Things happen. People lose money…LOT'S of money. So don't be one of them. Basically this stock market tip means don't be stupid. If one of your investments turns sour don't stick around hoping it will right itself. Have a set target loss percentage where you can cut and run. Again, it's about being disciplined, remember? Set it no higher than 15% of your opt in, and you'll have a save exit with every trade.
Stock Market Tip #4: The Sky's the Limit
In contrast to Stock Market Tip #3, if a stock is rising beyond belief, don't jump out in fear of it suddenly falling back to reality. Instead, ride it out as long as humanly possible. This is how the biggest and most talked about gains are made-this is how FORTUNES are made. This stock market tip will ensure that you give yourself the best chance possible of striking that gold mine. Now if the stock does in fact start to fall, go ahead and opt out. It'll be worth more to you to risk that little loss in the end for that huge gain you'll make.
Stock Market Tip #5: Back to School
You know the saying, “Learn one new thing every day?” Do it. Seriously. Our stock market is ever-changing, diversifying, and adjusting, and YOU need to do your homework. It takes a lot to stay on top of it all. So if you come across something that you're not familiar with just look it up. If you think you know it all…go LOOK for something. One of the easiest ways to accomplish this stock market tip is to know all of the trading vocabulary. That's also the easiest way to ensure you're prepared to take on any obstacle that comes your way.
Stock Market Tip #6: How to Bring Your “A” Game
Stock market trading isn't only about successful financial advancements. Well actually it is, but you're not going to be able to do that every day if you don't have the emotional strength to pull it off. This stuff is supposed to be fun. If you're not at your best psychologically, you're not going to be focused, you'll make poor judgments, and most importantly you won't make money. Just think about the meaning of this stock market tip. If you're enjoying yourself, it's no longer work, so you are free to “work” in a mentality that will, in fact, play to your strengths…and wallet.
Stock Market Tip #7: Staying Above the Curve
You don't have to make a fortune with every trade you make. You don't have to become a millionaire at the end of every trading day. Here's stock market tip #7: You won't. The people that shoot for that glory every day are the ones that are losing fortunes, not making them. What you need to do is play above the curve. Don't be average, but don't be extraordinary. Extraordinary has WAY too many risks to worry about. Fortunes are made gradually. It takes discipline and consistency…something the “average” trader lacks.
Author: Joe Harris
http://www.myeinevstor.com.
When it comes to popular stock market tips, there is no golden ticket to striking it rich. So I'm going to show you how to make your own HOT guidelines that will ensure you stay on the right course-the one that leads to success.
Stock Market Tip #1: Play Your Game
Develop a set of rules that you can follow. Whether they include some of the tips in this article or are strategies you've always lived by, STICK WITH THEM. An inconsistent, but more importantly an undisciplined trader will never make a profit. Chasing stock market tips won't make you money. Your rules are your money. Again, there will always be hot stock market tips that ensure success, but if you continue to whole-heartedly practice your own tips, you'll see profits in no time.
Stock Market Tip #2: Control Your Risk
There are many adventurous traders out there…and those are the ones that loose their fortunes. If you always look out to protect your capital base you'll ensure your financial safety. Now one of the most important stock market tips I can give you is to continue to let that capital base grow. That way, even if all of your investments fail, you won't be jeopardizing your previous profits. As a general stock market tip, never risk more than 3% of your portfolio on any one trade.
Stock Market Tip #3: The High Road in Cutting Your Losses
Things happen. People lose money…LOT'S of money. So don't be one of them. Basically this stock market tip means don't be stupid. If one of your investments turns sour don't stick around hoping it will right itself. Have a set target loss percentage where you can cut and run. Again, it's about being disciplined, remember? Set it no higher than 15% of your opt in, and you'll have a save exit with every trade.
Stock Market Tip #4: The Sky's the Limit
In contrast to Stock Market Tip #3, if a stock is rising beyond belief, don't jump out in fear of it suddenly falling back to reality. Instead, ride it out as long as humanly possible. This is how the biggest and most talked about gains are made-this is how FORTUNES are made. This stock market tip will ensure that you give yourself the best chance possible of striking that gold mine. Now if the stock does in fact start to fall, go ahead and opt out. It'll be worth more to you to risk that little loss in the end for that huge gain you'll make.
Stock Market Tip #5: Back to School
You know the saying, “Learn one new thing every day?” Do it. Seriously. Our stock market is ever-changing, diversifying, and adjusting, and YOU need to do your homework. It takes a lot to stay on top of it all. So if you come across something that you're not familiar with just look it up. If you think you know it all…go LOOK for something. One of the easiest ways to accomplish this stock market tip is to know all of the trading vocabulary. That's also the easiest way to ensure you're prepared to take on any obstacle that comes your way.
Stock Market Tip #6: How to Bring Your “A” Game
Stock market trading isn't only about successful financial advancements. Well actually it is, but you're not going to be able to do that every day if you don't have the emotional strength to pull it off. This stuff is supposed to be fun. If you're not at your best psychologically, you're not going to be focused, you'll make poor judgments, and most importantly you won't make money. Just think about the meaning of this stock market tip. If you're enjoying yourself, it's no longer work, so you are free to “work” in a mentality that will, in fact, play to your strengths…and wallet.
Stock Market Tip #7: Staying Above the Curve
You don't have to make a fortune with every trade you make. You don't have to become a millionaire at the end of every trading day. Here's stock market tip #7: You won't. The people that shoot for that glory every day are the ones that are losing fortunes, not making them. What you need to do is play above the curve. Don't be average, but don't be extraordinary. Extraordinary has WAY too many risks to worry about. Fortunes are made gradually. It takes discipline and consistency…something the “average” trader lacks.
Author: Joe Harris
http://www.myeinevstor.com.
Friday, April 6, 2007
Are you a Technical or a Fundamental Trader
In essence, whether you are a trader or an investor there are two ways to approach your trading and investing decisions. Both have very different views in the techniques they use to assess market conditions, and the direction an instrument may take. Needless to say both schools are equally disparaging about the other, and both believe their techniques are infinitely superior. Whilst there is some overlap there are two very distinct methodologies, and you need to be comfortable with one or the other. You will come across this terminology all the time. Whilst there are huge differences in the approach, it is safe to say that most large financial institutions now employ both methods as both have their strengths and weaknesses. Fundamental also applies to the broad economy such as GDP, exports, imports etc
The two schools are called FUNDAMENTAL and TECHNICAL and for the record I am primarily a technical trader. In a nutshell, the fundamental trader believes that a share's performance is based on the fundamentals of the company ( hence the name ) such as PE ratio, profit/loss, balance sheets, management, ratios, business forecasts - the sort of information that is contained in a small forest of paper provided to shareholders.
The technical trader however believes that the future performance is based purely on one simple piece of information, namely the price chart for the instrument. They believe that all the information about a company's performance is encapsulated in this simple chart. This is not an unreasonable assumption since the price reflects past performance, and is dictated by market conditions throughout the trading day. ( You may also hear the term chartist - this is the same thing ) In essence it is the ability to analyse a price chart in order to predict future price movements.
One of the key points to understand is that even though, as a technical trader you will principally be studying charts, fundamental data does play a part, but only on a large scale. You use fundamental analysis to determine what part of the business cycle the economy is in and therefore which industries offer the best growth potential. Then you would use that information to identify groups of target stocks, and finally use technical analysis of the price charts to follow trends and select prospects.
As a technical trader who trades currency for a living, I make virtually all my trading decisions based on the candlestick charts and whether I therefore believe a currency pair is likely to rise or fall. I have assumed that all the relevant information has been factored into the charts by all the other millions of traders around the world. However, I do take account of broad major fundamental economics such as interest rates, GDP, and inflation although the final decision is always based on the analysis of the price charts.
Author: Anna Coulling
http://www.making-bread.co.uk/
The two schools are called FUNDAMENTAL and TECHNICAL and for the record I am primarily a technical trader. In a nutshell, the fundamental trader believes that a share's performance is based on the fundamentals of the company ( hence the name ) such as PE ratio, profit/loss, balance sheets, management, ratios, business forecasts - the sort of information that is contained in a small forest of paper provided to shareholders.
The technical trader however believes that the future performance is based purely on one simple piece of information, namely the price chart for the instrument. They believe that all the information about a company's performance is encapsulated in this simple chart. This is not an unreasonable assumption since the price reflects past performance, and is dictated by market conditions throughout the trading day. ( You may also hear the term chartist - this is the same thing ) In essence it is the ability to analyse a price chart in order to predict future price movements.
One of the key points to understand is that even though, as a technical trader you will principally be studying charts, fundamental data does play a part, but only on a large scale. You use fundamental analysis to determine what part of the business cycle the economy is in and therefore which industries offer the best growth potential. Then you would use that information to identify groups of target stocks, and finally use technical analysis of the price charts to follow trends and select prospects.
As a technical trader who trades currency for a living, I make virtually all my trading decisions based on the candlestick charts and whether I therefore believe a currency pair is likely to rise or fall. I have assumed that all the relevant information has been factored into the charts by all the other millions of traders around the world. However, I do take account of broad major fundamental economics such as interest rates, GDP, and inflation although the final decision is always based on the analysis of the price charts.
Author: Anna Coulling
http://www.making-bread.co.uk/
Investing for Beginners
Wanting, hoping & wishing for more money is something we all do and at some point in our lives it can and does happen; from a win on the lottery to an inheritance, pay rise or gift the next question is always: what to do next? Will it be spend, spend – holidays, cars – or should it be save, save, save. Devil or angel? Your heart or your head? However, does it have to be such a stark choice – can you spend and still have enough to maintain a lifestyle without worry – of course so long as you remember two golden rules from the master himself, Warren Buffet: Rule one is “preservation of capital”, rule two “never forget rule one” They apply whether you decide to handle your financial affairs yourself or employ a professional. So what are the basic rules of investment and how do they work?
First you must understand yourself and, in particular, your view of risk. What does this mean? It means being honest with yourself and how you view both money itself and risk. Your values and beliefs about these will have been established at a very young age, primarily via your parents and those closest to you. If your view of high risk is to lose £100 in an investment decision, then I would suggest that you have a very low risk threshold. Alternatively if you are happy investing £250,000 in a new business venture and can sleep easily, then your risk threshold is high. Both views of course, have to be measured against your overall wealth. You can establish your own “risk profile” by completing any of free online personality tests such as those found at www.similarminds.com. If you decide to use a professional adviser this is the first thing he or she will try to establish. Put simply, they will try to understand the limit of your comfort zone where money is concerned, as well as your long term financial goals and objectives.
Many of the financial markets are extremely volatile, and prices can move significantly on a day to day basis. The US market for example is considerably more volatile than the UK market. For example, a share in the FTSE 100 can move up to 10p in a day whereas a share in the equivalent American market can move one dollar or more (60p) – i.e. 6 times as much per day. You’ve now taken the test and spoken to the experts what next? What will be the key to your success? Diversification or, put more simply, spreading it around will be key, because that is what the successful boys, and increasingly girls, do. It is simple common sense - you do not put all your eggs in one basket as this is asking for trouble. If you had £100,000 to invest, you might put 15% into shares, 10% in premium bonds, 25% in Government Bonds, and the rest into property. Most millionaires are risk averse, they just manage their risk better by preserving their capital, diversifying to spread the risk, and using sound money management techniques. Perhaps this is why they are millionaires!! Just watch Dragons Den and see how careful they are.
Once you have established your risk profile, and accepted that in order to increase the value of what you have it will be necessary to trade and invest, what markets or investments should you choose? Property, pensions, shares, bonds, unit trusts, options, derivatives, precious metals, currency, the list is endless. It all sounds very complicated and intimidating. In fact it doesn’t have to be. There is no reason to feel threatened or intimidated because by asking simple direct questions everything can be explained very easily and in a non patronising way. Remember this is your money and these are your dreams; never, ever invest in anything you do feel comfortable with or fully understand. If it can’t be explained clearly and simply or it keeps you awake at night, you shouldn’t be in it!!
Author: Anna Coulling
http://www.making-bread.co.uk/
First you must understand yourself and, in particular, your view of risk. What does this mean? It means being honest with yourself and how you view both money itself and risk. Your values and beliefs about these will have been established at a very young age, primarily via your parents and those closest to you. If your view of high risk is to lose £100 in an investment decision, then I would suggest that you have a very low risk threshold. Alternatively if you are happy investing £250,000 in a new business venture and can sleep easily, then your risk threshold is high. Both views of course, have to be measured against your overall wealth. You can establish your own “risk profile” by completing any of free online personality tests such as those found at www.similarminds.com. If you decide to use a professional adviser this is the first thing he or she will try to establish. Put simply, they will try to understand the limit of your comfort zone where money is concerned, as well as your long term financial goals and objectives.
Many of the financial markets are extremely volatile, and prices can move significantly on a day to day basis. The US market for example is considerably more volatile than the UK market. For example, a share in the FTSE 100 can move up to 10p in a day whereas a share in the equivalent American market can move one dollar or more (60p) – i.e. 6 times as much per day. You’ve now taken the test and spoken to the experts what next? What will be the key to your success? Diversification or, put more simply, spreading it around will be key, because that is what the successful boys, and increasingly girls, do. It is simple common sense - you do not put all your eggs in one basket as this is asking for trouble. If you had £100,000 to invest, you might put 15% into shares, 10% in premium bonds, 25% in Government Bonds, and the rest into property. Most millionaires are risk averse, they just manage their risk better by preserving their capital, diversifying to spread the risk, and using sound money management techniques. Perhaps this is why they are millionaires!! Just watch Dragons Den and see how careful they are.
Once you have established your risk profile, and accepted that in order to increase the value of what you have it will be necessary to trade and invest, what markets or investments should you choose? Property, pensions, shares, bonds, unit trusts, options, derivatives, precious metals, currency, the list is endless. It all sounds very complicated and intimidating. In fact it doesn’t have to be. There is no reason to feel threatened or intimidated because by asking simple direct questions everything can be explained very easily and in a non patronising way. Remember this is your money and these are your dreams; never, ever invest in anything you do feel comfortable with or fully understand. If it can’t be explained clearly and simply or it keeps you awake at night, you shouldn’t be in it!!
Author: Anna Coulling
http://www.making-bread.co.uk/
Trading on Support and Resistance Levels
The concept of support and resistance is extremely interesting, and one which will help you considerably in the timing of your trading decisions. Yet it is a very simple concept to grasp. Support and resistance are basic tools used by traders to identify key reversal areas. As the names suggest support acts to keep the price above a certain level, whilst resistance acts to keep a share's price below a certain level. Drawing support and resistance lines on charts, allows us not only to determine where these levels are, but also to consider future price movement in relation to them. Oh and don't worry, all charting packages have the facility to draw lines on the screen.
Firstly, let me try to explain how and why these levels arise. Imagine a price is moving up and then subsequently starts moving down again. At the turning point there will be many buyers trapped who did not sell before prices moved down, and have decided to wait until the price moves back up again before selling ( they are living in hope ! ) Let us assume now that the price has stopped falling, and has started rising again. As it nears the point at which it turned the first time, those trapped buyers breath a sigh of relief and sell at breakeven or slightly less, which forces the price back down again as there is now more selling pressure than buying pressure. Naturally in the up move there has been buying, and these buyers now become trapped as prices move back down again. Now this can be repeated many times over, and you will see many different instruments including shares that behave in this way. In some cases this price action can last days, weeks or even months.
At the point where prices were falling and then started rising, exactly the same thing is occurring, but in reverse of course. We now have short sellers who are trapped at the bottom and have to wait for the price to come back down to them, who gratefully close their positions when this happens, to be replaced by more short sellers who are then trapped in turn..... - I think you get the picture.!!
When this price action happens, it has several consequences. Firstly it produces what we call a channel and the instrument is said to be channeling ( or range trading ). The prices form a defined channel with two lines that can be drawn, one above, and one below. Now the important part for us is not to practice our drawing skills, but these lines actually help us considerably. Once one of these lines is penetrated by prices, it becomes a line of support ( for prices going up ) and a line of resistance for prices going down.
Let’s imagine we have been watching a share for some months which has been trading within a channel. Suddenly we notice one day that it has broken above the line and prices are now moving up. The line that was originally resistance to higher prices has now become a line of support and we can trade with more confidence, knowing that if the prices are going to go back down again they will have to penetrate this line of support or floor if you like. If you imagine a building with two floors, prices have moved from the ground floor through to the first floor, and what was the ceiling, has now become the floor. In other words it has become a SUPPORT to higher prices and will take effort to penetrate if prices fall back. It gives us a little more comfort ( but not too much ) in now buying into the move.
Using the house analogy again, we can see what happens at the bottom of the channel. Suppose we notice one day that prices have gone through the ground floor and into the basement, what was the floor has now become the ceiling and has become RESISTANCE to prices going back up to ground floor level.
Now, one final point on support and resistance. This occurs when prices ‘gap up’ or ‘gap down’. This occurs when the opening price the following day, has opened at a different price from that which it closed at the night before. Now the reason I mention it in the context of support and resistance is simply this - if prices break out of a channel with a gap up ( going up ) or a gap down ( going down ) this adds weight to the move and weight to your decision to trade. The reason the gap has formed is because the market makers have opened prices with a significant gap ( up or down ) - they have done this for a reason. If it also coincides with a break out from a channel you can be reasonably sure that this confirms the move and therefore has more significance. Look out for them, they are worth the wait!!
Author: Anna Coulling
http://www.making-bread.co.uk/
Firstly, let me try to explain how and why these levels arise. Imagine a price is moving up and then subsequently starts moving down again. At the turning point there will be many buyers trapped who did not sell before prices moved down, and have decided to wait until the price moves back up again before selling ( they are living in hope ! ) Let us assume now that the price has stopped falling, and has started rising again. As it nears the point at which it turned the first time, those trapped buyers breath a sigh of relief and sell at breakeven or slightly less, which forces the price back down again as there is now more selling pressure than buying pressure. Naturally in the up move there has been buying, and these buyers now become trapped as prices move back down again. Now this can be repeated many times over, and you will see many different instruments including shares that behave in this way. In some cases this price action can last days, weeks or even months.
At the point where prices were falling and then started rising, exactly the same thing is occurring, but in reverse of course. We now have short sellers who are trapped at the bottom and have to wait for the price to come back down to them, who gratefully close their positions when this happens, to be replaced by more short sellers who are then trapped in turn..... - I think you get the picture.!!
When this price action happens, it has several consequences. Firstly it produces what we call a channel and the instrument is said to be channeling ( or range trading ). The prices form a defined channel with two lines that can be drawn, one above, and one below. Now the important part for us is not to practice our drawing skills, but these lines actually help us considerably. Once one of these lines is penetrated by prices, it becomes a line of support ( for prices going up ) and a line of resistance for prices going down.
Let’s imagine we have been watching a share for some months which has been trading within a channel. Suddenly we notice one day that it has broken above the line and prices are now moving up. The line that was originally resistance to higher prices has now become a line of support and we can trade with more confidence, knowing that if the prices are going to go back down again they will have to penetrate this line of support or floor if you like. If you imagine a building with two floors, prices have moved from the ground floor through to the first floor, and what was the ceiling, has now become the floor. In other words it has become a SUPPORT to higher prices and will take effort to penetrate if prices fall back. It gives us a little more comfort ( but not too much ) in now buying into the move.
Using the house analogy again, we can see what happens at the bottom of the channel. Suppose we notice one day that prices have gone through the ground floor and into the basement, what was the floor has now become the ceiling and has become RESISTANCE to prices going back up to ground floor level.
Now, one final point on support and resistance. This occurs when prices ‘gap up’ or ‘gap down’. This occurs when the opening price the following day, has opened at a different price from that which it closed at the night before. Now the reason I mention it in the context of support and resistance is simply this - if prices break out of a channel with a gap up ( going up ) or a gap down ( going down ) this adds weight to the move and weight to your decision to trade. The reason the gap has formed is because the market makers have opened prices with a significant gap ( up or down ) - they have done this for a reason. If it also coincides with a break out from a channel you can be reasonably sure that this confirms the move and therefore has more significance. Look out for them, they are worth the wait!!
Author: Anna Coulling
http://www.making-bread.co.uk/
The Dangers of Trading on Margin
If you thought trading with your own money was a risk, then trading with other peoples is nothing short of stupidity. For the new trader this is like passing your driving test, and immediately taking the wheel of a sports car. Press the pedal and you will be rocketed forward, probably straight into a brick wall, and then the hospital.
Imagine for a moment that you have gone to the casino with friends, but unfortunately you only have £50 in your wallet. Your friend kindly offers to lend you another £50 for the evening. Full of confidence you advance to the tables and promptly lose the lot! In the space of a few minutes you have not only lost your own money but also your friend's. Had you just lost your own money you would have lost 100% (£50/£50). You have managed to lose 200% (£100/£50). This is what trading on margin is all about. It is called leverage and both losses and gains are magnified enormously.
In essence, trading on margin is borrowing money from your broker to buy shares and use your investments as collateral. Unfortunately margin exposes you to substantially higher risks and much bigger losses. You might ask why I am telling you all about it if it is so risky. The answer is twofold. First, I want you to understand the risks involved, and that it is NOT for the novice investor. Secondly, there are several instruments and markets that you can ONLY trade on margin. One of these is spread betting. Two others are options and currency. In the currency market which I know very well, as I trade it every day, some currency brokers offer leverage of 400:1. In other words for every £1 in your account you are able to trade 400 times that amount.
Let us suppose you bought a share at £10 and the price rises to £15. If you bought the share in a cash trading account (ie with just your own capital) you would earn a return of 50% ( £5 /£10). Now in a margin account your broker can lend up to 50% of the amount you deposit in the account. So suppose now you had bought this share using a margin trading account. You would have put in £5 and the broker would have lent you £5 to buy the share initially. It has now gone to £15. You pay back the broker the £5 he lent you, and you have been left with £10. Your profit is £5, a 100% return on your money!! ( £5/£5). So for a 50% increase in price, you have made a 100% return. Now let us look at the down side of trading on margin. Suppose the share you bought on margin at £10 falls to £5 - you pay your broker back the £5 you borrowed, and you are left with nothing. So on a 50% fall in value you have lost 100% of your capital!!!
This is what is called leverage. Leverage is a double edged sword, which amplifies both losses and gains to the same degree. Because leverage magnifies everything, it hugely increases the risk in your portfolio. In addition to the above there are two other factors to consider. Firstly there is interest to pay, as your broker does not lend you money for free. Secondly there is the dreaded margin call. If your margin account falls below very prescribed limits you will receive a margin call - this is the broker asking for more money to cover your losses. If this is not available immediately, your broker has the right to close some or all of your positions in order to reduce your exposure to the market. This is likely to happen in particularly volatile markets. If you receive a margin call, in my opinion, you are out of control.
If you are new to investing, I strongly recommend that you stay away from margin trading as long as possible. When and if you feel ready, remember you do not have to use the full 50%, you can start at a lower rate, so consider starting at 10% - you should still be able to sleep at night!
Author: Anna Coulling
http://www.making-bread.co.uk/
Imagine for a moment that you have gone to the casino with friends, but unfortunately you only have £50 in your wallet. Your friend kindly offers to lend you another £50 for the evening. Full of confidence you advance to the tables and promptly lose the lot! In the space of a few minutes you have not only lost your own money but also your friend's. Had you just lost your own money you would have lost 100% (£50/£50). You have managed to lose 200% (£100/£50). This is what trading on margin is all about. It is called leverage and both losses and gains are magnified enormously.
In essence, trading on margin is borrowing money from your broker to buy shares and use your investments as collateral. Unfortunately margin exposes you to substantially higher risks and much bigger losses. You might ask why I am telling you all about it if it is so risky. The answer is twofold. First, I want you to understand the risks involved, and that it is NOT for the novice investor. Secondly, there are several instruments and markets that you can ONLY trade on margin. One of these is spread betting. Two others are options and currency. In the currency market which I know very well, as I trade it every day, some currency brokers offer leverage of 400:1. In other words for every £1 in your account you are able to trade 400 times that amount.
Let us suppose you bought a share at £10 and the price rises to £15. If you bought the share in a cash trading account (ie with just your own capital) you would earn a return of 50% ( £5 /£10). Now in a margin account your broker can lend up to 50% of the amount you deposit in the account. So suppose now you had bought this share using a margin trading account. You would have put in £5 and the broker would have lent you £5 to buy the share initially. It has now gone to £15. You pay back the broker the £5 he lent you, and you have been left with £10. Your profit is £5, a 100% return on your money!! ( £5/£5). So for a 50% increase in price, you have made a 100% return. Now let us look at the down side of trading on margin. Suppose the share you bought on margin at £10 falls to £5 - you pay your broker back the £5 you borrowed, and you are left with nothing. So on a 50% fall in value you have lost 100% of your capital!!!
This is what is called leverage. Leverage is a double edged sword, which amplifies both losses and gains to the same degree. Because leverage magnifies everything, it hugely increases the risk in your portfolio. In addition to the above there are two other factors to consider. Firstly there is interest to pay, as your broker does not lend you money for free. Secondly there is the dreaded margin call. If your margin account falls below very prescribed limits you will receive a margin call - this is the broker asking for more money to cover your losses. If this is not available immediately, your broker has the right to close some or all of your positions in order to reduce your exposure to the market. This is likely to happen in particularly volatile markets. If you receive a margin call, in my opinion, you are out of control.
If you are new to investing, I strongly recommend that you stay away from margin trading as long as possible. When and if you feel ready, remember you do not have to use the full 50%, you can start at a lower rate, so consider starting at 10% - you should still be able to sleep at night!
Author: Anna Coulling
http://www.making-bread.co.uk/
How to Retire as a Millionaire ?
Will you have a sense of fullfillment and security when you have atleast a million dollars in bank when you are old and cannot work anymore. Almost anyone can retire as a millionaire, all you need is little over $3 a day. We will explore some techniques to make money work for you and make you a millionaire while you retire.
Dollar-Cost Averaging
Dollar-cost Averaging (or Regular Savings Plan) is a simple strategy of investing small amount of money every month. Investing atleast $100 every month in some investment like mutual funds or stocks that has an average annual return of 8% to 10%. Make this as an extra savings after your social security or provident fund savings.
Compounding
Einstein wondered Compounding as the eighth wonder. What made a mathematical genius wonder at this simple principle? Let us now see the power of compounding.
Let us say you are using Dollar cost average method to invest regularly. And you are investing $100 a month in stocks or mutual funds with a annual return of 10%. At the end of first year you will have $1320. At the end of 10 years you will have $21,037. Not a big sum, but still avoid the temptation to withdraw for that vacation. By the end of 30 years you will have some $217,132. After this at the end of 40 years you will have $ 584,222.
Now the magic happens, at the end of 46 years guess how much you will have, it will be million dollars ($1,045,170). If you notice that it took 10 years to accumulate $20,484, but it only took last six years to generate $460,948 or double from $ 584,222 to $1,045,170.
For compounding to work its magic
1. You must put aside some money lump sum or regularly in an interest generating account
2. Must not withdraw from the account
3. Allow sufficient time to compound
What you have done here is to simply invested $100 a month, which is like little more than $3 a day and retire as a millionaire. If you have started investing at the age of 20, by the age of 66 when you retire you will be a Millionaire.
Author: Jag Karnan
http://www.whyyouarenotrich.com/
Dollar-Cost Averaging
Dollar-cost Averaging (or Regular Savings Plan) is a simple strategy of investing small amount of money every month. Investing atleast $100 every month in some investment like mutual funds or stocks that has an average annual return of 8% to 10%. Make this as an extra savings after your social security or provident fund savings.
Compounding
Einstein wondered Compounding as the eighth wonder. What made a mathematical genius wonder at this simple principle? Let us now see the power of compounding.
Let us say you are using Dollar cost average method to invest regularly. And you are investing $100 a month in stocks or mutual funds with a annual return of 10%. At the end of first year you will have $1320. At the end of 10 years you will have $21,037. Not a big sum, but still avoid the temptation to withdraw for that vacation. By the end of 30 years you will have some $217,132. After this at the end of 40 years you will have $ 584,222.
Now the magic happens, at the end of 46 years guess how much you will have, it will be million dollars ($1,045,170). If you notice that it took 10 years to accumulate $20,484, but it only took last six years to generate $460,948 or double from $ 584,222 to $1,045,170.
For compounding to work its magic
1. You must put aside some money lump sum or regularly in an interest generating account
2. Must not withdraw from the account
3. Allow sufficient time to compound
What you have done here is to simply invested $100 a month, which is like little more than $3 a day and retire as a millionaire. If you have started investing at the age of 20, by the age of 66 when you retire you will be a Millionaire.
Author: Jag Karnan
http://www.whyyouarenotrich.com/
The Dow Theory
You will hear a lot about the Dow Theory as you travel through your trading career. Dow himself never actually used the phrase. That came later as analysts began to use the term.
I should back up here slightly and mention that in 1884 Dow published his first stock market average of 11 stocks. From the original 11 stocks there were some changes and rearrangements of the average until finally in 1928 he settled on 30 stocks which are now know as the industrial average and that is where we get the term the 'Dow Jones Industrial Average'.
The actual theory is fairly straightforward to explain and sensible if you take the time to think about it. I shall simplify it slightly, as we have not covered some of the terms yet.
1. The market discounts everything. The price you see is the true value of the market. If you are following a particular stock and it is trading at $10 then that is a fair value of that stock. It assumes that all the known information about that stock has been taken into consideration by the market and is reflected in the price. If new information was introduced it would change the price of the stock but it would still be reflected in the price.
2. The Market Has Three main Trends. We are starting to get into some technical expressions here but just bear with me, as we will explain all these terms as we progress. Dow interpretation of a trend was that each rally high be higher than the previous rally high and each rally low be higher than the previous rally low.
The three trend where a primary, secondary and minor trends. Now this is important because later on as we discuss this it will play a major roll in our analysis.
The primary trend is the main force behind the trend and is like a river flowing in a particular direction. The secondary trend is like tributary to the main trend. It may diverge for a time but eventually it will come back in line with the main river. The minor trend is like a small stream, which runs this way and that but is headed, in the general direction of the river.
The primary trend may take years to come to an end and develops over time. The secondary trend can take anywhere from a few weeks to a few months in duration and the minor trend may be in the opposite direction of the primary trend. Minor trends such as daily trend last a few days or so and are of little significance.
3. In addition to the three types of trends, Dow then went on to further qualify the trend by saying that the trend has three phases. An accumulation stage, the public participation stage and finally the distribution stage.
4. As the original Dow average was composed of shares from different sectors the next part of the Dow theory was that the average of the different sectors must confirm each other.
5. Dow also considered the effect of volume on a trend. He stated that volume should expand in the same direction of the trend.
6. The last major part of the theory is the trend should be assumed to still be in force until there is a definite indication that the direction has in fact changed.
My interpretation of the Dow theory above is very brief as it is to delve to deeply into any one particular subject. It is also not necessary for what I am trying to achieve and that is to give you a broad idea of how the markets work and some way to trade them.
The main point I want you to take away from the Dow theory is that there are three types of trends, a primary trend, a secondary trend and minor trends. We can use this in our approach.
By: Martin Chandra
http://forex-trading-tutorial.com/offers/
I should back up here slightly and mention that in 1884 Dow published his first stock market average of 11 stocks. From the original 11 stocks there were some changes and rearrangements of the average until finally in 1928 he settled on 30 stocks which are now know as the industrial average and that is where we get the term the 'Dow Jones Industrial Average'.
The actual theory is fairly straightforward to explain and sensible if you take the time to think about it. I shall simplify it slightly, as we have not covered some of the terms yet.
1. The market discounts everything. The price you see is the true value of the market. If you are following a particular stock and it is trading at $10 then that is a fair value of that stock. It assumes that all the known information about that stock has been taken into consideration by the market and is reflected in the price. If new information was introduced it would change the price of the stock but it would still be reflected in the price.
2. The Market Has Three main Trends. We are starting to get into some technical expressions here but just bear with me, as we will explain all these terms as we progress. Dow interpretation of a trend was that each rally high be higher than the previous rally high and each rally low be higher than the previous rally low.
The three trend where a primary, secondary and minor trends. Now this is important because later on as we discuss this it will play a major roll in our analysis.
The primary trend is the main force behind the trend and is like a river flowing in a particular direction. The secondary trend is like tributary to the main trend. It may diverge for a time but eventually it will come back in line with the main river. The minor trend is like a small stream, which runs this way and that but is headed, in the general direction of the river.
The primary trend may take years to come to an end and develops over time. The secondary trend can take anywhere from a few weeks to a few months in duration and the minor trend may be in the opposite direction of the primary trend. Minor trends such as daily trend last a few days or so and are of little significance.
3. In addition to the three types of trends, Dow then went on to further qualify the trend by saying that the trend has three phases. An accumulation stage, the public participation stage and finally the distribution stage.
4. As the original Dow average was composed of shares from different sectors the next part of the Dow theory was that the average of the different sectors must confirm each other.
5. Dow also considered the effect of volume on a trend. He stated that volume should expand in the same direction of the trend.
6. The last major part of the theory is the trend should be assumed to still be in force until there is a definite indication that the direction has in fact changed.
My interpretation of the Dow theory above is very brief as it is to delve to deeply into any one particular subject. It is also not necessary for what I am trying to achieve and that is to give you a broad idea of how the markets work and some way to trade them.
The main point I want you to take away from the Dow theory is that there are three types of trends, a primary trend, a secondary trend and minor trends. We can use this in our approach.
By: Martin Chandra
http://forex-trading-tutorial.com/offers/
Investment Scams and How to Avoid Them
Most people, especially those new to the investment arena, do not realize there are a number of common scams which are used to victimize investors each year.
The misconception about investing scams is that most smart investors believe they will "know one when they see one" - this is simply not true. Especially in the modern marketplace were criminals have all the resources of the world wide web to create realistic investing schemes which capture the investors attention as well as their money.
The anonymity of the world wide web is a breeding ground for scam artists targeting individuals who so desperately want to get rich quick. Many of these criminals will set up web pages with news letters, forums, and prospectus for companies which do not even exist.
These sites are design with information including success stories from other investors. This is used to lure new investors in. By following un-research claims an investor can easily lose his investments, retirement, and education funds.
Remember professional investors live by the mantra that customers buy products but investors buy securities. Do not be lured in but what merely sounds good. The key is to keep a keen ear for what sounds and is valuable. Major red flags include the use of emotional and subjective words in combination with an investing recommendation.
If you become interested in a stock there are several ways to check if it is a valid stock tip or not. The first place to start is research the company that the stock is for. Take a look at their financial statements to get an idea of how well the company is doing by checking both income and debts. If both of those are in order call the company and speak with human resources. Ask them to validate th claims in the newsletter, email or web page are true. These are great ways to check if a stock tip is fact or fiction.
Another great place to look for information about a specific company is the SEC. Public companies must register with and file yearly reports to the SEC to document their growth and development.
These reports are thoroughly checked to make sure they are truthful and accurate. This helps not only to confirm if you have a valid investment but will also document if the company's profits are going to continue to increase or decrease.
Access to the SEC and public companies can easily be found on the world web wide. If the advertisements claim to have certain investors feel free to call those companies and confirm their investments and their satisfaction with the company.
Many scam artists will use high profile company names to make the document more alluring to potential investing victims.
Additionally the NASD can be contacted. This organization helps states' regulate securities and has all the information needed to verify if a company is real or not.
Only through being an aggressive and educated investor can you utilize your money to it's fullest potential. Take the time to do the research, ask the questions, and if something feels funny, go with your gut.
There are plenty of real investing opportunities out there if you take the time to look.
By: Mika Hamilton
www.Global-Investment-Institute.com
The misconception about investing scams is that most smart investors believe they will "know one when they see one" - this is simply not true. Especially in the modern marketplace were criminals have all the resources of the world wide web to create realistic investing schemes which capture the investors attention as well as their money.
The anonymity of the world wide web is a breeding ground for scam artists targeting individuals who so desperately want to get rich quick. Many of these criminals will set up web pages with news letters, forums, and prospectus for companies which do not even exist.
These sites are design with information including success stories from other investors. This is used to lure new investors in. By following un-research claims an investor can easily lose his investments, retirement, and education funds.
Remember professional investors live by the mantra that customers buy products but investors buy securities. Do not be lured in but what merely sounds good. The key is to keep a keen ear for what sounds and is valuable. Major red flags include the use of emotional and subjective words in combination with an investing recommendation.
If you become interested in a stock there are several ways to check if it is a valid stock tip or not. The first place to start is research the company that the stock is for. Take a look at their financial statements to get an idea of how well the company is doing by checking both income and debts. If both of those are in order call the company and speak with human resources. Ask them to validate th claims in the newsletter, email or web page are true. These are great ways to check if a stock tip is fact or fiction.
Another great place to look for information about a specific company is the SEC. Public companies must register with and file yearly reports to the SEC to document their growth and development.
These reports are thoroughly checked to make sure they are truthful and accurate. This helps not only to confirm if you have a valid investment but will also document if the company's profits are going to continue to increase or decrease.
Access to the SEC and public companies can easily be found on the world web wide. If the advertisements claim to have certain investors feel free to call those companies and confirm their investments and their satisfaction with the company.
Many scam artists will use high profile company names to make the document more alluring to potential investing victims.
Additionally the NASD can be contacted. This organization helps states' regulate securities and has all the information needed to verify if a company is real or not.
Only through being an aggressive and educated investor can you utilize your money to it's fullest potential. Take the time to do the research, ask the questions, and if something feels funny, go with your gut.
There are plenty of real investing opportunities out there if you take the time to look.
By: Mika Hamilton
www.Global-Investment-Institute.com
Sunday, April 1, 2007
New Equal Weight ETFs Complement Sector Spiders
In November, nine new equal weight sector ETFs began trading. They are sponsored by Rydex, and they are counterparts to the original nine Sector Spiders that are composed of the stocks in the S&P 500 Index. I have been a long-time and enthusiastic advocate of equal weighted indexes because they truly allow you to spread your risk equally among all the stocks in the index, and I am very pleased to see these newest trading vehicles become available. Let's take a moment to explain what an equal weighted index is.
Most market/sector indexes are weighted by capitalization, which means that the largest cap stocks exert the most influence on the price movement of the index. For example, I once examined the S&P 500 Index and found that the top 50 stocks (ranked by market cap) actually represented about 70% of the entire S&P 500. What this means is that the remaining 450 stocks have very limited influence on the index.
In the case of these new equal weighted sector ETFs, each stock in the sector is initially given an equal weight in the index, and re-balancing takes place on a quarterly basis.
In addition to avoiding overexposure to the larger-cap stocks in the index, equal weight indexes usually perform better than their cap-weighted counterparts. This is because the smaller-cap stocks, which usually perform better than larger-cap stocks, have a heavier weight in the index.
The new ETFs are currently very thinly traded, but this should change as soon as they have been "discovered".
Author: Carl Swenlin
http://www.decisionpoint.com/
Most market/sector indexes are weighted by capitalization, which means that the largest cap stocks exert the most influence on the price movement of the index. For example, I once examined the S&P 500 Index and found that the top 50 stocks (ranked by market cap) actually represented about 70% of the entire S&P 500. What this means is that the remaining 450 stocks have very limited influence on the index.
In the case of these new equal weighted sector ETFs, each stock in the sector is initially given an equal weight in the index, and re-balancing takes place on a quarterly basis.
In addition to avoiding overexposure to the larger-cap stocks in the index, equal weight indexes usually perform better than their cap-weighted counterparts. This is because the smaller-cap stocks, which usually perform better than larger-cap stocks, have a heavier weight in the index.
The new ETFs are currently very thinly traded, but this should change as soon as they have been "discovered".
Author: Carl Swenlin
http://www.decisionpoint.com/
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