Trader’s Blog Contest for December
The contest couldn’t be any easier this month. Just answering the question and we’ll put you’re name in the hat to win the prize below.
So the question is…
“Will The First Trading Day of 2009 Be Controlled By The Bears or The Bulls?”
Prize
Winner will receive 6 workshops on learning, planning and researching trades from our authors in INO TV. These MP3s and digital PDF workbooks will be mailed to you courtesy of INO TV.
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Researching Your Trade -Linda Raschke |
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Should You Trade? - Bill Williams |
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Risk Reduction Through Good System Analysis & Diversification - Toby Crabel |
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Finding & Maintaining Your Personal Trading - Mark Douglas |
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Effective Learning - Mei Ping Yang |
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The Trader’s Battle Plan - Robert Deel |
How To Enter:
Comment on this post telling us about how you prepare for a trade and any suggestion you can offer other traders. There are no wrong answers. We just want to you to share your thoughts and stories with our other visitors.
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Rules
1. This contest is open until 11:59 PM on December 31st.
2. No wrong answers, any participation counts as an entry.
3. One entry per email address.
4. Winner will be picked by random integer software.
5. Winner will be contacted on Friday, January 2nd via email.
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Good luck!
Traders Toolbox: Money Management 4 of 4
This is the final portion of the Trader’s Toolbox: Money Management series. This post will recap the 5 main rules discussed. If you missed our previous post please click here for : Part 1, Part 2 or Part 3.
♦ Setting a goal - Decide what your trading objective is (quick profit and steady return) as well as your risk tolerance level
♦Diversification - If possible, allocate your finances between different products to avert the danger of getting wiped out in a single market. Don’t go overboard, though; think in terms of three to five unrelated instruments. Stick to markets you know, rather than risking the unknown for the sake of diversification.
♦Deciding how much money to risk - The total amount you risk at a given time in a particular market group or on a particular trade should be based on a a percentage of your total trading equity. Exceeding your allocation parameters can result in overexposure.
♦Use of stop orders - The name of the game is preservation of capital. Placing conservative stops to cut your losses will ensure you are around to trade another day. Stick to the limits determined by your equity allocation percentages.
30 years ago I learned this market secret
I can honestly say that 30 years ago I learned how to trade the markets in the pits of Chicago.
It was there, in one of those sweaty, tumultuous, in your face trading pits, that I learned one of the most valuable trading secrets in the world.
This one trading secret opened my eyes to why things happen in the markets.
This trading secret, which is over 800 years old, is one of the most monumental mathematical discoveries of all time.
The publication in 1202 of the “The Book of Calculation” was never meant to be a road map to success in the markets. However, it turned out to be an extraordinary blueprint for how modern day markets work.
The number sequences contained in this amazing 800 year old book, is like having a virtual DNA for every stock, futures and foreign exchange market.
No one knows for sure why these number sequences work. Some traders believe them to be mystical, others, like myself prefer to call them one of life’s little mysteries.
I have been using this sequence of numbers to trade the markets for over 30 years. I have to say that after all this time, I am still amazed that these numbers still work!
My new 8 minute educational trading video that remains true to core principles of the “The Book of Calculation.” Show you step by step, exactly how you can benefit from using this trading secret.
Once you view the video and absorb this valuable educational trading lesson, you can apply the exact same principles you learn to your own trading. What could be better than that.
We do not require you to register to view this video.
Discover and benefit today, from what I learned over 30 years ago in the trading pits of Chicago.
Every success.
Adam Hewison
President, INO.com.
Be Our Guest
We welcome syndication of our content in your blog or on your trading website. Please feel free to use our content with attribution - more details here to syndicate our content
“Saturday Seminars” - Trading on Expectations: Pinpointing Trading Ranges, Trends & Reversals
One of the most important factors affecting the market’s supply-and-demand equation (i.e., selling and buying transactions in the market) is the expectations of the participants — expectations about where prices are headed, fundamental reports and the market’s response to news releases.
The Federal Reserve Board recently adopted an expectations model of the markets for economic forecasting, and now you can apply the same approach to your trading. In testimony before the Senate Banking Committee in 1997, Federal Reserve Chairman Alan Greenspan described the expectations model this way: “Participants in the financial markets are susceptible to waves of optimism. Excessive optimism sows the seed of its own reversal. When unwarranted expectations are ultimately not realized, the unwinding of these excesses can act to amplify a downturn, much the way they can amplify the upswing.” This session teaches you how to identify and take advantage of these waves (trends) of optimism and pessimism and their reversals. You will also learn how Brendan combines elements of the economic science used in the Chicago Board of Trade’s Market Profile and the Nobel Prize-winning theories of expectations (as expressed in sentiment surveys) to develop a method for analyzing and trading the futures markets.
PDF WorkbookBrendan Moynihan, a foreign exchange trader at First American National Bank (now AmSouth) in Nashville, Tennessee. During his ten-year career in the investment business, he has been a bond market and currency market analyst, a commodity trader and a cash government bond trader. He has also been a hedging and trading consultant for banks and brokerage firms.
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Saturday Seminars are just a taste of the power of INO TV. The web’s only online video and audio library for trading education. So watch four videos in our free version of INO TV click here.
Traders Toolbox: Money Management Part 3 of 4
Crucial but often overlooked, money management practices can mean the difference between winning and losing in the market.
-Placing Stop Order- It’s helpful to think of these by their more formal name, stop-loss orders, because that is what they are designed to do – stop the loss of money. Stop orders are offsetting orders placed away from the market to liquidate losing positions before they become unsustainable.
Placing stop orders is more of an art than a science, but adhering to money management rules can optimize their effectiveness. Stops can be placed using a number of different approaches; by determining the exact dollar amount a trader wishes to risk on a single trade; as a percentage of total equity; or by applying technical indicators.
Realistically, methods may overlap, and you’ll have a certain amount of leeway in deciding where to put a
stop, but always be wary of straying too far from the basic asset allocation parameters established earlier. For example, if a trader is long one S&P 500 future at 450.00, a based on his total equity he has a $2,500 to risk on the position, he might place a sell stop at 445.00, which would take him out of the market with a $2,500 loss ($500 per full index point, per contract). Buss after consulting his charts, he discovers strong support at the 444.55, a level he believes if broken will trigger a major break. If this level is not broken, the trader believes, that rally will continue. So he might consider putting a stop at 444.55 to avoid being stopped out prematurely. Although he’s risking an extra $225, he’s staying close to his money allocation percentages and modifying his system to take advantage of additional market information.
Of course, the size of a position will affect the placement of stops. The larger the position, the loser the stop has to be to keep the loss within the established risk level. Also consider market volatility. You run a greater risk of getting stopped out in choppy, “noisy” markets, depending on how far away stops are placed. This can cause unwanted liquidation when the market is actually moving your direction.
Now suppose our hypothetical trader, who started with $50,000, is now looking at a $10,000 gain (which happened to be his goal for this trade) on a long position. What should he do? That depends entirely on his trading goals. He can take the $10,000 profit and, assuming he leaves the money in his trading account, turn to other trading opportunities. If he desires, he can increase the size of his trades proportionally to his increase in trading equity. This would give him the potential to earn greater profits, with the accompanying risk of greater losses.
He also could choose to keep the size of his trades identical to what they were before he made his initial profit, thus minimizing his risk (as he would be committing a smaller percentage of his total equity to his trades) but at the same time bypassing the chance for larger profits. If his winning positions had consisted of more than one contract and he believed the market was still in an uptrend, he could opt to take his profits immediately on some of the trades, while leaving the other positions open to gain even more. He then could limit his risk on these remaining trades by entering a stop order at a level that would keep him within his determined level of risk, as well as protect his profits. He does run the risk of giving back some of his money if he is stopped out, but counters that with the potential for even larger gains if the market continues in his direction.
Good money management practices dictate stop orders be placed at levels that minimize loss; they should never be moved farther away form the original position. You should accept small losses, understanding that preservation of capital will in the long run keep you in the market long enough to profit from the wining trades that make up for the losers.
Trading in the real world almost never seems to go as smoothly as it does on paper, mainly because paper trading typically never figures in such real world factors as commission, fees and slippage. “Slippage” refers to unanticipated loss of equity does to poor fills (especially on stops) that can result from extreme market conditions or human error. Factoring these elements into your overall money management program can help create a more realistic trading scenario, and reduce stress and disappointment when gains do not seem to be as large as they should be.
-One Final Note- Do your money management homework before you start trading. This helps you decide what to trade and how to trade it. On paper, money management sounds so obvious and based on common sense that its significantly overlooked. The challenge is to apply its principles in practice. Without money management, even the most astute market prognosticator may find himself caught in a downward trading spiral, right on the trend, but wrong on the money.
Using Option Spread to Reduce Risk
Happy Thanksgiving! I hope you spend this time with family and friends enjoying their company and eating delicious food! Today I’ve asked Behrouz Fallahi from http://markettime.blogspot.com to come and keep us on the educational track and teach us a bit about how to use option spreads to reduce risk.
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Many market participants are conditioned to think of options as instruments of gambling and undue risk. In my opinion options should be regarded as what they really are: instruments of market participation. Like any other tool, it is the way we use them that can make them help, or harm us.
I sometimes use options instead of buying or shorting the underlying securities. As we know, options come with an expiry date, and a time premium that shrinks ever so faster as we get closer to expiration. So, timing is important. Also, it is important that one chooses an expiry date that would give enough time for the trade to play out.
Following is a trade I did a while back using put spreads to short the Biotech Holders ETF (BBH). I will use a hypothetical position size of 10 contract for simplicity of calculations but that is not the size of the actual position that I had.
On August 14, 2008, a TV commentator’s remark on the biotech sector being hot and attracting funds caught my attention. I am a strong believer that when I hear something on TV, the story has already run its course. Not that financial pundits mean to deceive us, just that they, or at least most of them, pay attention to things like most of the rest of us - well past the half way mark if they are half good at what they do, right at the end if they are not.
A look at the BBH chart got me interested on the short side.
I noticed a few things
1. Price had a huge gap up in mid July
2. It followed through by another, smaller gap up, which was quickly reversed by a gap down, forming an Island Reversal.
3. The island reversal was ignored by bulls and price rose, but in a very tight slanted channel
4. The latest rise on the chart was accompanied by diminishing momentum, and volume
I liked what I saw for a short and decided to keep an eye on it.
My first thought was to see if I could find a leveraged short ETF on the Biotech sector. I could not find any. I am a member of a very active community of traders. I posted a question to see if anyone would aware of a Biotech short ETF. Instead of a simple Yes/No answer, I received detailed dissertations why it would be a bad idea to short Biotechs. This was my second contrary confirmation that I had a good shot on the short side. Not having been able to find an ETF to do the short, I decided to use put options.
A few days later, I got what I wanted
1. The rising channel broke
2. Stochastics gave a sell signal
3. Negative momentum divergences in place
4. Longer term momentum, at the top of the chart, showed signs of rolling over
Things are seldom perfect
1. Volume was lacking
2. price was on a first run out of a long term base indicating possibility of a mere pullback and not a total breakdown
3. Longer term MAs were pointing up
I decided to go on with the trade and buy some puts on BBH. But what puts? To decide on a strike, I first tried to come up with some target areas if the short would actually work.
1. There was the huge gap in 183-190 area
2. There was the top of rectangular base at 180 (that base had been 2+ years in the making)
3. 50% retracement of the up move sat right on the resistance line at 180
4. 32% retracement of the up move was somewhere in the 183-190 gap
I thought if I could get lucky, 180-185 area might define a drop target.
What option duration? Trying to give the trade a bit of time, I decided to buy Oct 185 puts. Before placing an order I defined on my exit rules:
1. Buy, sell, stop decisions were to be primarily taken based on price action of the underlying security and not the option price
2. If options were more than 1/3 in loss, the position would be closed.
For 10 Oct 185 puts at 1.25, I would have to pay 125 dollars a contract or 1250 dollars total. That would be all I could ever lose; if I could get to exercise my rules, I would actually lose 1/3 of that.
It so happened that the channel break signal that I took was a good one, and BBH started on its merry way down, all the way to this chart of Sep 4, 2008
The puts that I had could now be sold for 2.20 for a net profit of 220 - 125 = 95 dollars a contract or 95 / 125 = 76%.
But, conservative and risk averse as I am, I still am a greedy trader. This chart looked like it was rolling over on a weekly basis. So I decided to do something different.
1. I would sell 30% of the position and take some profit
2. I would lay a spread against the remaining 70%
I could sell 3 of my puts for 3 * 2.20 = 660 dollars, bringing my cost down to 1250 - 660 = 590 dollars for remaining 7 contracts = 90.7 dollars per contract.
I could now sell 7 Oct 180 puts for 1.25 or 125 dollars a contract = 7 * 1.25 = 875 dollars.
So I would be out 1250 - 660 = 590 dollars on 7 Oct 185 puts
I would get 7 * 125 = 875 dollars from the sell of the Oct 180 puts.
That would give me a net profit of 875 - 590 = 285 dollars, or 285 / 1250 (original investment) = 22%
Not as good as 70% but still decent, and I was still in the game, free of cost.
So what could happen from then till Oct expiration day if I did nothing?
1. BBH could stay above 185, and all puts would expire useless. Then I would make 22%
2. BBH could drop below 180, then I would be put BBH shares at 180, which I would sell at 185 using my higher puts and would make 500 dollars a contract on top of what I had already made (best possible outcome)
3. BBH could stay between 180 and 185 at price x, then 180 puts would expire, and my 185 puts would be worth (185 – x) * 100 dollars per contract + what I had already made
4. A disaster could happen and all contracts could be declared void, I would still make 22%, that is, if the disaster did not adversely affect my bank.
This is a recent chart of BBH showing what would happen if I had, against all technical signs, followed the pundit on TV, or the traders on the board I mentioned above.
A combination of basic chart reading techniques, decent timing, and risk management using options can produce good returns against well-defined, limited risk.
About the author:
Behrouz Fallahi is an independent market participant who keeps an active blog at http://markettime.blogspot.com.
Clean Tech: Complex Field, Simple Story
I’d like everyone to welcome back John Rubino from DollarCollapse.com. I’ve been a visitor to his site for a while now and it’s become clear that he’s passionate and knowledgeable about the subject of Clean Tech. So read his article below and ask him any questions you may have. Oh, be sure and check out his book, it’s a must read!
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Imagine, for a minute, that you’re Barack Obama. You’ve just spent two years running a non-stop, highly-successful presidential campaign. Now, when a normal person would be expect a well-deserved month on some quiet beach, the world is clamoring for a plan to stop the global economy from imploding. You’re not even moved into the White House and the weight of the world is on your shoulders.
Luckily, in formulating your plan you have a couple of advantages. First, with the federal deficit already projected to top $1 trillion in 2009, no one could care less if your proposals are expensive. Conventional wisdom says they SHOULD be expensive because government spending is the only thing with a positive arc these days. So you’re free to indulge your inner FDR and talk about a “New, New Deal” without fear of right wing ridicule. Second, a new generation of clean technologies is just now coming to market with the potential to solve some festering problems. Solar, wind, smart grid and the rest can replace foreign oil with locally produced (or conserved, same thing) power. They create jobs in the U.S., while depriving rouge oil producers like Russia and Venezuela of the means to make trouble. And they potentially fix global warming.
So your grand economic plan turns out to be something you can sketch out on a napkin: Borrow trillions of dollars and invest it in clean tech. You get jobs, geopolitical advantage, a cleaner environment, and an aura of supreme coolness, all with the stroke of a pen. And that’s exactly what soon-to-be president Obama announced last week, to the apparent joy of the markets: Friday and Monday saw the biggest two-day pop since 1987.
For investors, this sudden clarity in the financial landscape comes at an extraordinarily good time, since clean tech stocks have been absolutely whacked in the general bear market. They’ve popped a bit lately but for the most part are still down more than half from their oil-crisis euphoria highs. They are, in short, an investment thesis with both short and long term appeal. What they’re not is simple. This sector contains many different industries with radically different prospects. Some work today, some will work in a couple of years, and some will never work. So even with a nice stiff government spending tailwind, some clean technologies are more timely than others. Here are three to get you started:
Solar
Over the past decade solar cell efficiency (i.e. their ability to turn a given amount of light into electricity) has risen steadily while production costs have fallen. Now the best solar panels, when bolted onto an Arizona or California roof, generate power that’s competitive with the cost of electricity delivered from distant coal fired plants. This “grid parity” will make solar an attractive addition to most sunny-clime homes and businesses over the coming decade, giving the industry all-but-guaranteed double-digit growth. The question for investors is how to play the bleeding edge boom/bust cycle: During the recent oil crisis, solar power demand soared, causing a shortage of polysilicon, the industry’s main raw material. So everyone with any connection to the business built a polysilicon plant, and now there’s a glut. This is sending prices down, which is good for the solar cell makers. At the same time, the credit crunch is slowing demand growth for solar, which will cause a lot of marginal players to fail. AND several new versions of “thin film” solar are hitting the market, with potentially decisive advantages over traditional silicon. It’s messy to say the least. So…buy the leaders, which have strong balances sheets and in-demand technology. That would be First Solar (FSLR), Energy Conversion Devices (ENER), and SunPower (SPWRA), all of which trade on U.S. exchanges, and Q-Cells, which trades on the Frankfurt exchange as QCEG.
Wind
Wind turbines have gotten so big and so efficient that they’re competitive with utility scale coal and gas fired plants. Wind farms are going up all over the world, onshore and off, and by-and-large the technology is living up to its billing. The credit crunch is causing some projects to be cancelled, but since the makers of turbines and related gear were facing three-year backlogs at the height of last year’s mania, a slowdown will have little effect, other than to shorten the backlog. The major wind companies will, as a result, continue to generate 25% or so annual growth. Most of the major turbine makers are headquartered in Europe and trade on foreign exchanges. Among them: Vestas Wind Systems (VWE.CO — Copenhagen), Suzlon Energy (SUZL — Bombay) and Hansen Transmissions (HSNT — London).
Smart Grid
One of the Obama plan’s goals is to upgrade today’s aging electrical grid by installing high-capacity lines to ship power from wind farms to cities and adding gear to homes and businesses that let utilities and their customers manage and conserve power. This is known as the smart grid, and the opportunities are absolutely huge, since we’re starting with a really dumb grid. Some leaders in this field: Itron (ITRI), Echelon (ELON), American Superconductor (AMSC).
For Future Reference
Other clean technologies like biofuels, electric cars, and fuel cells are a bit further from the market right now. So don’t allocate much capital to them in the short run, but do follow their progress. Sometime in the next few years amazing news will start to filter out of these niches, both of game-changing technical results and promising stocks.
John Rubino
Turkeys, Trillions and Thanksgiving
Have you ever built or remodeled a house? If you have, then you know that it always takes longer and cost twice as much as you first estimated. This is exactly the position that the US government has put itself in, only this time the house is the whole country. Now we have to gut the country and totally redo everything. It’s likely to take twice as much time and cost US taxpayers twice as much money to get out of this recession.
Do you know how many zeros there are in a trillion dollars? I really didn’t know myself, as that is way above my pay scale. So, I looked it up on Google and there are 12 zeros behind the 1. When this mess is all over, we will be lucky if the government doesn’t spend 5 trillion dollars (5,000,000,000,000) to get everything back to some form of normalcy in the US markets.
We are continually seeing new people being trotted out in front of the cameras and microphone saying that 
this bailout is going to cost $700 billion and something else is going to cost $350 billion. I have a deep suspicion that they have no clue and no belief in what they are saying or doing. It’s also amazing to me that the people that got us into this mess in the first place on now in charge of getting us out of this mess. This does not seem like a very smart idea to me.
One of the most interesting things about the markets is that they never tell you when a bottom is in place until much later. I think that the many economic problems that are currently sitting on the back burner, will warrant this market to continue its slide to the downside. If you haven’t seen my video, “How Low Can The Dow Go,” I recommend that you check it out.
The technical outlook for the stock market remains negative in my opinion. There’s a great deal of overhead resistance in this market which leads me to believe we will still see further downside erosion. Unlike a bull market that constantly needs to have positive inputs like earnings and positive outlooks, a bear market simply can fall on its own weight.
One thing we rely on to tell us when the market switches gears from a negative to a positive trend is our “Trade Triangle” technology. Presently all of our “Trade Triangles” are in a negative mode for all the indices, and show little or no signs of turning up.
So what’s an investor to do?
Do you buy and hold because it looks cheap? That is not the way I believe you want to trade this market. The closest parallel we have to this market is the crash of 1929 and the bear market that lasted into the early ’30s. We’ve only been in this crisis mode for a little over a year and I believe we have a way to go before the recovery begins.
We still have a downside projection for the DOW at 6,600 and we see little or no reason to change that 
technical target at this time.
Make no mistake about it, these are difficult times for many people, and many people will lose their jobs before business and the markets pick up. There’s still the mess with General Motors (NYSE_GM), Ford (NYSE_F) and Chrysler to take care of. How much is that going to cost? In my opinion, the auto industry has been in decline and denial since the ’70s, and any money that is given to them is like throwing money down a rat hole unless there is a major new business plan and a severe downsizing of those industries.
No matter what rough times lay ahead, keep the faith, keep your head down and the computer on, because there are some great trading opportunities that I know will be coming up soon in the marketplace.
From all of our staff both at INO.com and MarketClub, we wish you success in the future. To all of our American friends and clients, we wish you a very Happy Thanksgiving. We still have a lot to be thankful for in this world.
Adam Hewison
President, INO.com
Co-creator, MarketClub
Put the Trader’s Blog widget on your website for free. Details here.
Something to remember in times like these.
Bad Trades
A bad trade is like a dead fish: The longer you keep it, the worse it stinks.
Good Trades
When a trade is making money, the market is telling them they are right and to let the position ride.
Don’t ever do this …
Winners don’t add to, or “average”, losing positions. They dump the trade and go looking for a new opportunity. Successful investors may add to the winning trades. When ahead, they press their advantage while remembering that at any time the market can turn on them and prove them wrong.
In trading keep your mind clear and do not get emotional about a trade. Remember you are not married to a stock rather you are in the dating game.
Learn more about common sense trading.
Adam Hewison
Co-founder of MarketClub
Is gold the last store of value?
Is gold the last store of value?
It has been a difficult time for gold bugs for the past two months as gold has been trapped in a broad trading range which made it seem insulated and immune to all of the financial chaos around it. Today’s action on Friday the 21st, put all of that in action to rest as gold soared to trade over the $800 in a matter of hours. This may be the move we’ve been looking for and coming from a two-month base, it seems large enough to propel this market higher.
I have just finished a new video on gold that goes into some depth and shows you potential upside targets for this market. The video can be played on any computer and does not need any special plug-in. It is available free of charge from MarketClub as part of our ongoing educational outreach program. Our goal is to help traders improved the timing and trade selection in a scientific way using tools that are real world tested and have stood the test of time.
Enjoy the video,
Adam Hewison
President, INO.com
Co-creator, MarketClub
