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  • Trader Lyn

    Trader Lyn 3:07 pm on April 4, 2012 Permalink | Log in to leave a Comment  

    How to ride the trend with a simple Moving Average 

    Stocks are either trending up, trending down or rolling sideways, understanding the direction of the stock’s movement and applying the right indicators will help us to become more successful traders.

    Let’s talk about an up trending stock, what indicator is more appropriate to use
    I personally use moving averages on trending stocks they work the best for me in a rising stock price.

    Let’s have a look below on the chart.

    The setting I use is a 55 Day, 21 Day, 5 Day moving average.I find that we can ride a stocks climb all the way to the top and exit as it reverses or closes below the 55 Day Moving average.
    In April 2009 we enter in November 2009 we exit with a nice gain.
    In March 2010 we enter in May we exit with a nice gain.
    In October 2011 we enter in June we exit with a nice gain.
    In February 2012 we enter and are still in the trade as the price is still above the 55 Day Moving Average.
    Now if you’re wondering about the big drop in price on the chart it’s a STOCK SPLIT why do I love stock split companies because  when I first started trading them 12 years ago it’s like a self-fulfilling prophecy a good growth company with strong earnings will eventually be driven back to the original price…yes my ah ha moment if you watched it is repeating itself.
    A stock trading at $77 a share is very expensive to buy 100 shares our investment is $7,700 but with an option we can control the same 100 shares for the next 2 years with only $1,000 deposit now that’s the power of leverage.
    The strike or the agreed price we have chosen here is the 80 strike.
    Let’s assume in the next 2 years the price goes back to the original price of $120 what is our call option worth well that’s easy to work out we realise the gain from $80 to $120 that’s $40 increase  x 100 shares it’s worth $4,000. That’s a 300% return.
    If we purchased the shares our return is 50% not  a bad return we wouldn’t complain as an options trader I ask where else could I be using my money wiser.
    In this example I have an extra  $6,700 to invest somewhere else.

     
  • Trader Lyn

    Trader Lyn 2:58 pm on April 4, 2012 Permalink | Log in to leave a Comment  

    Traders or Investors by Des Carmody 

    This blog post is a special submission from one of my dearest students and a very successful trader, Des Carmody. I hope you enjoy reading his article as much as I have!

    Trader Lyn

    TRADERS OR INVESTORS

    In the Australian Shareholders Association’s publication “Equity” for December 2011 and January 2012, an article by Marcus Padley was published.  I felt that his wise words needed a wider currency amongst Stockcourse traders who perhaps are not members of the ASA.  So with apologies to Mr Padley I have tried to encapsulate his article and fit it to the requirements of Stockcourse traders.  Any faults that you may come across are mine and not Mr Padley’s.

    INVESTORS:  For the purposes of this paper I will lump together fundamental investors, long term investors, value investors and income investors under the common head of Investors. Let us start with the first assumption then, namely, that people who regard themselves as investors would claim to be, on the whole, “buy and hold” investors who hold the belief that you cannot time the market and therefore it is “Time in the market” that counts.

    TRADERS:  The second assumption must be that people who regard themselves as traders would claim to be people who think they can – to a certain extent – time the market and therefore hold the belief that “timing the market” is everything.

    COMMON APPROACHES

    Next, let us consider the common approaches adopted by these two classes of shareholders.

    INVESTORS:  It is the common approach (by no means universal, but certainly sufficiently enough to be classed as common) for “investors” to make their trading decisions based on information given to them when contacted by their broker and given the latest thoughts on what the broker’s analysts have come up with.  For very good reasons the analysts employed by brokers can only carry out their job by conducting fundamental analysis of stocks which are on their watch list.  Read the fine print on the contract that you have with your broking firm and you will find that there are more disclaimers than grains of sand on a beach.  All care, no responsibility.

    It is thus the fundamental analysts whose advice is being bandied about and these fundamental analysts are good at certain things, including:

    • Identifying companies that make money (and that’s the root of it all in the long term).
    • Identifying rubbish companies.
    • Identifying good management.
    • Identifying sector trends.
    • Portfolio theory.

    … and most of this analysis is done with one aim in mind – to decide which stocks to buy.

    Often “buy advice” is dictated by the date of a company’s results when the analysts have just published their post result research.  That morning the analysts, in the morning meetings, report to hundreds of advisers that their research has disclosed that the company is in great shape.  The hundreds of advisers then get on their phones to their clients and tell them what the analysts have concluded.

    The “timing” is thus dictated by the results date.  The clients then compete against each other to buy the stock.  The price, using the basic supply and demand theorem, rises exponentially.

    Too much advice focuses on what to buy and whenever that conclusion is made that’s when to buy.

    There are a couple of things wrong with this stratagem.  First, by the time the advisers have contacted the first of their clients the news is stale.  The heavy hitters will have already purchased the amount of stock they need to keep their “portfolios” in balance.  This, of course, forces up the price.  Second, when the price has been forced up the analyst’s advice has to be altered and in all likelihood that advice would now be to “hold” the stock.  Even if it doesn’t change their advice the client would be paying a much higher price and thus reducing the percentage profit available.

    Investors, in the main, have difficulty with:

    • Timing the market.  They declare that it can’t be done.
    • Selling.  They don’t know how.
    • Being disciplined.  They will watch stocks being destroyed without doing anything about it.
    • Being vigilant.
    • Having a trading plan.
    • Being emotional.
    • Being lemmings.
    • Being wrong.

    TRADERS.  A common misapprehension about traders is that they are short term, rely entirely on technical analysis, know nothing about companies and aren’t interested in dividends or franking.  On the contrary, traders have a lot of strengths:

    • Traders are not just technical analysts; they are traders which means they have trading skills.  These skills are universal and are as useful for investors as they are for traders.  Some technical analysts never trade; they just fuss over formulas and principles.  Traders are different; they live in the real world and trade.  They are quite separate.
    • Traders are not necessarily short term.  Techniques can be applied over any time frame.  Applied over minutes and hours and it is akin to gambling.  Apply them over days and it is trading, apply them over weeks and months and it is investing.
    • Traders have exactly the same ambition as a long term investor, as Warren Buffet even; the ambition to buy a stock that goes up forever.
    • Traders have a trading plan and because of that they never miss a night’s sleep.
    • Traders are unemotional.  They know what they are going to do at all times because from the moment they buy a stock they have a system.
    • Traders are decisive.  Traders never prevaricate, they never agonise, they know what to do, they decided way before the trade was even opened.
    • Traders are honest about their abilities.  They know that making money in the stock market is about buying stocks with a high probability of going up.  It’s not about predicting the future – nobody can do that.
    • Traders are not proud.  They know that things will change, that they will get themselves into a pickle.  The difference is that when they do, they act; they don’t stand by some grand but flawed declaration about the future through thick and thin.
    • Traders are not lemmings.  They are at war with the herd, thus they retain an independence of mind and action.
    • Traders are commercial.  They see trading as a business and they analyse their success and failure like a business.  They constantly analyse, adapt, educate and improve.

    FORGET THE MARKET

    Any trader will tell you, you don’t hold ‘the market’ you hold a collection of individual trades and every stock or option presents its own individual trading challenge, its own separate battle.

    No trader is smart enough to make one decision that will be successful for every stock/option at the same time, so instead you are going to make 20 decisions using 20 price charts assessing each on its own merits.  If you think that this is muddleheaded just consider the advance/decline statistics on, for example, the NYSE; you will see that even on those days where the DOW goes through the roof there will be a number of stocks that have declined.

    You will also find without realising that by taking a stock by stock approach you end up timing the market without thinking.  If you watch 20 stocks and one by one they trigger your stop losses and you sell them, by the time the average man looks up in fear and says ‘ it’s time to sell the market’ you will find through a series of 20 individual stop losses being hit that you have already sold it.  The stocks or options spoke, you listened and you exited the market without the need for any grand declarations and you did it one at a time, ahead of the crowd and you never even knew you’d done it until you had.  That’s why we break it down into individual trades – because the stocks are the market and they will tell you what to do long before CNBC persuades you.

    “The Market” is a tool of commentators, the media and fund managers who use it as a benchmark.  You have no benchmarks so be realistic and don’t talk about the market – talk about stocks.

    TRADING PLAN

    As any trader will tell you, you have to have a system or mechanism that tells you when to sell.  This mechanism is embodied in a trading plan that is decided upon before you even buy a stock.

    This is the most fundamental of skills that all traders must have.  If you have not got a trading plan; if you have not got that plan written down; if you are not confident in your plan; if you are not prepared to change that plan when you realise that there is something wrong with it – then DON’T GET INTO TRADING.

    As a Stockcourse client you have available to you the expertise of a great team.  If you need help in coming up with a trading plan you could do yourself a favour and do the Fast Track course and personal training in Stockaid conducted by Simon Euers.  Also the Insiders course conducted by Michael Brooks would be of benefit to you.

    STOP LOSSES

    Stop losses are the essence of timing stocks and options and you will find that once you have developed a stop loss mechanism you could buy pretty much anything and after the purchase everything becomes systematised.  The system takes over.  You have nothing to worry about, no reason to stress.  All you have to do is monitor the trade and do what your system tells you.

    Trading systems are not about making easy money; they are about timing the odds of success in your favour by controlling the outcome and minimising losses.  You will still need to buy stocks/options at the right time and that’s where you need to combine the fundamental stuff with your technical skills.

    A stop loss is an order that automatically closes your trade at a predetermined price or trigger point.  It serves the dual purpose of limiting losses whilst at the same time providing a mechanism to take profits.  It also serves as the background for short circuiting debate and emotion whilst providing certainty.

    Individual traders have their own stop loss mechanisms and quite often a combination of mechanisms that come into play at different times for trades.  For example, once an option moves into a pre-determined level of profit your stop could be changed to a moving average stop.  That is a matter that is entirely in your hands.

    MISTAKES

    You will make mistakes.  You will sometimes sell stocks/options that then go up again. But nine out of ten stocks/options that are going down are going down for a reason and are likely to keep going down.  And if they don’t, don’t worry about it.  The idea is to learn what works and whatever you do has to be better than setting and ignoring.

    When it comes to controlling losses anything is better than nothing – and if your mechanism doesn’t work, you can always change it.

    It’s up to you and the reality is that the detail of the mechanism (whilst some technical traders will agonise over the best formula) is not crucial if you bear in mind what I said earlier about changing your plan if it is not working.

    THE GAME

    This whole game (if I can be so bold as to call it a game) is about “what” and “when”, not just “what”.

    THE QUESTION.

    The only question you have to ask yourself is this:

    AM I A TRADER?

     

     
  • Trader Lyn

    Trader Lyn 2:35 pm on March 5, 2012 Permalink | Log in to leave a Comment  

    Market Update Monday 5th March 

    Since early February the Dow Jones Index  has been flirting above and below the 13,000 a key technical level, because everyone is anticipating a pullback it makes me believe that the market may have some more upside before it corrects.

    So how do we trade this? The key to making money over the short term is to get really clear on whether you are a trader or an investor and your time frame  and having a trading plan.

    Because, over the short term, it is possible that the DOW Jones Index can move higher..

    Now if that happens, it may not be  a sustainable move in the longer term, but that won’t matter if you are a trader, as you are in and out and just looking to trade the movement.

    The US economic data on  Initial claims, non-farm payrolls, ISM manufacturing Index, GDP and consumer confidence have all come in better than expected seems the market is shrugging off bad news like home sales in the US and a slowdown in China manufacturing for the fourth straight month. It is also shrugging off the sovereign debt issues in Europe for now which includes Greece, Portugal, Spain etc  the ECB is on the same path as the Federal Reserve  essentially printing money which is not a long term solution to the ongoing sovereign debt levels it just takes the pressure off for a bit or could be delaying a full blown default by either Greece or others in trouble.

    The Volatility Index (VIX) is a measure of fear so how do we read it today, well readings of 50 or higher measures Panic, 30 or higher measures fear and anxiety, 20 measures nervousness, and below 20 measures complacency. As we are below 20 it seems for now fear seems to be leaving the market or are we just getting used to the headline risk or are we confident that policy makers will do the right thing for the economy?

    Well the short term is reading complacency how long can the VIX stay below 20 one to keep your eye on.
    Also of concern is the Dow Industrials Transport sector which  is a leading indicator for growth there seems to be a divergence happening now between other major indexes this should also be watched going forward.

     
  • Trader Lyn

    Trader Lyn 1:29 pm on March 5, 2012 Permalink | Log in to leave a Comment  

    How to create a trading plan 

    There are three key decisions you need to make when trading and if we think in these terms and your trading plan answers each question, then you may have the makings of a simple yet robust trading plan.

                 Under what circumstances will you enter a trade?
    •             How much money will you commit to the trade?
    •             Under what circumstances will you close the trade?

    Having a trading plan facilitates your decision-making by helping reduce the influence of your emotions from the equation and, therefore, will hopefully make you trade more efficiently.

    The best way to ensure you get the most from your trading plan is to write everything down.

    I believe your trading plan should take into account three broad areas:

    •             Your trading mindset (or psychology)

    •             Your money management (position size, hedging strategies & using stop losses)

    •             Your trading method (requirements for entering a trade or exiting, technical analysis tools used and your daily routine.)

    Many people accept that a trading plan is an essential requirement to trading well, yet they don’t know where to start to put one together.  It can be overwhelming at first to tackle this issue, so some of the things you must ask yourself first are:

    Why do you want to trade the markets?
    1.       Increase and grow your money for retirement?
    2.       Increase your yearly income?
    3.       Create a monthly income to help pay for bills?
    4.       To save up for a new boat, holiday house, trip overseas?
    5.       Pay for your children’s college?

    What is your time frame for achieving your goals?
    1 year
    2 years
    5 years
    10 years plus

    How much money are you going to invest?
    5K
    10K
    20K
    30K
    40K
    50K
    60K or more

    How much of this capital will be invested into the market at any one time?
    10%
    20%
    30%
    40%
    50%
    50% or more

    How much of your capital are you prepared to lose before you stop trading?
    2%
    5%
    10%
    20%
    30%
    40%
    50%

    What are you going to trade? (Stocks, Options, CFD’s, Forex, Futures?)

    What is your time frame for holding positions?

    Do you understand the risk with the trading tool or strategy you choose?

    How many trades do you want to do?
    One per day        [  ]
    One per week     [  ]
    One per month   [  ]
    How many trades per year?
    How much of your time can you commit? (It is important to take into account your lifestyle, family and personal commitments)

    1.       One hour day                        [  ]
    2.       One hour per week               [  ]
    3.       5 hours per week                  [  ]
    4.       10 hours per week                [  ]

    You must set in stone the most important thing with money management – protecting your capital.

    Even though your primary motivation is to make money protecting your trading capital is even more important.

    How can you make money, if you don’t have any money to trade with?

    The most important trading rule is to cut your losses. One way to do this is using stop losses.

    A ‘stop loss’ is a pre-defined level (price) at which you will exit a trade based on the premise that it is not moving in the direction that you had anticipated, and therefore you are losing money. Your prudent level of loss has been met by the risk you are willing to take.

    The first thing is how are you going to set your stop loss point?

    One of the best ways to manage your risk when trading is to limit or set a cap on how much money you put into a single position.

    What is the maximum percentage of your trading capital you are prepared to commit to a single trade?

    Another crucial part of money management is position sizing. How are you going to position size?

    What is going to be your maximum risk exposure across your trading portfolio at any one time?

    Will you limit the number of trades based on how much risk capital you have at risk across all of your open trades?

    What happens if you keep losing money? This question has little to do with trading but rather your own financial situation.

    Are you prepared to lose every cent of your allocated trading capital before you are forced to stop, or do you think you would like to hold on to some of the money and commit it somewhere else, with the plan of waiting or being patient to review why it’s not working.

    There are numerous products available to trade including shares, futures contracts, options on futures as well as options on stock, currencies (foreign exchange), CFDs and more, and they all have different risk profiles. If you are trading multiple products, how are you going to allocate your capital accordingly based on the different levels of risk?

    How are you going to trail the stock price with your exit once the price moves higher?

    How are you going to calculate this?

    Are you going to trade short term reversals in medium term trends?

    Are you going to trade in only blue chip stocks and look at medium term trends with a view to buying stocks as they trade above 12 month highs? Or below12 month lows?

    Are you going to trade more speculative stocks at the other end of the scale and trade breakouts from trading ranges?

    If you are going to use technical analysis, what indicators are you going to use?

    For example, are you interested in trends? If so, over what time frame and how are you going to identify them? Are you interested in reversals of short term or medium term trends? If so, how will you identify them and then what will you do once you identify them?

    If you are going to use fundamental analysis, what items are of most interest to you?

    For example, are you interested in earnings, dividends, growth, acquisitions? If so, how will you use that information?

    Human nature and behavior over the years, remains constant in the market. All market participants are driven by similar emotions and will often react to situations in the same way. Moreover, there are always a continual flow of new participants into the market and they are generally ignorant of the way the market has behaved in the past.

    For this reason, the same mistakes are often repeated by each new group of market participants – this is why chart patterns often work.

    First, will you consider a particular chart pattern as a setup (lead into) for a trade entry? Second, are
    there any chart patterns that will immediately stop you entering a trade or at least have you waiting until the pattern has completed or dissolved?

    Strategies for Low risk traders max 10% risk
    Holding positions up to 12 months or more
    Buying stock
    Selling covered calls
    Vertical spread strategies
    Calendar Leaps min 12-month option expiry to max 3 years
    Leaps

    Strategies for medium to high max 20% risk
    Holding positions 3-6 months
    Min 6-month option expiry
    Buying calls and Puts
    Selling calls and Puts
    Buying stock
    Selling covered calls
    Vertical spreads
    Calendar Leaps
    Leaps

    Strategies for high-risk tolerance max 30%
    Holding positions 1 day to a couple of weeks
    Min 3-month option expiry
    Buying short term calls and puts
    Trading CFD’s, Forex, Futures,

    What kind of education have you done to qualify your knowledge?

    Have you tested your plan before committing your capital?

    How long are you prepared to paper trade for?

    What is your goal and time frame?

    Are your goals realistic and achievable?

    Some of the more important factors include your personality traits like patience, confidence, decisiveness, emotional stability, mental agility, and the most importantly  – your ATTITUDE.

    Trading has a greater potential for reward than investing but with that extra potential for reward is greater risk. Those who trade well have been well educated and prepared. Very seldom does somebody start trading and make money from day one. Putting together a proper trading plan can seem time consuming, however I can assure you that it is one of the best things you can do and will greatly assist you in achieving the results you want.

     
  • Trader Lyn

    Trader Lyn 1:35 pm on February 13, 2012 Permalink | Log in to leave a Comment
    Tags: , , market news,   

    What to watch this week on the Markets 

    The agreements with Greece are dragging on the media may have you believing they are close to a deal we shall have to wait and see
    Protests in Athens over harsh austerity measures has the town on fire yes burning fires blazing through the centre destroying businesses,  buildings and houses we are seeing this kind of behaviour happening more and more around the world as angry people and take their rage on the streets.

    The cycle of the bull run on the Dow we have seen since 2009 may soon be coming to an end our charts tell us where the tipping points are, this week  important  words from the FED on Wednesday at 2pm we will be watching what they say about QE3 and the retail numbers released on Tuesday are also important this will show  whether consumer spending is growing or contracting  the non-payroll report that came out over a week ago showed a positive number, but all eyes will be on this month’s number to see if it has a follow through and that  it’s not just a one off distorted number.


    What Else to Watch this week in the US

    Monday

    President Obama releases 2013 budget proposal

    9:45 p.m. San Francisco Fed President John Williams on Fed mandate and monetary policy

    Earnings: Diebold, Masco, Regal Entertainment

    Tuesday

    7:30 a.m. NFIB survey

    8:30 a.m. Retail sales

    8:30 a.m. Import prices

    8:45 a.m. Philadelphia Fed President Charles Plosser on economic forecast

    10:00 a.m. Business inventories

    5:40 p.m. Atlanta Fed President Dennis Lockhart on economic outlook

    Earnings: Avon Products, Fossil, Marsh and McLennan, Zipcar, Goodyear Tire, Borg Warner, TransCanada, Hospira, Zynga, FMC Technologies, Weight Watchers, Metlife

    Wednesday

    8:30 a.m. Empire State survey

    9:00 a.m. TIC data

    9:15 a.m. Industrial production

    9:15 a.m. Dallas Fed President Richard Fisher on Fed operations and Texas economy

    10:00 a.m. NAHB survey

    2:00 p.m. FOMC Minutes

    Earnings: Comcast, CBS, Deere, Dr. Pepper Snapple, ITT, Nvidia, Agilent, Owens Corning, Teva, Abercrombie and Fitch, Anglo Gold Ashanti, Dean Foods, Devon Energy

    Thursday

    8:30 a.m. Weekly jobless claims

    8:30 a.m. PPI

    8:30 a.m. Housing starts

    09:00 a.m. Fed Chairman Ben Bernanke on future of community banking

    10:00 a.m. Philadelphia Fed survey

    Earnings: GM, Barrick Gold, Apache, Discovery Communications, JM Smucker, Progress Energy, Molson Coors, Hyatt Hotels, Huntsman, Duke Energy, PG&E, Applied Materials, Baidu, Leap Wireless, SunPower

    Friday

    8:30 a.m. CPI

    10:00 a.m. Leading indicators

    Earnings: Brookfield Asset Management, Campbell Soup, EnCana, Goldfields, Heinz, Amerigroup

     
  • Trader Lyn

    Trader Lyn 2:38 pm on February 6, 2012 Permalink | Log in to leave a Comment  

    Latest Market News 

    After strong non payroll numbers announced on Friday, (243K against the projected number of  150K) the market advanced higher.
    Whether we think the data is manipulated or not, the good number gives confidence that it’s not getting any worse for now.

    However this interesting article has another way to look at those numbers. I’ll let you make up your own mind.

    http://www.zerohedge.com/news/trimtabs-explains-why-todays-very-very-suspicious-nfp-number-really-down-29-million-past-2-mont

    These numbers are  released every month, so next months numbers will be extremely important to watch. The Australian market also advances today on the positive payroll news in the US.

    This week in Oz, the RBA meets to decide on a rate cut, also the Big Blue Chips are announcing this week the likes of BHP, RIO, TLS, MQG.

    Greece may seems closer to a negotiation deal that may just calm the markets for now. But we must be aware of just how serious the events in  Europe are to the rest of the world and the consequences.

    If a positive deal is met with Greece soon, the markets will move higher. If not,  it could be the start of the falling dominos just like 2008 all over again.  I think Europe has the capability for now to kick the can down the road a little further before it implodes on them.

    It is also a presidential election year in the US this November and historically that means bullish. There has only ever been 2 negative election years in history.

    January 2012 has been a positive month in the markets, it has started the year off in positive territory. The only thing concerning some investors out there is that the volume for January was at a 10 year low.

    They are wondering how much of the 8 Billion dollars that is sitting on the sidelines, waiting to be invested somewhere, will go into the stock market.

    No matter what the market does, if we have a trading plan there is always an opportunity to trade. See you online tonight for a full market update.

     
  • Trader Lyn

    Trader Lyn 11:39 am on January 31, 2012 Permalink | Log in to leave a Comment  

    Understanding 200 years of defaults 

    Something a little different this month -  I would like to share with you a report that I found has some valuable  explanations of what has happened in past history what is happening now and what will happen in the future which effects ultimately the stock markets.

    This report is Written by Carmen M. Reinhart, University of Maryland and NBER, Kenneth S. Rogoff, Harvard University and NBER

    Abstract:

    This paper offers a “panoramic” analysis of the history of financial crises dating from England’s fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example,defaults and restructurings in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.

    Major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors. A recent example of the “this time is different” syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

    Click the link below to view this 124 Page document:

    http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf

     
  • Michael Brook

    Michael Brook 9:50 am on January 30, 2012 Permalink | Log in to leave a Comment  

    Eliminating the Confusion Factor – Building a trading system that works 

    One of the curious things about trading is that it is a rule free place. There aren’t any real rules as to how you interact with the ebb and flow of price on a daily or minute by minute basis. There isn’t a policeman there to tell you that you are speeding or going the wrong way. There aren’t any stop signs telling you that you just about to drive into a highway on the wrong side when all the traffic is heading in the opposite direction. The trading environment is a rule free space.

    There’s a saying in german, “Wer hat der Wahl, auch hat der Qual”. Translated this means that if you have the choice you have the burden of the choice and it’s consequences.

    In a rule free space like trading you have to make a lot of choices repeatedly and the burden of those choices are yours and yours alone. Every time you think about a trade you are making a choice about that trade. Will you stay in or will you get out… what about the last time this happened?, what’s going to happen next? Etc, etc, etc…

    In such an environment, what is critical it to decrease the burden of the choices you necessarily have to make by virtue of being in the rule free space we call the market.

    The best way of doing this is to have a clear set or rules that you have for yourself that you have worked out works for you. My style of trading will be different to your style. My risk profile may be different to yours, my skill level may be different, the instruments I like to trade may be different to the ones you like to trade etc, etc,etc…

    Before you can trade successfully you need to make clear decisions about:

    • The instruments and markets you trade in
    • The timeframe you trade in
    • The level of risk you are tolerant of.
    • The amount of time you have to learn the skill.
    • The intention you have for learning how to trade.

    Each of those choices will affect your decisions and future profitiability and success.

    Some people trade intruments that are too highly leveraged for their skill level. It surprises me that many people will trade instruments with the highest risk (leverage) without considering the downside consequences of that type of trading first.

    This is akin to taking a learner driver and putting him behind the steering wheel a formula one race car telling him it’s going to be fine you’ll get there really fast. The predictable carnage is not easily explained away.

    Traders who able to make quick decisions can make better short term traders than others who take longer to make decisions.

    Once you have decided the things above you will need to do everything you can to reduce the amount of work that you will need to be doing in your decisions making.

    To reduce the confusion factor you will need to have a trading plan that has clarity. The more complex any system is the more things that can go wrong with it. System theory holds that for a system that has “n” components there are “n squared” possible failure modes of that system.

    So if you are building your trading system you want to make it as simple as you can.

    In order to make your trading system simple you need to:

    • Have it as simple as you can
    • Have a precise market (context) for each trade
    • Have a set of trades for each market.
    • Have a set of simple entry and exit rules.
    • Have a detailed review methodology

    If your trading is not working the probability is that either the decisions you made before you started trading have not stood up to your interaction with the market or the market is not favoring your trading system.

    If you trading system is not as simple as it needs to be or is dripping with complexity the chances are that you aren’t getting the results you want out of it. There is a reliable predictable path for most traders whose trading gets initially more complex then substantially simpler with time.

    Most expert traders have systems that are simple to implement.

    The path to trading success is much like sharpening a knife. You have test it out before you know if it’s sharp enough. This means sometimes you will get a cut or too in the process.

    The saying that the simple things in life are often the best is true particularly when it comes to trading systems.

     
  • Lyn Summers

    Lyn Summers 10:51 am on January 16, 2012 Permalink | Log in to leave a Comment  

    The trigger to set off a Global Recession is Europe! Do we see this happening now? 

    Italy’s largest Bank UniCredit lost 40% of their share price in the last 4 days and that’s after a 10 for one reverse stock split a strategy used to help prop up the share price but I guess it failed. They have 40 million customers globally in 22 countries.
    Check out the chart

    We are all  exposed with the outcome in Europe if their banks stand or fall the effects will be felt globally on different impacts.

    Europe’s troubles continue they are slipping into recession the austerity measures are proving to be challenging Bond yields are rising.
    The bond buyers are demanding a higher yield due to the risk perceived yes the Fear of default. This in turn pushes the countries debt up higher something they are struggling paying now an impossible situation or solution.Standard & Poor’s on Friday cut its ratings on nine European countries, including France, Spain and Italy the start of more to come.
    We have already seen the fall in the Euro, check out the chart below:

    What’s going on with the US
    JP Morgan reported quarterly earnings on Friday that met Wall Street expectations in profit but missed on revenue the Banks are an important sector to watch if confidence is lost in the banks this could lead to credit issues.
    The US  banks are also holding $4 million  foreclosure’s off their balance sheets remember they are hoping to put them on the market one day with the housing market lower than it was in 2009 it would  seem an inappropriate time to do that as it will further depress the housing market and they could take a lot less than they are anticipating.
    Stimulus has driven the US  stock market rally since 2009, now without more stimulus where is the stock market headed?
    Combined with the Europe woes any trigger could set off a selling frenzy at any moment on global markets the smart money are distributing  so the market top looks close. It’s Bear Wrangler time…

     
  • Michael Brook

    Michael Brook 10:07 am on January 16, 2012 Permalink | Log in to leave a Comment  

    A year of firsts. Lessons to be learnt. 

    If we fail to learn from the past we are condemned to relive it. Nothing is more truthful than this saying applied to trading. This is why many traders, correctly so, look to previous patterns of price action to guide their actions in the future.

    However, the market is constantly changing and evolving. One year may not be the same as any other. This year has proven to be different from every other year there has been in the market. As traders we must evolve our trading to the changing market within which we operate.

    In 2011 there was unprecedented volatility in the financial markets. In 2011 we saw

    • The first year where the XJO (the asx S&P200) closed down 2 years in a row.
    • The first day ever when XJO moved a total of 11% within a single day on XJO (Aug 9)
    • The largest ever single day volume spike in the history of XMJ ( the Australian materials sector)
    • The largest every 4 day volume on the history of the DJI Aug 9-11
    • The first year ever with 100 days greater than 100 point moves on the SPY.
    • The first time in 41 years where the spy closed within 0.5% of its opening, (this occurred in spite of the fact that the DJI moved over 120% of it’s value in 11 major moves)
    • The first period ever where 80% of all volume on an exchange was algorithmic(this occurred through august on the DJI)

    The market this year was characterized by massive moves sparked by news announcements, natural and man-made disasters and ongoing concerns about debt in Europe and elsewhere.

    So what is the significance of this information and how do we use this to our advantage?

    Firstly, we should never expect the past to be similar to the future. The speed and range of market movements is increasing and we should expect more of this in future markets. As the penetration of the algorithmic traders increases and the exchanges become more dependent on the income derived from those traders, the price movements will become more consistently larger.

    Secondly, traditional methods of trading are becoming more and more unprofitable. In such volatile markets last year’s where rapid movements of entire indices occur, tradition trading methods would have stops being hit all the time. Trend traders would be unable to make money because of the rapid swings and periodic clean outs of stops. Patterns would have difficulty making money as many patterns fail immediately after break out. The support and resistance line traders would have been worked over similarly as the volatility of the market pushes price briefly above and below support and resistance levels only to reverse once trades are entered into.

    Finally, the methods of trading that support shorter term profit targets that take advantage of the volatility will be the trading style that will be rewarded. Many retail traders like to hold positions for longer time periods. This is referred to buy and hold typically long trades. That strategy will have proven to be very costly in the past 18 months.

    As traders we must adapt to the new market and to use what the market throws at us to our advantage.

     

    An expertise acquisition perspective.

    The acquisition of expertise involves a systematic practice of the performance skill in many different conditions, so that when the performance is required in a new context it can be accomplished with skill.

    One aspect of training that is central to expert performance is the acquisition of flexibility to perform in different contexts. The performance skill is practiced in as many different possible environments to build flexibility into the performers performance.

    As traders, we need to have trading plans that are flexible that are able deal with different market conditions.

    By building flexibility into your trading you are able to function in profit in a market that is volatile.

     

    If you have flexibility as part of your trading strategy,

     you will never be in a market that you can’t profit from.

    So, how do you do that?

    Firstly, you need to have trade setups for volatile and non-volatile markets.

    Secondly, you need to have contingencies for each trade if the volatility of the market suddenly increases

    Finally, you need to know what sort of markets you don’t want to be in. If this isn’t it you should be out.

    2012 is likely to be as volatile as 2011. The causal factors of the volatility have not gone away and are likely to accelerate to their conclusion. If you are prepared you can trade profitably in any market.

     
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