Author: The INO.com Team

Money Management ... makes the all the difference in the world

Posted on by The INO.com Team

What a week!

Crude trades over $95 a barrel, gold hits new highs and Google breaks over $700 a share. On top of all that, the Fed cuts rates by a quarter point, giving the market what it wants, and stocks crater on Thursday.

So what's ahead ... more volatility?

"The past is the teacher of the future"
Old Hungarian Proverb

There is nothing new in the markets as financial history always repeats itself, which reminds me of one of my favorite market quotes. The quote is from former Fed chairman Alan Greenspan. The term he came up with is "Irrational exuberance" in a speech given at the American Enterprise Institute during the stock market boom of the 1990s. The phrase was interpreted by financial pundits as a typically cryptic warning that the market might be overvalued.

Although it is sometimes believed that Greenspan's comment was made near the height of the dot-com boom (and contributed to its downfall), it was actually said much earlier, in December 1996. Read more about it on Wikipedia.

The subject of todays blog posting is something you need more than ever in these volatile markets and that is money management.

In my previous Friday blog postings we discussed diversification and stops. These two disciplines are all part of your money management suite of tools. But there are two other elements that make up a successful money management strategy in my opinion.

The two missing elements I am talking about are and the importance of using FOCUS and DISCIPLINE.. You must have these two elements in your money management toolbox if you are going to succeed and make the kind of money that allows you to enjoy the good life.

Just imagine not having to worry about Fed actions, or stressing out about if some companies earnings is going to miss expectations.

Well, all that is possible with good money management. The tools we have discussed in our previous posts stops and diversification allow you the luxury of not worrying and stressing out over things you cannot control.

THE NUMBER ONE SECRET TO MONEY MANAGEMENT

All credit goes to the Oracle of Omaha, Warren Buffett for this secret. Mr Buffett who at 77 is a legend in the investment world. Here are Mr. Buffett two most important rules to investing.

Rule Number One: Never lose money.
Rule Number Two: Never forget Rule Number One.

If you follow this advice you will be very successful, perhaps like Mr. Buffett?

We were lucky enough to recently share some TV time with Mr. Buffett. You can watch it here.

Let's go back to our two topics today ... FOCUS and DISCIPLINE.

Here's an example of FOCUS.

Say you are bullish on a certain stock or futures market. You need to FOCUS on three key components. 1. Entry price. 2. Trade risk. 3. Profit potential.

Here's an example of DISCIPLINE.

This is what I believe is the difference between winners and losers in the market.

It can be all summonded up in one word DISCIPLINE!!!

Without DISCIPLINE the odds of being successfull in the market are against you.

Here's a simple recap of the four basic components that make up your money management game plan.

1. DIVERSIFICATION
2. STOPS
3. FOCUS
4. DISCIPLINE

Once you have mastered these four elements there is no doubt that you will be successful.

Next week The Friday Focus will take on the biggest hurdle most traders face and that is the importance of psychology in trading. Till then ... have a great weekend and a super profitable trading week.

Adam Hewison

Dow, NASDAQ and S&P all crater on good news

Posted on by The INO.com Team

When good news is bad news.

Hooray, hooray the Fed cut interest rates 25 basis point yesterday ... good news, right? This should have been good news for stocks so why did the markets crater? If the FED had cut by 50 basis points, would the market have fallen twice as far?

Here's a case of good news being bad news. When the market finally digest the Fed notes and saw that the odds where high that the FED was done cutting for the year, it said to itself OH, OH, no more getting the keys from the FED to take stocks for a ride.

Here's my take, and we have mentioned this before on this blog. The longs after a five year bull run are just tired. The technicals are beginning to break down and weaken.

MarketClub members should look at the MACD and see that several major indicies are rolling over but have not yet dropped into a full bear mode.

Here are the key levels we are watching very carefully ...

DOW: Major Support at 12,517

S&P: Major Support at 1,370

NASDAQ: Major Support at 2,386

We would go into an extreme bearish mode if these levels were to give way. Right now the indices are in a broad trading range that appers to have a negative bias.

As we have said before it's going to be a bumpy and interesting ride.

Watch the trade triangles for confirmation.

Good luck and stay tuned to this blog for updates.

Adam Hewison

Trick or Treat from the FED and Chairman Bernanke

Posted on by The INO.com Team

The markets are waiting, we are waiting, the world is waiting to see what the FED is going to do this afternoon.

Traders that I am hearing from are mixed in their opinions. The consensus seems to be that we will see a cut of 25 basis points.

What if the Fed cuts 25 basis points and the market does nothing, what then?? The markets particularly the DOW and the S&P 500 are all acting a little tired but have not turned down and entered into a negative phase. Today could change all that.

The bright spots and strength have all been on the NASDAQ with APPLE, GOOGLE and RIM acting as the juggernauts of the economy.

It's going to be a volatile day, so fasten your seat belts and get ready for a scary ride.

Stay safe,

Adam Hewison

Here's your Wednesday Lesson

Posted on by The INO.com Team

Traders,

If you're not yet trading with the trend, No worries, this video lesson will help.

It's been proven that it doesn't matter if you're day, swing, or position trading the key is to trade with the trend. Trend trading has been utilized for many years by professionals, intermediates, and novice traders alike who follow the trend with success. But why do they trade the trend and how do they find the trend?

The hardest part...Finding the Trend! The easiest part...Trading the Trend! Take a few minutes and look at this streaming video lesson titled, "Why to Trade the Trend and How to Find the Trend".

Why to Trade the Trend and How to Find the Trend

Diversification a major key to succesful trading

Posted on by The INO.com Team

Last week I promised you a blog on diversification so here it is.

Did you ever have your grandmother tell you not to put all of your eggs in one basket?

Well it turns out grandma was right. Grandma, knew a great deal about the power of diversification and how it reduces risk both in business and in trading.

IN BUSINESS ...

What if McDonalds only sold hamburgers, do you think they would still be competitive when the world is turning to healthier lifestyles. Now don't get me wrong every once in a while I like to chow down on a nice juicy hamburger. But I also like to eat healthy and so do a great many other people. McDonalds moved with the times and diversified into chicken wraps, salads and a whole host of other healthier food groups. In other words they diversified.

IN TRADING ...

It just doesn't make sense to trade just one market, there's just too much risk and too little opportunity in one market. A trader needs to stay flexible and at the same time be diversified.

Before we get into the meat and potatoes of market diversification let's take a look and see how the dictionary defines "diversification"

di·ver·si·fi·ca·tion

1. the act or process of diversifying; state of being diversified.
2. the act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous.

Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.


That's the official version of diversification. Now let's apply that to the markets. First off, we have to accept that the market can do only three things, it can go up, it can go down and it can go sideways.

Your portfolio on the other hand, can only move two ways. It can go up, or it can go down.

We all know the direction our portfolio should go, and we want to see it go in that direction with the least amount of risk. That's where diversification comes in.

 NUMBER ONE SECRET TO DIVERSIFICATION

Here is the number one secret to market diversification, spread the risk and trade in non correlating assets.

Here's an example of a non diversified portfolio.

Say you are bullish on Crude Oil and you buy a futures contract in crude, but what if the rest of your portfolio was full of energy stocks?

What you have created is one basket of eggs. In this case a basket of energy eggs. Your portfolio is dependent on one sector and that is energy. This is just too risky for the average investor. No matter how many stories you hear from the various experts saying that energy is going through the roof you don't bet the farm on one market ... ever.

You need to have as many non correlating asset classes as you can follow. This short video illustrates diversification perfectly.

The other key to diversification is cash. You don't have to be in all the markets everyday. Cash is a way of diversify ... Swiss Francs, Canadian Dollars, Euros, etc etc.

Here's an example of how a well diversified portfolio.

Stocks, bonds, futures and cash.

Out of those four asset classes, you have a multitude of choices. Stocks allow you to cover a broad spectrum of different domestic and international sectors. Bonds do the same thing, and the futures markets cover everything from raw commodities to financial instruments.

You can divide your portfolio into different percentages and allocate then to various asset classes. The more you divide into non correlated asset the less your risk will be.

Here's what I am suggesting. I call it the Will Rogers approach. Here Will Rogers was known for his famous quips.

"I'm more concerned about the return of my money than with the return on my money".

I guess Merrill Lynch should have remembered that when it had to write off 8.4 billion dollars and cause the firm to have it's first loss in 93 years. Diversification would have smoothed that disaster for Merrill, what got in their way was plain old fashioned greed.

The American humorist Will Rogers (1879 - 1935) had a special way of making a point. Here's another one of his insights about trading and investing.

"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it". -- Will Rogers

Will was right!

Only buy sectors when they are going up. When they turn down, get out and move into cash. Then look for another non correlating market sector for your portfolio that's moving up. For sophisticated traders you can even short different asset classes which is a way to turbo charge your returns.

Learning when a market is moving higher or lower is not as difficult as you might think. Take a look at how you can tell if your favorite market is going higher or lower here.

Yes, it takes time to analyze the markets and find winners, but the time of a buy and hold strategy is gone forever.

We are living in extraordinary times, never before have we had so many people living on the planet. Never before have we had so many major countries competing for an ever shrinking supply of raw commodities. Never before have we seen times like this that present both great opportunity and great risk.

Diversify ... spread your risk, don't be a Merrill. You can do well and thrive in the future with a well balanced and diversified portfolio.

Next week: Money management.

Have a great weekend and a super profitable trading week.


Adam Hewison