Articles
Forex 1-2-3 Method
Forex 1-2-3 Method - This particular technique has been around for a long time and I first saw it used in the futures market. Since then I have seen traders using it on just about every market and when applied well, can give amazingly accurate entry levels.
Pivot Point
Pivot Point - You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations. Plus we give you a free Pivot Point Calculator !
Bollinger Bands Report
Here’s a great report on using the Bollinger Bands indicator. Bollinger Bands take advantage of price action and volatility to create a picture that helps define the highs and lows of the market and can even identify reversals within the market.
If you have ever wanted to trade using Bollinger Bands then this report is worth its weight in Gold. Not only will you learn some new ways to use Bollinger Bands but there is also a video and a .pdf version to download as well that shows you how you can trade with them.
FOREX: Exiting positions at a right time
The presented article covers one of the most important (in author’s opinion) aspects of trading in general and Forex trading in particular - managing of orders and positions. This includes choosing entry points, making decisions about exit points, stop-loss and take-profit of the trader. I hope this article will help new traders, who just began to work with Forex, and also to experienced traders who trade regularly and regularly make or loose their money to the market.
When I started to trade Forex and made my first big losses and profits I began to notice when very important thing about the whole trading process. While the right time to enter a position was rarely a problem for myself (nearly 80% of all my open positions had gone into the "green" profit zone), the problem was hidden in the determining the right exit point for that position. Not only was it important to cut my risk on the potential losses with stop-loss orders, but to limit my greediness and take profit when I can take it and make it as high as I can.
There are many known guidelines and ways to enter a right position at a right time - like major economic news releases, global world events, technical indicators combinations, etc. But while the entering into a position is optional and trade can decide to miss as many good/bad entry point moments as they wish, this is untrue if we talk about exiting a position. Margin trading makes it impossible to wait too long with an open position. More than that, every open position in a certain way limits trader’s ability to trade.
Choosing the good exit points for positions could be an easy task if only the Forex market wasn’t so chaotic and volatile. In my opinion (backed by my trading experience) exit orders for every position should be toggled constantly with time and as the new market data (technical and fundamental) appear.
Let’s say, you took a short position on EUR/USD at 1.2563, at the time you are taking this position the support/resistance level is 1.2500/1.2620. You set your stop-loss order to 1.2625 and your take-profit order to 1.2505. So now, this position can be considered as an intraday or 2-3 days term position.
This means that you must close it before it’s "term" is over, or it will become a very unpredictable position (because market will differ greatly from what it was at the time you have entered this position). After the position is taken and initial exit orders are set, you need to follow the market events and technical indicators to adjust your exit orders. The most important rule is to tighten the loss/profit limit as time goes by. Usually if I take a middle term position (2-4 days) I try to lower the stop and target order by 10-25 pips every day.
I also monitor global events, trying to lower my stop-losses when very important news can hurt my position. If the profit is already quite high, I try to move my stop-loss the entry point, making a sure-win position. The main idea here is to find an equilibrium point between greed and caution. But as your position gets older the profit should be more limited and losses cut. Also, trader should always remember that if the market began to act unexpectedly, they need to be even more cautious with exit order, even if the position is still showing profits.
Every trader has their own trading strategy and habits. I hope this article will make its readers think about such an important aspect of trading as the exit orders and this will only improve their trading results.
by Andrey Moraru
The Properties Of Price Movement
You might look at the stock prices at the bottom of your television screen or, if you are trading currencies in the forex market, you might look at the exchange rates go up and down your computer screen.
Prices move and you wonder whether their behaviour means something. Could the market be sending out signals that you can use to make your decisions? How, exactly, are you going to study the market?
For anybody to make money from the market, they must have a way of studying it. There are predominantly two approaches: fundamental and technical.
Fundamental analysis focuses on value but this is the subject of another article. Technical analysis, on the other hand, focuses on price and its movement.
The movement of price has the following properties which traders can study to aid in their decisions:
1. Trend - its persistence to move in one direction,
2. Volatility - the magnitude of its fluctuations on a periodic basis,
3. Momentum - the rate of its acceleration and deceleration,
4. Cycle - its tendency to move in cyclical patterns, most especially in the futures market,
5. Market Strength - the number of transactions supporting its movements,
6. Support and Resistance - its tendency to rise or fall to a certain level and then reverse, repeatedly.
Analysts, using the technical approach of analysing the markets, have developed their own set of indicators, different to those used by fundamental analysts. These indicators are used to measure the properties of price movement.
Fortunately for modern-day traders like you, you do not have to devise your own tools. You just need to learn how they work and how to use them.
About The Author:
Marquez Comelab is the author of the book: The Part-Time Currency Trader. It is a guide for men and women interested in trading currencies in the forex market. Discusses analysis, tools, indicators, trading systems, strategies, discipline and psychology. See: http://marquezcomelab.com
Too Many Strategies, But Still Frustrated?
It is not too long ago when veteran traders used to draw trend lines using pencil and paper. Market data was sent by physical mail to them and there was no computer and trading desk. Were they really not able to perform by not using super analytical charting platforms? Were they all losers?
I bet they were not only doing great, but compared to my fellow traders (Including me) they were absolutely sophisticated traders. I don’t want to undermine anyone as we have many legend traders and hundreds of good traders who actually make money around the globe on daily basis.
My argument is merely pointed at those traders who think that broken accounts is a result of them not really having the best strategy to trade in a safe and secure manner while at the same time having a one year outlook for reaching 1 million dollar, through a 10000 buck trading account.
Where a trading strategy is introduced as a reliable method of making money for traders, there are some questions that must be asked, to evaluate the accuracy of the given strategy:
- Is it a trend or a range market based strategy?
- If it works as a trend based strategy, what can the strategy offer to trade around range markets, and vice versa for the range market based strategy?
- Is it a day trading strategy or planned to signal longer term trading signals?
- If it is an Intraday trading strategy, how many hours are required and when exactly should I sit down and watch the screen?
- If it is a long term strategy, what is the estimated possible drawdown in pips?
- Is there any historical performance of trading using the given strategy in real accounts and if the answer is "YES" for how long? (don’t rely on less than one year)
- Are there any money & risk management rules attached that are specifically tested on this particular strategy?
- What is the average/highest/lowest risk to award ratio of the last year’s trades?
- Is there anyone who has used the strategy on a real account? (Be aware of marketing tactics and ask someone who is honest).
- What is the outcome of the trades for the above mentioned trader? Even if positive, don’t necessarily trust that exact approach for yourself, because one cannot fit a common strategy with the same characteristics to every trader. In this case you need to test it yourself.
- Ask the developer about the psychological pressures that may come upon you while using that strategy on real accounts (We recommend to ask your mentor to analyze the strategy)
- Does it have an Exit and Stop Loss rule for different market situations?
- Ask the developer if you can get back to him occasionally to ask questions about some points that you don’t really understand (don’t make it 100 times a week cause he/she won’t sell any strategy to you).
However, I know a couple of guys who experienced real damage and disappointment where they tried to believe the strategy given to them from the first day. So I am being serious when I say don’t ever try to apply a new strategy on your real account, unless you have met an expert and he has given you the green light, or if you have just passed one year of continuous testing.
Final Words:
You may ask for how long? One year… it’s too much…I can’t wait…!! Well then you can try it, but count on it as a gamble…You know the gamble…Too many jack pots, nothing Hot Shots.
Let science make you wealthy step by step. Don’t ever think you are smarter than any other trader because no one knows what is going to happen next. So it’s better to be next to those wise traders who win, because they are disciplined and have spent a long time practicing before doing anything real on their money. Try to admit it if you are not sure enough about your ability, and try to solve the problems with patience and remember it is worth it if you make that million dollars three or even five years later, instead of losing what you got from hard work within just a couple of days.
Also, not to forget, forward any questions you might have on this article to my email address s.a.ghafari@iftc.ir and I will try to respond as soon as possible.
S.A Ghafari
FX Analyst
s.a.ghafari@iftc.ir
http://www.iftc.ir
The Sneaky Way To Managing Losses In Your Forex Trading
One of the cardinal rules of Forex trading is to keep your losses small. With small Forex trading losses, you can outlast those times the market moves against you, and be well positioned for when the trend turns around. The proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position. The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade. With your maximum loss set as a small percentage of your Forex trading float, a string of losses won`t stop you from trading. Unlike the 95% of Forex traders out there who lose money because they haven`t applied good money management rules to their Forex trading system, you will be far down the road to success with this money management rule.
What happens if you don`t set a maximum loss? Let`s look at an example. If I had a Forex trading float of $1000, and I began trading with $100 a trade, it would be reasonable to experience three losses in a row. This would reduce my Forex trading capital to $700. What do you think those 95% of traders say at this time? They would reason, "Well, I`ve already had three losses in a row. So I`m really due for a win now."
They would decide they`re going to bet $300 on the next trade because they think they have a higher chance of winning.
If that trader did bet $300 dollars on the next trade because they thought they were going to win, their capital could be reduced to $400 dollars. Their chances of making money now are very slim. They would need to make 150% on their next trade just to break even. If they had set their maximum loss, and stuck to that decision, they would not be in this position.
Here`s a perfect illustration why most people lose money in the Forex trading market. Let`s start out with another $1,000 float, and begin our Forex trading with $250. After only three losses in a row, we`ve lost $750, and our capital has been reduced to $250. Effectively, we must make 300% return on the next trade and that will allow us to break even.
In both of these cases, the reason for failure was because the trader risked too much, and didn`t apply good money management. Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits. With your money management rules in place, in your Forex trading system, you will always be able to do this.
by David Jenyns
http://www.earnforex.com
http://earnforex.blogspot.com
Learn to think independently by downloading the Independent Investor eBook, FREE!
Hi there,
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The Independent Investor eBook will show you the simple beauty of the true relationships among financial markets, the economy, and human psychology. The hard facts and price charts in this eBook challenge conventional beliefs and offer explanations for market behaviors that have always been considered “inexplicable.”
Normally, you’d pay over $100 for the reports contained in the Independent Investor eBook, but today you can download them free.
Don’t get caught running with the herd – learn to think independently by downloading the Independent Investor eBook FREE!
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TradeJuice.com
Subprime’s New Song: The Worst Is Yet To Come
Hi all,
We’ve just posted the latest article from the Elliot Wave International group about the subprime mortgage problems affecting the U.S. and European banks to our site. To check it out visit the link below:
http://www.tradejuice.com/elliot-wave/subprimes-new-song.html
Hunter Roberts
TradeJuice.com
FX site Looking Good
It seems like every one is talking about Marks Forex , even some of the ‘Big Boys’ are taking notice! And I see that AC-Markets have even started contributing to the offerings of this great forex resource.
I thought I would throw in a few of the ones that I have had a look at.
Forex Trading Examples - Forex Trading Examples where the potential for profit is seldom greater than the potential for loss in foreign exchange trading.
Types of Forex Orders - Forex Order types like market orders, limit orders, stop orders, oco are explained with examples.
Margin trading - Margin trading - Trading on a margined basis in foreign exchange is not a complicated concept as some may make it out to be.
Calculating Profit and Loss - Calculating Profit and Loss enables traders to track their profit and loss tick by tick as the forex market fluctuates.
Forex Speculation vs Investment - Forex Speculation vs Investment, some forex day traders dont seem to know the difference.
Forex Market Dynamics - Forex Market Dynamics are truly impressive. It has been estimated that the world's most active exchange rates like EURUSD and USDJPY can change up to 18,000 times during a single day.
Main Forex Currency Markets - Main Forex Currency Markets are mostly made of foreign exchange deals being traded between banks and other market participants over the counter.
Forex Market Participants - Forex Market Participants such as brokers and market - makers now join the banks in trading currencies.
Origins of the Foreign Exchange - Forex - Origins of the Forex Market or the Foreign Exchange.
Why Trade Forex? - There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures.
Trading with Strategy - Trading with Strategy is by no means a simple matter. It requires time, market knowledge and market understanding and a large amount of self restraint.
Anyway thats all for now, I am busy checking out a site from Russia! I will full you in if I find anything interesting …… thats if I can understand anything 
New Forex Articles
A week or so ago I told you about Marks Forex, I noticed that there were whole new bunch of tutorials that have been added.
Not bad for a free site!
Cheers.
Forex Heads Up!!
Heads Up every one!
I have just found out that Mark Mc Rae is launching a new forex site. I was just there now and its one to book mark. It is not complete yet and is only officially launching some time next week.
But here’s the inside track! Mark has spilled the beans, he has taken all the Forex tutorials we have all be scratching for and making them available to the public.
So go and take a look at the site: Marks Forex or Interbank Forex Currency Trading
Pivot Point Tuition
Pivot Point Tuition - The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).
Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.
Before I go into how you calculate pivot points, I just want to point out that I have put an online calculator and a really neat desktop version that you can download for free HERE
How Fast Can an Economy Go From Good to Bad?
The most recent GDP figures seem to echo what Fed Chairman Greenspan said in February in his semiannual Monetary Policy Report to the Congress. For brevity’s sake I’ll condense his opinion about the U.S. economy into three words: All is well.
I could offer a fact-filled and scathing rebuttal, but why be quarrelsome? Instead I’d like to answer this simple question: “How quickly can a very large industrial economy go from good to bad?” My case-in-point is recent indeed – up through the business news as of February 16, 2005. All the headlines and subheads come from BBC News reports. Please note the dates.
How long should you backtest a system?
I am frequently asked how long one should backtest a trading system. Though there’s no easy answer, I will provide you with some guidelines. There are a few factors that you need to consider when determining the period for backtesting your trading system:
Trade frequency
How many trades per day does your trading system generate? It’s not important how long you backtest a trading system; it’s important that you receive enough trades to make statistically valid assumptions*: If your trading system generates three trades per day, i.e. 600 trades per year, then a year of testing gives you enough data to make reliable assumptions*. But if your trading system generates only three trades per month, i.e. 36 trades per year, then you should backtest a couple of years to receive reliable data.
Underlying contract
You must consider the characteristics of the underlying contract. The chart below shows the average daily volume of the e-mini S&P:
It doesn’t make sense to backtest a trading system for the e-mini S&P before 1999, because the contract simply didn’t exist! In my opnion it doesn’t make sense to backtest an e-mini trading system before 2002 because at that time the market was completely different; less liquidity and different market participants. I believe that a reliable testing period for the e-mini S&P are the years 2002 – 2004.
* What is “statistically valid"?
Recently I received an article from a Ph.D in statiscs. He explained the correlation between the sample size and the “margin of error” in the table below. The bigger the sample the smaller the margin of error, but usually a sample date of 200 trades should be sufficent. If your trading system generates enough trades, then you should use 500 - 600 trades.
Read Article with images: Back Testing
Trading in Partnership
Trading together with a friend can have its advantages. If one of you has more experience and the other more money, you can help your friend through your experience and he can help with margins. Together, you can trade larger size and perhaps make more profits. However, unless you both agree to the same line of action and what the possible contingencies might be, it is essential that you decide which of you is to execute the trades. It is more difficult reaching trading decisions together than on your own.
If you haven’t decided on the contingency measures in advance you’ll find yourself arguing and disagreeing in the middle of a trade going against you when timely action is of the essence. It can be quite disheartening and dangerous.
If you are not absolutely sure about your partner, and you don’t agree with the way he trades, you are better off trading on your own.
Take for example an instance where the order placed was ambiguous and the broker executed it twice. The traders accepted the mistake and then the market moved against them. The partner with the greater margins but less experience was in charge of execution. He placed the order before the market opened to roll the position out. The market moved against him, he covered the position at three times the premium received and then the market corrected. He was unable to get the other side because he couldn’t watch intraday.
Trading is a business! You must be totally prepared in terms of having a business plan, knowing how to place orders, and being on top of them from beginning to end. Even then things can go wrong, but being unprepared can lead to disaster. The smallest details must be thought of and prepared in advance, but mistakes and oversights still happen.
I came across an interesting concept. The path to enlightenment involves conquering five human weaknesses: greed, fear, ignorance, pride and jealousy. We should be all familiar with the first two, which cause much grief to traders, but the last three can be a big problems, too, so it’s worth pondering on them. Human weaknesses always show up to undermine one’s trading.
Read: Trading in Partnership
Stop Placement
Stop placement is where we separate the kids from the adults.
Stop placement is the sole responsibility of you as the manager of your trading business. It is one buck that you cannot pass.
You are the end of the line when it comes to placing stops.
Let me show you why you, and only you, can decide where to place the stop. There are several considerations:
The size of your margin account has the greatest effect on stop placement. When you look at a trade and see where the stop should go, or where you would like it to go, you then have to look at the size of your margin account and determine whether or not you can even consider the trade.
Your comfort level. Although you may have sufficient margin to place the stop where you would like to, and although the stop is logical for the trade, you may not feel comfortable with the stop being so far away (or even so close), and so you will decide not to take the trade with the stop far away, or move the stop back if it appears too close.
Volatility. You must take into account market volatility when placing your protective stop. If a market that normally ticks two ticks at a time suddenly begins to tick five ticks at a time, you must certainly take the level of volatility into consideration. You may find out that you have to place your stop too far away for the size of your bank or your comfort level.
When you use mental stops, there are two other considerations which you must ponder when placing your protective stop. They are: Your speed in placing the order, and the speed at which your broker can place the order. Let’s look at each.
Read: Stop Placement
This is What REAL Credit Growth Looks Like!
Credit Growth -The Federal Reserve keeps thorough records of U.S. consumer credit, and most of the data goes back 30 years or longer. They put it all on the Internet, too. Scroll through the numbers, and before long you’ll have what amounts to a crash course in how rapidly the debt levels have grown during just one generation.
New car loans, for instance: In June 1971, the total amount financed averaged $3045 for 35 months. Fast forward to Nov. 2004, and the amount financed averaged $23,984 over 60.5 months.
But that’s just for starters. To see what real growth in the debt levels looks like, “revolving credit” (also known as credit card debt) is the place to look.
The Fed began keeping records on revolving credit in January 1968; the outstanding amount in that month was $1.4 billion. Jump a little more than five years ahead and you come to the first month that revolving credit exceeded ten billion, $10.2 in June 1973. Barely eleven years later came the one hundred billion threshold, $106.26 in December 1984. Near the end of 2004 (November), revolving credit stood at $782.15 billion.
That’s a whole lotta credit card debt. As you scroll the data, you do occasionally notice a marginal decrease in the monthly debt figures, but “more” and “bigger” is the rule….
Performance, Fortune & the U.S. President?
Many people study U.S. political history, others study U.S. economic history, and a relative few individuals look closely enough at both to see the strong connection – specifically, the link between the performance of the stock market and the fortunes of the president.
The closer you look the more obvious the link becomes. Only fighting a war does as much to shape public perceptions of a U.S. president’s performance during his term in office.
In the obviously limited space I have, I can make only a few sweeping observations. The bear market that began with the 1929 crash put the Democratic Party in office for the 20 years that followed the 1932 election. This string was broken when the Republicans nominated a war-hero, who took the White House in 1952. The Dow Industrials were approaching the pre-crash high, and Eisenhower became the dominant political figure during that bull market decade.
Democrats lost the White House again in 1968, almost three years after the Dow had reached a high that it would not finally surpass for nearly 17 years. Three U.S. presidents came and went during the bearish 1970s, one of whom resigned in disgrace.
The great bull market that began in the early 1980s helped keep Republicans in office for 14 years; a Democrat won by a plurality in 1992, yet the bull market saw him through two full terms of office, notwithstanding multiple scandals and impeachment.
Which brings us to the current Commander-In-Chief, a title which goes a long way toward explaining his reelection this past November. The 9/11 catastrophe, and the military invasion of two countries, tell you most of what you need to know about why George W. Bush won a second term. Yes, his term has included a three-year bear market (2000-2002), though it began before he took office; in truth he benefited from the 2003 market recovery.
A Trillion Barrels of Oil… and Prices Rise?
The notion of a “coming oil shortage” has been around for decades. I remember the lines at the gas pumps in 1973-74 all too clearly, because I had just gotten my driver’s license. The economic wise men of the time made dire predictions. If they had been right, the world’s oil supply would have been long gone by now.
Still, the notion persists as strongly as ever in some quarters. A professor at Princeton published a book in 2002 with “Impending World Oil Shortage” in the title, which was favorably reviewed in all the right places. The price fluctuations over the past year have only fed the beast.
Now, I could give you my opinion of all this, but it’s probably better to stick with the facts, to wit: There is no shortage of oil. There will be no shortage of oil. Not now, not next year, not in 50 or 100 years.
“Oil, Oil, Everywhere…” was the title of a fact-filled essay is a recent issue of The Wall Street Journal, which showed how absurd the “oil shortage” fears truly are:
“To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that’s trillion – over a century’s worth of global supply, at the current 30-billion-barrel-a-year rate of consumption.”
Mind you, those are merely two oil fields in Venezuela and Canada, comparative little leaguers vs. the major league oil fields in the Persian Gulf region. In a speech this past October, Alan Greenspan noted that, “During the past decade… gross additions to [world] reserves have significantly exceeded the extraction of oil the reserves replaced.”
So: Shortages have nothing to do with oil prices because there is no shortage. In truth, when it comes to the price of a barrel of oil in today’s market, there is virtually no evidence that supply & demand has anything to do with it. Total world supply and demand have grown at the same constant pace since the mid-1980s. And by definition, two constant factors cannot account for wide fluctuations in the outcome (namely price) of an exchange.
Read the whole Article …….
Fractal’s Edge Trading System
Hi,
It is not often that I get to give my subscriber a totally
complimentary course, but today is different.
I have managed to talk Quantum Futures into giving my V.I.P
subscribers a full Fractal’s Edge Trading System (value
$197) without it costing you a dime. They are using this system
to trade all the major markets.
You can collect it at http://www.tradeology.com/p.php/quantum
But first, let me ask you a question.
WHAT IF . . . you discovered . . .
A profitable and comprehensive trading solution
that includes:
* education in a proprietary trading method
* a cutting edge automated software trading system
* premium stock and futures data
* a weekly stock and futures watchlist
* a master-mind support group of like-minded traders
And WHAT IF I told you that you could receive this
unique trading education up front and ABSOLUTELY Fr~ee.
Would you seize the chance?
Well, here’s your chance to find out.
Download the F~ree “Fractal’s Edge Trading Course” and
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Good Trading
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P.S. I have to warn you though that my arrangement with Quantum
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Collect the course at http://www.tradeology.com/p.php/quantum
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Betting the House on the Stock Market?
.
The National Association of Securities Dealers (NASD) is shocked, shocked because – in the words of a recent financial headline – some people are “Betting the House on the Stock Market”
Homeowners are “pulling money out of their property at a greater rate than ever,” and now that the toothpaste is out of the tube, someone thinks somebody needs to do something. “The consequences of this problem can be so devastating,” said an NASD official, “that we’d really like to address this to keep it from becoming a big problem.”
Sheesh – what a nag. Don’t they know that debt is only a tool that allows money to flow from home equity into the equity market? Who’s to say which sort of “equity” is better anyway?
And the really bizarre thing is, the NASD’s warning is based on data more than two years old: “From 2001 through the first half of 2002, 11% of total funds obtained from mortgage refinancings were used for stock-market and other financial investments.” The fact is, the toothpaste came out of the tube slowly back then; these days it’s a gush. According to data on the Federal Reserve’s web site, revolving home equity loans stood at $211.1 billion on Dec. 4, 2002. As of Dec. 29, 2004, the figure is an all-time record $399.7.
In truth, no one should be surprised that Mr. & Mrs. Homeowner are cashing out their equity to purchase stocks. They’ve cashed out to make purchases of every other kind, and the economic powers-that-be proclaimed that, “It is good.”
“According to survey data, roughly half of equity extractions are allocated to the combination of personal consumption expenditures and outlays on home modernization…. the extraction of equity from homes has been a significant support to consumption during a period when other asset prices were declining sharply. Were it not for this phenomenon, economic activity would have been notably weaker in the wake of the decline in the value of household financial assets.”
For the record, this was Mr. Alan Greenspan’s testimony to Congress in 2003. Refinancing is good; cashing out is better; new stuff from the mall is better still. Within this progression, is buying stocks really so outlandish?
Housing and home equity have been the performance-enhancing drug that pumped up the U.S. economy for several years now.
Most conventional economists have said that “consumer spending” played this role, but you don’t have to dig very deeply to see the facts. Nearly $400 billion in home equity was “cashed out” – converted into debt – and homeowners in turn put it into the stock market or spent at the mall.
What does it mean?
A strong hint of an answer comes if you consider housing starts and GDP growth: In Q2 of 2004, for example, GDP was 3.3%. Yet if you remove the “residential home construction” component from that figure, GDP falls to 2.44% – and this no exception. Home construction played this role in quarterly GDP growth for several years, but a strong hint of trouble in paradise did appear in the Q3 2004 data; GDP came in at 3.9%, and would only have fallen to 3.8% without home construction.
This brings us to the most recent housing starts figure, which for November 2004 showed the largest one-month drop since 1994.
How long can millions of people use debt to finance speculation? History doesn’t offer a clear answer, since this much speculation on this great a scale is unprecedented. Still, the answer may come much sooner than anyone expected, and more quickly than most people wanted.
Robert Folsom is a financial writer and editor for Elliott Wave International, the largest independent provider of technical analysis in the world. To read more from Mr. Folsom, and to discover the value of unbiased market analysis, read Mr. Folsom’s Market Watch column on elliottwave.com.
In the months leading up to the presidential
In the months leading up to the presidential election, the financial press spilled a lot of ink wondering which candidate was “preferred by Wall Street.”
Speculation about that issue ended on Nov. 2, though there’s never been any need to speculate about which politician is most feared by Wall Street - New York State Attorney General Eliot Spitzer gets the vote hands down. That’s because he successfully carried out that most effective of all political attention grabbers, namely a crusade against big guys on behalf of the little guy. All indications are that he will be a formidable candidate for governor in New York in 2006.
If you’ve been looking for an aspiring politician with a superb ability to bring irony to life, Mr. Spitzer is your man: He advanced his career interests while pursuing the public’s interest by stopping conflicts of interest in high finance.
The truth about Buy and sell signals.
Wrong! The perennial questions are, “Should I buy? Should I sell?” All too many traders focus their efforts on identifying buy and sell signals. In fact, that’s what most trading books consist of-some way to find buy and sell signals. Trading systems are usually all about “where to get in.”
The research and analysis traders do is geared towards reaching the goal of getting that magic “base line” directive to guide their actions. How ignorant can you be?
Any successful, experienced trader will tell you that although properly identifying buy/sell signals is important, it’s not the key to being successful. Instead, the way you manage each trade is what will determine your success.
Traders who take the baseline approach tend to believe that the success of their trading activity is dependent on following the right buy/sell signals at the right time. Clearly, it’s important that a trader be able to understand the process of generating signals and to use the methods involved. Realistically though, almost any trader can find a way to generate signals (whether using technical methods already out there, coming up with their own system, or using their platform’s automated signal generation tools).
Any successful, experienced trader will tell you that your trade doesn’t begin and end with a buy or sell. There’s a trade management process involved. For each trade you make, you’re making a group of decisions. The way you manage and time those decisions is what will determine the success of your trade.
Let’ say two traders get the same signal at the same time and act on it. One’s trade may result in profits while the other’s results in losses. How is this possible? It can occur because each trader made a different combination of decisions throughout the course of the trade. The decisions might include scaling in and/or out of the trade, using or not using trailing stop losses, setting or not setting profit objectives prior to entry, patience or lack thereof, etc. The trader who made the most effective overall combination of decisions will have the better trade results in the end. Of course, there are times when pure chance, gives the better result to the worst trader.
It’s very important to regard trading as a process, and to understand that as a trader your efforts need to be focused on the activity of trading itself, as opposed to getting a quick base line answer. Because there are many things to take into consideration in making your trades successful, it’s essential that you educate and train yourself in all the different areas. Learn how to develop better trading plans and analysis methods, and then learn how to apply what you’ve developed to the process of a making a trade-from the original impulse to enter or stay out of a trade to the control of your thought processes and emotions in managing that trade.
by Joe Ross
Back-testing does it work?
It’s our job to trade “Futures” not “Histories” - Throughout the years I’ve been trading and writing I’ve often written about mind set-having the right frame of mind for your trading so you become a winner.
I’ve stated that it is our job to trade “futures,” not “histories.”
The future is the next bar on your chart. You can’t possibly know how it will develop, how fast prices will move, or where it will end up. Since none of us know where the very next tick will be, it’s impossible to know where the tick after that will be, or the tick after that, etc. All we know at any one time is what we’re seeing. Interestingly, what we’re seeing may not be true.
If we are daytrading, we are not sure that what we’re seeing is a bad tick, especially if it is not too far astray from the price action.
The daily bar chart doesn’t always tell the truth, either. The open may not be where the first trade took place. The close is merely a consensus, and may be quite a bit distant from where the last trade took place. The high may not have been the high, and the low may not have been the low. If you don’t believe that, then I challenge you to pick up any newspaper and take a look at some of the back months.
For example if the exchange has reported that a back month they opened at 9755, with a high of 9802, a low of 9760, and a close of 9784. Does that make any sense? How can the low be higher than the open? How can the close be higher than the high? Yet that’s the kind of garbage we have to put up with in this business.
Now you know the problem with back testing. Back testing and simulated testing are based on nothing but lies. That’s why they don’t work when you actually put them to the test with real data.
In fact, there are many reasons why back testing and simulation won’t work, and I may as well dump them in your lap right here.
Because you don’t really know where the high or low were, or if the market ever really traded there, you don’t know if your simulated stop was taken out or not.
If you say you have a system in which if you get three up days followed by a down day, the market will be up twelve days from now 82% of the time, then your whole statistical universe may have been based on what is not true.
Have you ever watched cocoa from the open to the close? You can clearly see it trading at the open, but by the time the market closes, the open will at times be placed opposite the close. That might be fifty or more points away from where you saw it open and trade, and also as born out by a report of time and sales.
The way they report cocoa prices is going to give a fit to a lot of candlestick traders. Why? Because they are going to see far too many “doji’s” (open=close), more than are really there. Cocoa is not the only culprit, but historically, it is certainly one of the worst
When you see a completed bar on a chart, you have no idea which way prices moved first. You don’t know if they moved down first or up first. You don’t know whether or not prices opened and then moved to the high, went down to the low, and then traded in the lower half of the price range until the close, at which time prices soared up to the high and closed there. You have no idea of the overlap. I’ve seen prices trade from one extreme to the other more than once at each extreme.
In any of those instances, your protective stop could have been taken out intraday.
You know nothing of the market volatility on any given day, once you see a completed price bar. Were prices ticking their normal, exchange minimum tick, or were they ticking two or three times the minimum every time prices ticked?
Even if you purchased tick data for your simulation, showing every single tick the market made, you don’t know what the volatility was. For instance, you don’t know if the S&P was ticking five minimum fluctuations per tick or twenty-five minimum fluctuations per tick, and if it was doing it quickly or slowly. You don’t know and you can’t know, and anyone who tells you their simulated system works, based on such phony baloney, is a liar.
Not knowing how fast the market was means you can’t really know what the slippage might have been. The faster the market, the greater the slippage. You can sit there and say that you would have gotten in at a certain price or that you would have exited at a certain price, but if you don’t know the market volatility, and how fast the market was, you do not know enough to say that you would have done such and such. Not knowing how fast the market was, you have no way of knowing how much slippage there would have been on your entry or your exit. Without knowledge of slippage, you can’t possibly know the risk.
That is also true of volatility. Volatility is made up of range of movement, speed, and tick size. If you don’t know the extent of slippage, you will not know the extent of the risk you would have encountered.
As if that’s not bad enough, you also don’t know how thin the market was at the time you would have traded it. If you are position trading, you can’t go by the reported daily volume (which is always too late to do you any good), because there is no way to know what the volume was at the time your price would have been hit. So here again you have no idea of what slippage you might have encountered, and once more you would not have known the risk.
If you want to spend your money on trading systems based upon the unknown, then you must assume the risk of doing so. Since this is a business of assuming risk, you are entitled to insure prices in any market that you care to.
Insurance companies spend a lot of money to make sure that the risks they take are actuarially sound. That is the equivalent of finding good, well-formed, liquid markets to trade in. But any market can become totally chaotic. Markets can become extremely fast, and they can become quite volatile. So even if your system was back-tested in a liquid market, when that market becomes fast and/or volatile, your back-tested, simulated system will not be able to cope with it and you will lose. It’s like going out to write life insurance on a battle front.
If your back-tested, simulated system does factor in some room for fast and/or volatile markets, then, when you will be trading in slow, non-volatile markets with the built in factor, you will be utilizing a system that is totally inappropriate for the slow, non-volatile market you are in. The best you can hope for is an “optimized” system. How can you possibly expect to compete with traders who are acting and reacting to the reality that is at hand at the time?
Extensive back-testing is for historians, not traders. It is the wrong view of the markets. Your trading must be forward looking without being ridiculous about seeing into the future.
If you don’t know where the next tick is, how can you possibly know where the next market turning point will be? Can you see into the future?
Maybe you like to trade astrologically. Those people are always trying to peer into the future.
In the auto business they have a saying, “There’s an ass for every seat.” Likewise, there’s a fool for every fortuneteller who claims he can see into the future.
I guess you can always go out to your local coven and hire a witch to tell you what beans will do tomorrow. She may even be right from time to time.
You could always do as one charlatan did and run the biorhythm for each market based on the day it first started to trade. Or, you can cast the markets horoscope based on the same date. With the biorhythm, you’ll know what time of day the market should be on its highs, and what time of day it will be on its lows.
You’ll know which day the market will be ecstatic and reach a new high, and which day it will be down in the dumps and make a new low. However, you’ll find that from time to time the market will reach new lows on the day it was supposed to reach new highs. Well, that’s easy enough to explain. You can tell everyone “We’ve had an inversion. Until the market inverts again, the lows will be the highs, and the highs will be the lows!”
by Joe Ross
