Friday, July 31, 2009

Portfolio Diversification and Other Myths

Van Tharp Institute
Click here for the Dr Van Tharps 2009 Live Trading Workshops Schedule

I recently caught about five minutes of a TV program on the Loch Ness monster. So many people are still convinced that it exists! The vastness of this great body of water allows hope to spring eternal that some prehistoric or otherwise unique critter could be hiding out in the loch.

The same hope for existence is true of other mythical creatures: the yeti, Bigfoot, and successful portfolio diversification.

It’s amazing to me, really. The lengths that institutions will go to protect the status quo is astonishing.

And the vastness of the markets, much like expansive Loch Ness, serves to give people hope that myths like diversification work.

An article published by the venerable behemoth Fidelity Investments made me chuckle recently. In an effort to keep folks clinging to their “buy and hold” mutual fund strategies, they made this laughable claim: “Diversification didn't fail in the recent market downturn. It worked—just to a lesser degree.”

The downturn cited in the article was from January 2008 to February 2009 (an odd starting date for the study, but we’ll go with it). During this time period, the S&P 500 was down 48% and a “diversified” portfolio of 70% stocks, 20% bonds and 5% short term investments was “only” down 34%.

Then they looked at the brief two month period of March and April of ’09. During this time, the all-stock portfolio (an S&P 500 mutual fund) was up 19.2%, while the diversified portfolio described above was up only 11.7%.

And they claim victory from this?

In the down markets, the diversified portfolio suffered 70% of the losses, and in it only made 60% as much when the markets turned up.

This is the promise of diversification—slightly smaller losses in bad times and substantially reduced gains in good times.

The bottom line is that mutual fund companies and almost all financial advisors are stuck defending a model that is broken. Buy and Hold strategies just do not work in markets that we have seen in the past 10 years. Buy and Hold is an outdated way of managing people’s portfolios. And the mainstream retail financial community will not admit it because they have a vested interest in propagating the myths that surround Buy and Hold. They will continue to publish ludicrous articles that claim victory where none exists as long as the regulatory structure and plain old inertia keeps them clinging to a broken and outdated model.

In future articles, we’ll explore some simple and some more sophisticated alternatives to Buy and Hold. Until then...

Great Trading!

D. R. Barton

About D.R. Barton, Jr.: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at Van Tharp Institute

Thursday, July 30, 2009

Three Phases of a Trader's Education

Traders Education
The Three Phases of a Trader's Education: Psychology, Money Management, Method

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 10, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.

Aspiring traders typically go through three phases in this order:

Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.

Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.

Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.

Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I’m more than comfortable utilizing the same guidelines that many professional money managers use – 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one’s trade decision is incorrect, but it also insures longevity. It’s one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three – determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn’t the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. It’s free until August 10.

Wednesday, July 29, 2009

Forex Fundamental Analysis

AVAFX

Forex Fundamental Analysis – an Introduction

Fundamental analysis is the study of economic, social and political data that represents and quantifies the economy in question with the goal of determining future movements in a financial market.

Analysts have been grouped into either Technical or Fundamental camps for many years, but actually there are very few pure technicians or fundamentalists. Technical analysts cannot really ignore the effect and timing of economic announcements, and fundamental analysts cannot really ignore various signals derived from the study of historic prices and volatility.

It is fairly difficult to take into account all the different economic announcements as well as the political and social situations that affect an economy, particularly in today's global market. However by understanding the basics and delving deeper into the various fundamentals of the economies one’s understanding of the financial markets can improve dramatically.

There are a myriad of economic announcements, and while it may be important to be familiar with schedules and understand the nature and possible impact of the announcements, it is very easy to be bogged down by too much information to the point where one may simply not be able to come up with an effective basis for trading.

Because of the vast number of fundamentals out there, it may be more important to focus on the main price movers as a basis, rather then try to know a little about a lot.

Economic Indicators

Economic indicators are quantitative announcements released as data reflecting the financial, economic and social atmosphere of an economy. They are published by various agencies of the government or private sector. These statistics are anticipated by the public and are released at predetermined times according to a schedule. They are used by many to monitor the health and strength of an economy. With so many players anticipating the release, the announcements themselves often create a surge in volume and may often move the price of various instruments very quickly.

With so many economic releases made daily, it is more important to be aware of a few major announcements and then to try to be up to date with them all.

The following is a basic guide to economic announcements:

1. Economic Calendar

Know exactly when each economic indicator is due to be released. Try keeping a calendar on your desk or trading station that contains the name of the indicator, the date and time as well as the expected release. (See Economic Calendar). Often it's not just the announcement itself that moves the market but the anticipation of the announcement, which can move the market sometimes days or weeks prior to the actual release.

2. Understand the Announcement

Understand what particular aspect of the economy is being revealed in the data. There are several aspects of an economy that are measured by growth, such as GDP; by inflation, such as PPI or CPI; by employment, such as Non-Farm Payrolls; by interest rate announcements; by confidence, such as Consumer Confidence or Spending, and so on. After you follow the data for a while, you'll become very familiar with each economic indicator and what part of the economy they are relating to.

3. Know the Indicators to Concentrate On

As mentioned before, there are a myriad of indicators that are released daily. It would be impossible to follow them all religiously, and it may well be a waste of time. Some move markets and others don't – concentrate on the ones that do. However economic indicators are not static over the years. Some have gained greater importance and others have become less important. Keep up to date.

4. Anticipation

The data itself may not be as significant as the difference between market expectation and the actual result. As mentioned earlier, it is important to know the expectation by the market. Expectations are then built into the price of the instrument. What is not built in is an unexpected figure or event. This is sometimes felt not only by the announcement itself but by the wording joined with the announcement. For instance, an expected 0.25% rate hike may not change the market as expected, however the wording following the announcement, that there will not be any further hikes, for example, may in fact move the price.

5. Understand the Release

Not all unexpected releases trigger a move in the market. Contained in each new economic indicator released to the public are revisions to previously released data. Sometimes these can be ambiguous. For instance, if durable goods rise by 0.4% in the current month and the market is anticipating them to fall, the unexpected rise could be the result of a downward revision to the prior month. Compare the revisions to older data because, in this case, the previous month's durable goods figure might have been originally reported as a rise of 0.4% but now, along with the new figures, is being revised lower to say a rise of only 0.1% Therefore, the unexpected rise in the current month is likely the result of a downward revision to the previous month's data.

6. Currency Crosses

Instruments are traded as one currency against another, therefore knowing one side of the game may not be enough. One currency may be down but the other one even worse, so the effect may be the opposite of what you expect.

Types of Indicators

Economic indicators are often described as either leading or lagging indicators. Leading indicators relate to economic indicators that change before the economy starts to follow a particular pattern or trend; they are used to predict changes in the economy. Lagging indicators are economic indicators that change after the economy has already begun to follow a particular pattern or trend.

US ECONOMIC INDICATORS

Non-Farm Payrolls, (new jobs created) not including Agriculture.

Released on the 1st Friday of every month at 8:30 am NY time.

Importance – Market mover

Trade Balance or US Trade Deficit

Trade Balance, calculates the difference between the total amount of exports versus imports in goods and services; the balance has been in a deficit since the 1970s.

Released on approximately the 10th of every month at 8:30 am NY time.

Importance – Market mover

Core CPI, Consumer Price Index

The CPI calculates the difference in price of a basket of goods and services that are influenced by the surroundings and paid by urban consumers; the Core CPI eliminates those same goods (food and energy) that are strongly influenced.

Released on approximately the 15th of every month at 8:30 am NY time.

Importance – Market mover

Manufacturing ISM, (inclusive of manufacturing)

Institute for Supply Management inclusive of Manufacturing gives an indication of activities in the manufacturing sector.

Released on the first business day of every Month at 10:00 am NY time.

Importance – Market mover.

Retail Sales

Calculates the monthly differential in sales by retail shops to the consumer.

It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences.

Released on approximately the 15th of every month

Importance – Market mover.

Michigan Consumer Confidence

Indicates consumer confidence in the US Economy, based on a monthly survey of 5,000 households in the US

The preliminary report is released on approximately the 15th of every month, the final report on the last Tuesday of every month.

Importance – Market mover

Gross Domestic Product - GDP

The output of goods and services produced by labor and property located in the united states.

GDP indicates the pace at which the country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.

Quarterly data revised monthly, released about four weeks after month end.

Importance – Market mover

Institute for Supply Management Index

The ISM is a composite index based on the seasonally adjusted diffusion indexes of five of the indicators (New Orders, Production, Supplier Deliveries, Inventories and Employment) with different weights.

Importance - High.

National Savings (%)

Personal saving as a percentage of disposable personal income.

The rate of savings has a direct impact on economic activity. A high rate of savings implies that little money is being directed into the economy. A lower rate of savings suggests that consumers are spending more, thus fueling the economy. However, a negative rate of savings means that the public is putting itself in debt - a situation that may drive growth in the short-run, but is unsustainable.

Importance - High

Weekly Leading Index (Monthly)

The Weekly Leading Index is a composite index based on the following seven indicators: the JOC-ECRI materials price index, mortgage activity, bond quality spreads, stock prices, bond yields, and jobless claims.

The WLI measures leading indicators and shows economic trends quickly and reliably by using indicators that measure drivers of business cycles. It shows troughs a median of three months ahead and peaks a median of ten and a half months ahead.

Importance - Medium.

New Orders for Durable Goods (in billions)

Sasonally adjusted.

Durable Goods orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods.

A Durable Good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.

Durable Goods orders are volatile, but can serve as an indicator of future economic activity. An increase in orders must occur before manufacturers will increase production. Conversely, a decrease in orders tends to result in a cutback in production.

Importance - Medium.

PPI – Finished Goods

Producer Price Index - Finished Goods, not seasonally adjusted.

Measures inflation at the producer level, and does not include services. Typically a sharp rise in the PPI triggers a decline in both the stock and bond markets.

The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.

Importance - Medium

U.S Unemployment rate (%)

Ratio between the number of unemployed persons and the total labor force, seasonally adjusted.

The unemployment rate is an indicator of overall economic health. A low rate indicates a strong economy where job seekers can find employment quickly, whereas a high rate may indicate a weaker economy. On the other hand, businesses can find employees more easily when the unemployment rate is high.

Importance - Medium

Residential Building Permits

New privately owned housing units authorized by building permits, not seasonally adjusted. Figures are for total permits, including both single-unit and multi-unit structures.

The housing market tends to be a leading indicator of economic activity. Aside from seasonal fluctuations, sharp increases (decreases) in home construction or sales lead to a corresponding increase (decrease) in the economy due to the fact that housing accounts for between one quarter and one third of investment spending and five percent of the overall national economy. Construction employment is also impacted by the housing market. A decline in the number of permits issued signals a decrease in construction employment.

Importance - Medium.

Industrial Production

A chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization).

The manufacturing sector accounts for one-quarter of the economy.

The capacity utilization rate provides an estimate of how much factory capacity is in use.

Importance - Medium.

Purchasing Managers Index (PMI)

The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions,

Constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders.

Divided into manufacturing and non-manufacturing sub-indices.

Importance – Medium.

Housing Starts

The Housing Starts report measures the number of residential units on which construction is begun each month.

A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.

Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates.

Significant reaction of start/permits to changing interest rates signals that interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month.

Report is released around the middle of the following month.

Importance – Medium.

Employment Cost Index (ECI)

Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas.

Employment estimates are based on a survey of larger businesses and count the number of paid employees working part-time or full-time in the nation's business and government establishments.

Importance – Medium-Low.

GERMANY ECONOMIC INDICATORS

IFO Survey (Income from Operations)

Business Confidence

Importance – Medium.

JAPAN ECONOMIC INDICATORS

Tankan Survey

Climate Survey or Confidence Survey.

An economic survey of Japanese business issued by the Central Bank of Japan, which uses it to formulate monetary policy.

The report is released four times a year in April, July, October and mid-December.

Importance – Medium.

Machinery Orders

Importance – Medium.

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Tuesday, July 28, 2009

Forex Technical Trading Guide

AVAFX

1. Chart the Trends and Range Bound Markets

Use long term charts to decide trends or range bound markets. Begin a chart analysis with daily, weekly and even monthly charts spanning several years if possible. A larger scale chart essentially shows the life of the market and provides clearer visibility and a better long-term perspective on a market. Once the long-term has been established, consult daily and intra-day charts, these charts can include anything from say 10 minute to daily charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer-term trends. If there is no trend then a different strategy is necessary, possibly playing the range until the market begins to trend once more.

As can be seen in the 1-hour EUR/USD candle chart below there has been an uptrend with three peaks and three troughs. Long entry positions would at 1.2700, 1.2760 and 1.2800.

Forex Technical Trading
Past results are not necessarily indicative of future results and the examples are not representative of all customer accounts.

2. Follow the Trend

If you determine the trend, then follow it. Market trends come in a variety of terms - long-term, intermediate-term and short-term. The first thing you have to determine is what type of a trader are you, long term or day trader, that decision will determine which charts you should be using. For instance, if you're day trading, use the daily and intra-day charts, but always use the longer-range chart to determine the trend, and then use the shorter-term chart for timing. Make sure you trade in the direction of that trend and then buy on dips if the trend is up and sell on rallies if the trend is down.

3. Locate Support and Resistance Levels

Find the support and resistance levels. As above when you want to buy an instrument, its best to buy near support levels. The support is usually a previous reaction low. Using the same logic, the best place to sell an instrument would be near its resistance levels. The resistance level is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old high becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies - the old low can then become the new high.

4. Retracements

Measure retracements in percentage terms. Market corrections up or down often retrace a significant portion of the previous trend. One can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. Therefore popular buy points in an uptrend are usually between 33-38% retracement of the original trend.

As can be seen from the chart below, when joining the trough at 1.2750 to the peak at 1.2890 in the 1-hour EUR/USD chart we can see the Fibonacci levels drawn out. The first retracement ended at the 38% line and the major retracement at the 62% line.

Forex Technical Trading
Past results are not necessarily indicative of future results and the examples are not representative of all customer accounts.

5. Trend Lines

One of the simplest and most effective charting tools are trend lines – use them. Draw a straight line that join two points on the chart. Up trend lines are drawn along two successive lows and down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines often signals a change in a trend. The longer a trend line has been in effect, and the more times it has been tested, the more significant it becomes; a trend line becomes valid if it is touched at least three times.

6. Moving Averages

Moving averages often provide objective buy and sell signals, hence they should be watched. They show you if an existing trend is still in motion and help confirm a trend change. Do not rely on moving averages to tell you in advance if there is a trend change imminent; use it as a back-up to your chart analysis for trend identification. A combination chart of two moving averages is the most popular way of finding trading signals. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day and 200-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.

As can be seen in the EUR/USD 1-hour chart below the 5-period and 25-period moving averages project and confirm the trend in progress. The 5-period moving average crosses over the slower 25-period moving average at 1.2715 confirming the up-trend with an exit point at 1.2770. The same rate 1.2770 is another indication of a resume in the up-trend with an exit at 1.2850.

Forex Technical Trading
Past results are not necessarily indicative of future results and the examples are not representative of all customer accounts.

7. Oscillators

Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a trending market, oscillators can often warn us in advance that a market has rallied or fallen too far and will soon turn or retrace. Two of the most popular oscillators are the Relative Strength Index or RSI and the Stochastics. Both these oscillators work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Oscillator divergences often warn of market turns and as opposed to moving averages they work best in range bound markets. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.

As can be seen in the EUR/USD 1-hour chart below, the Stochastics break through the 80-20 barriers and cross over themselves on corrections of the price. This occurs several times.

Forex Technical Trading
Past results are not necessarily indicative of future results and the examples are not representative of all customer accounts.

8. Know the Warning Signs

The Moving Average Convergence Divergence (MACD) indicator combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Longer-period signals take precedence over shorter-period signals. The MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a histogram because vertical bars are used to show the difference between the two lines on the chart.

As can be seen in the EUR/USD 1-hour chart below, the MACD indicators cross over one another beneath the zero line to show a buy signal and vice versa for the sell signal. This occurs most prominently at 1.2760 to buy, 1.2870 to sell.

Forex Technical Trading
Past results are not necessarily indicative of future results and the examples are not representative of all customer accounts.

9. Trend or Range Bound Market

The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or range bound phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.

10. Study

Technical analysis is a skill that improves with experience and study. The more you learn and practice the better you'll be, keep studying, fine tune methods, learn what works for you and what doesn't and remain technical and not emotional.

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Monday, July 27, 2009

Weekly Stock Pick

Buy Sell Hold
Earnings: Is That REALLY What's Driving The Market Higher?

By Bob Prechter Elliottwave

It's the season for corporations to report their earnings, and everywhere you turn, analysts talk about the influence of earnings the broad stock market:

Street Gains On JPMorgan Earnings, Economy (Forbes)

Wall St slips as earnings spur caution (Reuters)

Stocks Show Little Reaction to Latest Earnings (The New York Times)

With so much emphasis on earnings, what you're about to read next may come as a shock.

The idea of earnings driving the broad stock market is a myth.

When making a statement like that, you'd better have proof. Bob Prechter, EWI's founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt):

Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth in the 1980s can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “This may have just blown a hole through this most cherished of Wall Street convictions.”

What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

S&P500 Earnings Chart
Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart above shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings and the trend of higher earnings got killed.

So if earnings don't drive the stock market's broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors' mood -- or social mood -- changes before "the fundamentals" reflect that change, which is why trying to predict the markets by following the earnings reports and other "fundamentals" will often leave you puzzled. The chart above makes that clear.

"Simple logic based on external causes does not work in predicting financial markets," Bob Prechter explained in his June 2009 Elliott Wave Theorist. Try putting social mood first -- our publications can help you do that right now, risk-free. Click here for a free trial to find out for yourself.

My Stock Pick This Week

Is a short-sell on a big Cable TV company that the market loves to death right now. See my sell-short plan below. I base my buy and sell decisions based on psychology and sentiment mostly. Charts tell the current story on the fear and greed question, what I also call “the illusion of value game”. Successfully profiting long term from investing or trading in the markets is about when you’re wrong, you’re wrong small, and when you’re right, you’re right big. Reward versus risk. The pros know and use this, amateurs, don’t. The same applies to all of life in my opinion.

Yes I do look at fundamentals in my analysis, but as history has proven time and time again, sometimes stock prices fit into the fundamentals, and sometimes not. This is hardly a low-risk high-reward strategy to invest and trade the markets.

There’s a saying that an “economist is a trader in hindsight”. Meaning an economist tries to make sense out of what might happen in the future or has already happened in the market, and if he happens to be wrong, no worries, he’s doesn’t have any money on the line to lose over his wrong analysis. Amateurs and pros alike can be can wrong. The difference between the amateurs and the pros is that the pros have a plan to keep their losses small, and the amateurs don’t.

A successful trader who puts real money on the line, looks at the market to find low-risk high-reward chart price setups that can possibly provide 3:1 plus rewards and if wrong a small loss. Long term this is a strategy for long term success in investing and trading the markets.

Another saying, “Amateurs want to be right. Professionals want to make money”. Meaning that Amateurs go into the market without a real plan of first knowing at what price to enter a position and at what price to exit the position with profit or small loss, and for the human nature sake of wanting to be right, ride out painful losses until they are too much to bear, and take a big loss or get wiped out. Professionals have a system, which tells them at what price to enter long or short, a stop-loss price if the trade does not go their way, and take profit price targets to exit their positions with a profit. Professionals do not enter investments or trades without knowing this vital information first.

As an investor or trader, the real questions to be finding out which may be very hard to know exactly by the average investor trader, is who’s already got a position, how big their position is, is it short or long or both, at what price will they be exiting that position, and the same for any new position being considered. The insiders, big market players, NASDAQ market makers, specialists on the NYSE floor have this information, but the average retail investor trader does not so easily. The odds are in the pros favor.

Listening to the spin of news, fundamental reports, analyst’s recommendations, etc is a high-risk low-reward way to invest trade the markets. The funny thing about money, and a lot of it, people will say and do things they normally wouldn’t say or do.

So what’s the solution to this situation? Have and stick to a system of investing trading the markets that provide low-risk high-reward returns. Knowing at what price you will enter at, and what price you will exit at with a projected 3:1 plus ratio profit or loss. Also very important for those leveraging on margin is not to over leverage your positions and investing trading account. Below is a typical low-risk high-reward trade setup. Follow a system like this, and you’ll win some lose some, and in the long term, you’ll win at the investing trading illusion of value game. The fact is no one really knows what drives stock prices. I would suggest its fear greed and the collective social mood of the times. The pro traders are excellent reads on attaining higher than average returns in the markets. Knowledge > Goals > Plan > Action > Success

Sell-Short Shaw Communications Ticker SJR

Sell Entry: 17.52 to 17.19

Stop-Loss: 17.86

Take Profit Areas: 16.86 to 16.20, 13.44 to 12.89, 12.34 to 11.84

Shaw Communications Company Profile

Shaw Communications, Inc., a diversified communications company, provides broadband cable television services, Internet, digital phone, telecommunications services, Direct-to-home (DTH) satellite services, and satellite distribution services primarily in Canada and the United States. The company’s cable television services include cable and extended tiers, digital cable, pay television and pay-per-view, video-on-demand, bundling of services, and new video services. It also provides high speed Internet access services to residential and business subscribers. The company’s digital phone services include local residential line and long distance calling, as well as calling features, including voicemail, call display, call forwarding, three-way calling, call return, and call waiting. In addition, it operates a fiber network that serves as a platform for voice services, IP-based services, business-to-business services, and video. Further, the company distributes digital video and audio programming services through DTH satellite to residences and businesses; uplinks and redistributes television and radio signals through satellite to cable operators and other distributors, and related network services; and provides satellite tracking and messaging services to the trucking industry, as well as integrates and manages satellite data networks with land-based telecommunications. Additionally, it owns and leases, directly and indirectly, satellite transponders that receive and amplify digital signals and transmit them to receiving dishes located within the footprint covered by the satellite. As of August 31, 2008, the company had 906,320 digital cable customers, and 611,931 digital phone lines; and 892,528 DTH subscribers. Shaw Communications, Inc., formerly known as Capital Cable Television Co., Ltd., was founded in 1966 and is headquartered in Calgary, Canada.

Click here to review and trial the Trading Software we used in determining our short position on SJR.

Click the Shaw Communications Stock Chart for a larger view.

Shaw Communications Stock Chart

Friday, July 24, 2009

Forex Technical Analysis

AVAFX

Forex Technical Analysis – an Introduction

Technical analysis is the study of market data such as historical and current price data and volume in an effort to forecast future market activity. Historical price data is the most commonly used available data that is implemented into the analysis.

Historical market data is saved and forms charts over various periods of time. The technical trader can analyze varying periodical charts over a specific length of time for the basic purpose of picking the entry and exit levels of a trade. By studying the chart the chartist is able to get information at a glance that will hopefully represent the direction of the instrument in the future.

There is a never-ending argument between fundamentalists and technical analysts about which method of analysis will show the best results. Technical analysts will claim that all the fundamentals are already built into the price and so, apart from natural disasters and unexpected world events, the current price shows the market's expected value taking all the known information into consideration. The chartists are in fact looking for patterns or repetitions in price movements to guess the likely outcome of future prices. In a word, they are looking for trends.

Technical analysis assumes three main points:

1. Fundamentals are already built into the price

2. History has a habit of repeating itself – find what happened in the past and project it into the future.

3. Trends are key – establish whether the instrument is moving in a trend, and then follow it. Typically there are three variations: upward, downward or sideways. Once the type of trend is established, an entry point is picked for the commencement of the trade.

Over the years various mathematical manipulations were placed upon market prices and volumes. Theses manipulations (known as studies) helped the technical analyst focus on identifying the trend and the entry and exit levels.

As with any analysis, discipline is the most important aspect of the study. If your studies showed that something was to occur, then follow your studies – do not let the market change your plan. If you were wrong then you were wrong, but stick to your game plan. (see Technical Trading Tips and Guide to Trading for helpful hints to trade).

Charts - Types

There are three main types of charts: line, bar and candle.

Line charts are the most basic and simply join one period closing price to another.

Bar charts give more detail than a regular line chart in that each period is represented by a bar. The bar not only shows price movements from one period to the next, they also show price movements within the period itself.

Candlestick charts. These are very similar to bar charts except the colored bodies are able to give the viewer greater detail in movements within the period at a glance. Each period is made up of a candlestick – the candlestick is made up of a body and a wick on both ends. The candle body is then colored (typically red and either blue or green). The wick represents the high and low of the period, while the body represents the open and close of the period, the color lets us know if the price rose or fell in that period. If the candle body is red then the top of the candle represents the opening price and the bottom the closing, a green or blue candle would represent the opposite - the top of the candle would be the closing while the bottom would be the opening.

Forex Technical Analysis
Past results are not indicative of future results and the examples are not representative of all customer accounts.

Periods

Charts are viewed as a sequence of periodical prices. The fastest moving chart is a tick chart. Tick charts can only be seen in a line format since the low, high, opening and closing price during that period are one and the same. Every point on the chart represents one tick or one price quote. The next period is usually a 1-minute chart and then periodically higher: 5 minutes, 10 minutes, 30 minutes, 1 hour, 4 hours, daily, weekly and monthly.
The longer the period, the slower the chart. Longer period charts tend to show more stable trends. Shorter period charts tend to be used to pick entry and exit points.

Technical Indicators

There are many different types of technical indicators, however they can be grouped into five categories:

1. Trend Indicators: As mentioned before, trends show the persistence of price directions, either upwards, downwards or sideways. Trend indicators smooth out the historical prices to show market direction. The most common of these are Moving Averages. Simple trend lines can also be used to the same effect by drawing a line that joins the low and high points over a period of time; these are also used to form tunnels and triangles as popular means of analysis. Trend lines are also used to pick support and resistance levels.

2. Strength Indicators: This is essentially a volume indicator and more popular in futures markets than in foreign exchange. The most popular of these is Volume.

3. Volatility: This measures and shows fluctuations over a period of time. These indicators help to pinpoint support and resistance levels. The most popular of these is Bollinger Bands.

4. Cycle: These indicators tend to find patterns or, more correctly, repetitious cycles. Once again, this is more popular in other financial markets. The most popular cycle indicator is the Elliot Wave.

5. Momentum or Oscillators: These indicators map the speed at which prices move over a given period of time. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. The most popular momentum indicators are the Stochastic, MACD and RSI.

Commonly used technical indicators

Moving Averages

Moving averages are trend indicators and are used by traders as a tool to verify existing trends, identify emerging trends and signify the end of trends. Moving averages are smooth lines that enable the trader to view long-term price movements without the short-term fluctuations. Of the three types of moving averages, the most common is the simple moving average; the other two are the weighted and exponential moving averages.

All the moving averages are calculated as the average of a specified number of either low, high or closing prices of the period. The difference between the three types is the weighting or importance placed on each particular period. For example, the weighted and exponential moving averages give greater importance to the latest prices, whereas the simple moving average gives equal importance to all the periods chosen.

Each new point of the moving average drops off the oldest period and brings in the newest period. A moving average line will change depending on the number of periods chosen – the greater the number the slower the average. Some traders will play with a different number of moving averages, all with different periods, until they find a series of moving averages that they feel best indicates the behavior of the particular instrument being studied.

When choosing a moving average to work with, ideally in an upward trending market the current price should not fall beneath the moving average line chosen more than once. The moving average should form a support line during upward trends and a resistance line during downward trends. If the upward trend continues, yet it breaks the moving average line on more than one occasion, then it is a good indication that the moving average line chosen is too fast, and has not been smoothed out enough. If, for example, a 30-day moving average was used, then a 45-day moving average may be more appropriate for this particular instrument.

Once a trader is content with the behavior of the moving average line against the actual prices, he may use the line to signify the continuation of a trend or the end of a trend. If the price closes below the moving average line on two occasions in an upward trending market, it is an indication of the end of the trend and time to exit a long position. The same logic follows in a downward trending market except in reverse: the current price needs to close above the moving average on two occasions to indicate that the downtrend is over.

Another way of using moving averages is in pairs. Many traders will first find the long-term moving average as described above and add a faster moving average (smaller period) as an even earlier indication of the end of a trend. If the shorter moving average crosses the slower moving average, it may signal an earlier exit point for a trend.

Stochastics

The most commonly used stochastic is the slow stochastic. Stochastic oscillators are also used to determine either the strength of a trend or when the end of a trend is approaching. Stochastics are displayed by two lines known as %K (faster) and %D (slower) that oscillate between a scale ranging from 0 to 100.
The mathematics behind the oscillators is unimportant; what is important is the meaning and placement of the lines. When the lines cross above the 80 line, it represents a strong upward trend; when they cross below the 20 line, it represents a strong downward trend. When the %K line crosses over the %D line it could indicate a change in the trend, and a possible exit point. When prices are fluctuating, a normal appearance for the stochastics will be for them to cross over one another in mid range – which indicates the lack of a trend.

The stochastics give their best signal when both the lines are moving to new ground at the same time as the actual price. This is a good indication of the continuation of a trend. However when the stochastics cross in a different direction of a prolonged trend this could be an indication to either exit or switch directions.

Relative Strength Index (RSI)

RSI is another momentum oscillator. RSI attempts to pick reversals in the trend. As with Stochastics, they are read on a scale between 0 and 100. A reading above 80 indicates an overbought market and readings below 20 indicate an oversold market. Trading on RSIs should occur only when there is a direction change above or below the 80 and 20 lines, as RSI lines can often remain above or below the 80, 20 levels for prolonged periods of time during strong trending markets.
The shorter the RSI period, the faster it will be and the more signals will be issued. Here a trader needs to find his balance. Day-traders will often use shorter lines for more regular signals and longer-term traders will use longer RSIs.

Bollinger Bands

Bollinger Bands are volatility indicators and are used to identify extreme highs or lows in relation to the current price.
Bollinger Bands are based on a set number of standard deviations from the moving average. It essentially tries to indicate support and resistance levels or bands of expected trading.

As with the moving average, here too the trader can pick and adjust the moving average on which to base his Bollinger Bands and the number of standard deviations to use. The trader can adjust these over time to suit his individual trading style. The default used is usually a 20-day moving average and two standard deviations from the moving average.

A break above or below the Bollinger Bands may show an exit point or a reversal.

Moving Average Convergence Divergence (MACD)

MACD is an enhanced study of the moving averages and behaves as an oscillator. The MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. A 9-day moving average is generally used as a trigger line, meaning that when the MACD crosses below this trigger it is a bearish signal, and when it crosses above it, it's a bullish signal.

Traders use the MACD for trend reversals. For instance, if the MACD indicator turns higher while prices are still falling, this could be an exit point and a possible reverse trade.

Fibonacci Retracements

Fibonacci retracement levels are a sequence of numbers that indicate changes in trends from previous peaks or troughs. After a significant price move, prices will often retrace a significant portion of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci retracement levels.

In the currency markets, the commonly used sequence of ratios is 23.6%, 38.2%, 50% and 61.8%. Fibonacci retracement levels are drawn by joining a trend line from a significant high point to a significant low point. The pullback simply represents a correction in the trend and not an end to the trend. The most significant pullbacks are the 38.2%, and 61.8% levels.

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Thursday, July 23, 2009

Guide To Forex Trading

AVAFX

1. Set a Stop Loss: Before entering any trade, decide beforehand the amount you are willing to lose and stick to it. Set a stop loss on the trade before you enter. Do not fluctuate your stop loss if you are in a losing trade. During times of extreme volatility it can be difficult or impossible to execute orders. Stop orders become market orders when executed, so the order may not be filled at the desired price. As a result, the initial risk can be estimated, but not guaranteed.

2. Let your profits run: Do not be emotional about a trade – you will lose some and win some. Know the reason why you entered a trade and stick to those reasons. The less emotional you are the more successful you will be. Stick to your game plan – move your stop loss as the market moves in your favor and let your profits run. During times of extreme volatility it can be difficult or impossible to execute orders.

3. Don't be influenced: You have your own game plan stick to it. If you are influenced by others you will constantly be changing your mind. Learn to insulate external sources once you have made up your mind. You will always find someone who will give you a logical reason to do the opposite.

4. Keep your position sizes within your limitations: Successful traders know that in order to profit you trade for the long term. Trading is a game of probabilities, and over the long run as long as you stick and implement sound strategies and stay consistent – success is much more likely to come. To be a successful trader you should never take a position that puts substantial capital in jeopardy. In actuality you will rarely find successful traders who risk more than 10% of their account in any trade. You might want to start small and increase your trade sizes as your confidence grows.

5. Know your risk vs. reward ratio: The minimum ratio you should be using is 2:1, so if you are successful on 50% of your trades you are doing well. For instance, if you are long GBP/USD and you want to earn 30 pips you should not risk more than 15 pips. You should never risk 30 pips in order to make 10 pips. If you do, you’ll make a lot more successful deals then unsuccessful ones, but the poor ones will ruin any of your chances for profit. Your risk vs. reward analysis is extremely important to trading successfully.

6. Have adequate capital: You should never trade with money that you cannot afford to lose. Always make sure that you have enough credit. For example, you should can ask yourself the following question: “if I were to lose 50% of my opening balance in 6 months will I still be able to afford to trade?” Only if the answer is yes should you start trading. One of the keys to successful trading is mental independence, which means your trading freedom must not be influenced by your fear of losing.

7. Trending or Neutral: Learn to analyze the market – is it a trending market or a neutral market? In a trending market, follow the trend. In a neutral market, buy on lows and sell on highs. As long as you use stop-losses you are controlling your risk.

8. Don’t fight the trend: Don’t try to buy on dips and sell on highs in a trending market. The old saying "the trend is your friend" is a good one. Why fight it – go with it!

9. Averaging – don’t do it: One of the most common mistakes traders make is the continuing adding of a losing position. Averaging will be the death of short-term trades. For short-term trades, preserving capital is the most important thing, and putting too much capital at risk will jeopardize success. In short-term trading, if a strategy is right the market should move in the correct direction within a relatively short period of time. However if it's wrong, the short-term traders should realize that they traded incorrectly, and they should take the loss and move on. There is not much room for pride in short-term trading. You should never add to a losing position.

10. Chasing a bad idea: This happens all the time. You see a potential trade and then decide to wait till the next day to see if it sets up. By the time you see that it did exactly what you thought, it may be too late. Review your reasoning for the trade, make sure your initial reason is still there and if not, forget about the trade. There will always be trading opportunities, so be patient and strike.

11. Understand the way the market thinks: You should understand that all the information (except for newly released information which the market adjusts to within a short moment) is already built into the price of the cross. You should know what indicators are coming, particularly the majors, and you should know what is already anticipated by the market. There are many publications of market anticipation for major indicators.

12. Trading - a game of probabilities: You will not be correct 100% of the time – it’s a fact. Good, experienced traders all know this. It’s a numbers game, and you’ll make some and lose some. The idea is simply to win more than you lose, not to catch all the fish in the pond. Understand that trading is a game of probabilities, and if you do the right thing, in the long run you will come out ahead. Learn from mistakes. When you start trading, you may well lose more than you make. Think about what you did wrong and try not to be emotional about the trades. If you stick to your game plan and learn, hopefully your profits will out weight your losses.

13. Know why you are in the trade: Keep a trading log, and write down why you entered a trade. Don’t be impulsive. Have a plan. This way you will learn which strategies work for you in the long run and which don’t. If trading before or after releases works for you, look for them and trade those.

14. If the logic goes you go: If the reason you entered the trade disappears then so does your reason to remain in the trade. If you think you’re at a low and it breaks through, get out. Then reevaluate and decide once more.

15. Have a maximum run: If you have 4 or 5 bad trades in a row, take a break. Something isn’t working. Go away and regroup. Don’t be afraid to take a break.

16. Study: Learn new ideas, keep up to date, and don’t trade other people’s ideas. You should always know why you are in the trade.

17. Have Fun: Enjoy what you do. Keep calm and stay as unemotional as possible – you will be more successful.

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Wednesday, July 22, 2009

Advantages of Forex Trading

AVAFX

The world's largest financial market

As mentioned earlier, the FX Market is by far the worlds largest. With over 2 trillion dollars being traded daily there are several distinct advantages brought forward to the investor.

The first are the hours. The FX market never closes, and because of the huge volumes the market always has plenty of liquidity within it so that any investor knows that when he wants to enter or exit a trade, it will always be possible.

24-hour 5-day a week market

The FX Market is always open. On Monday morning trading starts in Sydney, Australia and as the day goes on more financial markets join in; through Asia – Hong Kong, Singapore and Tokyo - then through to the Middle East, Europe and finally the Americas. The most liquid hour of trading occurs in the European mornings when the U.S has joined in and Europe and the Middle East are still trading.

When the U.S starts to close, Australasia begins again and the process goes on 24-hours a day until the markets close at 5pm New York time on Friday.

The totally global FX market allows investors to trade at any time and never be caught out, in the event of a world event or an economic announcement without the ability to trade. This is truly unique to the FX market.

What is the location of the FX Market?

The FX market is considered to be an Over the Counter (OTC) or "inter-bank" market, since transactions are conducted directly between two counterparts either over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

The world's most liquid financial market

The liquidity in the market also gives the investor the confidence of knowing that the FX market will always behave the same, day or night, anywhere in the world – unlike other financial markets that either close their doors for trading or widen up the spreads due to the illiquid time of day, simply because there are not enough players in the market.

Streaming Rates

Through the AvaTrader platform, traders are able to view on-line, real-time, executable foreign exchange spot rates on streaming prices.The rates rates are generated by Ava's liquidity providers who are the world's major international banks and leaders in foreign exchange. The rates seen on the AvaTrader platform are Ava's rates as a market maker and reflect the world wide flow of FX supply and demand.

The world's most transparent market

In other financial markets, large players have been known to move a particular share or commodity in order to profit. Because of the vast volumes in the FX markets it is almost impossible for even the largest groups to interfere with the general market forces.

Zero Costs

There are zero costs for trading in foreign exchange with Ava FX. No costs for trading, no commissions, no hidden fees, or brokerage charges – in fact no costs at all. Ava FX earns its income through the difference between the buy and sell prices.

When comparing the FX Market to other financial markets, the savvy investor immediately realizes the difference. In the equity markets, for instance, investors pay anywhere from $7 to $30 per trade, via on-line discount brokers. When using full-service brokers this can often be $100 per trade.

When comparing the futures market, trading commissions, exchange fees and clearing fees are all part of the package.

For every investor cost is a serious issue, and when you compare the world's main financial markets in terms of cost, the FX Market is clearly head and shoulders above the rest.

Spreads

Another cost to trading is the spread between the buy and sell price. With Ava FX offers the tightest spreads are offered - 3-4 pips on major currency crosses. This represents a cost of 0.025% which is or one-quarter of one per mile, or one-twenty-fifth of one-percent.

In the equity markets, for example, a standard spread is often 0.125%. That’s five times the spread in the foreign exchange market, not including the added transaction costs mentioned above.

If looking at the futures markets the situation isn't much better. When comparing like traded instruments for example the EUR/USD contract for example, we find the spreads available with Ava FX are 40% less than those available in the futures market. Once again that is without taking into account the added fees charged when trading futures.

Accessibility

In order to start live trading with Ava FX, an investor can open up a trading account for as little as $100. That barely pays for the opening commission in the other financial markets. The high degree of leverage that is obtainable in the trading of off-exchange foreign currency transactions can work against you as well as for you. Leverage can lead to large losses as well as gains.

No Restrictions

When trading with Ava FX, clients can trade amounts as small as 5,000 units of the base currency and in integral sizes thereof. When comparing similar instruments in the Futures markets the amount is 125,000 units and integral sizes thereof. Your entry to trading is much easier with Ava FX.

Leverage

With Ava FX, investors can trade with leveraged amounts up to 200 times their current equity value or 200:1. This dwarfs what is normally offered in the equity markets, being 2:1 (100 times as much). The futures markets margins vary greatly from one instrument to another but do not often fall below 10:1 (20 times as much).

Currency crosses generally fluctuate a lot less than equities or futures and so leverage is essential to successful investment in the FX market. The investor should use the tools available to him within Ava FX's platform, such as limit and stop-loss orders. Combining these orders with correct money management is also important to successful trading.

The high degree of leverage that is obtainable in the trading of off-exchange foreign currency transactions can work against you as well as for you. Leverage can lead to large losses as well as gains.

Shorting – Profit with both Rising and Falling Markets

In various financial markets throughout the world, there are many limitations against the possibility of shorting certain instruments. In the FX market, whenever you enter a trade you are immediately long (bought) one currency and short (sold) another. Therefore the opportunities to go long or short are the same and the opportunities to profit are endless.
In general terms you are considered long if you bought the major currency and short if you sold the major currency. (See Basic Concepts)

What you get with Ava FX

By simply opening up an account, the whole brokerage package is automatically given to the trader. Irrespective of the trading size or activity of the client, there is immediate access to a full-featured trading platform offering:

Demo Account: Practice on our demo account, using all the live features that are available on our robust full-featured trading platform.

Full Streaming Rates: Up-to-the-second streaming, executable exchange rates, 24-hours a day.

A wide range of currency crosses to choose from.

No fees whatsoever. Ava FX is compensated through the difference between the buy and sell prices.

Leverage Trading: Clients can trade with a leverage of up to 200:1 – that means a greater opportunity to profit. The high degree of leverage that is obtainable in the trading of off-exchange foreign currency transactions can work against you as well as for you. Leverage can lead to large losses as well as gains.

Orders: Trade professionally with single-click market executions, or with double-click market trading. Place stop-losses, limits, O.C.Os and more. During times of extreme volatility it can be difficult or impossible to execute orders.

Charts: Professional charts, easy to use, updated instantly. Save multiple charts on separate worksheets.

Technical Analysis: Use the various technical indicators to help with your decision-making. A wide variety of indicators are available.

Updated Economic Calendar and Analysis: Follow the economic announcements, know when they occur and what they mean, and use the Ava FX's daily commentary and analysis to stay ahead.

Service – We are here for you. Our 24-hour staff is always available for any question or request.

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Tuesday, July 21, 2009

Introduction To Forex

AVAFX

The FX Market

The Foreign Exchange market, which is often referred to as the "forex" or "FX" markets is the largest, most liquid and most transparent financial market in the world. Daily average turnover has now exceeded 2 trillion USD. All the US equity markets combined do not reach 3% of the volume traded on the FX market.

Unlike other financial markets, where for the most part you can only profit in rising markets, in the FX market profits are made by accurately predicting shifts in the relative values of any two currencies. So the cyclical changes that affect other markets are meaningless to the FX market. The constant fluctuations of exchange rates offer a continuous opportunity for profit.

Basic Concepts

The term Foreign Exchange means selling one currency and buying another simultaneously. Since currencies are traded in pairs, to profit from an exchange rate move you need to buy the currency that you expect will strengthen and sell the other. For example if you believed that the Euro (EUR) was going to appreciate against the dollar (USD) you would buy the EUR/USD; or in other words buy the EUR and sell the USD. Alternatively, if you believed that the EUR was going to depreciate against the USD then you would sell the EUR/USD; or sell the EUR and buy the USD.

There is no need to wait for a bullish market to profit, for at any given moment, one currency will be strengthening against another. The FX market is therefore constantly producing opportunities to invest.

Who Trades in the FX Market?

Foreign exchange traders can be separated into two groups, hedgers and speculators.

Hedgers: Governments, companies (exporters and importers) and some investors have foreign exchange exposure. Adverse movements between their local or domestic currency and the foreign currency of the group they are either doing business with (for the exchange of goods and services) or investing in will affect their bottom line. This is the core of all foreign exchange trading; however it only makes up approximately 5% of the actual market.

Speculators: This groups, which includes banks, funds, corporations and individuals creates artificial rate exposure in order to profit from the variations or movements in the price.
Forex reviews and currency trading information.

Currency Pairs

Currency Pairs: Each currency is recognized by a three-letter code. For example, EUR is the EURO and refers to the European currency, USD is the United States Dollar. The worlds leading currencies (often referred to as the majors) are the EUR, USD, JPY (Japanese Yen), GBP (the British Pound or Sterling), CHF (the Swiss Franc), AUD (the Australian Dollar) and the CAD (the Canadian Dollar).

Currencies are traded in pairs and are displayed as such. There is always the three-letter currency code a slash and another three-letter currency code. The first currency displayed refers to the "base", "leading" or "primary currency"; the second currency refers to the "secondary currency".

For instance when looking at the EUR/USD the EUR is the leading currency and the USD is the secondary currency. The "currency pair" or "currency cross" is then followed by a number; this is typically a five digit number with a decimal point after the first, for instance 1.2660.

The number represents the ratio of one currency against the other, and can be read as "the amount of the secondary currency needed in order to have one unit of the major currency". In the example just given, EUR/USD 1.2660, one would require 1 Dollar and 26.6 cents to exchange for 1 Euro.

Bid and Ask or Buy and Sell

There are always two numbers given after the currency pair, the first always has a smaller numerical value then the second. This can once again be shown using the same example (EUR/USD 1.2660 1.2663). The first number is known as the "Bid" or "Sell" and the second number is known as the "Ask", the "Offer" or "Buy".

The Bid (Sell) number represents that price where one can sell the major currency and buy the secondary currency, in this case the price at which one can sell the EUR and buy the USD. The Ask (Buy) number represents the price where one can buy the major currency and sell the secondary , in this example the price at which one can buy the EUR and sell the USD.

In the trading window below the trader is able to buy the EUR against the USD at 1.2847 or sell the EUR and buy the USD at 1.2844. The trader is also able to buy the USD against the JPY at 117.60 and sell the USD and buy the JPY at 117.57.


Calculating your P&L

As discussed above the foreign exchange rate represents the value of one unit in the major currency in the terms of a secondary currency. Since when opening a trade you exercise the trade in a set amount of the major currency and when closing the trade you do so in the same amount, the profit or loss generated by the round trip (open and close) trade will be in the secondary currency.

For example if a trader sells 100,000 EUR/USD at 1.2820 and then buys 100,000 EUR/USD at 1.2760, his net position in EUR is zero (100,000-100,000) however his USD is not. The USD position is calculated as follows 100,000*1.2820= $128,200 long and -100,000*1.2760= -$127,600 short. The profit or loss is always in the second currency. For simplicity's sake the P&L statements often show the P&L in USD terms. In this case the profit on the trade is $600.

As can be seen from the Open Position window below in Ticket number 411 the trader has bought 20,000 EUR against the USD at 1.2806. The current rate to close is 1.2844, so the trader has a current profit of 38 pips and 20000*0.0038= $76.


A Pip

We can see that in this case the trader made 60 points, or pips. This is calculated as follows 1.2820-1.2760=0.0060; therefore 1 pip=0.0001 and on a 100,000 EUR/USD position 1 pip is worth $10. In a USD/JPY position where the market rate is 118.30 one pip is 0.01. We can therefore see that a pip is equal to the last decimal point shown on a rate. The value of 1 pip in USD/JPY for a 100,000 position can be calculated as follows: 100,000*0.01= 1,000 JPY. In USD terms this is equal to 1,000/118.30= $8.45 (rounded to the nearest cent).

Orders - Stops and Limits

As in other financial markets, one can enter the foreign exchange markets at the market or deal rate (this is often known as a Market Order) or at a future rate this is known as a Stop (often known as a Stop Loss) or Limit Order. However as opposed to other financial markets, placing orders in the FX market is much easier, gives far better results and has many more opportunities and variations on the order placed.

When you wish to enter into a trade at current market conditions, you simply execute a buy or a sell market order. Often a trader will wish to either limit the loss of the position that he has open (in which case he is able to set a stop order) or wish to enter a trade - but at a rate that is more attractive than the current market (in which case he can place a limit order).

As discussed above, a stop order can be placed on an existing open position to limit the possible loss on the open trade. For instance, if a trader is long 100,000 EUR/USD at 1.2820, he is obviously expecting that the EUR/USD rate will rise to where he will be able to get out at a profit. However the trader may wish to limit the loss that he is willing to take on the trade. If the maximum loss the trader is willing to take is $1,000 and he knows that every pip is worth $10 in this case (calculated by 100,000 EUR*0.0001= $10) then he will want to set his stop order 100 pips from his execution price in this case 1.2720. At 1.2720 the client will lose $1,000 if it is not closed earlier and the AVA platform will execute the order if and when the Bid (since in this case the stop order is a sell order) reaches the stop rate of 1.2720.

During times of extreme volatility it can be difficult or impossible to execute orders.

Orders – O.C.Os, I/Ds and Trailing Stops

As mentioned above there are many combinations of orders that are possible to carry out in the FX market, using AvaTrader platform. Stop and Limit orders as described above are the basic orders available. All the rest are simply combinations of them or contingent orders.

During times of extreme volatility it can be difficult or impossible to execute orders.

O.C.Os

O.C.O is short for "One Cancels the Other". This is used against an open position, and is done in the following way: the trader places a stop order and a limit order against an existing open position. The first one that hits closes the position (a loss if the stop order hits and a profit if the limit order hits), and when the trade is closed the remaining order is cancelled.

This can best be described by an example. Say the trader is short 250,000 AUD/USD at 0.7730 and he wishes to profit $1,250 USD but is only willing to risk losing $750 USD, then he would place the following orders: The trader would set a limit order 50 pips away from the execution price since 50 pips at $25 per pip is $1,250USD; therefore the limit order would be placed at 0.7680 at the same time the trader sets a stop order 30 pips from the executed open price since 30 pips at $25 per pip is $750US; therefore the stop order would be 0.7760. The orders would be placed O.C.O which means that one order can be hit or triggered to close the open position and when that occurs the remaining order is cancelled automatically.During times of extreme volatility it can be difficult or impossible to execute orders.

I/Ds

I/D is short for "If Done". This is a spin on the O.C.O. Where the O.C.O is placed on an existing trade, the I/D is placed on a trade that has not yet been exercised. This can best be shown by an example: say the trader wishes to go short on the AUD/USD at 0.7770 in 250,000 AUD but the bid price is currently only 0.7730. Now as above the client wishes to profit $1,250 USD but is only willing to risk losing $750 USD; then the trader would set an original limit to sell the 250,000 AUD/USD at 0.7770 and place another limit that becomes active if the first limit hits (hence the term If Done).

The I/D order can also have a stop order attached as above. If the trader would like to set the same conditions as the O.C.O order above i.e. 50 pip profit and 30 pip loss then the full order would read as follows:

Sell 250,000 AUD/USD at 0.7770 I/D 0.7720 Limit and 0.7800 Stop.

Below we can see an actual I/D order with a combination O.C.O on the Orders worksheet where in Order number 205 the trader wishes to buy 20,000 EUR against the USD at 1.2680. If this occurs then there is a stop order against it at 1.2670 (a maximum loss of 10 pips) and an O.C.O limit of 1.2790 for a profit of 110 pips. During times of extreme volatility it can be difficult or impossible to execute orders.


Trailing Stops

A Trailing Stop is an active stop loss that keeps a set distance away from the current market price and updates according to the market. This is best used in a moving market that is going in the direction the trader wants and the trader wishes to guarantee the profits made. This can be best illustrated by an example:

Say a trader enters into a long 200,000 USD/CHF position at 1.2430 and sets a stop order at 1.2380 with a trailing stop of 50 pips. The maximum the trader can lose is 50 pips as above, but the stop loss will automatically update itself as the market moves. For instance, if the market moves to 1.2450 then the stop loss would update itself to 1.2400, always keeping 50 pips from the maximum rate. The stop loss will keep updating itself until it triggers or the original trade is closed. During times of extreme volatility it can be difficult or impossible to execute orders.

Hedging Trades

On the AvaTrader platform, traders have the opportunity to hedge their positions. A hedge is a trade that is in the opposite direction of an existing trade or open position. This can be a partial or a full hedge and does not close the position although it has the same effect. Some traders enjoy this feature and use the capability to hedge an open trade rather then close it out as part of their trading strategy. It should be noted that a hedge has the same effect as closing or partially closing an existing trade except for the fact that both the long and the short positions remain in the open positions table, are treated as open trades and must be closed at a later date.

Rollovers

On the AvaTrader platform all open positions are automatically rolled or swapped to the next business day. Traditionally all spot trades in the FX market are performed for a period of two working days when the delivery of the transaction is to take place. Since Ava through its AvaTrader platform does not permit delivery trades all trades must eventually be closed. Hence in order to avoid the delivery of the trade, the positions are automatically closed for the original trade date and reopened for the next trade date. In order to keep things simple and give maximum advantage to its clients the open and close rates of the roll are kept the same as the open position rate. A premium is then either added or subtracted based on the interest rate differential between the two currencies being traded.

This is a very beneficial and time saving method to continue the trade on the traders behalf until such time as the trader decides to close the trade.

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Monday, July 20, 2009

Weekly Stock Pick

Buy Sell Hold
The Market Week Ahead

Earnings reports are in full swing this week. Dennis Lockhart is speaking this Monday, and Bernanke is speaking Tuesday and Wednesday. Jobless claims and leading homes sales reports are coming out on Thursday, and Consumer Sentiment is coming out on Friday.

My Stock Pick This Week

Is a REIT or real estate investment trust. Lots of pros and cons fundamentally to this company right now. An upward move in the stock is now presenting itself as a low-risk high-reward short-sell candidate for the short-term possibly. As the recent up move since the first week of March at 12 to 14 dollars a share, the volume has been steadily declining. I’m betting the run is over with for awhile. In case it’s not, stick to the stop-loss to live and trade another day.

Sell Short Annaly Capital Management. Ticker NLY

Sell Entry: 16.32 to 15.82

Stop-Loss: 16.50

Take Profit Areas: 15.43 to 15.06, 12.38 to 11.94, 11.52 to 11.1

Annaly Capital Management Company Profile

Annaly Capital Management, Inc., a real estate investment trust, engages in the ownership, management, and financing of a portfolio of investment securities. The company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans. Annaly Capital also invests in Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association debentures. The company has elected to be taxed as a real estate investment trust (REIT). As a REIT, the company would not be subject to federal corporate income tax, provided it distributes at least 90% of its taxable income to its stockholders. It was formerly known as Annaly Mortgage Management, Inc. and changed its name to Annaly Capital Management, Inc. in August 2006. Annaly Capital Management was incorporated in 1996 and is based in New York City.

Click here to review and trial the Trading Software we used in determining our short position on NLY.

Click the Annaly Capital Management Stock Chart for a larger view.

Annaly Capital Management Stock Chart