Thursday, September 28, 2006

Trading With Candlesticks

Utilizing technical analysis is an important component of wise investing in various securities and can be done to any kind of security, including mutual funds, stocks, bonds, etc. When using technical analysis tools on a specific security, you are looking for price patterns, price fluctuations, and trends. Your ultimate objective is to figure out how you stand as an investor. In other words, should you sell or buy?

So, how is stock market technical analysis accomplished? There are several different methods. Some investors use technical indicators as part of their technical analysis process and others do their technical analysis by studying charts of a security's past activity. The best investment advice regarding technical analysis is to use several different methods - comparing one against the other in a system of checks and balances.

There are several assumptions made when using the best technical analysis tools. A first assumption is that the past is a good indicator of the present. However, when dealing with the stock market, coming to this conclusion during technical analysis does not always lead you to profitable results. The other assumption is that all securities have a tendency to form stock chart patterns in their fluctuations. This is fine, and is often the case, but the market is often unstable because of stock volatility.

How then do you make use of the most important technical analysis tools? Why try it if they are not completely accurate? Well, even though they are not 100% accurate, you still stand a reasonable chance of analyzing correctly, depending on how thoroughly you were in your analysis using the methods you have chosen.

Therefore, fundamental and technical analysis methods offer a way to make educated choices when making new investments in securities and determining how to handle your current investments. So you can at least have confidence in knowing you did your absolute best, even though it isn't a sure thing,

So who will do the technical analysis? Well, you can either hire people to perform the technical analysis or you can do it yourself. If you work with a company that helps manage your long term investing accounts, it's a safe bet that they employ human resources to help analyze the market and gather data. Then they pass this information to their clients in an attempt to guide them in their investment options.

If you choose to do it yourself, using technical analysis with candlesticks, it could take a while to get the hang of it. Science and math are used to do the analysis, but many consider it an art. Although you can use formulas to give you a set of numbers, it is an "art" for that person to determine what the numbers actually mean.

Market Direction: Learning how to use candlestick signals not only makes the analysis of the markets much easier, it allows for quick analysis of all other trading entities that may be affecting the equity markets. Attempting to analyze the general market trends becomes dramatically easier using candlestick signals. An additional proven benefit of using Candlestick analysis is the ability for quick evaluation of specific markets that may be influencing the stock market.

Trading specific commodities or currencies is extremely effective when using candlesticks signals. The markets in general or individual stock prices usually have multiple influences affecting their price movement. As seen in today's charts, positive trading of crude oil prices made it difficult for the Dow to push through an obvious resistance level. Commodities and currencies, on the other hand, usually have much less outside influences affecting their direction. This provides one huge benefit. The reversals are much easier to identify and the new trend will persist much longer, usually without dramatic choppiness.

Keep in mind, candlestick signals were developed over the past few hundred years when trading Rice. This is the most basic of all commodities. Investor sentiment is clearly identified in any trading entity as long as it involves human emotions. Our recent trade on live cattle illustrates the effectiveness of a change of investor sentiment.

Utilizing the candlestick signals is the prime factor for identifying a reversal. Adding those signals to the other indicators, that most technical investors will be watching, enhances the probabilities dramatically of being in and out of a trade at the optimal points. This can be clearly seen as Live Cattle formed the Evening Star signal with stochastics in the overbought condition. Excellent probabilities for going short. The Evening Star signal is one of your most accurate and clearly defined reversal signals. The 20 day moving average has the possibility of creating a bounce, but the failure of that level would then be looking at the 50 day moving average.

Click the Trading With Candlesticks header link above to learn more about investing speculating and trading with the technical analysis method.

Good day and good trading.

Wednesday, September 27, 2006

Trading Software

What good is a Ferrari if you never take it out of the garage? Today, we are going to talk about the trader's equivalent of a Ferrari - trading software. Just like the beautiful car that sits in the garage, the software has amazing power and is completely useless unless you use it properly. Not only that, the software will make you money, the car will not. Today, we will show you how to test systems properly, with a focus on how to get the most out of trading software like Tradestation and Trade Navigator. When you look at strategy performance reports, they can sometimes look like Egyptian hieroglyphics. Let's break down important numbers, and show you how to use them to make as much money as possible! When used properly, trading software can increase your returns, and reduce your volatility by double, triple or more hopefully leaving you richer than the Pharaoh of Egypt!

A - Net Profit- Net profit is the all important number when comparing one system to another right? That's not necessarily true. Do not be blinded by net profit, because it doesn't tell the whole story. For example, if you take the rate of return from the money market and compare it to the rate of return in stocks (the S&P 500) from May 1999 to present you would find that they both have similar net profit (less than 10%) But net profit does not tell the whole story here. It doesn't tell about all the investors who had to work an extra 10 years because they lost all of their money in stocks. So, don't get too tied up with net profit. It does not consider volatility among other factors. We prefer using "select net profit" rather than net profit and we will tell you why in a moment.

B - Percentage Profitable - Percentage is also a number you don't want to follow too blindly. Some systems have a high percentage profitable and yet the losses are so much bigger than gains, that the systems lose money over time. However, when looking at percentage profitable and the win/loss ratio, the key is have both of these numbers high. Consider a coin toss, which has a percentage profitable of 50% and a win/loss ratio of 1. Multiply the 2 together and you get 0.50. A system that has a product (when you multiply these 2) of 1 or greater, is an outstanding system indeed. But many profitable systems have a product of 0.73 or better. So settle for now less than .73.

C - Ratio Average - This ratio compares the average size of winners to the losers. The higher the number, the better the system. Systems with high win/loss ratios (such as the one pictured here) typically have a percentage profitable of less than 50%. Every system has weaknesses

D - Buy/Hold Return- This is the return for your chosen time period had you bought the stock and held it. This figure is important when you compare it to "percent in the market" (F). Take the return on initial capital and multiply it by percent in the market. If that number is higher than the buy/hold return, your system is more efficient than buying and holding the stock.

E - Profit Factor- Profit factor is gross profit divided by gross loss. This figure tells you how many dollars you gained for every dollar lost. In other words, profit factor takes into account losses and thus is risk-adjusted. This number should be positive and a profit factor of 3 or more is a major plus. F- Percent in the Market- This looks at the trading strategy and tells you how often the strategy is in the market. For instance, if there are 200 bars tested and the strategy has active trades for 20 out of the 200, the strategy is 10% in the market. Use this in conjunction with net profit and buy/hold return to figure the efficiency of the trading strategy. Another number that you want to use when testing (not pictured here) is coefficient of variation. This is a fancy word for volatility and you can compare this number (it's expressed in percentage terms) in once system to the next to compare risk. As mentioned earlier, software is the best and fastest way to test your observations and ideas. It will answer many of the questions you have about the market and what works. If you can't decide whether you believe in a particular trading technique, test it. Find the best systems via testing. Read the book Computerized Trading by Mark Jurik.

Click the Trading Software header link above to demo and trial the top trading software programs on the market today.

Good day and good trading.

Tuesday, September 26, 2006

Profiting From Volatility

Most traders have heard the story of Long Term Capital Management (LTCM). For those who have not heard the story, LTCM was a hedge fund designed to take advantage of situations where the price volatility of a financial instrument would go from higher than average to normal (the mean). Can lowly traders such as ourselves take advantage of volatility as a warning that large moves are coming? The answer is yes. Most traders would agree that periods of high volatility are usually followed by periods of low volatility. But what about the other way around? Are periods of low volatility followed by periods of high volatility? They are indeed (most of the time). Today, we will briefly discuss a strategy that you can use to take advantage of volatility explosions.

Here is a quantified signal to take advantage of these occurrences. We are going to focus on getting clued in on volatility increases before they occur. Optimized historical tests have shown that it's effective to compare 6-day historically volatility against 100-day historical volatility. When 6-day historical volatility is 50% or less than 100-day volatility, this tells us that the stock or index has calmed down and it becomes likely that a large market move is about to happen. Keep this in mind if you are considering entering a straddle. You can use this technique to find ideal entry points. One extremely effective technique for entry is to find a stock that fits this low volatility criteria. Once the stock breaks out of a tight range (which should be in place based on low volatility), trade the stock in the direction of the breakout. So if the stock plummets downward, then sell short, and if the stocks shoots up, go long. Usually, the longer a stock or market index stays in this low volatility state, the larger the move will be once it breaks out.

You should use stops with this technique in the following way. Once you get a breakout following the period of low volatility, take note of the high of the breakout day if it is a bullish breakout. Once the stock closes above the high of the breakout day, then go long on the stock. Use the low of the breakout day as your stop loss price in order to reduce risk.

Monday, September 25, 2006

Trading Attitude

One of the lessons trading has taught me is that the right attitude helps create the conditions to reach your goals. I am often tested on the importance of the right attitude, as I sometimes find myself falling into old patterns of hurry, stress or negativity that come with approaching deadlines. When I found myself feeling stressed, I had to first make myself aware of the stress, and then to re-channel any negative thoughts into the positive feeling of the blessings I possess.

As a trader, once you get clarity on what you are targeting as your goal, your attitude then becomes critical to staying on the right track. A positive attitude will tend to open up your acceptance to new ways of trading, primarily in the areas of riding winners longer and being less hesitant to cut losers more quickly.

In the Merriam-Webster dictionary the first definition of "attitude" focuses on "the arrangement of the parts of a body or figure." Only at the fourth definition do we read that attitude is "a mental position with regard to a fact or state." This implies that a person's body posture is an important expression of his attitude. I have noticed that when you are sitting in front of your trading screens, when you sit up straight, it tends to inspire more confidence than if you are slouching. There are many other physical aspects to consider in how you cultivate the proper attitude. One I work on is steady and rhythmic breathing. In moments of excitability I have noticed my breathing tends to become short and shallow. This is not conducive to long-lasting focus and concentration, so I will seek to become aware and then take deep breathes at counted intervals to get into deeper breathing and a more relaxed and focused state.

Usually when we talk about attitude, we think of either people with positive attitudes or negative outlooks on life. The optimist expects good things to happen in his life, while the nay-sayer is constantly blaming others for his difficulties. One of the key defining points between winners and losers in trading is the ability to take full responsibility for the actions and outcomes that occur in one's trades. The acceptance of personal responsibility is a key difference between successful and unsuccessful traders, and success can be traced back to a positive mental attitude. A positive attitude does not mean you never have negative thoughts, but it does mean that you become aware of negative thoughts quickly and seek to neutralize them or reframe them to a positive vision.

A positive attitude also allows you to find new opportunities in the midst of losing trades. A positive attitude definitely is reinforced by past trading success, but when we ask which came first, the positive attitude or the successful trading approach, the positive attitude usually came first and helped cultivate the final outcome of trading success.

Click the Trading Attitude header link above to learn more about having the right Trading Attitude.

Good monday everyone.

Sunday, September 24, 2006

Trading Software Comparisions

Stock Trading Software - What Are The Advantages?

If you are interested in learning about stock trading software and its realistic advantages, the following information should be helpful.

Stock Trading Software - How does it Work?

Before choosing any stock trading software, you should have moved beyond the level of beginner stock market investing. At that point, you will be able to define your rules, or criteria, for the stock trading software. The software will then scan and find stocks that match your criteria. Buy or sell signals are made evident by the software.

Once the trading signals are recognized, orders are executed. You can program the stock market investing software to place orders or they can be done manually, depending on how you've programmed the software.

So, the process is:

Rules or criteria are written for the software.

The stock trading software matches up stocks to your criteria and makes trading signals for buying or selling.

The execution of orders is done.

As stated before, it is important that you have enough trading experience in the stock market and you are familiar with basic stock investing concepts. This means that you probably shouldn't begin using stock trading software until you have a good understanding of technical analysis and enough experience with stock trading to create profitable criteria for scanning and finding stocks.

A question you may be asking is: Why do I need the software if I have enough experience?

There are several advantages of using stock trading software.

Manage your portfolio. You can control your investment risk reward ratios and monitor your stocks effectively.

Avoid greed and fear - The improper management of emotions is one of the most important reasons why investors lose money. Even though investors are aware of this and try to avoid decision-making based on their emotions, they always seem to fall into this trap again and again. Using software you help you control your emotions.

Time savings - Because there are so many stocks for investing, software tools scan many stocks in a short time period for investment opportunities based on your best stock market investing strategy.

Using Stock Trading Software

Choose software that is a good fit for your goals. There are various kinds of software on the market with differing price points for picking stocks. Find on that is suitable for your needs. There are both semi-automatic and fully automatic trading software packages available. When using semi-automatic software, you yourself place the orders. Fully automatic software can be programmed to sell and buy stocks automatically if that is your desire.

Short term investors consider trading software a necessity. Software is indespensable for option traders, swing traders, and stock market day trading. In general, software is suitable for short term investors. It may not be as much a necessity for long term investors.

Before you buy any stock trading software, choose one with a 100% money-back guarantee or try a free trial version if available.

We compared well known stock trading software packages and the comparision ratings. Click the Trading Software header link above to review the comparision list.

Good weekend and good investing.

Friday, September 22, 2006

College Tuition

529 Plans - Part I

In 2005, annual tuition costs at four-year public universities rose 7.1% to $5,491, while tuition at private colleges and universities rose a similarly significant and 5.9%, to $21,235. But tuition is just part of the pie. When you add in room and board, students pay an average $12,127 for one year at a public school and $29,026 if they choose a private institution.

That’s a significant outlay, and most students find themselves in need of financial aid at some point in their education. Many parents scrimp and save – and often put off saving for their own retirement, just so their children can go to college. Now that’s a subject for another issue of Financially Fit, but today, I’d like to talk about the 529 Plan, the college-funding investment that has experienced explosive growth in the last few years, with more to come in light of recent favorable federal regulation.

What is a 529 Plan?

Born in the 1980s as a vehicle to save for college tuition, the plan became part of Section 529 of the Internal Revenue Code in 1996.

But the 529 really took off when the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made qualified distributions exempt from income tax. Additional elements of the Act enlarged the definition of family members to whom a 529 beneficiary might be changed, and also allowed colleges, or a consortium of colleges, to sponsor 529 plans. Today, distributions of 529 plans may be used at more than 8,000 schools in the U.S. and more than 800 international higher education institutions.

And while those provisions were fabulous, there was a clincher. The Act included a sunset clause, which provided for expiration of the tax measures in January 2011. Not anymore! As of last month, the Pension Protection Act of 2006 made the federal income tax exclusion on qualified withdrawals permanent, meaning continued expansive growth of 529’s is right around the corner.

529 Plans are operated by the individual states to assist families with savings for future college costs. It is each state’s decision as to whether it will offer a plan and what benefits and options the plan will contain. Every state has at least one 529 plan available.

529’s come in two flavors:


Prepaid plans are offered by states and educational institutions, many only to in-state residents. Investors purchase tuition credits in prepaid plans – quarters, semesters, or years of tuition, that are then guaranteed for the future – irregardless of whatever tuition hikes occur between time of purchase and time of use. Prepaid plans generally cover in-state tuitions, but many will allow transferal of the contract to out-of-state schools, although one may not receive full value.

These plans will often are limit enrollment to certain ages or grade levels. And they typically charge enrollment and administrative fees.

The performance of prepaid plans is based on tuition inflation, not investment performance, making them ‘safer’ and attractive to conservative investors. They would be more suitable for children who don’t have a tremendous number of years prior to going to college, maybe, 3-7 years from enrollment in the plan.


529 Savings Plans are sponsored by the individual states, but not by educational institutions. Most have no state residency requirements.

The growth of 529 Savings Plans is based upon the market performance of the underlying investments in the plan. They may include stock mutual funds, bond mutual funds, money market funds, and certificates of deposit. Most plans will offer a range of age-based asset allocation portfolios, becoming more conservative as your child nears college age.

They may also offer risk-based asset allocations, keeping a fixed percentage in fixed-income versus equity regardless of the beneficiary’s age. Others are designed with a stable value or guaranteed option whose goal is to protect the account principal while offering some investment growth.

Savings plans can generally be used at any U.S. college or university and some international institutions. They are not guaranteed by the states and are not federally-insured. And unlike most prepaid plans, they have no age limits, are open to adults and children and enrollment is usually open all year. However, switching among investment options is usually limited, often to once a year.

These plans may charge enrollment fees, sales loads (broker commissions), annual maintenance fees, annual distribution fees (similar to the 12b-1 fees at mutual funds, and average between .25% and 1.0% of your investment) and asset management fees (which may be waived or reduced, depending on size of the account or if contributions are automatic).

529 plans offer numerous advantages, including numerous tax breaks, owner-control of the accounts, no income limitations, and ability to make large contributions. Next week, I will cover each of these benefits in detail and also provide you with a list of questions you should ask prior to committing to a plan, as well as several resources to help you in finding the best plan for your family.

More on 529 plans next week. Have a good weekend.

Thursday, September 21, 2006

Forex Signals

We've been trialing many of the popular forex signaling services. No forecast service or any analyst for thats concerned in our experience can provide profitable trading results all the time. There will be times of drawdown and thats what money management and stop-loss are for to minimize losses and drawdown. So you don't loose your entire trading stake in a short period of time and get knocked out of the trading game.

After trialing many top forex signal services, we compared them for a variety of criterior and have ranked them at the following page. During our trialing of these forex signals we still applied our own analysis. We found these services very useful as part of our overall forex trading strategy. Most of these fx signals provide a free trials. The overall best forex signal service we found to be was the DashboardFX from FX Universal. Click the following link to review the entire list we compared and rated.

Forex Signal Service Providers Compared

What are forex signals? Frex signals are paid services offered by some forex brokers and independent forex annalists. Companies that offer forex signals monitor and analyze the market for you, providing you with their data via desktop alerts, email or even SMS and pager alerts.

Forex signal services analyze several factors when preparing their data. They do a technical analysis of market conditions and use a combination of indicators to identify trends and isolate profitable entry and exit points. They then send you the results via the venue of your choice and you can choose to use the signal in your own trading, or pass on it.

Most forex signal services offer signals for only a handful of the most popular currency pairs, such as EUR/USD, USD/JPY, GBP/USD, USD/CHF. Occasionally, you can find specialty services that offer signals for other lesser traded pairs. Forex signals can cost upwards of $100 / mth. The benefit of subscribing to such a service is that they analyze and crunch the data for you, saving you time and energy. It should be noted, however that using a signal service is no substitute for a proper education in the forex markets. Forex signal services give you data, you still need to know what to do with it.

When shopping for a signal service, make sure that they provide you with historical data so that you can see their track record for yourself. Remember, that like any trader, forex signal services also have loosing trades. You shouldn't expect a signal service to be a sure ticket to instant forex wealth, but rather look at them as another excellent tool in your trading toolbox.

Click the Forex Signals header link above to review our comparision of the top forex signal service providers.

Good day and good trading.

Wednesday, September 20, 2006

Pro Trading

Whether you are looking to retire, or start another business, or trade full-time. The viability of trading for a living is really dependant on several factors, which can be very similar to any scenario in which you hope to leave a current salary behind in hopes of greater gain, greater freedom to do what you want or any other objective you wish to accomplish. Given the continued slimming of the ranks in bigger corporations, it's wise to consider planning an alternate future.

If you want to break away from your current situation, you have to have a plan to replace the income you will lose. If you are making $100,000 annually, what will it take to replace this?

There are several factors you need to consider:

1) What capital base are you starting with? Most traders are far too undercapitalized, meaning they don't give themselves a chance to stay in the game because they have too little money and thus invest too great of a percentage of their capital into any one trade. According to the book Market Wizards, one great trader noted that his ideal portfolio risk per position was 2.2%. That means if you invest 10% of your capital in an options trade, you should not take more than a 22% loss. Most traders take on too much risk per position and end up enduring an excessive drawdown which knocks them out of the game.

2) What return can you realistically expect to generate? Here your assumptions should be conservative, based on averaging all your wins and losses over time. If you expect to generate a 10% annual return, then you need a starting capital base of $1,000,000 to end up with $100,000 annually. If you expect a 20% annual return, then your initial capital must be $500,000.

3) Investigate corporation and LLC structures for tax savings. There often are ways to better manage your expenses via trading as a business instead of as an individual. One of the best books on the subject is Ted Tesser's The NEW Trader's Tax Solution. Also consult your tax adviser to assess your situation in more detail.

4) Cut living expenses as much as possible. This may lower the effective dollars you need to live on, which can help you in the early years by reducing the pressure to trade too large or too often.

The bottom line is that you may be ready, or perhaps you need to keep your current income a while longer while also trading on an end-of-day basis. I set up many of's recommendation services to be based on end-of-day updates, which often allows us to focus on the bigger trend moves and fits the schedule of traders who still need their salary income while staying involved on the trading side. Make sure you are capitalized well going in to trading for a living. Also make sure you can implement your well-tested method's entries, exits and money management strategies without a fault. I don't want to see anyone end up like the guy in the old Ameritrade commercial, where his stock shoots up intraday, he runs into his boss's office yelling I QUIT and then comes back to his monitor to discover his stock has given back all its gains. If you follow a plan to aggressively cut expenses to increase your amount saved, and trade that wisely on an end-of-day timeframe, you can build your capital to the point that you can realistically expect to create a trading career for yourself.

Click the Pro Trading header link above to learn more about being a successful trader for the long term.

Good day and good trading.

Tuesday, September 19, 2006

Elliott Wave Trading Software

Elliott Wave trading has its pro's and con's with traders any other trading systems or methods have. I've heard a little more negative about Elliott Wave trading than I've heard positive from other traders. My experience over the years with it has been positive.

As I read my Elliott Wave Principle book, its states the basic tenent of the book is . . . The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

Being a surfer, I'm a beleiver in the nature of ocean waves and their characteristics. In my time surfing and spending time on the ocean, I see repetitive waves on the water. If they happen within earth's nature do you think they happen or can happen in human nature? I'm inclined to beleive so in my experiences over my life.

I use Fibonacci in my trading. Fibonacci is very good and uncanny in its ability to dertermine support and resistance levels in any time frame. Elliott Wave seems to be a more complex form of Fibonacci as it provides more than just support resistance and extension analysis but very high ratio reward risk reward trade setups. I've seen some trades with Elliott Wave trading provide as much as a 12:1 reward to risk ratio. That's huge. Many trading systems can only claim much less than this. In trading, especially using leverage margin, money management and position sizing correctly is the key to long term success in trading any market. You must use stop-loss and keep your losses smaller than your winners is the bottom line. If you don't, over time you will trade you money away.

We have just started testing an Elliott Wave trading software called MTPredictor. We are distributors of the MTPredictor Elliott Wave Trading Software now. Once we have throughly tested it for 60 to 90 days we will be reporting on it it here. Currently we are finding this software to be very valuable. With this software traders can determine price entry, stop-loss and multiple profit targets, and the best of all, it has a built in function for taking the proper trade size according to account amount size. This software controls money managment and pinpoints position sizing with precision to keep risk to a minimum. Minimizing risk is so very important in this trading business.

Here's a list of MTPredictor features. users enjoy a 10% discount off the regular price, and a 30 day money back guarantee.

• Elliott Wave Software that finds, evaluates and manages trades based on Elliott Wave Analysis in stocks, forex, futures, options, indexes, currencies and commodities.

• End of Day / Real-Time / Stocks / Futures / Forex

• Real-Time Traders use data from eSignal® TradeStation® or RealTick®.

• End-of-Day Traders use any high quality data.

• Scan for low risk trades on all timeframes.

• Assess the risk/reward of every trade - before you trade.

• Determine your optimum trade size.

• Control your trade management with precision.

I encourage you to check out this software by trialing it and share your experience with it here.

Click the Elliott Wave Trading Software header link above to learn more about this trading software or copy and paste the following page address into your browser address bar.

The waves are coming up! Lets go surfing! Good day and good trading.

Monday, September 18, 2006

Weekly Stock Market Outlook

NASDAQ Outlook

The NASDAQ Composite found another 6.86 points on Friday to gain 0.31%. For the week, the close at 2235.59 was 69.80 points higher (+3.22%) than the prior week's close. But perhaps bigger than bullish move was the fact that the NASDAQ managed to finally close back above the 200 day moving average. In fact, we saw three consecutive closes above the 200 day line...each of them slightly higher than the last. That's bullish, but is there something else that could undo last week's breakthrough?

There are two potential problems with last week's rally. First, the triple-witching expiration week may have skewed things considerably. There's no real way of knowing how or if it did, but considering this week followed a moderately bearish week, we have to wonder what changed (especially knowing September is historically a weak month). If it was indeed triple-witching at work, then we also have to wonder if things are set to fall again...since the expiration is now history.

The other issue is even more ambiguous, but we also think it's possible that this past week was just a wave of short covering. Once things settle down, and the short covering dries up, we have to wonder if the bulls will chuck it again.

On a more technical (and specific) note, take a look at how low the VXN is again. Even if the expiration week drove the VXN lower, it's still too low. As we've seen too many times recently, a low VXN inevitably leads to a substantial pullback. The question is just one of when. Plus, being stochastically overbought again, the pressures are really weighing in.

On the flipside, breaking above key moving averages is still breaking above key moving averages. To topple the 200 day moving average line is a big deal. So, here's how to play this point, buying into the rally now is dangerous. No matter what, let's wait and see what happens when we pull back to the 20 day line (blue) at 2178. That's where we bounced last time, and that's our make-or-break line this time. If we can find support there and bounce again, then this rally would be much safer. If it's not support - and the NASDAQ falls under it - then the next likely support level is the 50 day line at 2118. Keep in mind that either way, the composite will have to slip back under the 200 day average.

Nasdaq Chart

Nasdaq Chart

S&P 500 Outlook

The S&P 500 moved to 1319.85 after Friday's 3.55 point (+0.27%) move. For the week, the large-cap index gained 20.95 points, or 1.61%. It was already over all of its key moving averages, so there was no new ground to break there. But, there is an interesting potential resistance line right in view now...and breaking past it could mean new highs for the year. The odds don't favor getting past it, but if we do, the celebratory rally could be huge, despite the odds.

The key line we're watching right now is at 1326 (and change). That's where the SPX hit highs for the year back in May...right before it all came crashing down. Friday's high of 1324.65 is just a fraction under there, so needless to say, tensions are high. If the market is going to implode, we're pretty darn close to getting to that point. Watch closely.

The trump card, of course, is the VIX. Like we mentioned in the NASDAQ's discussion above, a triple-witching could have skewed the VIX just like the VXN. But, seeing it come up and off that lower Bollinger band is still a worry. Forget the reason - complacency is dangerously high, evidenced by a dangerously low VIX. Something's got to give. Yet we still can't deny this past week as bullish.

As with the NASDAQ, the best move here may be to wait and see what happens when and if we get past 1326. If we struggle around here, don't be shocked to see a dip all the way back to the 50/100/200 day lines around 1280 (we think the 20 day line is getting tired as support....when it actually is). If instead we break past 1326, the bulls may just not be worried about the risk.

S&P500 Chart

S&P500 Chart

Dow Jones Industrial Average Outlook

The Dow Jones Industrial Average edged the S&P 500 slightly on Friday, gaining 0.29% (+33.38 points) to end the session at 11,560.77. For the week, the Dow gained 168.66 points, or 1.48%. The Dow is also just a hair under new highs for the year, or 11,709. But, like the rest of the indices, the Dow has been riding on luck a little too long. The close on Friday was a little weak, and the weekly gain may have been a little artificially inflated. We'll have to see how it plays out. As with the other indices, a strong break past 11,709 would overcome most of the potential problems we see now. Support - if needed - would ultimately be around 11,200, where the 50 and 100 day lines are converged.

Dow Jones Industrial Average Chart

Dow Jones Industrial Average Chart

Saturday, September 16, 2006

Questions For Your Trading Plan

I hope you're enjoying the long holiday weekend. I like to take this extra time to think big picture about things, and one of the trading issues I see a lot of traders dealing with is a lack of clairty about their plan, if they even have one.

Do you have a written trading plan? Most do not. In order to manage your emotions effectively when trading, you need to create a written plan that you can review regularly to stay focused on your goal of trading success. By writing down your plan, you put yourself in the top 3% of individuals who have written goals and plans, giving you an immediate edge on most traders. Make sure you have answered these questions, which are covered in further depth in my book Big Trends in Trading

1) How you will enter trades? The key to good entries is putting on trades where there is relatively low risk compared to much higher reward. You also should write down a clear catalyst for the expected stock move.

2) How will you exit trades? You should define an initial stop point for your trade, at the point where the trend is invalidated. You will also need a 'trailing stop' technique to protect your profits.

3) What type of orders will you use to enter and exit? When entering, I like to use limit orders, good for the day only, while exits are often market orders. Why? Because limit orders allow me to define my risk and reward clearly on the entry of a trade, while when I need to get out, market orders allows immediate exit compared to the risk of missing my exit with a limit order.

4) How much capital will you need to trade successfully? There are economies of scale as you increase the amount of capital you trade with. Costs related to commissions, quote systems and equipment begin to diminish as the percentage of capital invested goes up.

5) What percentage of your capital will you invest in each trade? The amount of capital I typically use is 10% per trade in my own accounts. I know traders who commit anywhere from 5% of their account per trade to 20% of their account per trade. You goal should be to keep portfolio risk per trade at less than 2% per trade (for example if you invest 20% of your portfolio in a trade, a 10% loss on that position would lead to a 2% loss on your portfolio). (continued below)

6) How many positions will you focus on at once? I like to concentrate my portfolio in my best ideas, plus I like to stay focused on how each stock is acting. If my portfolio is too big (I'd say more than 7 stocks is too many to focus on), then I will lose focus and invariably miss an exit on a trade that I should have previously exited.

7) What will your Trading Journal look like? In my Trading Journal, I note daily observations, particularly related to my ability to execute my trading plan. I also commit to doing a post-trade analysis every month. I note what I did right and wrong, and seek to learn from mistakes to minimize future errors in similar circumstances, while also looking for winning patterns where I seek to repeat big successes.

8) What is your Position Review process? Have an end-of-day routine to close your day. Review your trades, and assess if you followed your plan. Keep a log of all your trades, and make comments on each position.

9) What is your Preparation process before trading? You need defined time to prepare for the next trading day to build up your trading confidence. I prepare after the close for the next day's trading, which allows me to formulate a plan of action BEFORE I get into the heat of battle. This keeps my trading proactive instead of reactive.

10) What broker will you use? Most traders mistakenly think that commissions are the number one factor they can control. In reality, commissions are a small cost compared to the broker's effectiveness at executing your trade. Your focus should be finding a broker who gets you speedy and fair execution of your orders.

Once you have defined these facets of your trading plan, you are in an excellent position to have a strategy to control your emotions when trading. Make sure to review your plan on a regular basis to create effective trading habits.

Have a good weekend.

Thursday, September 14, 2006

Future Price Shock

Price shocks: Two weeks ago, ADVO Inc (NYSE:AD) shares were down 25% at 10:30AM Eastern. Every day, there are price shocks like this, and we've all experienced them. Sometimes, the shocks help us, and other times they do not. The real question is, How should we deal with these shocks? Today, we will discuss price shocks. Specifically, we will look at whether they are predictable, how to act when they occur and how to factor price shocks appropriately into systems testing.

Predicting the Future

The most important concept to remember regarding price shocks is that they ARE NOT predictable (unless you have inside information). You take ADVO's move two weeks ago for example. There is nothing on the chart that suggested that merger partner Valassis would pull out and sue ADVO. The first thing that must be realized is that price shocks cannot be predicted. The difference between price shocks and average trends is that average trends tend to have recurring, gradual patterns, whereas price shocks tend to occur suddenly with no recurring patterns preceding the shocks. Generally speaking, half of price shocks will move in your favor and the other half will not. Now, let's move on to price shocks and their affects on system testing. Systems testers need to be aware of the effects of price shocks on their data. The most common mistakes that systems testers make are:

Testing during periods that had not significant shocks.

Erroneously selecting strategies with the highest net profit due to price shocks.

Just getting lucky enough to be out of the market during a shock.

This is why it's important to look at charts when testing and optimizing. Your results could potentially betray you if you don't include the right data. You should realize that when testing, it's possible to tweak your rules so that they are always on the right side of a price shock. That's because you have a small data set and you could potentially be over fitting your optimal levels and strategies in ways that fit ONLY THE PAST. The point is, keep an eye on your charts when you are evaluating a new system. Make sure the system didn't just get lucky in the short-term. You can avoid this by, using several test periods of at least 2-3 years a piece.

What to Do

Let's now discuss actions steps when a price shock does occur. First of all, what should you do if a price shock moves against you? If the price shock crosses below your stop loss, then get out of the position. If you are not crossing a stop, then hold the position for one day after the shock. You can now exit if the price closes at another extreme price point, or if you get a contrarian trend signal. In the case that you price shock is favorable, it is usually best to exit at close or open the next day. The reason is that volatility is usually high immediately after a price shock and the trading system that you usually use is no longer valid. It's better to move on with your normal system at that point. Keep these points in mind when evaluating systems and after encountering price shocks.

Click the Future Price Shock header link above to learn more about predicting future values and setting stop-loss targets if the market proves you wrong.

Good day and good trading.

Wednesday, September 13, 2006

Trading Success

People are always looking for the real secrets of trading success, but their mental biases always have them looking in the wrong places and at the wrong things. Consequently, they search for magical trading systems with 75% accuracy or better or for great entry systems that they think will help them pick the right stock. Picking the right stock has nothing to do with success and neither does the accuracy of your stock picking.

Practically all Market Wizards agree that the key ingredients to your success are:

(1) the golden rule of trading — cut your losses short and let your profits run.

(2) that part of your trading system that tells you how much.

(3) the discipline to do both.

When you think about the golden rule of trading, it basically describes exits—how you abort losses and ride winners. When you think about Position Sizing, it basically controls how much you risk on any given trade.

Dr. Tharp has designed the Secrets of the Masters Trading Game to help traders learn the secrets to trading success before they trade the markets. This game totally de-emphasizes entry or stock picking and instead requires that you focus on the most important aspects of trading. Position Sizing and letting your profits run. The new game has ten levels that get progressively more difficult to master. However, once traders have mastered these principles, they will know they have mastered some of the key skills to trading success.

Download the game to your computer by clicking on the Tradeing Success header link above. You will have the opportunity to play levels one through three of the game for FREE.

If you choose to purchase the Secrets of the Masters Trading Game, which includes unlimited access to levels 4-10, all you will have to do is order on line. The entire game is $195. Once you order the game we will give you a personal access code that will allow you to play all levels of the Secrets of the Masters Trading Game.

I have found the game to very helpful, and I have played it over and over again with different money management programs. It’s one thing to read about the mind traps that traders create regarding probabilities and the gambler’s fallacy, or to read that random number series can contain protracted winning and losing streaks, but playing a simulation that feels like trading really drives home the lessons about discipline, systems, and expectancy. Playing the game over time helps reinforce the idea that you get the same probability distributions as everyone else, and that your trading plan will need to address this fact through money management, position sizing, trading rules etc.

I have found that it also helps you change the way you frame the activity of trading, because the game focuses on systems results and strips away entries, setups and the other false control illusions that traders inevitably get wrapped up in. At first it didn’t feel like trading, because it didn’t focus on the things that I did when I traded, but gradually it did.

It dawned on me that I might not be focusing on the right areas. The opportunity to view a trading system as the random distribution of hundreds or thousands of independent trials changed my view about my ability to change the markets, and focusing on maximizing system outcomes has given me a fresh perspective on trading, systems development, and risk.

The Secrets of the Masters Trading Game by Dr. Van Tharp is one of the finest tools I've used to improve my trading. A trading game designed for real world trading. Excellent to say the least. Click the Trading Success header link above for more information and the free trial.

Good day and good trading.

Tuesday, September 12, 2006

Fundamental Analysis

So far in our review of market models, we have focused on technical analysis – the analysis of price, volume and other measures of a trading instrument’s activity.

For the next few weeks we’ll look at fundamental analysis – which is by far the most widely used method of stock evaluation and it is used extensively in the futures, currencies and bonds, but in a slightly different fashion. Our look at fundamental analysis will focus mainly on its use for stocks.

At its core, fundamental analysis attempts to measure the intrinsic value of the underlying issue.

Fundamental analysts will look at both qualitative and quantitative data to make a judgment on the intrinsic value of a security. These measures can be broadly classified as.

Macroeconomic data that affect the market and the sector,

Microeconomic factors that affect just the company itself.

In the coming weeks, we’ll break these areas down into the primary measures used by fundamental analysts and look at the usefulness of each. We’ll culminate our study with my favorite fundamental yardstick.

But now on to our rubric:

Is it theoretically credible? Of course – many economists and financial analysts would argue that ONLY fundamental analysis is meaningful and that technical analysis is some sort of voodoo.

Who’s it most useful for? Long-term traders and investors. While there are some short- term plays (like buying before an earnings announcement and selling afterwards), but for the most part, fundamentals are taking a long-term view.

How Fanatic are the fans? Extremely! As I mentioned above, there are large groups of adherents that believe this is the only way to evaluate a stock.

Is it being used by real-life traders? Of course. Most of the best traders I know look at both the fundamental and technical picture regularly.

Click the Fundamental Analysis header link to learn more and have a balanced approach to investing speculating and trading the financial markets.

Have a great day!

Monday, September 11, 2006

Perfectionist Trading

The desire to be perfect cost me plenty of money in the early days of my trading career. Why? Because a perfectionist cannot take a loss, so small losses can easily turn into bigger losses for the trader who is not able to admit being wrong. Plus the trader will try to book a profit too soon to feel like a winner. Read on below for methods to tame perfectionist tendencies in trading.

Perfectionists share a belief that perfection is required in order to be accepted by others. The reality is that acceptance cannot be gained through performance or other external factors like money or social approval. Instead, self-acceptance is at the root of happiness. The biggest obstacle to overcome that I have faced is fear of failure. If you have a perfectionist mentality when trading, you are really setting yourself up for failure, because it is a given that you will experience losses along the way in trading. You have to think of trading as a probability game You can't be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you. If you cannot take a loss when it is small because of the need to be perfect, then the loss will oftentimes grow to a much larger loss, causing further pain for the perfectionist trader.

The objective should be excellence in trading, not perfection. In addition, you should strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. In trading, the great ones make their share of mistakes, but they are able to keep the impact of those mistakes small, while getting the most out of their best ideas. In order to change long established behavior patterns and personality characteristics, it may be necessary to enlist the support and services of a qualified professional. Long established habits, beliefs and traits never change overnight, but acceptance of a problem is a first step.

Here are a few tips consistent with attempting to become less perfectionistic.

Begin to appreciate the process as well as the outcome - set more achievable goals.

Realize that you are worthy no matter whether you win or lose on a given day.

Focus on achievement less and on enjoyment more - you may even be surprised with more favorable outcomes.

Don't be so critical of your errors - just learn from them.

Set one goal and make it process oriented - forget about the outcome. If you achieve that goal to improve your trading via that goal, you win no matter the outcome.

Perfectionists often seek to control uncontrollable factors in a trade (like waiting for all the risk to be out and everything to look perfect, the quality of the fill on the exit especially, hoping or willing a better outcome by doubling down on a loser, and many more). When a trader focuses on these uncontrollables, he is more likely to tighten up and not be able to pull the trigger to exit a losing trade or miss out on a new winner that has moved too far.

Based on these perfectionist tendencies, I recommend the following entry strategy for perfectionists. Enter half a position as soon as you see an opportunity that generates at least 3 times the reward for the risk at the current market price, then place the remaining half at your desired perfect entry price. For exits, always place market orders, as the tendency for the perfectionist is to try to get a better exit price with a limit, and then keep missing the exit on the way down.

Here's how this strategy can work as an example: Buy just half of a $10,000 position in a stock as your initial order. If the stock goes down in price, don't buy any more of the stock. If it goes down to your stop price, sell the stock to take your loss. However, if the stock moves up in price from your initial buy point, and it is performing relatively well, you might add another $3,000 to your original $5,000 buy. You would have $8,000 of your $10,000 total position in the stock already committed. If the stock moves up another few percent, you can finish your $10,000 position by buying another $2,000. In this way you average up, not down. You only want to add money if your prior buys are working.

Click the Perfectionist Trading header link above to learn more about being a successful trader.

Good day and good trading.

Sunday, September 10, 2006

Exchange Traded Funds

Exchange Traded Funds (ETFs) have been one of the hottest trends in the stock market for the last few years. They have many advantages that both traders and investors should consider.

ETFs are similar to mutual funds, in that you are getting the advantage of diversity by investing in a group of stocks all at one time. However, there are some major differences between these two types of funds. The most important difference is that ETFs trade just like stocks. You can use any broker to buy an exchange traded fund, such as QQQQ, just like you would buy MSFT, INTC or any other stock. This is a major advantage over mutual funds, which are much harder to get in and out of.

ETFs are also not actively managed. Mutual funds usually have a group of people who manage the holdings of the fund and try to provide the best possible returns. ETFs simply track a set group of stocks, usually based on an already established index. Either the major market indexes such as the NASDAQ 100 or other indexes as with the more focused funds like IYF from iShares, which tracks the Dow Jones Financial Sector Index.

Another major advantage to ETFs is that they usually provide a highly liquid asset to trade. According to Yahoo! Finance, which has a large section of their site devoted to information about ETFs, there are 33 funds that have an average daily volume (past three months) greater then 1,000,000 shares. The most heavily traded funds are QQQQ, SPY and IWM. These three funds track the NASDAQ 100, S&P 500 and Russell 2000 indexes, respectively.

The future of ETFs is in the tracking of assets other then stocks. Last year, streetTRACKS released a fund that just holds gold and allows investors to buy gold without the normal hassle of commodity trading. The StreetTRACKS Gold Shares ETF trades under the symbol GLD. Another new fund is Rydex's Euro ETF, the Euro Currency Trust (FXE), which is the first to track a currency. The two newest commodity ETFs are the U.S. Oil Fund ETF (USO) and the iShares Silver Trust (SLV). Still more commodity and currency funds are being planned for release in the future.

Click the Exchange Traded Funds to learn more about investing in and trading ETFs.

Good day and good trading.

Saturday, September 09, 2006

Technical Indicators

Today, we will discuss a few popular indicators, their purposes, their strengths and their weaknesses. We will also look at some guidelines on how to set your lengths and time periods when working with these indicators. ADX (Average Directional Movement Index) Is a technical tool that measures the strength of a current trend. The higher ADX is, the more powerful the trend. ADX can be used to find powerful trends that traders suspect will continue. It can also be useful to look at the 2 main components of ADX, the DM+ line and the DM- line. If find it extremely useful to buy on bullish crossovers and to sell short on negative crossovers. ADX is also an excellent confirmation tool when you are using a trend based (as opposed to reversal-based system). I have not tested thouroughly enough yet, but it could be useful to use ADX to find stocks whose trends have lost their power. For example, I've noticed that many trends lose their power at the 40 level in ADX. At this point, most trends can continue no longer. That means that an ADX reversal at the 40 level can also be an excellent exit signal for long positions and an excellent indicator for entering short positions. We may be testing this further and discussing the results later.

Beware of the weakness of ADX. ADX tends to look bullish too late during medium and small trends. ADX is rarely able to recognize market bottoms and exact turning points except when looking at DMI crossovers.


Stochastics - Stochastics is an extremely effective trading indicator. There are several ways to trade this indicator. It can be used both to find reversals and also to find powerful trends. For example, I find it extremely effective to use stochastics to confirm that a powerful trend is in place. Use the 80 level and 14 days as your settings. Another extremely effective way to trade stochastics is to watch for a K-line crossover of the D line while below the oversold level. When you see an upward crossover (K line crosses above the D line) while under the oversold level, this is a fantastic tool for finding stocks that are emerging bullishly from oversold. This technique is actually one of the best performing techniques I have ever found in back-testing. Make sure that if you are using software to trigger this signal, that the language only gives you a signal when the crossover occurs and stays completely under the oversold line on the same day. If it crosses over oversold on the same bar, it decreases the effectiveness of the signal. It seems as though stochastics is telling us that this stock is finally emerging from the doldrums, but if it moves too much, it's often a fakeout.(continued below)

Percent R

We have tested %R and found that it works extremely well as an exit signal. It's highly effective to use a percent R length from 10-14 and an overbought level of over 90. If you see Percent R cross above the OVERBOUGHT level, watch it, because when it crosses back below, this is an excellent sell signal. The great thing about percent R is that it looks at the highest high and lowest low in a predetermined date range and identifies those points as points of short-term resistance and support. This is just one way to use % R. One major weakness of Percent R and stochastics is that they both fail when stocks continue trending powerfully in the same direction. These 2 oscillators are good at finding short-term reversals, oversold, and overbought conditions. However, there are times when stochastics and Percent R indicate that oversold conditions exist and the stock continues to drop. Beware of this risk and this tendency. The reason we use these 2 indicators, is that although they fail sometimes, they work more often than they don't. That wraps up our discussion of 3 popular indicators and how to profit from them. If you have time to research, keep testing your ideas using various software.

Click the Technical Indicators header link above to learn more about technical indicators and technical analysis.

Have a good weekend.

Controlled Trading

While you cant control how the market will behave once you place a trade, there are many aspects of your mindset that you can control. Read on below for more on where you fall on the Focus of Control.

When you go through a trading slump, do you ever find yourself blaming something outside yourself? One of my favorites used to be blaming the system - the system is rigged against me: the brokers are the only ones getting rich, the market makers are killing me on these bid/asked spreads, the guys getting in pre-IPO are getting the best prices, etc. When you blame an external situation, you are giving up control, and instead letting yourself be controlled by outside events. This converts you from a proactive trader into a reactive trader. If you are reacting after the fact in the markets, you are in turn letting your emotions start to rule you, instead of planning how you will react to any set of circumstances. You know how letting emotions control you turns out in the markets -- badly.

Justifications and excuses are the hallmark of traders who consistently lose. Excuses seek to diminish the traders responsibility for a losing trade, creating what psychologists call an External Focus of Control. This means that the trader believes he is acted upon by events beyond his control. In comparison, a trader with a strong Internal Focus of Control believes he is responsible for every reaction that happens to each action he takes. When the trader feels external circumstances control his results, he will not tend to set goals (why should he? - the market will create the result for him), and the controlled trader will not apply as much effort to prepare or trade. This makes it neary impossible for a trader to build self-confidence. How can you believe that your actions will succeed when events are totally out of your control?

Great traders take total responsibility for each action they take. They do not carelessly take actions to buy or sell. Such impulsive moves can destroy the trader's confidence. The successful trader knows that every action taken will produce a reaction, and actions taken with the probabilities on the traders side will increase the odds of favorable reactions over time. You must believe that you control your own destiny. If you are not getting the results you expect of yourself, look inside yourself. Stat analyzing your actions and behaviors: are you hanging on to losers too long? Are you cutting profits too soon? Are you not able to pull the trigger and then you watch helplessly as the stock roars on without you? These or other frustrations should clue you in that you need to fix some element of your trading plan, and you should make decisions and act immediately to find a proactive solution after evaluating your situation.

Click the Controlled Trading header link above to learn more about becoming a successful investor speculator and trader.

Have a good weekend.

Thursday, September 07, 2006

Emerging Markets

Let's take break from the norm here and talk about some international economics as it related to trading opportunities abroad. The general consensus for many economists is that Brazil, Russian, Inda, and China will combine to be the prevailing economic powerhouses of this century. They all have GDP's that continue to soar and they've signed trade agreements that assure economic ties for years to come. Today, we will briefuly discuss these countries and tehn we will move on to a few ADR's of foreign stocks traded on the NYSE.

One of the main reasons that the BRIC's of Brazil, Russia, India, and China have potential to be the economic powerhouse of the 21st century is their recent adoption of global capitalistic economies. Goldman sachs reported that BRIC economies currently are responsible for 20% of the world growth in GDP. That number will swell to 40% in 2025. Ultimately, this will . Part of the reason why these economies are so intwined is that China and India are become dominate providers of manufacturing and services, while Russia and Brazil have much of the supply of raw materials. It's a match made in heaven. As far as the stock market goes here is how these markets have performed in the last 12 months 1. China (Shanghai)- up 40% 2. Brazil- up 40% 3. India- up 37% 4. Russia - (data temporarily unavailable).

Let's move on and talk about how to trade these stocks. I have found that when trading ADR's, the best way to trade is to time the underlying market first. Let's look at an example. For most foreign markets, it's highly effective to use %R and RSI to find oversold conditions. These make for good entry points. When you're done finding a company with bullish conditions, move onto the right ADR. I find once again that stochastics, RSI, and %R are the best at finding short-term entry points for call options. To sum it, opportunities outside of the US and plentiful. Economic and market trends are very bullish for ADR's. Use your trading system to take advantage. Be disciplined- and trade well!

Click the Emerging Markets header link above to learn more about investing in ADRs or foreign stock on the NYSE.

Good day and good investing.

Wednesday, September 06, 2006

Value Investing II

Peter Lynch makes "Value Investing" a household word.

Last thursday, I wrote about the resurgence of Value Investing and discussed Warren Buffetts additions to Benjamin Grahams original thesis. This week, I would like to continue with Peter Lynchs expansion of the notion of value investing.

Peter Lynch - the longtime Fidelity Magellan fund manager - brought the concept of Value Investing to the masses with his books One Up On Wall Street and Beating the Street.

He wholeheartedly bought into Grahams and Buffetts strategy of value investing, and then further enhanced it by taking much of the mystery and formality out of investing and making regular people feel like they weren't too stupid to commandeer their own investing plan.

With his homespun stories of paying attention to your neighborhood and investigating the stocks of companies that you like and that seem to be doing well in your community - the Home Depots, the Wal-Marts, the Limiteds - Lynch enticed millions with the thought that individual investors could bring home what he likes to call ten-baggers, or those stocks that return 10 times your investment. Then, he really took the wind out of the quants on Wall Street when he told investors that they learned all of the math they needed to make money in the stock market in the 4th grade!

Like Graham and Buffett, he also shunned both market timing and investing in companies that are difficult to understand. And Lynch placed tremendous emphasis on the importance of research in making the right buy-and-sell decisions. Bottom line: if you dont do your homework, you are not going to do well.

Lynch went on to give investors real tips for separating the winners from the losers by defining the perfect company:

It sounds dull - or, even better, ridiculous. In my career, I have made money on some of the most boring stocks you can imagine, and so did Lynch: Trucking, banks, REITs, paint manufacturers, even a lawn mower company. Or it may do something dull, or disagreeable. Maybe it cleans out septic systems, or disposes of biomedical wastes. Or the rumors abound: Its involved with toxic waste and/or the Mafia. Or, theres something depressing about it. Face it, not one of us wants to think about dying, but for years, funeral home companies made out like bandits in the stock market. Lynchs thinking was bring it on. Those are often just the sort of companies that were his ten baggers.

Its the undiscovered stock, or the company that is undercovered by Wall Street. In other words, the institutions dont own it and the analysts dont follow it. Most likely, the reason its undiscovered is that the company just doesnt need Wall Streets capital and is not yet an underwriting client for the big brokerage firms. And if thats the case, analysts usually dont bother with it. Yet, investors can make a killing, since often these are just the types of businesses that competitors buy at a premium price.

Peter Lynch made investors rich with undiscovered companies. Learn how you can do the same for yourself. More than well-known, household names, its the yet to be discovered companies that yield high returns to discerning investors.

Click the Value Investing II header link above to learn more about investing like Warren Buffett and Peter Lynch.

Good day and good investing.

Tuesday, September 05, 2006

Donchian Channels and The Turtle Method

In trading folklore, few stories capture the imagination like that of the original Turtles.

Richard Dennis and William Eckhardt had a widely rumored bet about whether traders were born or could be made. Supposedly the movie Trading Places was based on this rumor.

The interview process for selecting the team is also the source of rumor and legend.

They put together a rule-based, systematic way for their trading team to execute their trades.

The set-up and entry for that system used a very simple breakout concept: Donchian Channels. While the name is impressive, it is quite straightforward: channels are established by the high and low of the last x bars. On a daily chart, a 20 period Donchian Channel would be formed by the highest high and lowest low of the last 20 bars.

In the Turtles system, they simply bought a breakout above the upper channel and sold breakdowns below the lower channel.

The key question is did it work? The answer is that yes, it did work and worked well. Some claim that the original Turtles averaged 80% compounded returns over four years. Rumor has it that, at least in the early going, the experiment made no money because one of the partners insisted on hedging all the positions of the new traders!

Now lets look at our market model questions for the Donchian Channels:

Is it theoretically credible? Yes – trading breakouts has been an age-old method for making money and will always work in trending markets.

Whos it most useful for? Long term trend followers. Could be useful as a stand alone entry in strongly trending markets.

How Fanatic are the fans? Very! There are some websites that make it sound like you would have to be a real loser to trade any other way. The strategy has plenty of detractors as well. Connors and Raschke had a strategy called Turtle Soup that fades or goes against the Turtle entry.

Is it being used by real-life traders? Yes. Plenty of folks still trade this. It works well in trending markets, not so well the rest of the time. Most Turtle followers are using longer time periods for their Donchian Channels now.

Click the Donchian Channels and The Turtle Method header link above to learn more about this trading system and many other successful trading systems. With knowledge, dated goals, a plan of action, and taking action, you can have success in the financial markets.

Good day and good trading.

Monday, September 04, 2006

Trading Rules

Trading is a game just like any other game. When you are learning how to play a game you first need to become familiar with all the rules and only then can you start to practice what you have learned to start playing the game. Eventually with practice your skills will improve and you will start to win more. You must be careful to not mix up those steps though. Remember, practice makes permanent not perfect. You want to discipline yourself to practice the right way from the start so you have good trading habits.

Lets start with the rules. What are your rules for trading?

The rules are different for every trader. That is something you have to decide for yourself based on your goals and the amount of risk you are willing to take. It works best if you write these rules down on paper or on your computer, somewhere where you can see them easily and review them often. The first draft doesnt have to be perfect, but this will be your playbook for the game. Always keep yourself accountable to these rules. Here are some questions you will need to ask yourself to start to develop your rules for your system of trading:

When are you going to trade? Are you going to place all your orders after hours and let them execute during the day or are you going to watch the market during trading and place your orders? Types of orders are you going to use? Are you going to place market orders, limit orders, stop orders or a combination of different types depending on the situation? What are the advantages and disadvantages to each and how will you use them for money management? What is your hold time going to be? Day trading? Swing Trading? Short-term trading? Long-term trading? Different time periods have different potential opportunities and risks. What are you going to trade? Just stocks? Perhaps options as well or even futures and currencies. How does volume affect your trades? There are plenty more as well, but you get the idea.

Then you need to use your rules to develop your system. To do this you will need to learn about different indicators and oscillators, how they work and what assets they work best with. You will need software of some kind to test the results of your strategies.

Once you know the rules then you need to practice the game.

Then it is a good idea to do some paper trading? With your newly developed system, that is using either one of the stock market trading simulators available on the internet or just keeping track on your own. Get used to applying your strategy to real life and get a feel for how to manage it for several weeks at least.

Once you have done all this, you will be ready to start playing for real.

You probably noticed that the majority of this article was dedicated to the rules section. That is how it is supposed to be. The actual trading is the easy and fun part. Just like most games, playing is the fun part, but many hours of work and dedication go into learning the skills before playing the game. So learn the rules, practice what you have learned and then you will be ready to win.

Click the Trading Rules header link above to learn more about having a sound and successful trading system.

Good day and good trading.

Sunday, September 03, 2006

Insider Buying

Insider Buying: How to Use it to Your Advantage

Insider trading immediately brings two thoughts to mind - 1) high-profile scandals, such as those perpetrated by Ivan Boesky in the 80s, and more recently by Martha Stewart and the scalawags at Enron, and followed just last week by insiders at DHB, the armored vest maker, whose stock rode high, then collapsed; and 2) the legitimate buying and selling of stock by company insiders, which may provide opportunities for individual investors to profit. It is this second type of insider trading that I want to discuss today.

Theoretically, a company insider might be considered as anyone who knows material financial information about a company before it is publicized. But the SECs official definition of a company insider is an officer or director of a public company or an individual or entity owning 10% of more of any class of a company's shares.

In its attempt to keep insiders on the straight and narrow, the SEC developed three specific methods of reporting insider holdings and trading activities.

Form 3 - An insider of an issuer that is registering equity securities for the first time must file this form no later than the effective date of the registration statement. If the issuer is already registered, the insider must file the form within 10 days of an investor becoming an insider.

Form 4 - This document is used for changes in ownership and must be filed within two days.

Form 5 - This form, that reports any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting, must be submitted to the SEC within 45 days after the end of the company's fiscal year.

Since it contains all recent insider trading activity information, Form 4 is the most important of all documents for individual investors who wish to profit from insider trading activity. Fortunately, one of the provisions of the 2002 Sarbanes-Oxley Act significantly changed the timeliness of reporting insider activities to the SEC. Prior to the act, it took an average of 41 days for the data to reach the SEC. After August 29, 2002, that window was narrowed to 2 days after the transaction occurred - a tremendous change that benefits investors.

Once these self-filed forms reach the SEC and are processed, investors can access them through the SECs web-site:, and then subsequently through many other financial web-sites that I will list at the end of this report.

Insider Buying and Selling: What it Means to the Individual Investor

In the past few years, the business of watching insider buys and sales has given rise to a whole industry of companies who do nothing but that. Newsletters, web-sites, and intricate trading models have emerged to advise investors on which insiders are buying and selling. The reason is that people believe that insider trading activity often indicates the future direction of a companys stock price. After all, who could possibly be better informed as to the intimate details of a company's fortune?

When I analyze companies, I like to see company insiders who express their belief and confidence in their products by owning a portion of the companys stock. If they put their own money at risk, especially if they are buying shares in the open market rather than at discounted prices through options or warrants, it gives me an indication that they are optimistic about their companys future. And if there is a sudden flurry of buying, especially large volume purchases, it draws my attention for further investigation, as it is generally a good indicator of coming good news.

Here are a few helpful hints: Insider buying at small companies is often a better indication of higher future stock prices than at larger businesses. Why? A small company - unlike the General Motors and the Intels of the world - usually has a very limited number of insiders. And those insiders are pretty intimately acquainted with the companys activities. Further, because most small companies receive very little attention from the main-stream media and Wall Street, their news and trading activities are often ignored and/or misunderstood.

Pay attention to which insider in the company is buying. Studies indicate that the insiders who reap the best performance gains, in order, are the Chief Executive Officers, company officers, members of the board of directors, then large shareholders. It is therefore to your advantage to make note of CEO purchases.

Insiders tend to buy early. Studies have indicated that most of the extra price appreciation insiders realize arrives more than 30 days after they make their purchases. That means, you probably wont see an immediate increase in share prices.

The more shares insiders are buying, the better the companys prospects look. If several insiders are purchasing a large volume of shares, that could be significant.

You would naturally think the opposite conclusion could be drawn if insiders are dumping their companys stock. However, that is not necessarily true, because insiders may sell for a myriad of reasons, many of which are not related to the future prospects of the company:

1. Need the money for a new house, childrens education, taxes, or any number of other uses.

2. Diversification. I know of several CEOs who sell a portion of their company stock each year, just to ensure that their portfolio is diversified and not too heavily weighted in any one investment.

3. The exercising of options. A good proportion of insiders compensation comes from options and stock grants, which they periodically unload for no other reason than that they need the money. Even if you see that a CEO has sold stock and now has 0 shares left, that doesnt show any of the vested options on a million shares that he may own. Perhaps he just exercised a few options and sold a small percentage of his shares.

4. Release of restrictions from an IPO. After an initial public offering (IPO) or a private placement, insiders are subject to numerous limitations on their ability to sell; often as long as one year. Frequently, many sell a lot of their shares as soon as possible at the end of the restricted period.

5. Trading outside of reporting period restrictions. Many companies heavily restrict insider trades in months 1 and 3 of a companys quarterly reporting period. They often permit no trades during month one until the quarterly report is publicly issued. Then add a few days for public digestion. By month three, a company generally has some idea of how well the quarter went for them, so that month is also restricted. That leaves just 4 months out of the year in which insiders can freely trade their companys stock. Trading is further restricted if there exists material information that might affect the stock that is not yet public. Result: When given the opportunity to trade and especially if in need of cash, insiders just snatch the chance and sell at random times.

The bottom line: Tracking insider trading can pay off for the investor and is a good indication of an insiders faith in his company. Just be careful how you interpret the data you gather. Ive done some research to help you begin.

Click the Insider Buying header link above to learn more.

Good day and have a good new week.

Saturday, September 02, 2006

Weekly Stock Market Outlook

Nasdaq Outlook

The NASDAQ Composite found an extra 9.41 points on Friday, gaining 0.43% to end the week at 2193.16. That was 52.87 points above the previous Fridays close, and translates into a big 2.47% gain for the week...and offsets the prior weeks mild loss. For the last three weeks, the composite is up 136 points, or 6.6%. The degree of gain would make you think we are entering a new period of bullishness, but we still see a lot of liabilities on our chart.

This week, the NASDAQ managed to get back above the 100 day moving average line, which leaves the 200 day average as the last potential barrier - its at 2224. However, there are more than a handful of pitfalls on the radar.

First, the VXN is well into the lower end of its range...and finding support at the lower Bollinger band. It has yet to actually spring up and off that band line, but it will - eventually. Each day the VXN sinks and the NASDAQ rises, the spring-loaded trap gets wound even more tightly. Which brings us to the second pitfall - we are well into overbought (stochastic) territory.

Third - and perhaps the biggest red flag - is the distinct lack of volume behind all of this buying. The recent gains have only had minimal volume behind them. Even more telling is the fact that last weeks only bearish day was also the highest volume day. Fir the rally to be sustained, the volume scenario should be the other way around.

OK, so when, and by how much? The bigger picture trend is a bullish one...maybe too bullish. We need to make some sort of correction soon, primarily to unwind the overbought problem. Realistically, a slide back to the 20 day line at 2141, or even the 50 day line at 2108 would be more than enough to take care of that. The thing is, we may need to go even just a tad higher to spark the dip. The most likely beginning of any selloff, if we do indeed go higher in the coming week, is going to be the 200 day line. Be sure to watch closely what happens if we get there.

And by the way, if we work past the 200 day line without any glitches, it may be enough for investors to shrug off all these obvious risks and further accelerate the rally. We will look at that when and if the time comes.

Nasdaq Chart

Click For A Larger Chart

S&P 500 Outlook

The S&P 500 rallied to 1311.0 on Friday, picking up 7.20 points (+0.55%), which ended up being the best day of the week. And speaking of the week, the large-cap index only gained 1.23% over the previous Friday, by adding 15.90 points over the last five days. The superficial math looks fairly bullish, but you may want to check under the hood.

The three-week old discussion regarding the VIX has changed slightly. As of August 18th, we considered the VIX too low, as it had rune into the lower Bollinger band. Now, although the VIX hasnt budged, the lower Bollinger band - the too low level - is much lower. In other words, the floor was lowered. This now allows the VIX more room to sink...and by default gives the S&P 500 a little more room to rise.

That, however, doesnt change the fundamental problem - the VIX is still showing way too much complacency overall. VIX readings at or under 12 (like they are now) are associated with market tops. We dont think this one will be any different. The question is just one of when. We expected to see any correction by now, but so far, it hasnt happened. We still expect to see it. But, we no longer think its going to be a major one. The S&P 500 is up by 6.0% over the last six weeks, so the bigger trend is undeniably bullish. As for any dip, the combined 100 day and 200 day lines at 1277 should be the worst case scenario. That would allow the VIX to bleed off most of it excess confidence, and relieve some (if not all) of the markets overbought pressure. However, it still doesnt answer when. It should be soon, but we may need to retest the 2006 high of 1326 before we start such a selling spree. Or, a couple of closes under the 10 day line at 1300 would be the alternative sell signal.

In either case, the pullback should be trade-worthy. And, when and if we gat past 1326, we think the bullish rally will also be a big one. Anything between 1295 and 1325 is something of a no-man's land.

S&P 500 Chart

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Dow Jones Industrial Average Outlook

The Dow Jones Industrial Average actually led Fridays charge with a 0.73% gain, adding on 83 more points to close out at 11,464. On a weekly basis, however, this blue-chip index only gained 1.6%, or 180 points. On a relative basis, the Dow still appears to be the safest place to be for long-term investors, but we also still see a short-term bearish trade in the works here...meaning we are due for at least a small dip within the bigger bullish picture.

Like the NASDAQ, the gains here are nice, but suspiciously lack volume. Plus, the momentum is waning now that we're back into overbought territory.

The Dows bigger make-or-break level is this year's high of 11,709, but thats not quite on our plate just yet.

Dow Jones Industrial Average Chart

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Friday, September 01, 2006

Trading Rules

1 - Discover your skill and focus on it. Look back at your past trades with your account statement or whatever record you have of your trading. Decide on where your skill lies. For example, are you good at market timing? Are you good at picking the write sectors? Are you good at day-trading? Look at your track record and decide which is your best skill. Focus on that. Many traders get inundated with trying to perfect everything and yet they are truly good at just a few or perhaps one thing. If you are good at market timing during single days, consider day trading S&P futures for example.

2 - You determine your ultimate fate, not the market. Remember that even though the market may move in your favor, you may still make mistakes. Even, though the market drops, its possible to make the perfect moves and consider yourself a winner although you may have lost some money. When it comes to the market, the market is all we have to work with! We dont want to get angry with the only thing we have to work with! That would be like getting mad at oxygen! Instead, keep a detailed journal and of your actions. Make sure you take note of your successes and your mistakes so that you can constantly improve!

3 - In every difficult event or circumstance, we find new understanding and huge benefits. Zig Ziglar likes to say that you cant climb a smooth mountain! That means that the rough edges and (equity drawdowns) help us to advance. Napoleon Hill used to say that every tragedy has the seed of an equivalent benefit in it. Its not just a trading philosophy, but a life philosophy as well. I once went through a huge equity drawdown and it felt like it was the end of the world. But, soon afterwards, I began to scrutinize risk versus reward in an entirely new way. I began to look at new ways to find stocks whose prices were less correlated and even prepared for equity drawdowns the way a Californian architect would prepare for earthquakes (which inevitably happen). My trading techniques became better than ever! The huge drawdown was a key part of my trading education, which is an education I am glad to pass on to customers and readers.

4 - Find someone to compete with. If you dont work as a trader professionally, team up with a friend. You probably have friends who trade. If they do, ask them to compete with you on a monthly basis trying to beat each others returns (and keep risk in mind as well). You will find yourself trying harder than ever before and you will have a new resource to learn from. Traders often find solace in having someone to compete with. Often times, their trading buddies give them support right before they are about to quit. Follows these rules and you'll have a leg up on the competition. Be discipline, and trade well!

Click the Trading Rules header link above to learn more and sharpen your trading skills.

Have a good weekend.