Category: General

What The Volatility in the Markets Taught Me in 2008

Posted on by The INO.com Team

Today's guest author is Maria Palma owner of www.FullyStocked.info. Maria is going to share what she learned from the volatile 2008 markets. After reading this article I reflected a bit on what I learned last year, and I have to say Maria seems to be right on point.
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2008 was a year full of ups and downs in the financial marketplace.  It seemed like every time I turned on the news, reporters were relaying some kind of financial catastrophe.  All of this bad news was enough to make ones hair fall out completely - that is, if you got caught up in all of the havoc.

There were many lessons to be learned in 2008, and this is what the volatility in the markets taught me:

1.  Stop reading the financial news every day.  Think about it - if you turned on the news every day and heard all these depressing stories of people losing their money, it can definitely mess with your psyche.  As someone who invests for the long term, listening to all these stories caused me to doubt my own investing strategy even though I was fully aware that this was just a temporary situation.  My philosophy when it comes to the financial markets has always been:  What goes down eventually comes back up.

2.  Don't put all of my eggs in one basket.  Heard that phrase before?  This was probably the biggest lesson that people learned in 2008.  I was hearing stories of people who invested all of their money in one mutual fund or put all of their savings in one bank, only to lose it all because of the unstable markets.  If there is one thing I've learned from my years of investing, it's not to depend on one institution to help me with my money.

On the same token, I've learned not to invest all of my money in the stock market.  There are many ways you can invest your money - there's real estate (with all the foreclosures taking place, it's a great time to buy), plus there are business ventures you can become involved with.  Not only do I invest in stocks, but I also have several businesses, and currently I'm looking at starting a REIT (Real Estate Investment Trust).

3.  Be selective about where and who I get my financial advice from.  There is a wealth of information out there (especially on the internet!) about how to trade, where to trade, what tools to use, etc.  There are many fast-talking financial advisers who will tell you to buy this or invest in this or that.  Just because they work for a big-name financial firm doesn't mean they know everything!  Some of these so-called advisors are only thinking about their own self-interests.  However, that's not to say that there are not advisors who are ethical, honest, and have their client's best interests at heart.

I've learned to go with my gut feeling when it comes taking someone else's financial advice.  I provide advice on my blog and it's based on my own investing experience.  I realize now that each person has their own financial goals, so their trading or investment strategy may be completely different than mine.  What works for me may not work for someone else.

Yes, I learned many financial lessons in 2008 and I'm sure each of you had your own lesson to learn as well.  If there's one piece of advice that I believe everyone should follow, it's this:  Educate yourself thoroughly on any type of investment you make and most of all...read the fine print!
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Maria Palma is the owner of www.FullyStocked.info, a blog that offers investing information for both the savvy investor and the beginner.

What Matters is Profit!

Posted on by The INO.com Team

Today's guest blogger is Craig Pritchard author of Trader Craig's Market Edge. Craig wrote about what drives him to enter and exit a trade. So without further delay, here's what really matters to Craig

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Prior to reading the little book titled The Adam Theory of Markets or What Matters is Profit by Welles Wilder, I had been consistently losing money trading.  Most of my efforts had been expended in trying to find the perfect method for predicting market movements.  I had spent a considerable sum on subscription services to a variety of well known trading gurus that claimed to have solved the riddle of the markets only to be disappointed time and again.  While I do not use the method described in the book, a story in the book helped changed my perspective on the markets.

In the beginning of the book, Mr. Wilder tells a tale about an aspiring trader who is attempting to explain to his young daughter what he is doing.  As he shows her his trading screen he tells her that he is buying because the market is going to go up.  He is certain of this because special numbers called the Azerhoff numbers are signaling that the market is going to go up.  After listening to his explanation, the young daughter replies, “but daddy, it looks like it’s going down to me." Frustrated, the aspiring trader tries to reassure his daughter that the Azerhoff numbers mean that the market will go up.  Again she responds, “It still looks like it’s going down to me."  Eventually, the frustrated trader exits the trade for a loss.

The point of the story, of course, is that all market indicators and theories are secondary to price and even a young child can look at the chart and see which way the price is going.  If we are long a market, we profit when we sell at a higher price than we bought, regardless of what the indicators or prognosticators say.  Ultimately, it is always price that determines our actions in one way or another.  Certainly, we can use indicators to help us anticipate, i.e. be prepared for, changes in trend, but the movement of price alone determines the trend.  By learning to see and follow the trend in price, we can come to accept what the market gives us without being overcome by the emotions of fear and greed.  Trading can then become an enjoyable and profitable experience.

The question arises as to what trend to trade.  The trend can be different on different time frames.  The approach that I have found that works the best is to look at three different time frames.  Two examples are Monthly and Weekly, Daily and Weekly, and Daily and Hourly.  The smallest time frame is the trading time frame.  When the higher two time frames are in agreement, we enter trades in the same direction on the smallest time frame.

Marketclub’s "Trade Triangle " Technology is a good example of a method that employs the above approach.  The Monthly trend is up when the market makes a 3 month high.  The Weekly trend is up when the market makes a 3 week high.  We enter long on the Daily time frame, i.e. on a specific day, when today’s price exceeds the high of the prior 3 weeks.

This same approach can be generalized to any number of trend following methods.  For example, moving averages, macd, swing points and volatility breakouts can all be used to identify the trend.  On Friday January 2, 2009, the major indexes closed above their 20 day 2.0 SD Bollinger bands giving an exit signal for short positions using a volatility system.

Currently, there is a great deal of speculation about the current Elliott wave count for the markets.  Many traders are increasing short positions in expectation of a final fifth wave down to new lows, but that may be a dangerous and costly position to take.  The Monthly trend is still down, but the Weekly and the Daily trends are up.  At the same time many market commentators have already declared an end to the bear market.  This, too, may be a dangerous and costly position to take given the direction of the Monthly trend.

Even though the market stance is neutral using the Monthly, Weekly, Daily time frames, we can still profit from a potential rally in January.  Since the Weekly and Daily time frames are now up as long as the market does not make a 3 week low and trades above the prior week’s low, the hourly time frame can now be used for entries and exits with a long bias.  Ideally, we should wait for a pullback that does not break the prior week’s low, and then enter long on the hourly chart on a breakout above the prior day’s high.  Trail a stop using a 3 hour low or a break of the prior day’s low with a view to exit at predetermined targets.  Remember to adjust your risk on the trade accordingly, and do not trade this method if you cannot watch the markets intraday.

In conclusion, speculation about potential market movements can help us realize possible outcomes and manage expectations, but we should only trade the price for profit and not opinions and expectations.  Short opportunities may come again soon if the Weekly trend turns down, but don’t bet on it just yet.

Best,

Craig Pritchard

www.tradercraig.blogspot.com

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The ideas and opinions expressed above are those of Criag Pritchard of "Tradercraig.blogspot.com" and do not necessarily reflect those of INO.com, MarketClub or staff members.

Why Do I Need A Trade Log?

Posted on by The INO.com Team

Today's post is by Alan Martin from Forex Calculator Online. I've known Alan for a while now, and I asked him give me a little insight into what he thinks makes a successful and disciplined trader. He responded with two words "Trade Log!" Be sure to take a look below at Alan's thoughts on the importance of recording your trades.

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Why do I need a trade log?

The Primary function of the Trade log is to save time. It’s a simple and effective tool and I use it every time I trade.

There is never enough emphasis placed on the importance of keeping good records. This is one of the essential ingredients that separates the successful, well disciplined trader from the ex-trader.

Every successful and well disciplined trader keeps a trade journal. Every aspect of each trade is logged. They record the technical data, the history, functionality of each trade, and what made them take that trade. Most importantly, they record how they felt as they went into, during and when they exited the trade.

All this information is essential to track performance, follow strategies, learn from mistakes and work out plans for ongoing improvement. It is an essential ingredient in a profitable trading tool kit.

As the old saying goes, “A blunt pencil will always remember 100% more than the sharpest mind."

Record keeping is considered time consuming and non-productive, especially if you’re just beginning and don’t know how to do it. It can be devastating to not track your performance. How are you ever going to know when you are improving?

A few words of wisdom:

The inability to enter a trade demonstrates a trader's lack of discipline. Either it’s a “go” for the trade or it’s a "no go." If a trader’s system has too many poorly defined areas, it should be changed. Trading should be mechanical; either the squares are filled-in, or its no trade. Sounds simple, but egos want to shine and show that their ideas are better than some mechanical system.

Also, many traders may be trading money that they can’t afford to lose. This puts even more pressure on the trader to not be wrong. Once should always say to themselves, "If I lost this... would it affect my lifestyle?" Not only that, a good system establishes a minimum account drawdown limit; it’s like setting a stop-loss on your trading account. If you hit a predetermined drawdown level, trading comes to a stop until real changes are made-either in the system or the trader’s mental/emotional outlook.

But just talking about these things is not enough. Most of us aren’t very good at giving ourselves a valid self-appraisal. What we need to do is establish a report card giving a grade not only to our system, but also no our emotions and mental discipline. A trader needs to establish procedural constraints and then learn how to match feelings and thoughts to the trading process.

Being able to deal with a losing trade is what separates successful traders from ex-traders. As a matter of fact, it has been shown many times that it’s not so much the system, as it is the trader’s ability to maintain the proper mental discipline and emotional understanding. This gives the seasoned trader the ability to take the higher ground. One of the intangible benefits of learning to become a successful trader is the fact that you usually become a much more honest and introspective person. You learn to honestly appraise your performance and probe your weaknesses. You learn to stay humble, focused and accepting of things you can’t control. All of these things do more than make just successful traders; they can make for success in life.

In conclusion, one of the most essential ingredients in a profitable trading tool kit is keeping accurate records of each trade logged in your journal.

Cheers,

Alan Martin

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Alan is the creator of Forex Calculator Online. If you enjoyed this post be sure to visit his site for more from Alan.

December Trader's Blog Contest Winner

Posted on by lindsay

There were 224 eligible entries for the December Trader’s Blog Contest. Thank you for everyone who participated. For those of you that answered Bulls, you were right.

The lucky winner of 6 seminars from our INO TV digital library was comment number 198…

Shelton W. of Greenbrier, Tennessee

Congrats Shelton, your discs will be shipped out today. Don’t forget to enter our January Trader’s Blog Contest sponsored by INO TV, where the question is, “Where will the DOW close at the end of Q1 2009?” We’ve had a lot of responses already, so it only takes a minute and a guess.

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Best,

The INO TV Team

Wall Street enjoys upbeat start to 2009

Posted on by The INO.com Team
From our media partner Associated Press.

Wall Street enjoys upbeat start to 2009

By TIM PARADIS

NEW YORK (AP) — Wall Street started the new year optimistically Friday as investors brushed off a weaker-than-expected report on manufacturing and sent stocks sharply higher. The Dow Jones Industrials jumped about 250 points and above 9,000.

The market wasn't spooked by the Institute for Supply Management's report that its manufacturing activity index fell to the lowest level in 28 years in December. The Street's cool reaction extends a pattern that began to emerge after the market touched multiyear lows on Nov. 20.

Economic data have been terrible for months and investors have shown little surprise even as some readings fell well short of economists' already low expectations. During past recessions, the market has recovered ahead of the economy by growing numb to a stream of poor data and looking for signs that the downturn isn't worsening.

The ISM, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December from 36.2 in November. Economists polled by Thomson Reuters had expected a reading of 35.5; a figure below 50 indicates contraction.

Wall Street's move higher comes amid light trading after the New Year's holiday. Modest volume can lend buoyancy to the market as upbeat buyers have reason to come out and those with less conviction stay home.

Investors will be looking to Monday's session, when volume is expected to be greater, as a better barometer of market sentiment for 2009. The final session of the week follows a terrible year for investors. The Dow fell 33.8 percent in 2008, its worst performance since 1931.

Still, the market's move higher was welcome.

"We like to see the markets shrug off the bad news. That typically is a sign that we're forming a bottom," said Eric Thorne, an investment adviser at Bryn Mawr Trust.

In late afternoon trading, the Dow rose 247.95, or 2.83 percent, to 9,024.34, its first move above 9,000 since Dec. 8.

Like the Dow, broader stock indicators also advanced for the third straight session. The Standard & Poor's 500 index rose 27.05 percent, or 2.99 percent, to 930.30, its highest level since No. 10. The Nasdaq composite index rose 50.25, or 3.19 percent, to 1,627.28.

The Russell 2000 index of smaller companies rose 7.06, or 1.41 percent, to 506.51.

Advancing issues outnumbered decliners by about 5 to 1 on the New York Stock Exchange, where volume came to a light 706.8 million shares.

Bond prices fell as investors took on riskier assets. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.42 percent from 2.22 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.09 percent from 0.08 percent Wednesday.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude rose $1.51 to $46.11 on the New York Mercantile Exchange.

Thorne contends 2009 could be a strong year for Wall Street because most investors are so shaken from the sell-off in 2008, which erased six years of gains in stocks. Market bottoms often emerge because investors are so pessimistic or because stocks seem incapable of making any sustained recovery.

"A bottom isn't formed in one day or even in one month but probably over several months," he said. "Expectations are extremely low for the economy, for corporate earnings and for the stock market itself."

From Nov. 20 to the end of 2008, the Dow advanced 16.2 percent, while the S&P 500 rose 20 percent.

"We're very confident that the $9 trillion that is in cash right now will look to find a home in better-performing assets," he said, referring to the amount of money invested in conservative but low-yielding areas like money market funds. Yields on safe investments like Treasurys have fallen to virtually nil as investors have clamored for safety and surrendered hopes of even earning a return on their money.

Todd Leone, managing director at Cowen & Co., cautioned against reading too much into Friday's advance and said the first full week of the new year should provide insight into investor sentiment for 2009.

"The first five days are usually very telling," Leone said. "I'm not sure we'll be up or down." He said an advance in stocks Friday wasn't a surprise as some investors start the year by wading into the market. He said selling is more likely to occur next week.

Investors had little corporate news to go on Friday other than the completion this week of some major banking acquisitions. Bank of America Corp. finalized its deal to acquire Merrill Lynch & Co. Wells Fargo & Co. closed its acquisition of Wachovia Corp., while PNC Financial Services Group Inc. bought National City Corp.

The dealmaking came after the mortgage and credit turmoil torpedoed bank's balance sheets and sent banks' stocks tumbling. In some cases, banks grappling with liquidity shortages and rising loan losses were forced to make deals to remain in business.

Next week brings a flurry of economic readings and potentially early comments from companies on their 2008 results and 2009 forecasts.

A Labor Department report next Friday on December employment is expected to draw attention. A month ago, Wall Street showed newfound resiliency in the face of a bad reading on what is typically the most important economic report of the month. Stocks initially sagged but finished with big gains Dec. 5 after the government reported that employers slashed a larger-than-expected 533,000 jobs in November. Investors were hoping the poor report would prompt Washington to take broader steps to shore up the economy.

"The employment numbers will almost undoubtedly be very ugly. What will be interesting to see is what the market's reaction will be to those numbers," said Thorne. "We're also very interested to see what the corporate earnings reporting season will be like."

Stocks overseas also began the new year with a rally. Britain's FTSE 100 rose 2.88 percent, Germany's DAX index jumped 3.39 percent, and France's CAC-40 increased 4.09 percent. Markets in Japan were closed for a holiday.