Wednesday, October 31, 2012

Hurricane Sandy Investment Profit Opportunities

We Send Our Best Wishes of Those Affected by Hurricane Sandy

First we pray for everyone adversely affected by Hurricane Sandy and send out thoughts of goodness for recovery and forward growth from this storm and resulting disaster. From disaster there is opportunity and I just don't mean profiting from disaster, but re-emerging and thriving from it psychologically and emotionally. Being directly affected by any type of disaster in your life can be very traumatic and stressful affecting the way you live your life moving forward. Instead of thinking about the negative of the disaster effects, think about the good that can potentially come after it and what you want to see, feel, and experience going forward. Its the best thing you can do to help yourself and others recover from any type of disaster in your life. Its called the power of attraction from the The Secret book and movie.

From Disaster There Is Opportunity to Grow Forward

Hurricane Sandy was one of worst storms ever to hit the USA East Coast with its millions living in disaster affected areas. Life will move and grow forward in time, business will go on, and the financial markets will all survive. Below is some general industries and business sectors that may be winners from the aftermath of Hurricane Sandy.

Insurance Stocks Adversely Affected?

Obviously if the damage claims are very large, the insurance companies could be adversely affected. Insurers should take a loss if the damage claim are very large. Reinsurance companies should be the biggest losers if this is the case. If damage claims are small there may be a long-term buying opportunity in the potential sell off of the leading insurers.

Hurricane Sandy Industry Sector Potential Winners

Home improvement building construction stocks should benefit on the rebuilding of damaged structures.

Dining restaurants with displaced people needing to get some food.

Travel companies such as lodging stocks, auto rentals, airlines, railroads, and trucking should be big beneficiaries.

Consumer goods stocks of food water and battery companies and suppliers should benefit.

Diversified machinery companies would benefit with increased water pump sales.

Media and telecom companies providing services of mobile phones, smartphones, television, radio, facebook, twitter, should see more traffic and or more possible sales.

Zacks Investment Research Recommends Three ETFs to Watch in Hurricane Sandy's Aftermath

Although it is still hard to say just how long lasting the impact from will be, the storm appears to be living up to at least some of its hype so far. The major weather event looks to knock out power to millions across the broad Mid-Atlantic and Northeast regions of the U.S., potentially costing the area billions in economic activity, not just during the storm, but possibly for a longer period depending on how long the lights take to come back on.

Beyond the damage, power outages, and the potential loss of life, the so-called ‘Frankenstorm’ has also impacted stock markets in a very important way. The storm has now knocked out stock trading for the second day in a row, marking the first time in more than a century that weather has been the cause for a two day trading suspension of the New York markets.

While traders anxiously await the resumption of trading in a number of key financial products, there are undeniably some sectors of the broader economy that look to be especially impacted once trading starts back up again. In particular, we think the following three ETFs could be directly affected by Hurricane Sandy and possibly in for some volatile trading once markets open back up later this week:


With Hurricane Sandy impacting some of the most valuable and densely packed real estate of the United States, insurers could be in for a rough time this quarter. While the stocks in this space have been performing pretty well so far, damage is expected to reach well into the billions and looks to hit a number of insurance companies in the process.

Due to this, a host of insurance ETFs could be in for some down days if the storm turns out to damage a large swath of the eastern seaboard. While KBWP looks to be the most directly impacted ETF by this storm, the iShares Dow Jones US Insurance ETF (IAK) looks to be a more popular ETF play on the situation.

This fund has about $70 million in AUM and sees volume of roughly 17,000 shares a day, making it extremely more popular than KBWP. The product also holds about 60 securities in its basket, giving it wide exposure to the firms in the Dow Jones US Select Insurance Index.

Investors should also note that the product has a large cap tilt, although mid caps and small caps account for roughly 40% of the assets too. Yields are also decent on this fund at roughly 1.6% in 30 Day SEC terms, although fees are a little steep considering everything, coming in at 47 basis points a year.

International trading of major insurance firms that dominate many insurance ETFs were down initially following the first reports of the damage, so it could certainly lead to losses. However, it is also worth pointing out that if the storm doesn’t turn out to be too bad insurance ETFs are likely to continue their solid run, suggesting there is some risk built in to this scenario, especially on a company-by-company basis.


Assuming that the storm does a great deal of damage, firms in the construction sector could benefit from the cleanup afterwards. "This will show up in increased spending at hardware and home stores," Diane Swonk, chief economist at Mesirow Financial wrote in a recent note. "There should also be an increase in spending, once damages from the storm are assessed and repairs get underway. That spending could borrow a bit from traditional holiday sales, depending on how much insurance is paid on those claims."

Given this trend, construction-based firms could continue their solid run heading into the ending part of the year, adding to their non-storm related gains from earlier in 2012. While there are a number of ETFs to play this scenario, one that stands out is the iShares Dow Jones Home Construction Index Fund (ITB).

Mid caps and small caps dominate this product, while home builders account for roughly two-thirds of exposure in this popular fund. Beyond direct homebuilders, companies in the retail, appliances, and building materials spaces also make up a decent chunk of assets too.

These firms could benefit as people restock their homes to replace the damaged items, acting as a pre-holiday catalyst for much of the sector. Additionally, the product has a huge volume and solid AUM so trading in and out of the fund shouldn’t be a problem at all.

Not only has this ETF been a top performer so far in 2012, but the product has a Zacks ETF Rank of 1 or Strong Buy, suggesting that there could be more strength in this product even without the storm acting as a tailwind.


Much of the storm is centered on Philadelphia and the broader metro region around this important city. While many Americans probably know that Philly was vital to the country’s founding, they might not know that it is today a major center of gasoline production.

Ports that service tankers have been shut across the Northeast while major refineries in the region are also closing down or operating at reduced levels. Given that other pipelines and various other gasoline related businesses are poised to shut down or see reduced output thanks to the storm, we could see a huge short-term reduction in gasoline for this key region of the nation.

While it is true current demand is probably reduced to a lack of economic activity right now, the real test will be when the storm passes. If the damage is severe and there is a struggle to bring back production, gasoline could have some legs as we approach November.

An easy way to play this trend is with the United States Gasoline Fund (UGA). This product tracks RBOB futures and charges investors just 60 basis points in fees.

The ETF also sees decent volume and AUM of, respectively, 45,000 shares a day and $60 million in assets. This suggests modest bid ask spreads for this product, making it relatively easy to trade.

The fund looks to easily be the most impacted by the trends highlighted above and it is also one of the only ones that has a focus on RBOB futures. Due to this, this fund looks to be one of the best ways for short-term traders to play Hurricane Sandy and her short to medium term impact on the East Coast.

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Tuesday, October 30, 2012

The Three R’s of Trading Success

This is going to be part 1 of a 3-part series I’m putting together, so stay tuned next week for part 2. And don’t worry, whether you are trading stocks, options, futures or forex, there are some key elements that I have come to understand that all successful traders need to follow. I have over time tried to distill these successful elements or “habits” into three main categories. These are first, to have a consistent trading ROUTINE, Second is to have specific entry and exit RULES and then to follow them. Third, is to maintain specific RISK management rules. I refer to these habits of success as the three R’s of successful trading. The most successful traders I know incorporate all three of these elements into their trading habits.

Today, I will discuss the first of these three trading elements, which is to establish a consistent trading ROUTINE. In order to trade successfully, not only is it important to identify a trading routine, but also a routine that is best for your individual circumstances. Because, whatever routine you decide on, it has to be one that you can continue to follow for the long run. For example, if you are have a system that works well trading forex at the London open buy you reside in the United States, you will need to arrange your schedule so that you are consistently available to trade very early in the morning as the London forex markets open at 2am eastern time. If staying up that late is a challenge for you, then it may be more practical to adjust your trading system and routine to trade the Forex on the US open which is at 8am Eastern. The key to implementing a successful routine is to make it practical so we can follow through and be consistent with it.

Another important key to deciding on a routine is what style of trading you like. For example, if you are planning on trading Stocks or ETFs on a daily position basis you will need far less time than if you want to “scalp” trade the forex market which requires an exclusive block of time at a set time per day every trading day. So, understanding what kind of trading style and what markets you are interested in the long run will help determine what routine you eventually decide is the best for you.

So, like the “chicken and the egg” I am not sure what comes first, the system or the routine, but one thing is for sure, without a consistent routine regardless of how good your system is, the chances for trading success is greatly diminished. In other words, you could have a best system around, but without a consistent daily trading routine, you will have trouble implementing that system. Like anything worthwhile in life, consistent effort and energy is required to make it happen

To me the most important thing about a trading routine is to make sure that whatever you decide to do, pick something you can stick with. To sum up, it is very important to your overall trading success to have a specific trading routine and STICK WITH IT!

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Monday, October 29, 2012

Value Stock Pick of the Week

Rent and Buy Industrial and Commercial Equipment with United Rentals

USA East Coast Weather Alert: NYSE Closing Stock Exchange Floor for Hurricane Sandy by Morningstar Investment Research

The New York Stock Exchange said its trading floor would be closed starting Monday, the first such shutdown in 27 years, as New York City braced for Hurricane Sandy and a shutdown of the city's transit system.

Trading in all securities listed on the Big Board will be moved to Arca, an electronic trading platform operated by New York Stock Exchange parent NYSE Euronext (NYX), which operates the New York Stock Exchange, according to a statement by the company. The market operator said activity will also be suspended on its NYSE MKT exchange, formerly known as the Amex. "We are open for business and at the same time acting in accordance with actions taken by the city and state of New York," said Duncan L. Niederauer, chief executive of NYSE Euronext, in a statement.

Zacks Investment Research reports United Rentals, Inc. (URI) seems to be well positioned to benefit from improving U.S. construction activities. Plus, an expansion in the rental market will definitely help the growth prospects of the stock.

This Zacks #1 Rank (Strong Buy) has a compelling valuation, including a price-to-earnings (P/E) multiple of 11.08 that makes it a true value pick. In addition, this equipment rental company has surpassed the Zacks Consensus Estimates in five straight quarters, and is witnessing an upward trend in earnings estimates since its third-quarter report.

Strong Q3 Performance

On October 15, United Rentals reported third-quarter earnings of $1.35 per share, which beat the Zacks Consensus Estimate by 21.6% and trounced last year’s earnings by 46.7%. The company has now topped the Zacks Consensus Estimate for five consecutive quarters with an average surprise of 141.1%.

Total revenue increased 8.7% year over year to $1,219 million, but fell short of the Zacks Consensus Estimate at $1,280 million. Rental revenue grew 8.9% to $1,051 million on the back of a 7.9% jump in the volume of equipments rented and a 7.5% increase in rental rates. EBITDA during the quarter surged 27.8% to $570 million, with EBITDA margin expanding 700 basis points to 46.8%.

Due to the acquisition of RSC Holdings, the company realized cost synergies of $45 million during the quarter and raised its long-term cost synergy target to between $230 and $250 million, up from at least $230 million forecasted previously. Management expects to recoup $100 million of the target in 2012, up from $80 million estimated earlier.


Management reiterated its 2012 outlook for total revenue between $4.6 billion and $4.7 billion and EBITDA of $1.95 billion to $2 billion. However, the company increased its rental rate projection by 50 basis points to approximately 7%.

Earnings Estimates on the Rise

The Zacks Consensus Estimate for 2012 rose 9.3% to $3.53 per share over the past 30 days, as all 5 estimates were revised higher. The current estimate implies year-over-year growth of 88.7%. For 2013, the Zacks Consensus Estimate is up 1.3% to $4.73 per share, suggesting year-over-year growth of 34.2%.

Impressive Valuation

In addition to an attractive P/E multiple, United Rentals has a price-to-book (P/B) ratio of 2.37. (A P/B ratio under 3.0 and P/E below 15.0 generally suggests a value stock.) Its price-to-sales (P/S) ratio is just 1.00, lower than the industry average of 1.76. Volume is fairly strong, averaging roughly 3,045K daily. The return on equity (ROE) also looks attractive. It has a trailing 12-month ROE of 34.7% compared with the peer group average of 5.9%. It also has a PEG ratio of 0.90, which is less than one and indicates that the stock is reasonably valued given the long-term earnings growth projection of 12%.

Chart Overview

The 12-month EPS chart below indicates that the stock price is now gradually moving upward along with earnings estimates. The stock price has generated a solid year-to-date return of 34.9%, significantly higher than the S&P 500’s return of 10.6%.

United Rentals is the leading equipment rental company operating through 848 rental locations (as of September 30, 2012) in the United States and Canada. The company offers approximately 3,400 types of equipment on rent to a diverse customer base comprising construction and industrial companies, utilities, manufacturers, government entities, municipalities and homeowners. United Rentals, which primarily competes with Hertz Global Holdings, Inc. (HTZ), has a market cap of $3.62 billion.

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Friday, October 26, 2012

Candlestick Auto-Recognition Trading Software

Quickly Identify Candlestick Patterns Without Thinking!

Legendary Japanese rice trader, Munehisa Homma, gained a huge fortune, and popularity using candlesticks analysis.

Japanese Candlestick Charts are on record as being the oldest type of charts used for price prediction, dating back to the 1700's, when they were used for predicting rice prices.

In Track 'n Trade, you have the ability to click, and select your favorite candle patterns, and have Track 'n Trade find, identify, and even auto-trade each signal through our famed Autopilot Trading System.

Auto-Recognize Profitable Japanese Candle Patterns

Click and select your favorite chart patterns.

Detects 18 different Bullish & Bearish Patterns

Track 'n Trade Automatically finds and identifies each individual pattern.

User definable: change, modify, and refine each patterns specifications individually. Define the perfect candle pattern.

On the fly recognition, no historical scanning required. (Track 'n Trade throws Candlestick buy/sell Signals in real-time.)

Available for Forex & Futures Traders.

Learn to recognize and review patterns yourself, by having Track 'n Trade highlight which bars make up each individual pattern.

Turn on Candlesticks labels; on-screen text that identifies the name of each candlestick pattern

Turn on/off candlestick buy/sell arrows, which indicate bullish/bearish trends.

Complete color control, to adhere to any screen background, or printed chart.

Save and retrieve personal custom settings, and with one-click return to factory default settings

Custom Signal Filters

Every aspect of the Track 'n Trade Candlesticks Tool is user definable and customizable.

Custom Japanese Candlestick Filters, user definable filters are important in two aspects.

We must determine what exactly is a "candlestick" formation, and what constitutes a "good" signal.

Track 'n Trade allows the trader to define the individual bar sizes, and relationships one bar to the next, giving complete control to "weed-out" the less than optimal signals.

We must determine which signals are the ones that provide us with the best chance at capturing the beginning or end of a large move in the market.

Track 'n Trade uses moving average filters to help determine which signals are coming at the beginning or end of a trend, or are just "noise" signals that seem to occur halfway through the trend.

Full customization of colors, tags, labels and signals are key to any traders approach to the market, and Track 'n Trade is fully customizable. Make Track 'n Trade look and feel exactly like you want to accommodate even the most particular points of view and interest.

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Thursday, October 25, 2012

Forex Trading Indicator Cheat Sheet

I was just working with a new student this week who was asking a lot of questions about indicators. So to answer all his questions, I put together a little “cheat sheet” of indicators and a very basic description of what they do. Now, keep in mind that this is just a “cheat sheet” and just scratches the surface of what these indicators do. They were all invented by some pretty smart people, and an entire book could probably be written about each and every one of them… but I’m not much of a book writer. So a VERY short synopsis is what you get.

I also want to chime in with my own two cents: Most of these indicators are NOT needed. I personally use a few of these in my trading methods, but what I do is I use very common indicators like a few of these, and I use them in very UNCOMMON ways. But you’ll have to check out a few of my trading systems to fully understand what I’m talking about. But at the end of the day, the truth is you don’t need every one of these indicators. One or two could be helpful if that’s what your trading method and trading tactics call for, but rarely do you need to use all of them at the same time. I often see many of my students suffering form indicator overload. I take a look at their trading platform and it looks like a video game gone wrong. I’m a big advocate of keeping things simple and uncomplicated. There’s no magic trick to being successful trading forex, and adding a bunch of indicators is not going to get you the results you want. Using a method and staying disciplined with it is what brings you success. But enough lecturing from me, here are your indicators and what they do:

Bollinger Bands: These are lines that are drawn on your chart and act as little support and resistance level indicators. They are more or less volatility indicators but can be useful to those who are working off of support and resistance levels and have a hard time spotting them.

MACD: This is a two line indicator that uses two moving averages (fast and slow) and helps spot trends. The only issue I have with this one is it tends to have quite a bit of lag because of the two averages, so it’s more historical than anything.

Parabolic SAR: This is an indicator that spots trend reversals (SAR = Stop and reversal) and is pretty easy to follow because it shows you only bullish or bearish goals. When the dots are above a candle, sell, if they’re below, then buy. Simple as that.

Stochastic: Now this is an indicator I end up using in a lot of my methods and I think it works pretty well. What it does is it tells you when there are cases of something being overbought or oversold.

RSI: RSI stands for Relative Strength Index, and is very similar to stochastic. Same information, I prefer the stochastic.

ADX: Average Directional Index. This is another trend spotting indicator and can be very helpful if you know how to use it. What’s good about the ADX is it tells you the “strength” of a trend which can help validate a trade you’re thinking about entering.

IKH: This stands for Ichimoku Kinko Hyo and is a “price momentum” indicator.

There are many many more indicators, but that’s all I have time for today. Again, if you’re interested in learning more about any of them, I highly recommend getting a book or at least doing some web searches as there is a LOT to know about all of these. But at least now you’ll be able to hold your own at the next trader’s cocktail party.

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Wednesday, October 24, 2012

A Conversation with Three Super Traders

Last year, Van offered his Super Trader students the opportunity to thoroughly learn one of their trading systems by teaching it to other traders. Several of them took him up on his offer and that’s the origin for the upcoming Great Super Trader Systems Workshop. Whether you have an interest in attending the workshop or not, we thought readers would find interesting how these three Super Traders answered the same ten questions. We hope some of their comments will help you generate some trading ideas of your own. Enjoy.

Mark McDowell

Q. What are your thoughts about the markets right now? Mark

Today, I classify the market as “bull quiet.” I believe we’re in the midst of a long-term bear market, but I expect that both bull and bear cycles will occur in the context of the overall market. I believe cycles are shorter during long-term bears than during long-term bulls, so I’m trying to stay nimble and use trading systems that match up with the market type.

Q. What do you trade?

I trade stocks, ETFs and Forex.

Q. What kinds of trading systems do you use, and how many do you have in operation?

Currently, I use 1) the intraday system I’ll be teaching at the November workshop; 2) a swing-trading system that enters on pullbacks in a trend; 3) a weekly system based on relative strength in a large set of ETFs; 4) a monthly system based on momentum in a small set of ETFs; 5) and a trend-following system for Forex trading.

Q. Do you have a preferred style of trading, or do you focus on a particular kind of price movement?

I don’t have a preferred style. My overall objective is to have multiple systems that are uncorrelated, so I look for different techniques for entries, exits, position sizing, etc. in various markets.

Q. Why do you trade?

I trade to generate income and save for retirement. I left Accenture in 2002 and decided to make trading my profession soon after that. I also have a systems background, so I enjoy developing and trading new systems.

Q. At what area of trading do you believe you excel? Why?

My strengths are in design, coding and testing trading systems that are more mechanical and less discretionary in approach. During the last couple of years, I’ve done a lot of research and tried various ways of trading—both mechanical and discretionary—on a variety of time frames. Currently, I have several systems that are in various stages of design, coding and testing.

Q. If you could improve one area of your trading, what would it be? Why?

I’d like to improve my ability to read the market so I can adapt more quickly and dynamically to turning points. In other words, I’d like to become more effective at “trading in the now,” as Van says. I think it would improve my overall trading results.

Q. What difference did the Super Trader program make in your trading?

The Super Trader program made a huge difference in three areas: psychology, business planning and system development.

The Super Trader program provides a significant amount of information to support the development of a detailed business plan and trading systems that fit you as an individual. I believe it would have taken me far longer and cost me a lot in terms of trading losses and missed opportunities if I’d tried to develop a business plan and trading systems on my own.

But the biggest improvement was in my psychology, where I experienced several personal transformations and learned how to continue to transform myself. The psychological work we do in the Super Trader program has had a positive effect on both my trading and other areas of my life.

Q. What prompted you to want to teach one of your systems?

First, it’s great to have the opportunity to help other traders, and I wanted to teach a trading system that originated with concepts taught in other Van Tharp Institute workshops I’ve attended. Also, I know from past experience that the process of teaching my trading systems to other people provides me with a deeper understanding of those systems. I believe the questions and discussions will generate a lot of good ideas.

Q. What should people know about the system you‘ll be teaching at the ST Systems workshop?

I designed this intraday system so that it would be easy to execute. It uses a set of simple criteria for setups and then uses intraday price action for making entries and exits The system scans for stocks and ETFs that have pulled back in a trend. It uses tight stops once it enters a position. Exits occur when stops are hit or when the intraday target is hit. The win ratio is greater than 50%. It’s based on research originally published by Larry Connors and uses a statistics-based approach to managing entries, stops and exits. I began developing and testing the system almost three years ago. I’ll be presenting my third version of the system.

Bruno Serfaty

Q. What are your thoughts about the markets right now? Bruni

I guess you’re talking about the U.S. equity market, but you could expand the question to include the fixed income markets, the commodity markets, or international markets.

I’m always reluctant to answer such questions because they often lead to making predictions. I always prefer to identify what’s going on in the present and what the big picture looks like.

From a macro-economic point of view, we now have two major opposing forces at work. On the one hand, banks and governments, particularly in the U.S. and Europe, try to improve their respective balance sheets through a massive and somewhat unprecedented deleveraging process. This leads to restricted lending and government cutbacks, naturally constraining economic activity and job creation.

On the other hand, central banks are pursuing an aggressive quantitative easing policy, effectively supporting banks and governments in order to keep the world economic activity financed.

Over the last couple of years, the U.S. policy makers have been among the most aggressive with this quantitative easing approach and one of the least proactive when it comes to deficit reduction. The net result is that the U.S. equity market has been one of the best performing markets in the world, as measured by the S&P large cap index. The poor relative performance of the small and midcap sectors indicates that the current rally is not generally broad based and could be quite vulnerable to large corrections. At present, market volatility (as measured by the weekly Average True Range) is quite benign.

As a result, we’re using the U.S. equity markets to trade long swing-trading strategies, but with a restrictive capital/risk allocation, because the rally is based on capital injected by central banks rather than on solid strong economic and profit growth.

Other markets that we find interesting are precious metals (silver, gold), which, after a long correction, have started to trade well again. I’m also looking with interest at ETFs based on such countries as India, Brazil and China, which have been among the worst performers in recent months but have the potential to catch up with their U.S. counterpart.

Q. What do you trade?

Let me answer this question as the second part of the response to the next question.

Q. What kind of trading systems do you use, and how many do you have in operation?

Our firm’s objective is to generate steady and consistent returns over time.

We therefore seek genuine diversification in our trading systems. We accomplish this in two primary ways: diversification in terms of markets we trade and diversification in terms of time frames, from long term to short term.

For long-term trading, we use a long-term trend-following system with a tactical overlay across global markets through Exchange Traded Funds. This includes international markets, fixed income markets and some liquid commodities.

While the U.S. equity market is trending up, we use an equity swing trading system that successfully captures the volatility of individual stocks without being too exposed to overall market volatility. Because of our stock selection process, we tend to trade more small and midcap companies ($1 billion market cap minimum).

Finally, because we’re based in Europe, we trade the Eurostoxx and the Bund Futures with a short-term day trading system, particularly during volatile periods.

Q. Do you have a preferred style of trading, or do you focus on a particular kind of price movement?

Yes, I like to buy on weakness and sell on strength. I like to trade against the crowd, but only within a very strict framework.

Q. Why do you trade?

Every day is a different challenge.

Q. At what area of trading do you believe you excel? Why?

I excel at designing repeatable trading processes that make money over time. Then I teach others to run them on my behalf.

Q. If you could improve one area of your trading, what would it be? Why?

Short-term day trading. It requires such patience, discipline and courage. I admire those who successfully trade on a daily basis.

Q. What difference did the Super Trader program make in your trading?

That’s a long story. On a personal level, I’ve achieved a greater sense of self-awareness and belief.

On a technical level, I’ve learned to never blame myself or anyone else when we lose money, but I’m constantly asking myself and my colleagues: What’s missing? That’s an empowering question.

Q. What prompted you to want to teach one of your systems?

I want to share and give what I’ve learned from Van to others. I’m grateful for the opportunity. If I can help someone trade better, I’ll have achieved my objective.

Q. What should people know about the system you’re going to teach at the ST Systems workshop?

The system I’m going to teach is based on common sense, reasonable probability and trust that if you keep applying yourself, you’ll enjoy great success.

Frank Eaves

Q. What are your thoughts about the markets right now?Frank

My primary focus right now is on the Super Trader program and research for Dr. Tharp, so I don’t pay much attention to the day-to-day movements of the markets.

Q. What do you trade?

Actually, I’m not trading at the moment. I chose to refrain from trading while I work through the psychological portion of the Super Trader program. Before I started the program, I didn’t really trade with formal systems, so I’m grateful to be out of the markets at the moment. When I do finally start trading again, it will be a completely different experience for me. I’m not even half finished with the program, and already my view of the markets and systems has changed quite drastically.

Q. What kind of trading systems do you use, and how many do you have in operation?

In the past, I day traded the S&P E-Mini futures contract and swing-traded technology stocks.

Q. Do you have a preferred style of trading, or do you focus on a particular kind of price movement?

My beliefs about the market have been changing a lot. I’m developing systems that will allow a computer to do the trading for me. This mechanical approach appeals to me because I’m a programmer; I like the consistency that computers can bring to trading. Also, an algorithm increases my span of control considerably. An individual might be able to consistently trade four symbols a day with a particular system, but a computer algorithm could execute the same system against more symbols. I expect that I can automate multiple trading systems to execute against many symbols. With the appropriate position sizing algorithm, an automated trader could earn a very good return on investment.

Q. Why do you trade?

My beliefs about my reasons for trading have evolved over time.

Initially, trading looked like a way to help me maintain my standard of living in retirement. That view began to shift as I progressed through my corporate career. I worked 60 to 80 hours a week, but when review time came around, I was getting less than 1%-2% in annual raises. I realized that if I learned how to trade well, I could put in less time and have a much better return on that time.

My next beliefs about trading were mostly based on fear in the wake of the financial crisis. In 2008 it became clear to me that a severe crisis could force a company to lay off even its good employees. This thought hadn’t occurred to me before then because I’d been operating under a strong belief system: if I worked really hard, my company would keep me, and my family could maintain the standard of living we’d grown accustomed to. As that belief system fell apart, my mental state became filled with a lot of fear and a preoccupation with scarcity. That’s when I began to see trading as a way for me to live anywhere and still be able to maintain my standard of living.

Now, as a result of Dr. Tharp’s Super Trader lessons, I’ve learned that there’s abundance everywhere, and that our natural state is one of thriving. I’ve gained a much deeper understanding of how Dr. Tharp views the markets: There is infinite wealth available. When I start trading again, I’ll tap into that abundance.

Q. At what area of trading do you believe you excel? Why?

I excel at automating and back testing systems. I’m a professional computer programmer and have been applying my skills to help me understand and trade different markets for over 10 years.

Q. If you could improve one area of your trading, what would it be? Why?

I would improve my ability to recognize when my beliefs stop me from seeing that a system can be traded successfully. Before testing various trading systems for Dr. Tharp, I had a set of beliefs that informed me about whether or not a certain system would work. They were just beliefs, but I interpreted them as true and therefore operated as if they were true. I’ve written reports in which I concluded that a particular system didn’t work, only to discover later, after being encouraged to understand more about Dr. Tharp’s beliefs, that these systems really did work. It has been fascinating to make this discovery: my belief that a system would not work influenced my back testing process in such a way that the resulting data actually confirmed the belief. By changing my beliefs, I could change the back testing process and end up with test results that showed that the system actually did work.

That’s a very important point to keep in mind when trying to see the abundance that’s available in the markets. A trading system idea might look like it won’t work, but the more knowledge you have about yourself, and the more you understand yourself, the better you’ll be at determining whether you’re looking at the truth or a belief. The systems that work in the markets are so much simpler than any I would have thought possible, and the potential returns are so much bigger.

Q. What difference did the Super Trader program make in your trading?

Let me talk about the difference it has made overall as I have not begun trading again. The biggest difference is that my fear has gone down tremendously. Prior to being in the Super Trader program, I had a preoccupation with scarcity. Now I’ve developed a mentality of abundance.

Also, as I’ve discovered more about my belief systems and how those beliefs originated, I’ve become a calmer and happier person. It’s as though I’ve become a different person since starting the Super Trader program. I can only image the difference I’ll see once I finish the entire curriculum.

Q. What prompted you to want to teach one of your systems?

Dr. Tharp asked me if I wanted to teach a system for which he’s had me do a lot of research. I really like this system because it helped me see relationships in the market that I wasn’t familiar with before.

Q. What should people know about the system you’re going to teach at the ST Systems workshop?

This system finds some opportunities in bear markets and lots of setups at the bottom of bear markets—something I previously didn’t know how to do. Someone could actually use it for signaling the bottom of a bear market, even if they decided not to take the trades. Also, the system uses certain kinds of data for screening that few traders probably think about using. I’ll provide lots of data and spreadsheets for people who like to play with that kind of stuff after the workshop has finished. Because there are a number of possible variations, it can be traded in many different ways and can be modified to fit most peoples’ personal belief systems.

Click here to review more about Van Tharp Trading Education and Training Workshops.

Tuesday, October 23, 2012

Apple Earnings Report

The "tech wreck" of earnings misses has been brutal, with IBM, GOOG, and MSFT all making it tough to still love tech.

And AAPL hasn't even reported, but enough institutional holders of the stock have been selling to drive shares down to some very compelling levels. I thought the selling would continue this week, as many aggressive hedge fund bears are likely targeting $600 to see who they can flush out.

So it's nice to see the stock up over 2% this morning, even though I was hoping for a chance to buy more below $600.

But I also concluded last week that the selling is getting very close to over-done and that the "impending earnings miss" this Thursday is all but fully priced-in.

How do I know they are going to miss?

I don't, of course. But I pay attention to price. And price (and volume of the institutional variety) have been saying one thing: analysts and investors were getting more nervous about the quarterly results on Thursday.

The consensus for this FY12Q4 has been floating around the past two weeks just below $9, with the latest read at $8.93.

And this is after the company warned in July about this quarter coming in 25% below Street expectations of over $10. The consensus went as low $8.40 in July and has slowly worked its way back up.

But not everybody is on board, with the traditional AAPL bull Stifel Nicolaus reaffirming their call for $8.01.

And here were some headline updates last week on iPhone unit sales projections for the quarter...

William Blair reduced estimates from 33 million to 26.5 million units. And last Monday, their analyst also brought his EPS estimate for the quarter down to $8.39 from $9.17.

Gabelli & Company lowered their iPhone sales estimate from 32.1 million to 29.9m. Also last Monday, they took the full-year EPS down from $46 to $44 (consensus is $44.37).

Morgan Stanley is at 25 million units.

These are all houses prepared to be underwhelmed by this Thursday's report and they have probably been advising their private wealth and hedge fund clients that "better buying opportunities" in AAPL would soon be around the corner.

Wedbush is at only 24 million iPhones for the September quarter, saying that they expect sales to be tempered by the supply/delivery issues which many have cited in addition to potential quality issues (Maps, aluminum scratches, etc).

But, they, along with Barclays and Stifel, also expect a strong ramp in iPhone 5 sales and new products (iPad Mini) into Fiscal Q1 (the December quarter, since the quarter about to report is Apple's FQ4 for 2012). And they reiterated their 12-month price target of $885.

Barclays is at $930. Their analysts speak of Apple's dominance of "disruptive mobility" in tech continuing to power their earnings growth.

Stifel Nicolaus has been one of the biggest Apple bulls on the Street, but they are preparing for a big miss this week. Last week, as noted, they reaffirmed their $8.01 estimate for the quarter. They did raise their iPhone sale estimate from 22 million to 25 million, but they too remain concerned about supply issues.

Now Stifel is above the Street consensus for the December quarter at $16.50, but they just brought this down from an overly optimistic $16.91, as they view weaker Mac sales cannibalized by the new iPad Mini.

More importantly, they think Apple will guide the December quarter lower. And this has caused the analysts to lower their 2013 full-year estimate from $55.91 to $54.27, which is still above the consensus of $53.72.

One last note about the phone carriers: Verizon's numbers implied good things for iPhone 4 & 5 sales. Wells Fargo analyst Maynard Um found them very encouraging. This week, we get AT&T reporting on Wednesday the 24th and Sprint on the same day as Apple, so we should get a lot more visibility. The bottom could already be in by then I imagine.

Bottom line: I think the Apple miss is almost priced-in.

What do you think? What will an $8 report do?

And what will a $9 report do... send the stock racing higher?

Finally, will tomorrow’s new product announcements make sure the bottom is in at $610?

Monday, October 22, 2012

Energy Company Positive Earnings Surprise

Zacks Investment Research reports Pinnacle West Capital Corporation (PNW) has announced positive earnings surprises in 3 out of the last 4 quarters, and will be reporting again early next month. Earnings estimates for this utility company have been on the rise, underscoring its Zacks #1 Rank (Strong Buy). The stock also offers a healthy dividend yield of 4%.

Q3 ‘Round the Corner

Pinnacle West Capital Corporation is expected to release its third quarter earnings on November 2. The Zacks Consensus Estimate is at $2.28 per share on expected revenue of $1.15 billion.

On August 2, Pinnacle West Capital reported second quarter 2012 earnings per share of $1.12, surpassing the Zacks Consensus Estimate by 7.3% and last year’s earnings by 43.5%. The strong results were aided by warmer-than-normal weather, lower infrastructure-related costs, higher transmission revenues, lower fuel costs and improved mark-to-market valuations of fuel contracts.

Pinnacle West reported revenue of $878.6 million, growing 9.8% from last year’s $799.8 million. Revenues also surpassed the Zacks Consensus Estimate of $861 million. An increase in Regulated Electricity segment revenue was largely responsible for the overall improvement.

Earnings Momentum Inches Higher

The Zacks Consensus Estimate for 2012 is at $3.43 per share, which is up nearly 2% in the past 90 days and suggests year-over-year growth of 14.7%.

Stable Dividend

Pinnacle West Capital Corporation has been consistently paying dividends to its shareholders. On October 18, 2012, the Board of Directors raised its quarterly dividend rate to 54.5 cents from 52.5 cents. The new annualized payout rate of $2.18 per share reflects an attractive dividend yield of 4%.

Reasonable Valuation

Shares of Pinnacle West Capital currently trade at 15.8x 12-month forward earnings, a 1.3% premium to the peer group average of 15.6x. Its price-to-book ratio of 1.52 is at a discount of 7.8% to the peer group average of 1.57. The price-to-sales is at 1.80x, a 58.9% premium to the peer group average of 1.37x.

The company has a trailing 12-month ROE of 9.5%, compared with the peer group average of 10.0%.

The chart below depicts the full picture with shares of Pinnacle West gaining 17.5% over the last six-month period.

Pinnacle West Capital Corporation was founded in 1920. The company provides electricity services in the state of Arizona, through its subsidiaries. The company is involved in the generation, transmission and distribution of electricity from coal, nuclear, gas and oil and renewable resources.

The company primarily competes with Southwest Gas Corporation (SWX). With approximately 6,663 employees, the company’s market capitalization is $5.93 billion.

Click here to review more energy investing resources.

Thursday, October 18, 2012

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Wednesday, October 17, 2012

Trading the Google Earnings Report

One of the most useful characteristics of options is their ability to control risk and achieve a high probability of success when trading impending earnings announcements.

Google will announce third quarter earnings after the market closes on Thursday. It does not take a conspiracy theorist to recognize that the following day, Friday, is the last day to trade October options. Given this timing, options trades can be constructed with near surgical precision to reflect the trader’s hypotheses regarding the price reaction to the earnings release.

I thought it would be helpful to review some of the data that an options trader should consider prior to constructing an option trade to profit from this event and to consider some other potential trades.

First, the recent history of stock price move on earnings release must be considered. The reaction of price over the last four quarterly releases has been +8%, +7%, +2% and +3% with the two lowest numbers correlating with the two most recent earnings releases.

The second factor to consider is the information embedded in the current pricing of the options chain. The easiest way to determine the aggregate opinion of the overall option market as it relates to the expected move following the earnings release is to calculate the value of the front month at-the-money straddle discounted by roughly 15%. It is important to recognize that this value is reflective of the anticipated magnitude of the move and gives no information whatsoever on the direction.

In the case of GOOG, closing prices on Monday with GOOG trading around $740 give a value of ($19.90+20.80)*0.85 = $34.60. This equates to roughly a 5% move or a projection with a 68% probability (1 standard deviation) that the price movement will be bounded within this range.

Option positions to trade earnings can be based on two general considerations: directional or non-directional. Directional based trades can be constructed using a variety of approaches, but MUST account for the collapse of implied volatility following earnings release.

To be blunt, this means that simply buying only puts or calls in the front month series is not putting probabilities on your side. Appropriate directional constructions would include vertical spreads, butterflies, and calendars. Each of these trades either mitigates or benefits from the inevitable collapse of implied volatility immediately following the earnings release.

Playing earnings directionally is a difficult game. Recent market history is replete with unanticipated earnings misses and unforeseen earnings blow outs. For those who wish to play these announcements directionally, I feel the major value of an options approach is to control risk crisply since there will inevitably be unpredicted and unpredictable price reactions.

My preference is to use strategies that are profitable over a wide range of prices. The potential constructions in this category include iron condors and double and triple calendars. Such trades do not deliver the overwhelming returns of a correct prediction of price direction, but over a large series of trades result in a high probability of success.

The trade I would like to consider is that of a triple calendar spread. We will buy the December series options, and sell the October series with dramatically increased implied volatility as a result of the impending earnings release.

Click the GOOG Option Chain Images Below for a Larger View

The strikes highlighted above would be sold-to-open in this spread while the strikes shown below would be bought-to-open simultaneously to produce the calendar spread discussed above.

Calendar spreads are usually constructed by selling the near month put or call and buying the same strike in the preceding month. In this case, note that the November options trade with substantially higher implied volatility than do the December options as a result of “bleed over” of the elevated October volatility.

This trade is short term and is designed to be closed on this coming Friday (10/19/12). Note that the break even points for the trade are around $670 and $840 respectively. These break even points are outside of a double of the expected move. Based on the current implied volatility driven probabilities, this trade has an approximate 90% chance of successfully producing a profit.

This is not the elusive “free money” trade either. Since we have discussed that trade for several weeks, I think the reader gets the idea there is no such thing. Option trading success comes from constructing high probability trades and executing these trades in sufficient numbers that the statistical law of large numbers delivers the predicted success rates.

A corollary of this is not to “bet the farm” on any one trade. While we typically choose high probability trades, there is no such thing as “free money” and a low probability event cannot be allowed to curtail your trading career.

Click Here to Review More Options Trading Resources

Tuesday, October 16, 2012

Profitable Triangle Trading with the Forex ProfitCaster

Make sure you watch the entire presentation on that page -- it reveals some brand new profitable forex trading ideas.

Trading the Forex market has been a mystery for many people around the world and there are many traders who still dabble in the markets but don't make real money. To help those traders, Bill Poulos of Profits Run, a professional trader and trainer, has created a new system called Forex Profit Caster that has the financial market buzzing.

After producing multiple top selling high quality Forex and trading programs, Poulos has gone back to the drawing boards and assembled a truly innovative system. His new trading system utilizes a custom web-based software application, including custom charts using the latest web technologies which means it works on any computer and any device with a full-featured browser, like iPhones and iPads.

A quick Forex Profit Caster review shows that Bill's new strategy focuses on his Forex Triangle pattern that he has shown can predict the direction of the 8 most profitable Forex markets with 79.6% accuracy. Poulos has even made the software so that it will filter out false break outs and focuses on the hourly or end of day time frames.

Not only is Bill providing members with the trade alert software but one will also get access to his top of the line training and his support team. For those that invest in the program will get 4 video CD-ROMs, trading reference guides, trading blueprints, fast start guides, online Question and Answers sessions, member's only website and much more.

Monday, October 15, 2012

Biotech Value Stock Pick

Zacks Investment Research reports United Therapeutics Corporation (UTHR) performed above expectations in the first half of 2012 and is positioned to continue performing well through the remainder of the year. This Zacks #1 Rank (Strong Buy) biotechnology company is well-positioned to gain share in the pulmonary arterial hypertension (PAH) market. In addition, the stock is reasonably valued with a forward price-to-earnings (P/E) multiple of just 12.1.

Earnings Strength

United Therapeutics is expected to report its third-quarter financial results on October 25. The Zacks Consensus Estimate is at $1.24 per share with revenue of $227 million.

On July 26, the company reported second-quarter earnings of $1.43 per share, topping the Zacks Consensus Estimate by 27.7% and beating last year’s result by 20.2%.

Revenues jumped 22.8% year over year to $225.6 million and exceeded the Zacks Consensus Estimate of $213 million. The improvement was primarily due to the increased patients being prescribed Remodulin, Tyvaso and Adcirca. All three products target the PAH market.

United Therapeutics is well-positioned to gain share in the PAH market. Lead product, Remodulin, continues to look very strong in both the intravenous (IV) and subcutaneous (SC) forms. Remodulin sales should benefit from the approval of the IV formulation in Europe.

The company is working on developing Remodulin for the Japanese and Chinese markets, which would bring in incremental sales.

Upcoming Catalyst

United Therapeutics has a major catalyst coming up later this month. The company is seeking US approval for oral Remodulin for the treatment of PAH. A response on the approvability of oral Remodulin should be out by October 27, 2012. Approval would be a huge boost for the company.

Earnings Estimates on an Upswing

Over the last 90 days, the Zacks Consensus Estimate for 2012 increased 7.3% to $5.00 per share, suggesting year-over-year growth of 23.1%. Moreover, the Zacks Consensus Estimate for 2013 increased 5.9% to $5.23, implying year-over-year growth of 4.7%.

Reasonable Valuation

In addition to a low P/E multiple, United Therapeutics’ PEG ratio of just 0.90 indicates that the stock is reasonably valued given the expected long-term growth rate of 13.5%. A P/E ratio below 15.0 generally suggests value. The company’s P/B multiple of 3.00 is on par with the benchmark for a value stock and well below its peer group P/B multiple of 4.23.

The chart below shows that the share price has been generally tracking the company’s earnings performance. Given the increasing trend of the Zacks Consensus Estimate, the share price should continue increasing.


United Therapeutics focuses on the development and commercialization of therapeutic products for patients with chronic and life-threatening diseases. The company's lead product is Remodulin, an injectable formulation of treprostinil, indicated for the treatment of PAH in patients with New York Heart Association (NYHA) Class II-IV symptoms.

Tyvaso is an inhaled version of treprostinil. An oral version of treprostinil (oral Remodulin) is currently under US Food and Drug Administration (FDA) review. The third product in the company’s PAH portfolio is Adcirca (tadalafil; sold by Eli Lilly (LLY) as Cialis for erectile dysfunction). United Therapeutics, which has a market cap of $2.9 billion, has some early stage candidates in its pipeline focused on the development of treatments for cancer and infectious diseases.

Friday, October 12, 2012

ETFs vs. Mutual Funds and What's Best?

Although ETFs aren’t even 20 years old, they have become a force to be reckoned with in the investment world. Assets under management for the industry are now well over one trillion dollars and new products are debuting on a nearly weekly basis.

Funds now allow investors to purchase pretty much anything ranging from large cap U.S. stocks to German bonds, equities in Thailand, commodities, and everything in between. Yet despite the fact that ETFs are going increasingly mainstream, there are still several misconceptions about the product and especially how they relate to their chief rival, mutual funds.

Mutual Funds are more established than their ETF counterparts and have been around a lot longer too. In fact, mutual funds can trace their roots back to the 18th century although the first true American open-ended mutual fund debuted in the mid 1920’s.

After surviving the Great Depression, mutual funds took off after World War Two becoming one of the go-to investments for the American public. Currently, there are close to 7,600 mutual funds in the U.S. with assets under management over $11 trillion. The product now dominates the lucrative retirement market and is still a force in other types of accounts as well.

With both product types now exceeding at least $1 trillion in assets and 1,000 total funds, the debate is beginning to intensify over which is more appropriate for investors’ portfolios. While there are a number of structural differences between the two products and how they are created, we have highlighted some of the most important facts that investors must remember when deciding between the two products for their portfolio.

In many ways, ETFs took the concept of a mutual fund and improved on it. There are many ways in which ETFs have revolutionized the investment world and opened up a variety of asset classes in a fashion that mutual funds have never done.

Thanks to this, the products have becoming extremely popular for both short-term traders as well as those seeking to build a long-term buy-and-hold portfolio. Below, we highlight five reasons why ETFs are better than mutual funds from a structural standpoint:

1. Intra-Day Trading - Arguably the single biggest difference between ETFs and mutual funds is on the trading front. Mutual funds, no matter when one calls up their broker to sell or buy, are only traded at the end of the day and never during market hours.

Basically, at the end of a trading session, a mutual fund company will determine the net asset value (NAV) of all the securities in its fund, divide by the total number of shares outstanding, and then use this figure to payout investors who are leaving the fund and charge investors who are adding the product to their portfolio. This is only done once a day and anyone that misses the cutoff must wait until the end of the next trading period in order to redeem or obtain shares (also read Alternative ETF Weighting Methodologies 101).

ETF investors, on the other hand, face no such restrictions and can buy and sell shares of a fund just like they would a regular stock. This means that investors can purchase and sell an ETF in the same day, buy more if prices fall or sell if the value rises in a short period of time. Obviously, this flexibility is a great feature for ETFs and can come in handy when markets are oscillating wildly and investors want to get in or out of an investment in a very short period of time.

2. Expenses - Beyond trading differences, the next biggest variation between the two comes on the expense front. On average, mutual funds change investors a little over 1% for their services while ETFs have an average about half of that. Furthermore, several exchange-traded funds charge investors less than 25 basis points a year in fees while a few broad stock market ETFs charge less than ten basis points for their services.

In fact, it is very possible to build a well-diversified portfolio with assets in all the major classes, that has an expense ratio below 20 basis points a year by only using ETFs. This is pretty much impossible from a mutual fund standpoint unless one only uses Vanguard funds. This is largely due to the structure of these products and their index following nature, they are the only type of mutual fund that can rival ETFs on an expense front, admittedly beating them out in most cases.

However, beyond this exception, all of the ten most popular mutual funds have expenses in excess of 70 basis points with most coming in close to 1%. This can often go even higher for funds that are targeting more obscure sectors or those that employ a more actively-trading methodology.

While this wouldn’t be too bad if active managers demonstrated value, a recent study suggested that close to two-thirds of actively managed mutual funds underperform the market. So not only are investors paying more in fees for mutual funds, but they are often underperforming index-based ETFs anyway, suggesting that most would be better off in exchange-traded funds for the vast majority of their exposure.

3. Disclosure requirements - Another key difference between mutual funds and ETFs has to do with the underlying holdings of the funds and how often information is released regarding this data. ETFs are required to disclose, on a daily basis, what their portfolio of securities is made up of and what proportions are in each asset.

This allows investors to know if a particular fund is matching up with their expectations making comparisons that much easier. It also gives investors a chance to see when trades were made (in active funds) and how far securities have deviated from their initial weighting (in index products), allowing investors to have valuable information about their potential or current investments.

Mutual funds, on the other hand, are only required to disclose their positions on a quarterly basis, a much less rigorous requirement. This can allow for all sorts of moves and changes in between the disclosure dates potentially giving managers the opportunity to rapidly adjust a portfolio right before the day of disclosure in order to make the basket of securities look more favorable.

Given how rocky markets have been and how quickly some assets are gaining and losing values, a quarterly update probably isn’t enough for most investors suggesting that for those looking to keep a truly watchful eye on their investments, ETFs are again the way to go.

4. Taxes - Staying in control of tax liabilities is an issue that is often at the forefront of investors’ minds but is something that many often overlook when deciding between an ETF and a mutual fund. That is because many might assume that these two products would incur identical tax liabilities although that may not always be the case.

That is because of how mutual funds and ETFs are structured and how this difference can impact tax liabilities on a yearly basis. Most mutual funds are structured as pools of assets and each investor has a share in the pool. When more assets come in, the mutual fund company must buy up more shares of stock while the opposite situation takes place when investors cash out of the fund.

This is generally different from most ETFs as these products do not usually have the same pooling feature. Instead, when a person buys an ETF they are just purchasing a basket from another investor, no shares in the underlying securities are bought or sold.

Additionally, when big investors create a new group of shares in an ETF or cash out of a large position in an exchange traded product, this doesn’t generate any transaction events either. This is because ‘authorized participants’ simply exchange the shares of their ETF for the underlying securities in what is known as an ‘in-kind’ exchange, a situation that doesn’t generate any taxable events.

While this might seem like a minor and extremely technical detail, it can have huge tax consequences. This is because when someone in a mutual fund cashes out, the underlying shares can be sold in order to raise the necessary money for the redemption. This ensures that everyone in the pool—because everyone owns a little piece of every holding—can be hit with a taxable capital gains distribution, even if they did not sell any shares that year. ETFs, on the other hand, do not usually have these issues of capital gains being spread across investors because transactions are between two individuals or institutions; no shares need to be bought or sold and thus they do not generate capital gains for the other investors in the ETF.

This allows investors to keep better track of their tax liabilities and to have more control over them as well. While this might seem like a minor issue, it is an important one nonetheless that investors need to be aware of before choosing between the two product types (also read ETFs vs. ETNs: What's The Difference?).

5. Options - Lastly, and probably the least important to long-term buy-and-hold investors, is the ability to use options on ETFs. These securities give investors the right, but not the obligation, to buy (or sell) an ETF at a future time period after paying (or obtaining) a premium from investors. While they are probably not used very often by long-term investors, these securities have valuable abilities that can help many with their portfolios.

Probably most important is the ability to hedge against losses although speculation and bets on sideways movements are also helpful. In this way, investors can control a greater amount of securities for a small price, increasing leverage but allowing a trader to deploy capital elsewhere in the meantime. Since mutual funds do not trade intra-day, they do not have this feature, forcing investors who want to use options as a part of a strategy to look at the equity or ETF markets instead (see more in the Zacks ETF Center).

Although ETFs may be leading the way in a number of key areas, mutual funds aren’t going away anytime soon. This is because of a few factors that keep mutual funds, despite their drawbacks, in the spotlight and a favorite among many investors. Below, we highlight three areas where mutual funds still have ETFs beat:

1. Active Management - Although there are a few active ETFs, for investors seeking the watchful eye of a portfolio manager mutual funds are still tough to beat. The active funds seek to weed out the securities that are mostly likely to underperform and only invest in top performing assets. While this may not be very helpful in widely traded and heavily watched spaces such as the U.S. Treasury bond market or mega cap stocks, it can produce value in more obscure sectors.

These can include high yield bonds or small cap equities where there is an overabundance of options and few analysts following the many choices. This can potentially allow managers to outperform a benchmark suggesting that, in some cases, an active touch may be better.

While it should be noted that there are a few active ETFs, there isn’t exactly a wealth of choices; by pretty much any definition there are less than 30 active funds on the market, at time of writing. Furthermore, many of these actively-managed ETFs have very low trading volumes which can result in wide bid/ask spreads, a factor that could add to total costs for investors.

So for investors seeking to have someone managing their investments and for those who do not trust products that just track a benchmark, mutual funds are probably the better choice at this juncture.

2. 401 (k) plans/ retirement accounts - The way in which most Americans have exposure to mutual funds is via their retirement savings, usually in some-sort of employee sponsored account. Since mutual funds have been around for so long and since they are often sponsored by giant financial companies such as Fidelity or Franklin Templeton, the fund sponsors have developed an administrative network to sell their funds to companies and their employees, often times consisting of only their funds.

Since this has been going on for quite some time and because these firms are firmly entrenched in their positions due to high switching costs and lack of administrative support from ETF providers, a great deal of retirement assets are in mutual funds (see Understanding Leveraged ETFs).

So in other words, if an investor is seeking to find a new product for their retirement fund, chances are ETFs will be off-limits, greatly limiting the appeal of this product for many investors. However, it should be noted that this is starting to change with the advent of commission-free trading across a number of discount-brokerage platforms. This is a good start to unseating mutual funds in the realm of retirement accounts but much more will have to be done in order to truly slice into their lead.

3. NAV Purchases - Although intra-day trading is certainly a nice feature of ETFs, there are times when it is disadvantageous. For example, if your ETF is trading at a discount to its net asset value (NAV) but you want to sell right now, you are out of luck and must take a hit in terms of return. Mutual funds are instead required by law to redeem shares at net asset value at the end of a particular trading day. A similar issue can also arise in terms of the bid/ask spread as well.

For ETFs, there is a buyer and a seller and these two individuals will have different prices for which they are willing to trade their shares. When a market is very liquid, this can be an extremely small figure, often times as little as a penny. Yet when a particular ETF doesn’t have high trading volumes, the spread between the bid and the ask can be significant and can result in a worse price for investors.

Once again, mutual funds do not have to deal with this issue because there is no bid or ask; what an investor receives is what the NAV is at the end of that day’s trading session, ensuring that mutual fund investors do not have this issue to worry about.

Click here to review more Exchange Traded Fund investing resources.

Click here to review more Mutual Fund investing resources.

Thursday, October 11, 2012

Global Macroeconomic Fundamentals and Currency Trading

Gabriel Grammatidis is a successful full-time trader and graduate of the Super Trader program. He has extensive experience trading Forex and will share his knowledge at a three-day Forex workshop from November 9-11 at the Van Tharp Institute in Cary, North Carolina. In the following interview, Gabriel talks about his approach to trading, the techniques and habits that lead to success in the markets, and his own development as a trader.

Q. Do you monitor macroeconomic fundamentals?

For example, the ECB and the Fed are in the process of increasing their respective money supplies. Do you pay attention to any of that, or are you a purely technical trader who just looks at the charts?

I monitor macroeconomic developments very closely, especially during these turbulent times. They form the basis for my big-picture view of capital markets, which determines how I structure my investments and trading—i.e., what and how I should trade (investing, swing trading, daytrading), which asset classes to own, etc. If you want to protect your wealth, I believe it’s important to think about where potential risks might develop. When it comes to short- and medium-term trading, I focus on charts.

Q. It seems that you rely more on the price action you see in the charts than on indicators. Why is that?

Actually, I use a combination of price action and indicators. Most of the indicators people use are based on past price action, which provides a signal after a price move has occurred (lagging indicator). Consequently, many traders enter when the move has already played out quite a bit. To get in early, I typically use leading indicators that anticipate a price before the move happens. Combining leading indicators with price action helps me get the best view of the markets.

Q. Do you monitor the markets on days you don’t trade, or do you just catch up when you get back to trading?

I don’t monitor the markets when I’m not trading. The Forex market operates in sufficient liquidity 24 hours a day, so there are opportunities around the clock. This gives me the flexibility to schedule my trading times around whatever else is going on in my day. In Forex, I think it’s much more important to trade at times when you feel your best rather than to allow specific exchange hours to dictate your day. When I take a day off to go hiking in the mountains, I usually catch up the next morning.

Q. Van stresses the importance of understanding market types for trading system development. Do you measure market type in the currency markets?

There is no Holy Grail system that works well in all market types, so it’s important to analyze how well a system performs in each market type and how many trade opportunities might occur. You can then select or concentrate on those systems that perform best in the specific market type you have. The three systems I teach in the upcoming workshop are trend-following systems that require good uptrends or downtrends. Quiet market types allow me to benefit from other kinds of low-risk trade ideas (e.g., a consolidation pattern breakout failure).

Q. What do you believe causes support and resistance levels? Is the same force at work in Forex markets as in equities or commodities?

Support and resistance levels are caused by market participant psychology. When you look back in time, you see that support and resistance levels have worked even when charting was not performed. Technical analysis applies particularly well to Forex.

Q. Have you read any good books on Forex trading, or do you find technical analysis books more useful?

I screen the market for Forex books once in a while. They all make for interesting reading, but now that I understand the inner workings of the Forex market, I find technical analysis books more useful. In the end, the best trading book is your own trading journal.

Q. You used a trading simulator at your workshop to help people learn your systems’ setups, entries and exits. Have you used a simulator yourself to practice trades on your own?

Yes. I believe that a simulator is a good tool to use after a trade is finished. During my daily debriefs and weekly reviews, the simulator allows me to go back in time and replay situations as though they were “live.” It’s like a drill training session that gives me the ability to think through difficult situations and work on my weaknesses (just as in sports).

Q. You talk a lot about risk management. Why is it important, and how do you apply it to your own trading?

Apart from psychology, trading is mainly about risk management and less about generating profits. Once the risk is under control, the profits tend to unfold themselves (if the system has an edge). I manage my risk through a dynamic position sizing strategy and by monitoring key trade statistics that give me an early warning indication if something isn’t working right.

Q. You also stress the importance of preparing for the trading day. How do you prepare?

It is my habit to follow certain routines in life. I start my trading day by riding my stationary bike, stretching and meditating. A self-analysis and mental rehearsal is also part of my trading preparation. Van stresses the importance of following the top tasks of trading, and these preparations are an important part of the tasks. When I don’t follow my morning preparation, my mental state for trading is impaired. So I better do it...

Q. Some of the attendees at your June workshop were a little surprised that meditation improves your trading. How does meditating and understanding your personal psychology help you trade better?

Meditation improves every aspect of life and trading. The more I trade, the more I understand that trading is mainly about psychology and mental states. Meditation is an important tool for achieving a peak trading mental state. Accepting or even being grateful for whatever happens (win or lose) is a precondition for trading well. Trading from a state of fear or greed is not advisable.

Q. In what areas do you think you excel as a trader?

I am a creative person, and I constantly research and test new systems. One of my strengths is being able to take a trading idea and test and refine the rules for it until the system is production ready.

Q. If you could improve one aspect of your trading, what would it be?

Being less prone to overtrading.

Q. What's the hardest part of trading for you?

The hardest part for me is flawless execution of my system rules no matter what. Not following your rules is a mistake, and most mistakes generate losses. If you want to flawlessly execute your rules, you need to work on clearing non-useful beliefs or emotional blocks. Too often, the mind self-sabotages in order to satisfy unconscious beliefs that are detrimental to trading success. During the Super Trader program, I had to unlearn many of the beliefs I had acquired in my life and learn new ones.

Q. What do you do to continue your education and development as trader?

I attend workshops, talk to trader friends and read books. Having a social network of trader friends is important.

Q. Where do you see your trading going in the next year or two?

Right now I’m developing some new trading systems that should be operative within a year’s time. I’m also working on opportunity detection tools that give me visual alerts if a setup is about to trigger.

Q. What kinds of life experiences have been the most helpful to your trading? Athletics? Your corporate experience?

That’s an interesting question. I used to think that trading was similar to athletics, but it’s not. Whereas athletics is an emotionally intense activity, trading is done best when emotional intensity is very low. My corporate career taught me how to be creative within a logical mind frame, so I guess that my professional career has helped me the most.

Q. Why is trading so difficult to learn?

Trading is a simple thing once you get past all the obstacles—but doing that can take years. When most people start trading, they are “unconscious incompetent.” As they acquire more trading knowledge, they become “conscious incompetent,” then “conscious competent.” This can be compared to somebody who learns to drive a car and just had some driving lessons. The most critical step toward consistently winning in trading is developing the ability to execute systems flawlessly (unconscious competence). Most people, including myself, are unaware of this progression, or else they grossly underestimate the time and effort it will take to advance through the process.

Q. Why do you teach other people your trading systems when you could stay home and make money just trading them?

This question implies that life’s purpose is all about money. I take great joy from teaching others and seeing them progress. I know how difficult it is to get started, and I know that I can save people a lot of time by pointing them in the right direction. I’m grateful to all the people who helped me, so I’m happy to transfer my know-how to others.

Thank you for your time, Gabriel. We look forward to seeing you on November 9 Forex Training Workshop.

Wednesday, October 10, 2012

Trading and Still Having a Real Life

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If any of you traders out there have every followed any of my teaching, been part of my forex coaching sessions, or used any of my stock indicator systems, then you know one of my main philosophies is:


If you’re a day trader, and enjoy the thrill of watching every tick of the market, then that’s fine. I personally do that myself sometimes, but I’m a “trading nerd.” But again, I only do that sometimes.

You see, I’ve been trading a long time… over three decades. And I remember a time when I was younger; I would come home from work, and go straight to my den and pour over charts till the wee hours of the morning. And these were the days before computers so I was plotting all these things with real charts and a magnifying glass.

It was brutal and took a toll on my quality of life. Now that life lesson was a driving force behind what I do today. So each course I develop, each student I coach, each piece of software I invent… I always have in the back of my mind: How will this make each trader’s life easier?

It’s one of the biggest myths out there that we traders need to be staring at computer screens until our eyes glaze over. It’s not needed. In fact, it might even be detrimental. Watching the ever-fluctuating markets can do a lot to someone’s psyche. So you see the market twitch up and down and what does that do? It becomes a huge temptation to over trade. Or a temptation to stay out of trade, or get into a trade that ultimately differs from where your trading plan and or trading methods or system tell you to be. So you see, staring at charts can be dangerous.

At the end of the day, you need to find a trading system that utilizes methods and tactics that fit within your trading plan. If you only have an hour to trade everyday, or heck, you only have 10 minutes, then that’s how your trading system should operate.

Enjoy your life. Take time to go golfing, fishing, spend extra time with your family… trading is fun, but so is living your life. With the right system, you can have both.

Click here to review Profits Run trading education and trade alert software.