Wednesday, January 31, 2007

Trading Opportunities 2007

As we begin to look ahead to the opportunities ahead in 2007, it also pays to look back on lessons learned in the last year as well.

Here are some lessons learned from trading that you can implement to take yourself to higher levels of prosperity in the year ahead:

1. Trading is a mirror of other elements of my life. If I am behaving in an undisciplined way outside of trading, my trading shows undisciplined behavior like not following stops. If I feel depressed about something in my personal life, my trading observations will not pick up as many opportunities as I cannot see the possibilities that I see when I am in a positive frame of mind. Use a journal to diagram issues in your trading that can allow you to not only be a more effective trader but also experience personal growth.

2. Treat every trade as both a potential loser and a potential winner. Know how to tell the difference when you're in it.

3. Think positively. Have confidence in yourself. If you don't feel good about what you're doing, change it immediately.

4. Never make a trade on a market that just completed a major move if the only reason for making the trade is that you just saw a major move and missed it. (Warning-Those most susceptible to this are the ones who did expect the move but made the trade earlier.)

5. Winning traders and losing traders experience the trading environment differently. It makes them feel different and as a result their actions consistently vary. In psychological terms, they interpret the market differently because they have a separate belief system in the way that they see themselves relative to the stock market. Change your belief system from the reactionary emotional beliefs of most losing traders to a more proactive unemotional approach.

6. Know when not to trade. This skill is just as important as knowing when to pull the trigger. Part of being a great trader is being a keen observer of what a stock is telling you. By committing to observe objectively, you give yourself permission not to trade until the conditions are right.

7. Don't trade for excitement or entertainment. Avoid the highs that come from quick profits or the lows that can appear after losses. If you have a sound system, it does not matter whether any particular trade makes a profit or a loss. What matters is that the probabilities over time are in your favor. You must remember that no system is perfect, and prepare for losses along the way. You should measure yourself on whether you followed your rules and executed your system, for both winning and losing trades. The process of trading is much easier when you focus on execution of a system rather than on whether each individual trade was right or not, because you take your ego out of the process. This makes you more rational and less emotional, which leads to better investment performance.

8. It is critically important to protect your psychological capital by not overtrading or playing for excitement instead of profits. This can cause you to be emotionally "drawn down", and then sit out, usually as a move just begins that could have been a big opportunity. Yet you miss the new big trend because you were financially and emotionally exhausted by overtrading in a tough market. As a result, you can't see through the negative emotions because you feel beat up by the markets. Managing your internal psychological state of mind is equally important as managing your financial position.

9. Be careful not to overreact to intraday news. It seems to me like every year, there are more whipsaws where the opening occurred in one direction but was then reversed with a close in the opposite direction. I like to do my preparation for each day's trading in advance after the previous day's close, so I know what the market structure looks like heading into the next day's trading. This allows me to move from a reactionary state to a more proactive posture. This helps position your mindset to capitalize on news-driven intraday volatility.

10. Accept total responsibility for the results of your trading. Remember that losers always look for somebody else to blame. Winners look to themselves particularly if they have to take a loss on some trades, as is inevitable for all traders and all systems. When you accept total responsibility, you commit that in any market environment you will find the way to win.

Want to learn from or trade with the champions of the market? Click the World Cup Advisors links below. "If you can beat them? Join them!" Good day and good trading!

World Cup Advisor Trading Championships
World Cup Advisors
Trading
Championships
Trade with the Best

Tuesday, January 30, 2007

Trading Systems

The following is from one of our training partners Dr. Van K. Tharp, and whom we think is the finest trading trainer in the world today. Once you read more of Van Tharp's teachings, we think you'll agree.

Six Keys to a Great Trading System
By Van K. Tharp, Ph.D.

Most people, as they learn about trading, are exposed to a lot of disinformation. It’s almost as if there is an intelligence agency putting out information to make sure that the average person cannot trade right.

As a result, in Chapter 7 of the new edition of my book Trade Your Way to Financial Freedom, I present six major factors that are the keys to your success trading well. These six factors include:

Factor 1: Reliability, meaning “what percentage of the time do you make money?” is the first key factor. Most people emphasize this. They want to be right on every trade because they were taught in the schools that 70% or less is failure. However, the real facts are that you can be right about 30% of the time and make good money.

Factor 2: The relative size of your profits compared to your losses is the second key factor. In prior tips we’ve talked about thinking about your trades in terms of R-multiples. Well, this key success factor basically states that you want your losses to be 1R or less and you want your profits to be large multiples of R. This is essentially the golden rule of trading – “cut your losses short and let your profits run.” It’s one of the real keys to success, but it is very hard for most people to do.

Factor 3: The third factor is the cost of your trading. When I first started trading, it costs about $65 each time you got in and out of the market. Trading costs were atrocious. Now you can get in and out for as little as a penny per share. However, trading costs can still mount up in an active account. Several years ago I was trading very actively. I was up about 30% on the year and I noticed that my trading costs totaled more than my profits. Thus, even with today’s massive discounts, it still costs a lot to trade.

Factor 4: The fourth key factor is how often you get a good trade or trading opportunity. For example, if you can make an average profit of 1R per trade and you make 50 trades per year, you’ll be up 50R. But if you make 500 trades, you’ll be up 500R.

Factor 5: The fifth key factor is the size of your trading capital. When your account is too small its very difficult to make good returns. But when your account gets to a decent size, then making good returns becomes much easier. This occurs simply because some accounts are just too small to trade. The reverse also occurs. When you get to big, so big that you can move markets just by entering or exiting, then it also becomes much more difficult to make good returns.

Factor 6: The final key factor is your position sizing. Position sizing is that part of your trading that tells you “how much” throughout the course of a trade. It is probably responsible for 90% of your performance variability – that’s how important it is.

Most people would just want to be right most of the time. However, you an be right 99% of the time and still be wiped out on any of the following scenarios:

a) You don’t have enough money to trade and the one time you are wrong you are wiped out.

b) Your position sizing is too big so that the one time you are wrong you are wiped out.

c) Your one loss is so big (regardless of position sizing) that it wipes out all of your profits (perhaps you have small stops and your loss is a 100R loss).

All of those factors could wipe you out, so you must understand all of these factors together and how they work. And, of course, that is the focus of Chapter 7.

Until next week when we discuss the big picture, this is Van Tharp.

Trading Simulation Game

Dr. Van Tharp - International Institute of Trading Mastery
"Secrets of the Masters" Trading Game


Helping others become the best trader or investor
they can be has been Tharp's mission since 1982.
An Original "Market Wizard", Dr. Tharp
offers unique learning strategies, and his trading
education techniques for producing great traders
that are some of the most effective in the field.
Over the years Tharp has helped people overcome
problems with system development and trading psychology,
and success related issues such as self-sabotage.
His trading education programs are of the highest
quality and are world-renowned.
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.


Good day and good trading!

Monday, January 29, 2007

MTPredictor Trading Software

There's a lot of trading software on the market to choose from. Key questions to determine from any trading software are, does the software automatically identify low risk high reward trades, does it automatically assess risk-reward, does it automatically determinne position size so you don't over leverage your account, and does it automatically manage the trade after entry into the market. If you answer no to any of these questions, eliminate the software as a purchase candidate.

One trading software we know very well that satisfies all the requirements above and more is MTPredictor. Successfull trading is all about entering low risk high reward trades. With proper position sizing added in, winning in the markets is a virtual certainty.

MTPredictor finds and identifies low risk high reward trades. It assess's risk-reward, it determines position size, manages the trade after entry, and it does it all automatically with a graphical display on the screen. Use MTPredictor with stocks forex futures, commodities, in any market worldwide.

Question: Why do the vast majority of traders fail ?

Answer: Because they do not control and manage their risk properly.

MTPredictor trading software puts the trader in control.

Find low risk high reward trade opportunities. Assess which trade is worth the risk. Determine how much to risk on each trade. Employ a method to cut losses and run profits. Have the choice of intraday or end-of-day tools.

The MTPredictor Trade Process

Find an Ideal Low Risk High Reward Set-up ~ simple ABC correction | critical price level (upper orange zone) | red price reversal bar. See sample chart example by clicking the MTPredictor Trading Software header link above or the MTPredictor image below.

Assess the Risk/Reward outlook ~ a good R/R ratio at the first profit target.

Use Money Management rules to determine position size ~ with the built-in Risk Calculator.

Run the Trade Management strategy ~ profit targets projected on the chart for visual confirmation mid-trade.

Result - Virtual Perfect Trading ~ and reward risk ratios of 3:1 to 15:1


Low Risk High Reward Trading Software
MTPredictor Trading Software - Free 30 Day Trial
Low Risk High Reward Trading
10% Discount For Invest2Success.com Users



Click the MTPredictor image link above to read more information about this high quality trading software and receive a FREE 30 Day Trial. Trade smart, and play to win. High quality tools as MTPredictor Trading Software will help you keep your losses small, and your winners big. The golden rule of trading in the financial markets.

Have a great day!

Sunday, January 28, 2007

Weekly Stock Market Outlook

NASDAQ Outlook

The NASDAQ Composite edged higher by only 1.25 points (+0.05%) on Friday, leaving the index at 2435.39 for the week. That was 15.82 points under (-0.65%) the previous week's closing level, and was the second losing week in a row. While the momentum is clearly gone, we still can't call it a breakdown yet.

For the first time in months, we're seeing consecutive closes under the 50 day moving average line...4 in the last five days, to be exact. In many regards, that's a completed sell (intermediate term), evidence that the momentum has indeed changed as described above. The bearish MACD crossunder from early in the week confirms the same. Adding to the same opinion is the fact that we hit resistance - again - at 2470 right before things turned south again.

The reason we can't get all the way bearish though, is that support line at 2394 (yellow). We've bounced there several times in the last month, usually unexpectedly. We're only about 40 points above there right now, so the good news is, we may see a make-or-break move in the next few days.

Our opinion? We're still reserved here, but we will point out that this trip back towards that support line is under very different circumstances than the last few were. So, the result may be different this time around.

NASDAQ Chart

Click For A Larger Chart

S&P 500 Outlook

On Friday, the S&P 500 closed at 1422.2, 1.7 points below Thursday's close...a loss of 0.12%. The weekly loss of 8.3 points (-0.58%) was only slightly more dramatic, and by the end of the day, we found the SPX has been spinning its wheel over the last couple of weeks. Oh, it's finding support from the lines you'd expect it to. The problem is, those lines are flattening a little more each day. (continued below)

Around mid-week, we pointed out that a new support line for the S&P 500 was being established. The old in is framed with red, dashed lines; the new one is marked by blue, dashed lines. Clearly the slope of the new one is much less bullish than the older one.

The reason we bring it up now is to point out that even the lower edge of this new generally-bullish channel is being tested. Friday's low of 1416.95 just brushed that line, meaning even a minor dip on Monday (or afterwards) could break yet another support level, and force us to redraw those frames even less bullishly.

Simultaneously, notice how the support line is running parallel with the 50 day moving average (purple). In fact, the two are almost on top of each other. Much like the NASDAQ's chart, the 50 day line is being challenged as support for the first time in months, though we did find support there in early January. The point is, the overall bullishness is slowly faltering. If we don't get a recharge soon (as in the coming week), what little bullishness there is may be deflated.

The 50 day line is at 1413.57. A couple of closes under that level will put us on the bearish side of the fence.

In the meantime, the VIX remains stuck in a range (between 10.0 and 12.5....pretty much where each of the Bollinger bands is right now. Recently, the VIX's relative peaks and bottoms have occurred at the band lines. And as you can see, there's still some room for the VIX to rise before 12.5 is seen again. That margin is the wiggle room the bulls have before we turn bearish based on the VIX. A close above 12.5 would probably occur at the same time as the SPX fell under the 50 day line....a double confirmation of a bigger bearish move. If instead 12.5 acts as a ceiling - and if the 50 day line support the SPX - the bulls will stay alive.

S&P 500 Chart

Click For A Larger Chart

Dow Jones Industrial Average Outlook

The Dow Jones Industrial Average matched the S&P 500 on Friday with a 0.12% loss of its own. For the Dow, that meant a 14.98 point dip, which parked the index at 12487.02 by the end of the session. For the week, the similarities to the SPX were sustained.....the Dow lost 0.62% (-78.15) points over the last five sessions. Like we pointed out in the MidWeek Update, the overall trend is still pointing the chart higher, but it looks like the bulls are falling asleep.

So, you probably won't find it hard to believe the Dow's chart is largely mirroring the SPX's. The less-bullish support line (blue, dashed) is being tested, as is the 50 day average line (purple). If the DJIA falls under 12,391, that support will be broken as well. And just so you know, the Dow hit low of 12,391 on Friday.

Less objectively, note how the selling volume got heavy - and frequent - in the last couple of weeks. It's been the strongest span of distribution we've seen since late October. To see it coincide with a break in momentum is a major red flag.

Dow Jones Industrial Average Chart

Click For A Larger Chart

Have a great week!

Friday, January 26, 2007

Van Tharp - The Traders Coach

Today, I'm sharing an article from our trading education partner, Dr. Van Tharp of International Trading Mastery Institute. Van Tharp is world renowned for his trading courses, seminars workshops, and books on the subject of trading success. Trade Your Way To Financial Freedom is but one of his excellent books and highly recommended reading for all traders and investors.

Click the Van Tharp - The Traders Coach header link above to learn more about Van Tharp and his high acclaimed trading education programs.

The following article is from Van Tharp’s associate, D. R. Barton Jr. D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. His writing credits include co-authoring Safe Strategies for Financial Freedom and co-creator and contributing author on Financial Freedom Through Electronic Day Trading.

For the past four weeks we’ve discussed one of the big problems with finding a trading system that fits you. I call it the Christmas Present Syndrome because the problem is like the one that faces people as they open presents. When we unwrap a present or dig into new trading system or idea, we are confronted with a difficult emotional and intellectual transition: we move from the world of possibility filled with hope and unlimited expectation into the world of definitive knowledge, filled with the reality that flaws and tradeoffs really do exist and that it may not work as well as it did on TV. During the holidays, having our Christmas presents turn from possibility into reality can cause a bit of post-celebration overeating.

But with a trading system, Christmas Present Syndrome can cause us to toss out good and useful ideas. Or worse yet to blindly tweak systems, killing long-term performance or leading to other unintended consequences.

To combat the knee-jerk of throwing out a trading system or idea the first time we find a tradeoff that has to be considered, we spent the last two articles talking about setting goals for our trading (BEFORE looking for a system) and looking at some key big-picture measurements of system performance that should help be considered. This week we’ll look at some other measure of performance that should be considered when evaluating your trading system. Make sure you look at the following as you review your candidate system (in addition to the items that we discussed last week):

What percentage of the system’s profits did the top two or three winners generate? This is a frequent problem for systems that have a low frequency of trades or long holding times. Some position trading systems are notorious for generating great track records because they caught one or two phenomenal moves and were mediocre on the rest of the trades. While catching big trades is a good thing, you can’t have a system that is breakeven or even a loser except for that once-in-a-decade move in coffee… One way to test your system to make sure it isn’t a “one hit wonder” is to see how well it performs if you omit the best three and the worst three trades.


Trading Simulation Game


"Secrets of the Masters" Trading Game. Helping others become the best trader or investor they can be has been Tharp's mission since 1982. An Original Market Wizard, Dr. Tharp offers unique learning strategies, and his trading education techniques for producing great traders that are some of the most effective in the field. Over the years Tharp has helped people overcome problems with system development and trading psychology, and success related issues such as self-sabotage. His trading education programs are of the highest quality and are world-renowned. 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.

Knowledge > Goals > Plan > Action > Success. Have a good weekend!

Thursday, January 25, 2007

Cashflow 101 Board Game

I remember I loved to play Monopoly when I was a kid. Hopping around the board buying up and renting out as many real estate properties as I could get my hands on. That game taught me a lot about buying, renting, and managing real estate but it was not the whole big picture of what a real life as an individual investor was then and even more so, is now.

Robert Kiyosaki, internationally acclaimed author of Rich Dad Poor Dad, the Cashflow Quadrant, and many other excellent finance and investing books has created a real life board game about starting a career, earning, dealing with and managing money, and persons choices and consequences of it all. It's an excellent real life board game where the players learn and educate themselves about the world of money, finance and investing, while have a whole lot of fun at the same time.

My family and I play Cashflow 101 all the time. I feel so good that my young children are learning so much about today’s reality of money and investing. Something that I did not learn as a young child, but learned later in life after making some big mistakes. By playing Cashflow 101, I'm making sure that my children have a head start to having assets work for them, instead of having to work for money their entire lives. As Robert Kiyosaki said, "it's what the rich teach their children that the poor and middle class do not." It all starts with education and knowledge. With that, anyone can begin the journey to financial freedom and success.



Here's a brief summary of what the board game is about.

Rich Dad Cashflow 101 & 202 are investment educational board games that teaches accounting, finance, investing, and at the same time and makes learning about managing your time, energy, money fun and exciting. A real life investing game that teaches about basic career choices and their consequences, the way to best think and act about money, staying out of debt, and the most of all investing it to have money working for you, instead of you working for money. Cashflow 202 add on game provides advanced success skills of technical trading, speculating, and investing in the stock bond option forex and commodities markets. Cashflow For Kids Board Game Too.

If you’re new or old to investing, Cashflow 101 will teach and entertain all at the at the same time.

Click the "Cashflow 101 Board Game" header above or the board game image to read more information about it and purchase.

Have a great day!

Wednesday, January 24, 2007

Low Risk High Reward Trading Software

Today I'm going to talk about simplifying you’re trading and investing life with the use of technology. A computer, internet connection, and the MTPredictor trading software. Forget all the manual labor it takes to invest and trade in the markets. Let technology help you do it and save time energy, and money.

The bottom line for winning in the markets in the long term is keep your losers small, and your winners big. This means you must apply low risk high reward ratios in your trading and stick to them. If you don't, you may simply be entering the market when there's far more risk than reward and either get stop-loss out all the time, or God forbid, taking a big loss if you didn't use stop-loss. Trading this way, you won't be in the trading and investing business very long.

It’s best to enter the markets with at least a 2:1 reward to risk ratio or more. Reward risk ratios that are over 3:1 are really good, and upwards of 10:1 or more are huge. The markets are always offering different amounts of risk and reward at any given time. The key of successful traders and investors is that they enter the market only when it shows low risk and high reward. Certain chart patterns provide low risk high reward trades. It’s these low risk high reward chart patterns that the smart traders take advantage of. Identifying these trade setups is the beginning to a successful trading plan and long term success in the markets.

With the so many things to remember and apply when trading and investing, its takes a lot of time and energy to remember and apply it all. Here's where technology comes in. The MTPredictor trading software that automatically identifies the low risk high reward trade setup, provides entry price, stop-loss price, and take profit target prices automatically, letting you see the risk reward ratio automatically, and has built in position sizing money management function to not over leverage the trading account. Over leveraging of a trading account is one of the most common reasons a novice trader makes when trading. They basically risk too much according to the trading account equity amount. This is a major no-no in trading.

Save time energy and money. Try MTPredictor Trading Software to help you increase your chances of long term success in the markets.

Take a look at this chart below of the forex pair pound dollar GBP/USD this year January. This low risk high reward trade setup provided a gigantic 15:1 reward to risk ratio. Traders and investors who take advantage of very high reward to low risk trades like these and stay out of the market when its showing too high a risk for the reward will be smiling all the way to the bank.

GBP/USD 120 Minute Time Frame Chart - January 2007

Click For Larger Chart

Click the "Low Risk High Reward Trading Software" header link above to learn more about the MTPredictor Trading Software, receive a free 30 day trial, and as a Invest2Success.com user, a 10% discount off the regular price.

In the long ago past we had to do things manually. Today, technology has simplified our lives. Let technology simplify your trading and investing life also. What’s more valuable to you? Time or money? I hope you said time. If you lose time, you can't get it back. As long as you’re alive, you can get money back.

Good day and good trading!

Tuesday, January 23, 2007

Stock Sectors Continued

We had a reader comment on our Stock Sectors post http://invest2success.blogspot.com/2007/01/stock-sectors.html asking the following question about stock sector historical charts. “Would you happen to know if there is some type of historical chart that shows the nine cyclical stock sectors in the months of their strength on a yearly basis?”

BigCharts.com is a free website which one can view sector charts. The sector charts main page is at the following url.

http://bigcharts.marketwatch.com/industry/bigcharts-com/

More on stock sectors and stock market cycles.

Stock Market cycles are patterns of expansion and contraction in the economy represented by the flow from recession to recovery and back. Cycles, as the word implies, are constant repetitive motion, conditions that repeat themselves over and over again. As human beings have a social nature, this social nature generates forms. As the forms are repetitive, they have predictive value.

The Stock Market Cycle in a nutshell. The following describes the sector rotation at the beginning of a bull market all the way through to the market top and into a late bear market.

Early Bull Market

Financials & Transportation
Technology
Capital Goods
Basic Industry
Energy & Precious Metals

Market Top

Consumer Non-Cyclical Healthcare
Utilities
Consumer Cyclical

Late Bear


The S&P breaks the market into 11 different sectors. Two of these sectors, utilities and consumer staples, are defensive sectors, while the rest are more cyclical in nature. The other nine sectors are: transportation, technology, financial, energy, consumer cyclical, basic materials, and capital goods, health care and communications services.

Cyclical stocks can be classified according to how they react to business cycles. Cyclical stocks are stocks of companies whose profits move up and down according to the business cycle. Cyclical companies tend to make products or provide services that are in lower demand during downturns in the economy and higher demand during upswings. The automobile, steel, and housing industries are all examples of cyclical businesses.

The stock prices of cyclical and non-cyclical stocks relate to how the business cycle changes. Cyclical stocks move more dramatically, both up and down, with the cycle, while non-cyclical stocks show little movement relative to the cycle, for example, utilities. The idea behind cyclical and non-cyclical stocks is simple. When money is tight, what can you do without or put off, and what do you really need?

Defensive stocks are the opposite of cyclical stocks: they tend to do well during poor economic conditions. They are issued by companies whose products and services enjoy a steady demand. Food and utilities stocks are defensive stocks since people typically do not cut back on their food or electricity consumption during a downturn in the economy. But although defensive stocks tend to hold up well during economic downturns, their performance during upswings in the economy tends to be lackluster compared to that of cyclical stocks.

An investment approach recognizes that the basis of stock price disparity among groups is the difference in business conditions among segments of the economy. Analyze macroeconomic, technical, political and demographic trends as they relate to the securities markets. After determining the most attractive sectors, select individual companies and fixed income securities that should benefit from the current investment environment. Earnings are a key driving force behind the differing price changes among groups of stocks or sectors of the stock market. Earnings averages, which are measures of valuation, show favorable and unfavorable investment periods.

This strategy is based on the growth/cyclical stock market theory. This approach has been particularly successful in identifying major divergences that have occurred in the stock market and is now commonly used by institutional investors. In more recent years, greater diversity has occurred within the economy and the financial sectors. Monitoring the many industry averages now available on a technical basis is a must.

The importance of being aware of sector rotation in the stock market is shown by historical charts. Major sector averages performance shows that sectors have reacted fairly independently of each other. However, they have also moved in harmony for considerable stretches, particularly when broadly based advances or declines were under way. When viewed in this way, the term "market" as usually understood becomes less than meaningful and the general terms "bull market" or "bear market" becomes misleading. Major stock groups may be in either a bull or bear trend while another group is acting very differently.

Examples of Sector Rotation in the Stock Market:

From 1957 through 2000, the Cyclical Average has outperformed the Traditional Growth Average during nine periods that averaged about two years in duration. The Traditional Growth Average has outperformed the Cyclical Average ten times during this period with an average length of about 2.7 years. One of these averages beat the S&P 500 Index in all but eight of the 43 years. Correct sector rotation investing on a year over year basis would have produced more than twice the gains earned by the S&P 500 Index. Classifying companies according to the factors which influence their earnings is a crucial key to investment success. The failure to make this distinction has been the most obvious flaw of the popular averages and has often made them misleading at crucial turning points.

Watching the main stock sectors, will greatly increase investing and trading success in the markets, and should be a part of every investors traders strategy.

Click the "Stock Sectors Continued" header link above to obtain more information on sector trading and investing.

Good day!

Sunday, January 21, 2007

Weekly Stock Market Outlook

NASDAQ Outlook

The NASDAQ Composite's gain of 8.10 points on Friday (+0.33%) left the index at 2451.31 for the week. That was 51.51 points lower (-2.06%) lower than the previous week's close, and leaves the composite right on the verge of a breakdown.....again.

What a week! A complete reversal of the previous week's big rally. However, between the two weeks, the trend is essentially a wash. And, the index is trapped between support and resistance.

The resistance is the 20 day moving average line (blue) at 2451. We fell under it sharply on Thursday, and the rebound on Friday got stopped right there.

The support is the 50 day average (purple) at 2434. The selloff got halted there on Thursday, and that's where the recovery move was staged on Friday. It's a big deal in itself, made even bigger by the fact that the 50 day line was where the bulls drew the line at the end of last year/beginning of this year. If the bears really want to get a grip, we need to see a couple of closes under the 50 day line before we can see the market is truly headed lower. (It would be the first time we made two consecutive closes under the 50 day moving average line since last August.) If you're looking for an even safer bearish confirmation, wait for a close under 2394 (yellow), where we've seen support since November.

On the flipside, a close back above 2470 (red) - where we topped a couple of times late last year - would be bullish. We popped above there a couple of weeks ago, but clearly had no staying power.

Note that most of the technical indicators are painting an indecisive picture.

NASDAQ Chart

Click For Large Chart

S&P 500 Outlook

On Friday, the S&P 500 ended the session 4.15 points higher, gaining 0.29%. On a weekly basis, that was 0.25 points, or 0.02%, lower for the shortened option expiration week.

Bullish overall? Yes, still, but that's certainly in question. The fact is, the 10 day line (red) held up as support at the end of last week, and we hot a new 52-week high the day before that. However, this is definitely not the kind of strength we were seeing just a few weeks ago.

But, as we said of the NASDAQ, and as we'll say about the Dow, the picture is about as mixed as can be right now.

We're about where we were as of mid-December. And, it's becoming much easier to pull back than it is to advance. That faltering is bearish.

Yet, it can't be denied that we are still inching higher....support at the 10 day line, a bullish MACD divergence, hitting new highs. As with most of the indices right now, there are pretty clear support and resistance lines. The key support line we're watching is the 50 day average (purple) at 1408. The resistance line is still at 1431. True, we peaked above there briefly last week, but have yet to close above there. If we do though, the bulls will have a much stronger case.

We'd look closely at the VIX, but immediately following an expiration week, it may not be fruitful. Right now it's low, and also approaching a potential support area (the lower Bollinger band). Yet, we've seen the VIX hit the lower band line before, and just keep tracing it lower (see late November). The possible difference this time is the major increase in volatility since late November. Just look at how the VIX has been bouncing around since November - a stark difference in the VIX's minimal swings for the four months before that. In other words, support and a bounce is more likely at the lower band line right now. If that's what happens, we'll look for stocks to make good on their downside potential.....as long as the SPX's 50 day line breaks.

S&P 500 Chart

Click For Large Chart

Dow Jones Industrial Average Outlook

The Dow Jones Industrial Average saw a miniscule loss of 2 points on Friday, but an equally imperceptible gain of 10 points for the week. That was a loss of 0.02% for the day, and an 0.08% gain the from the prior Friday's closing level. To see the blue-chip index hold its ground is bullish in a sense, thanks to the support sustained at the 10 and 20 day moving averages. However, the bullish envelope is certainly being pushed.

As the chart shows, that longer-term bullish channel is still technically breached, as the pace of gains has slowed off quite a bit. However, we'd be hard pressed to say this was a big problem just yet. It's not impressive for the bulls, but it's not a problem.

The red flag is all that selling volume the last three days of the four day week. That was the biggest distribution wave we've seen since late October. Why? Great question...why? That, paired with an already-struggling chart, doesn't bode well for the bulls.

So, here's how we're playing it - consider this a notice for the Dow. Our line in the sand is the 50 day line (purple) at 12,348. We found support pretty close to that before the runup two weeks ago. Most other support has given way; that's going to be the last likely floor. Plus, there's a new support line (green) being formed there.

In the meantime, don't get too excited about a renewed uptrend unless we start to see new all-time highs again. That would be a move above 12,667.

Dow Jones Industrial Average Chart

Click For Large Chart

Click the Weekly Stock Market Outlook header link to view our main site and the many offerings we have available. Knowledge > Goals > Plan > Action > Success

Have an excellent week.

Friday, January 19, 2007

Forex Training

Its the weekend now with the markets closed, and time for to hone your skills as a trader.

Today I'm going to talk about learning to successfully trade the forex market and win in the long term.

One of the best training companies in the world is Online Trading Academy. They provide some of the finest in complete training for stocks, options, and futures. High quality training for all the financial markets. They also have live onsite training centers worldwide.

Online Trading Academy is the most trusted name in Financial Education has put together this splendid Value Pack - 8 Compact Discs to use interactively on your computer. These cds are jammed packed with the information you need to Get Started, to Understand and Trade the Forex Marketplace.

You will be taught at your own pace, how the "real" FX market works. Before you finish with the first CD you will know and understand the difference between "Dealing Spread", Direct Access and Fee based transactions. Go into this market with your "Eyes Open".

The next CD takes you into "Set-ups, Trade Strategies and Trade Tactics" - Yes, there is a difference. In the Advanced concepts you will see how to use both Fundamental Analysis and Technical Analysis. We teach how to use ADR to choose high probability goals. Learn the uses of Fibonacci, Linear Regression and multiple TA Indications.

If you need help, there are interactive tests at the end of each lesson, which will help you focus on the areas you need help with. This value pack contains both an Intro to Fx and advanced FX trading concepts. You will need some help in Technical Analysis, so there are 3 CD's devoted to FX Charting. You will finally see how to setup accurate, logical Entry, Exit and Stop Loss.

Here is a spotlight of the cds this Professional Trader Education Value Pack for Forex Traders value pack includes:

Forex CD 1- The Fantastic World of Forex

Get more bang for your buck through the leverage of E-minis! Mike Mc Mahon takes you through the ins and outs of trading this highly liquid financial instrument.

Forex CD 2- Advanced Spot Forex Trading Strategies

Learn the more advanced Forex Trading techniques from a pro with this Brand New CD - step-by-step instructions through high probability entries, exits and the necessary stops to give you maximum profitability and capital preservation.

Technical Analysis for the Professional Forex Trader (Part 1)

Learn to use charts and technical indicators in a clear, simple and concise manner to improve your trade entries and exits.

Technical Analysis for the Professional Forex Trader (Part 2)

Learn to use Support & Resistance in combination with proper Trend Line drawing to mark on the high probability Entry/Exit. You learn how to "Stay In" a trade as we explore continuation patterns and the use of Moving Averages.

Technical Analysis for the Professional Forex Trader (Part 3)

Learn to use Technical Indicators for the trading of Forex. We will explore their proper use and evaluation and dispel many of the bad beliefs many have been given by the "guru's".

Fibonacci Trading CD - Use Mathematical Magic for Better Profits from Each Trade

Fibonacci numbers and ratios point to specific turning points in the markets' movements. Learn how to use Retracement, Extension and Projection Analysis to maximize your profits and tightly control the losses.

Click the Forex Training header link above to obtain the finest in Forex Training with Online Trading Academy's home study forex course.

Knowledge > Goals > Plan > Action > Success

If your goal is strong enough, you will do whats required to have success.

Have a great weekend!

Thursday, January 18, 2007

Back Testing

Today, we will be discussing the do's and don'ts of back testing. Back-testing is a highly practical and a very real way to test the strength of certain beliefs and ideas you have about the market. Do you think that a market above the 200-day is bullish? Test it. For instance, we have found that short-term bottoms in the SPX tend to perform worse when below the 200-day line, but much better when above the line. We wil discuss how to choose time periods to test and to evaluate the strength of you system.

The first thing traders should understand is that in this day and age, we have the technology to remove much of the subjectivenesss and mystery about the market. You need to answer these questions before you trade:

How will your system react to drawdowns?

Is your trading system practical (i.e. do you have time to use this system?)

Can you tolerate inactivity if your system suggests doing so?

Testing also benefits the trader psychologically and many would argue that psychology is more important than market knowledge when trading. After all, an uninformed conservative trader often does better than an intelligent, reckless trader. Testing fills a trader with confidence and decreases the likelihood that he will be too scared to trade when the moment is right. Also, testing makes the trader aware of what drawdowns might look like and what sort of weaknesses his system has. Let's move on to the do's and don'ts of testing procedures.

Do's and Don'ts

Make sure that you don't mix your in-sample data with your out of sample data. For example, the best way to test is to form a list of stocks, and test them. Then optimize on a different list of stocks. Finally, test the strategy on a completely different set of stocks in a different time period from the original test. If there is no overlapping in the data then you wont' have to worry so much that you've "overfit" the data for the past. Remember that one danger of optimizing too much is that the strategy might not work unless markets behave exactly the same as they did during the optimization period. Another effective means of testing is to do simulated trading for a multi-month period. You can then test your strategy without risking money on it. Also, since you will be more emotionally detached at this point, it will be an opportune time to hone the sytems.

You should also decide how you will treat outlier trades in your system. You may want to include outlier trades if your system depends on them. Otherwise, your results may suggest that the system is not profitable when in fact it is. Be sure to keep in mind that there is more to a good system than net profit. I like to pay attention to standard deviation or coefficient of variation as measures of risk. Return is always relative to risk. Keep these points in mind when developing a system and be sure to stick to the system once you start trading. Large run-ups and drawdowns tend to cause system traders to change their systems to their dismay.

Click the Back Testing header link above to see the best software we've back tested and now use full time. Automated low risk high reward trade identification and trade management. Reward risk ratios of 3:1 to 12:1 . . . thats huge! Also comes with built in position sizing and money management functions. With this combination, winning in the markets is a virtual certainty.

Good day and good trading.

Wednesday, January 17, 2007

Psychology of Trading

I'm still here traveling around Asia investigating investment opportunities. The internet here seems to be getting better after the Taiwan earthquake a couple of weeks ago. I think I'll be able to make daily updates again. I hope so, I'm way behind on my online work. Here's a little piece on the Psychology of trading, one of my favorite topics.

Ari Kiev says that instead of letting your emotions dictate your actions, let the emotions run their course. Keep a journal and observe what effects your emotions have you on you. Get to know yourself better and take more precise actions. How much does psychology play into trading? Think about this. Psychology IS trading. Psychology is 99% of the reason that stocks move. Computers don?t make the moves, people do. So today, we will discuss The Psychology of Risk by Ari Kiev. We will discuss some of the major points of the book and dig up some gems, for your enjoyment. The good news is that Kiev's book has a bias towards short-term trading. Let's look at some of his ideas.

1. Your heart leads you - The problem with most traders is how they automatically react to their emotions. Everyone gets emotional to some extent when trading. The key is to first observe your emotions and then act. Do not let your emotions automatically move you into action.

2. Questions - Answer these questions and you will be illuminated! Do it! As a trader, What more do I need to know? What can I do to change my self-limiting habits and attitudes that often lead to repeated failures or limited success? How do Iavoid being trapped with over analysis, regrets over losses, and other things that preoccupy when I am trading?

3. Goals - Goals require you to act differently on a daily basis and that forces you to break out of old habits, which many people find uncomfortable. This feeling of anxiety is really a blessing though. The alternative is to remain comfortable and stagnant. It takes guts to set goals and it takes discipline to achieve them. With goals, your trading purpose goes from "I want to make as much money as I can" to "I need to make 50% this year and therefore I must....." Goals create well-defined action.

4. Mental accounting and justification- It's very common for traders to treat fast- earned profits differently from the rest of their capital. This type of behavior is completely irrational even though it is very common. It happens very often with gamblers. Another common mental accounting technique is to justify losses in one trade with gains from another. It's like saying, it's okay that I'm losing money on GM, I am making money on TM. So, I suppose I can just hold on to GM as long as TM makes up for my losses. Poppycock! If TM is the winning stock, get rid of GM and hold on to your strong trade! The key here is to evaluate every trade as if it stands completely alone. If it was the only position in your portfolio, what would you do with the stock?

5. Trading and Self-Worth - Just like in many areas of life, traders often trade in hopes of showing self-worth and making themselves feel better about who they are. Have you ever done this? Think abou it. Have you ever felt like mister cool, after a profitable trade? Ironically, trading is not a measure of who we are or what we are worth. To step into that world is highly dangerous. If trading defines who you are, then how will you feel when you trade poorly? The key here is to ask this question continuously, "what is the most effective way to trade?" It has nothing to do with what sort of a person you are.

6. Assumptions and spontaneous thoughts- Many traders don?t realize how much of their decision making is dictated by inaccurate assumptions and spontaneous thoughts. For example, a trader might be watching CNBC and hear that the Fed Chairman is thinking about raising interest rates even further. Next thing you know, the trader sells all of his utility stocks right as they are bottoming out. Realize that trades are often made using irrelevant and emotional information. Before placing a trade, ask yourself why you are placing the trade. If your answer is not strong, then don't trade.

Good discipline, good trading, and good day.

Sunday, January 14, 2007

Weekly Stock Market Outlook

NASDAQ Outlook

On Thursday, the NASDAQ Composite broke past that barrier of 2470, rallying all the way up to a close of 2484. On Friday, we got a bullish confirmation of that breakout when the index closed 17.97 points higher, or at 2502.82. That was 0.72% above Thursday's closing level, and 2.82%above the previous weekly close. The bottom line is....it's bullish. We'll discusses a few reasons why below.

The NASDAQ is already into a bullish MACD crossover. That paired with the break past resistance is enough for us to make a bullish call here. But if that weren't enough, we could also look at volume and come to the same conclusion. The volume behind the buying has been the strongest we've seen in weeks. And more than that, it's been consistently strong.

True, it probably is institutional buying, as they reposition this time of year. But, whatever....if stocks are going higher, they're going higher - regardless of the reason.

The only potential pitfall we see is the degree of gains over the last three days of the week. The index really pulled away from its moving averages lines - far enough away to perhaps get reeled in a bit. That's ok though, as the bullish have already struck a good blow. As long as the 1- day (red) or 20 day (blue) moving averages hold up as support during a pullback, this new uptrend should remain alive.

On a side note, the current scenario is bullish also because we're now seeing the NASDAQ start to lead in terms of percentage gains. It had been lagging - badly. But now with investors seeking aggressive names like the ones that make up the composite, the subtly hint is that the market is thinking bullishly.

NASDAQ Chart - Daily

Click For A Larger Chart

S&P 500 Outlook

The S&P 500's 6.95 point (+0.49%) meant a close of 1430.75 on Friday. For the week, the index closed 21.05 points higher, or 1.49%. That was an impressive move, but the S&P 500 has one more hurdle to cross - one the other indices don't - before we can say we see fully confirmed bullishness. But make no mistake, based on last week's chart, we think the market is indeed setting up another bullish leg.

That final barrier is 1432 (red, dashed). That's essentially where we toped out in mid-December, close to the peak on January 3rd, and basically mirrors Friday's high, Yes, we know we're splitting hairs here, but that's the discipline.

In the meantime, and as we discussed last time, the 50 day line ended up serving as support, and then acting as a launchpad for this rebound. That led to a cross back above the 10 and 20 day averages, which is a short-term buy signal in itself.

The VIX also chimed in, signaling this pop was likely when it encountered resistance around 12.70 (thick, red). That was where the VIX hit tops in December, and then again in early January. It was also where the VIX's upper Bollinger band (blue, dashed) was at the time, which made it even tougher for the VIX to move higher.

As for when the VIX might encounter support, it's not happened yet. The lower band is at 9.6...and we doubt it will be able to turn up again until such a floor is hit (see mid-December for an example). During the time it will take for the VIX to get that low, which could be in just one day, the SPX should have enough of an opportunity to break past 1432.

S&P 500 Chart - Daily

Click For A Larger Chart

Dow Jones Industrial Average Outlook

The Dow Jones Industrial Average (found another 41 points on Friday, gaingin0.33% to tend the session at 12,556. That was 158 points (1.27%) above the prior week's close, and definitely puts this chart back into a bullish zone of sorts.

Not much to add here, as the story seems about the same. The 50 day line served as a springboard, pushing the DJIA back into its long-term bullish zone. The 10 and 20 day line are again acting as support. And, you don't need us to tell you the Dow has been hitting new all-time highs of late. (While we're always skeptical to follow the conventional wisdom 'buy new highs', in the case of the Dow it would have paid off.)

That being said, most pundits are arguing that large cap stocks are primed to lead in 2007. We don't disagree. We just want to note that this does indeed include all of the Dow names. Didn't we just say the NASDAQ (more aggressive. Smaller) stocks were taking the lead? Yeah. A contradicting view? Yes, somewhat. Here's the deal....

The bullish-about-large-cap view is a philosophical one, and has more to do with rotation and the economic cycle. The NASDAQ-leads view is a technical one, and shorter-term. The question you need to ask if you want to act on either theme is simply what your timeframe and desired activity level is. Are you an investor, or trader, or both?

By the way, the market is closed on Monday in observance of Martin Luther King Jr. Day. Trading will resume on Tuesday.

Also keep in mind that this coming week is an expiration week. The last few have been wild and unpredictable, and we doubt this one will be any different. Conventional thinking - even our technical analysis - can get trumped.

Dow Jones Industrial Average Chart

Click For A Larger Chart


Have an excellent week!

Wednesday, January 10, 2007

Low Risk High Reward Trading Software

The internet is getting a little better and faster here in Asia but it's still very slow and hard to access the blog since the Taiwan earthquake. I hear they should have it fixed in another week or two. I truly hope so.

Today I want to share with you an excellent automated trading software that provides low risk high reward trading. This trading software has built in position sizing, so winning in the market long term is virtually a certainity.

Click the Low Risk High Reward Trading Software header link above for more information and a free 30 day trial.

Below is the key benefits and features of the trading software.

Good day and good trading.

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Click the following link to view an example chart of the software, take a tour of the real-time, end of day versions, and access low risk high reward trades submitted at the MTPredictor Forum by users and MTPredictor Developers.

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Good New Year & Good Trading! – http://www.invest2success.com

Monday, January 08, 2007

Dow Jones Industrial Average

Everyone knows what the DOW is, but what exactly does the number mean? How is it calculated? Not very many people know exactly how this works, but it is an important and interesting thing for traders and investors to understand.

Today, the DOW is an index made up of 30 different major companies. Most of these companies are very commonly known names, such as Disney (DIS) and General Electric (GE). The DOW is probably the most well known of the major United States indexes, and is used for tracking the stock market. Despite it's fame, the DOW is coming under increasing scrutiny as being less important then other indexes such as the S&P 500, because it only tracks 30 stocks and does not give relevant weightings to certain sectors.

The Dow Jones Industrial Average was created by Charles H. Dow on May 26, 1896. Originally it had only 12 stocks. The DOW, as it's name implies was a simple average of the prices of the 12 stocks. It was easy to calculate which was good because they did not have the sophisticated computer systems that we have now.

To adjust for stock splits and mergers the divisor (originally 12), has have to be adjusted over the years. Currently the divisor is down to 0.14452124. So if Intel (INTC) gains $1, it is responsible for about 6.919 points of movement on the DOW index. Just divide the dollar movement of the stock by 0.14452124 to calculate this.

Investors have been watching the DOW very closely over the last few months because it has been pushing into record territory for the first time since the crash of the internet bubble. November 17 was it's last record close at 12,342.56. As of today's close, the DOW is very close to that level and could make another record high.

Click the Dow Jones Industrial Average header link to learn more.

Good day and good trading.

Financial Predictions 2007

In the January 2007 Elliott Financial Forecast

The Year of the Financial Flameout

How Wall Street’s biggest firms are wrong in calling for a flourishing bull market in 2007.

With investor optimism reaching record highs at the end of last year, 2007 appears to be set for some major surprises for unsuspecting portfolio managers – and anyone else who hasn't read the January 2007 Elliott Wave Financial Forecast.

Co-edited by Bob Prechter's hand-picked team of Steven Hochberg and Pete Kendall, EWFF is a monthly newsletter packed with wave analysis and commentary that helps you identify when it's best to invest in a market, and when it's best to step aside. That way you can minimize risk and maximize opportunity.

Bottom line, its all about low risk high reward trading strategies for success in the long term.

In this month's issue, Pete and Steve show you:

What it means for the markets when Wall Street's financial assets make up more than 35 percent of U.S. Gross Domestic Product (quadruple the amount in 1994).

A clearly labeled price chart of the DJIA in its terminal fifth wave.

Commentary and a supporting chart of what this past year's record optimism means for the markets in 2007.

Whether or not you should be concerned that corporate insiders are dumping their own stocks, even as public optimism abounds.

And a whole lot more, including your regular monthly updates on the Dow, Bonds, Nasdaq, Metals, S&P500, and the U.S. Dollar.


PLUS:
Invaluable commentary on cultural and social trends that affect the marketplace

Read This Issue Now for just $20 . . . or Find Out How You Can Get a Better Offer.

Subscribe to The Elliott Wave Financial Forecast today RISK-FREE for just $19 a month, and get tons of extra benefits with your monthly subscription.

When you subscribe, you get much more than the current issue. You get all of the great bonuses below – all at $1 less than the cost of the current issue.

Here's what you get with a subscription:

A completely Risk-Free, Money-Back Guarantee

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Online access to at least the previous month's Elliott Wave Financial Forecast

Access to all future FF issues, including occasional special reports, released between now and the end of your quarterly subscription

Elliott Wave Principle - Key to Market Behavior, book by Prechter and Frost

Access to EWI's Subscribers-Only Message Board

Access to the Subscriber's Lounge, including four of Bob Prechter's classic Elliott

Wave Theorists, historic television interviews and much more

Free 90-minute video: The Basics of The Wave Principle

Click the Financial Predictions 2007 header link above to registration for free. Review all the various financial product and service offerings that fit your investing style.

Good day and good trading.

Thursday, January 04, 2007

Taiwan Earthquake

I'm in the Asia region this month, and having a big problem with the internet being very slow over here currently. The recent Taiwan earthquake has disrupted internet service here for the time being. Sometimes access to the blog is too slow or not available at all. I hear they will have it repaired within a couple of weeks. Until then, I may not be able to make daily postings as I would like because of this service disruption. I'll make every attempt to continue my daily postings during this time but they may not be so frequent until full internet service to Asia has been restored.

Good 2007 to you all!

Wednesday, January 03, 2007

Germany: Stronger Currency... Rising Exports?

Ever since the euro began crushing the U.S. dollar back in 2001, European economists have warned that it would not end well for European exporters. The stronger the euro gets, they said, the worse would be the impact. A strong currency is never good for exports – that’s Economics 101. So when the euro-dollar exchange rate hit the all-time high of $1.36 in December 2004, duck and cover, said analysts.

That turned out to be a false alarm, because in 2005, Germany – European Union’s biggest, export-driven, economy and a nation that in 2002 fully switched from the deutsche mark to the strengthening euro – “overtook America to become the world's biggest single exporter.” Strong euro or not, Germany’s trade surplus in 2005 was “greater than that of China, Japan and India combined.” (Telegraph).

Now let's fast forward to present day. This was another good year for the euro: It gained some 14% on the U.S. dollar, pushing the exchange rate from $1.16 in January to $1.33 in December. Moreover, the European Central Bank has just reported that, "the euro recently surpassed the dollar in terms of the amount of bills in circulation worldwide" (Deutsche Welle).

That's a troubling trend, some economists warned again. "The recent euro exchange rate strength will negatively affect the price competitiveness of the export industry. The peak in export growth may be around the corner" (Bloomberg).

Maybe, but not yet, because in 2006, despite the surge in the euro, "German exports rose 13%, allowing Germany to retain its crown as world's biggest exporter of goods." Hmm.

American economists, just like their European colleagues, also say that a stronger dollar adds to the U.S. trade deficit. But as soon as you plot the two on a chart, it becomes obvious that this economic “axiom” is no axiom at all. We’ve shown this chart before, but in light of the latest news from Germany, it bears showing once again. It shows the “relationship” – or lack thereof – between the U.S. dollar and the U.S. trade deficit over the past decade:

Click For A Larger Chart

Charts are the core of Elliott wave analysis. One glance at a well-made chart is worth a thousand “fundamental” explanations, wouldn't you say?

Click the Germany: Stronger Currency... Rising Exports? header link above to put low risk high reward Elliott Wave Trading Software to work for you.

Good day and good trading.

Online Trading Academy

An Interview With Mike McMahon of Online Trading Academy

December 28, 2006

Passion and enthusiasm are the "watch" words of Mike Mc Mahon. He brings both to his trading and his teaching, with almost 35 years of experience in the market, as an investor, a trader and a licensed Commodities broker. In this interview, he explains his views on the markets and his recommendations on how to learn to trade.

How many years have you been involved in the markets?
About 35 years over all and highly concentrated work for approximately 25 years.

What makes you a successful trader?
Belief in myself is my best trait. Over the years I have developed a discipline that works. I follow it religiously. This gives me the confidence to do the right thing in virtually every situation. That confidence allows me to be more decisive. And the better decision-making affords me a very nice return. I guess you might wish to distill that into a simple comment of "Discipline is my success secret". I return a couple of hundred percent typically on my risk capital. 1999 was a very good year for me with a 600% return. I trade with about 18 - 20% of my financial assets, the rest being in long-term portfolios. I am strong equity right now, but I change my portfolio to match the market character.

Which technical analysis tools do you find the most useful?
I use quite a variety in my trading. First, understand that I employ momentum, swing and position trading in my arsenal. Needless to say, the advent and proper interpretation of Level II is my main source for decision-making in momentum trading. Your question leads me to swing trading, which by definition is based on technical analysis. I use a standard RSI in conjunction with a very simple approach to support and resistance lines.

I analyze generally with 15 minute charts and watch with 1 minute charts. Market indicators help with decision support for entry and exits. I keep a close eye on S&P futures, the Tick, the TRIN and the market index that I am trading in, typically NASDAQ Composite.

One of my better tricks is looking back 90 days for high/lows approach on NASDAQ stocks. These tend to breakout (up or down) more frequently than Big Board stuff. By using a simple consolidation lines/channels, I look for confirmed breaks through support or resistance and act accordingly. I am currently studying Fibonacci analysis (Fib Nodes, confluence, 3x3 displacement) which is fascinating and appears fruitful...but I am by no means an expert in this field. To re-answer your previous question...another winning trait is that I fully realize that I am in a learning mode. There is never a day that goes by that the market does not present me with a new challenge or a different thought. You need to be flexible and open-minded to achieve.

What weaknesses have you overcome that have improved your trading?
The single biggest weakness I had was in not allowing my positions to fully develop. I was taking money off the table too quickly, while there was a still potential profit. This lead to the next problem of ego. After getting out early, I would convince myself I was right and not get back in immediately, again foregoing profits that eventually were there. In order to over-come this problem, I set myself the task of loosening my trailing stops (in swings and positions). This was quite a change and took a couple of years to get used to. I now will allow a profitable position to erode a bit to confirm it has finished its run. While I am not maximizing my profits, the ability to allow the trade to develop to its fullest has more than paid off, even if I am leaving a little on the table. Needless to say, this is not the strategy I employ in momentum trading. There, my stops are very rarely over 37 cents and generally as tight as a nickel.

What minimum attributes do you believe a person should possess before considering becoming a trader?
Qualitative: Decisive, disciplined, non-egocentric yet individualistic (tough combo), bold (not foolhardy), and enjoys the trade (You have to like this, you have to have a passion for it).
Quantitative: Several years of Market study (to be successful, not to start), appropriate risk capital (with little emotional attachment to it), ability to devote time to a rather harsh mistress (no less than 16 hours a week in research and study - does not include actual trading time).

What knowledge or training does a potential trader need at the minimum before beginning to trade?
There are three ways to learn. The first way is the school of hard knocks - trial and error (expensive error!). The second way is the self-study method of reading every book and listening to every guru and then placing money at risk. And, the third way, getting a formal education, which must include discipline, risk management and capital preservation. Some may think those are the same thing but they are very different when inspected.

Of course, you must learn about the market, the influences of the political arena, indicators, sentiment, world financial influences and human psychology. Certainly, there must be training in the new tools available, Level II reading and interpretation, technical analysis, understanding that there is manipulation in the markets (it is not just supply & demand), etc. There are other topics that need to be understood. For the beginner, you do not have to "Master" them all, but you must be familiar with them.

As you progress, their importance becomes more clear and you than start to use them more effectively. Of them all, my personal beliefs and strategy tend to place more import on the psychological aspects. The market works on perception - right or wrong - perception of danger, perception of profits, perception that someone else perceives differently. Having a working understanding of these aspects allows me to anticipate where the herd is going. Ultimately, the best education is the experience of being in the market. Formal education simply gives you some protections and a few tools to get started with.

Longevity is the real need. Those without training squander money, get caught up in trying to get even, doubling up on the next trade, etc...and, lo and behold, just about the time they "get it", they no longer have any risk capital to work with. They become "wannabe" traders that almost made it...they just didn't last long enough. Formal education informs them of the risks, sets a true framework of discipline to work with and develop, and teaches them how NOT to lose money as fast, thus, allowing time and experience to do their job.

Must the trader view his/her trading as a "business" to be successful?
Absolutely. This is true on many different levels. Psychologically, if it is not a business, then it must be "play". Play is wonderful, however, you tend to do foolish things during "play". You can pretend, you can be someone you are not, you can afford to be emotional, both exuberance and depression. None of these things are winning traits in trading. It must be a business.

You must realize that there will be business losses, business profits, business taxes, business expenses. If you are not organized, punctual, determined and aggressive, your business will fail - trading, selling ice cream or writing software. Because of my psychological makeup, I need to trade on a floor. I need to "go to work". While this is not necessary for all, and in fact many successful traders do trade remotely, shielded from the "noise", I have learned, however, that for "Mike" to work well, I need this little discipline (Heck, it is actually a Big Discipline).

Of the successful traders that you know, what characteristics or qualities make them successful?
Pretty much the ideas and traits I have already mentioned. Decisive, bold, ambitious, non-emotional (or at least trying), disciplined and (did I mention it) disciplined. Most of the traders that I know who are returning handsome profits all have developed a discipline and style over time. All have a "plan", a strategy....yet to a person, they are all flexible to stay with an ever-changing market. By the way, most are very tight-lipped on exactly what their strategy is. Both trading strategy and discipline can be very personal.

Of the unsuccessful traders that you know, what characteristics or qualities make them unsuccessful?
Simply take the reverse of the last question and the question on minimum attributes. I think fear is the mind-killer. As I noted, beginners lose, some lose big, some small but all lose. It is getting over that emotional pitfall, "I am a Loser", and simply realizing that nothing good comes without work and setbacks.

Fear also works on decision-making. Too often a trader sits and watches a price move up the ladder, all the while saying, "this is going up, I should buy ....maybe I will let it confirm... yeah, it is going up, on the next dip I am a buyer". Needless to say, this person eventually bought it at the top, only to see the position turn over on them, reinforcing the defeat by the fear that disallowed the decision in the first place.

There is no straight road to success...even Mr. Gates had his ups & downs. Under-capitalization is another big killer, as I already mentioned. Surprisingly, over the last year or so, I have seen less of the "Get Rich Quick" attitudes in our classes, so either we are getting more serious students or the media has had a salutary effect on short term trading.

What are the most common mistakes made by the neophyte trader?
Wow, alphabetically or numerically. Sorry, the novice and apprentice are faced with countless challenges that must be overcome one by one. I can break it down into two groups - analytical risk and execution risk - I may be oversimplifying but let's start there. Again, most see a price going up and they buy. They need to see that a price "Will" go up but buy it as there are still sellers, i.e., as it is about to find support and turn around. This is very difficult psychologically.

I have just demonstrated another problem with bias....for the second time I have used a "buy situation". Most neophytes do not see anything but up trends. They are biased to the long side. Again analysis has failed them because they do not "believe" that the market can go down and that they can make money at the same time. Execution has become a major issue.

The public is waking up to the fact that they are not necessarily getting the best fills in a timely fashion from their brokers. Thus the hue and cry for more self-directed trading that online brokers offer. Many do not understand the simple differences of Limit vs. Market orders, what the spread (and therefore the load) is, etc. Additionally, with the advent of the Direct Access Trading Platforms, simple keystroke or mouse-licks get many into trouble.

I tell a story on myself from a few years back: I was short 1000 shares of CSCO before it split. I was bucking the market and thought I had a retracement I could take advantage of (needless to say, this was a momentum trade). The momentum turned on me and I quickly closed the position...sold that sucker fast...oops, now I was short 2000 in a up market. I did not panic, I changed my share size to 2000 and sold it off....I stared in disbelief. I had done it again! (Yeah, Joe Professional, huh?). I finally changed it over to 4000, took my left finger in my right hand and pushed the BUY button and finally got out with about a $700 loser...all due to a lapse of concentration and poor execution.This was a classic beginner mistake, not buying to cover a short position.

Beginners often buy the wrong stock...they have a chart they are looking but the wrong symbol in their execution box. The bad news is that most will freak out and close the position. Often, the mistaken position will move in the desired direction because the entire market was moving, it was in the same sector, etc. When that kind of mistake is made....don't be too hasty, look it over and decide. Panic and rash decisions can be devastating.

In teaching Scuba diving, one of our tenets is "Think and then act"....it cuts down on panic. A major mistake that beginners make is in over-trading. It is fun and exciting. However, even with little losers and few moderate winners, commissions and fees add up. They do not take the time to analyze what they have done (why the trade was good or bad) and end up with a large cost for the day without learning anything. Not learning is the biggest mistake.

How critical are the mental aspects of trading?
Incredibly crucial. Again, for me, psychology is a major aspect. Therefore, understanding yourself first is vital. How do you react in times of stress? Are you decisive - both ways, in and out? Are you happy to be doing this? (it is amazing how some are drawn to trading but eat antacids all day...what's the point, you should like what you are doing). Can you be mentally tough enough to let losers go...or do you fret over them? Again, the mental aspects are there or they are not....you can learn to read charts, you can train to "see" momentum, but if you are not mentally fit, you will lose.

Do you recommend that paper trading, simulated trading or other training tools be used by a beginner before actually trading?
Absolutely, but as everything else in trading is double-edged, so too is simulation. Simulated trading allows the novice to see the workings of the market, if they pay attention. Seeing price action and the movements of the market participants (Market Makers and ECN's) is invaluable. Simulation also helps establish execution skills...picking the right trade route, the right buttons or clicks to complete the trade, etc. The two bad things about simulation is that it is not LIVE. I said two...the simulators I have worked with all fill the orders easily or with great difficulty. This is not how the real world works.

Unfortunately, the bias is to "easy fills". This gives a very false impression to the novice, they simply do not know any better. The other half to the LIVE problem is that there is no money at risk. Again psychology comes into play. It is amazing to me that many have risked large sums of money in business or in investments with little emotional response; yet, the very aspect of trading with real money will cause sweaty palms and heart palpitations. Simulation, paper trading or "play-dough" is very necessary but needs guidance and insight from an experienced trader/trainer to avoid these pitfalls.

What steps should a new trader take to minimize his/her risk of losing capital?
Every one he can. Seriously, there are some simple steps to minimize risk that all should employ, especially the beginner.

1. Keep share size small until you are sure....novice or experienced...test the waters, add to winners. Increase share size slowly with experience and comfort.

2. Decide and if it doesn't perform as expected, decide to get out...simply put, "When in doubt, get out!"

3. Set stop limits....both on the individual trade and for the day. I already mentioned my "in trade" stops but how about this as a daily quit point - "1% of risk capital down, quit for the day." This tells the beginner that if he has $50,000 buy power he should quit if he loses $500.00, whether it be in the first few minutes or near the end of the day. Stop Losing! Find out WHY.

4. Leave internet stocks, ipo's and volatile stocks to the pros. Yes, an internet stock may soar 20 points but it can fall that easily too. I have seen to many accounts melted down because of a mistake in judgment. When these guys move, they really move quick and the novice tends to focus on the problem, not the solution. There are plenty more methods...avoid trading during major announcements, don't add to losers, be patient, learn the characteristics of one or two stocks and don't stock hop...to mention a few.

What should a trader do to improve his/her skills and performance?
Learn everyday. Make a plan and stick to it until the plan does not work. Then modify the plan and work it again. Write down every trade with "why you took the trade" as the most important aspect. Then review and analyze why it worked or didn't. Write down a list of disciplines, review it every week and re-write it. Writing is important, you tend to fool yourself with mind games, but if it is right in front of you, in print, it is hard to lie to yourself. Start simple and develop your disciplines over the course of your trading career.

I have found some strange disciplines in my life - I stop trading for 1 week when I have had 30 days of wins ( I tend to lose focus and think too much of myself). I do not trade the opening (Clearing)...the old adage holds true for me...."amateurs open the market, pro's close it.". I do 1 week (minimum) of study and research before I will take a trade if I have been away from the market for more than 2 weeks (like a vacation). Ultimately, discipline will be the most benefit to the trader...new or old.

How important is having a mentor or a person closely supervise the new trader for the first few months?
Invaluable, however, the old joke is that if I were to help you with golf, do you really want to shoot a round in the low 130's. The mentor needs to be seasoned and successful. It is tough enough for the neophyte but bad leadership or poor habits will only contaminate them. They are new, fresh....old pro's have habits suited to their particular personality. I believe mentoring is wonderful but it should be done by a "teacher" who understands the needs of the student. We have assembled quite a group of mentors recently who are worthy of the name and I can recommend them to you highly.

Do you recommend that a log book be kept by the trader of all transactions with notes on all trades?
As noted above (no pun intended), log your trades and LOOK at them. It does no good to write them down if you do not go back and review and analyze. If you think it is too much writing, then I offer that you are over-trading. As experience and skill develop, you will find alternate methods for reviewing trades.

Do you recommend that traders use limit orders on the buy side and stop losses to prevent large losses?
This is a tough question in that it is too broad. There are many times in a running market that a market order is preferable to a limit order. This is also modified by the method of trading - online through a broker or with Direct-Access Trading (DAT). DAT affords you greater transparency and control. However, once dealing directly, market orders are almost unheard of as the use of ECN's required Limit orders only. Again, most experienced traders would never limit themselves to one execution route. As for Stop losses, absolutely they need to be used. Again, different methods arise. Some will actually set mechanical stops with conditional orders while I almost exclusively use mental points. I also don't tend to fool myself anymore - kind of like cheating at solitaire. Novices need to use both right away. They are the beginning of the self-discipline. They are also the most often breached.

Would you discourage or encourage a person who believes that trading stocks is something they want to try?
People are curious. Many things attract them to trading. The mystique of being a market mogul. The appeal of fast action and high risk. The deep hidden hope that they will strike it Rich. All of these, and host of reasons more, lead people to the Online Trading Academy. We are happy to answer their questions and, we hope, they honestly answer ours. We constantly strive to warn, disclose and educate these inquisitive people about the risks of this market and its suitability (or not) as a profession. Some immediately see the hard work involved and leave, with their hopes of quick profits destroyed, others want to press on. These few we try to serve to the best of our abilities. Finding a teaching, active trader is difficult. The cadre we have all enjoy teaching for teaching's sake. Sounds awfully noble, but there are real rewards other than dollars and cents. To answer simply, yes, I encourage people to find out if this arena is for them, but I also stress that is not for all.

Are there any books you recommend that are a "must" for the beginning trader?
I have provided a short list of books that I have read and found valuable. There are many other fine publications, articles and whatnot that I would have the beginner read. Many of the higher-level books are just that...too advanced conceptually without the basic foundation of the trading world.

Reminiscences of a Stock Operator - Edwin LeFevre

The New Market Wizards - Jack Schwagger

The Disciplined Trader - Mark Douglas

Trading in the Zone - Mark Douglas

The Art of War - Sun Tsu - available from Amazon.com

Computerized Trading: Maximizing Day Trading and Overnight Profits - by Mark Jurik

The Strategic Electronic Day Trader - by Robert Deel

Japanese CandleSticks-by Steve Nison

Technical Analysis Explained - by Martin Pring

Note: These books can be purchased from OTA's Bookstore and Amazon.com!

I also recommend the following:
Investor's Business Daily
The Wall Street Journal
Barron's Financial Times
BusinessWeek
Forbes
Inc. Magazine

Click the Online Trading Academy header link to put first class trading knowledge and experience in your favor.

Good 2007 and good trading!