Ramblings About The Financial Markets

ISM Index and Auto Sales Will Move The Markets

Sun, 02 Mar 2008 23:10:00 GMT

ISM index or Institute for Supply Management will be released Mar 3 at 10:00. The last reading was 50.7 which showed the economy to be weak. Readings below 50.0 suggest contraction which is what is expected, confirming what many have been saying for some time now "the economy is in recession". Auto sales will come next on Mar 4th which should add a critical piece to whats really going on in the U.S. economy. Auto sales account for 20% of retail sales and gives insight into consumers feelings about buying big ticket items. More volatility can be expected as more economic data is released as we near the March 18th FOMC meeting. There will be no doubt a spirited debate on the size of the interest rate cut and even if Bernanke should offer no cut in favor in containing inflation.

Making Money Isn't The same as being Right

Thu, 14 Feb 2008 12:30:00 GMT

The financial markets are complex. It is not possible to accurately predict specific price movements of any stock, futures, bonds or any financial instrument with great certainty. The very best traders get it right 70-80% of the time. Elite traders know they will be wrong 20-30% of the time, but that doesn’t bother them because they know how to manage risks to maximize profits and minimize loses with the mentioned percentage winners. It seems obvious, but countless traders continue to lose hard earned money. Some of these traders keep losing because they care more about being right than making money.

When the mind is clear to only concern itself with making money and not being right, more money will be made. When the mind doesn’t have to spend energy defending a wrong position it is free to create and execute the most advantageous positions to profit. Never forget why you are in the market: To make money!

Who Can You Trust?

Fri, 18 Jan 2008 12:00:00 GMT

The financial markets in a tailspin as pundits and government prognosticate recession, or should I say the "R" word because avoiding the word recession will somehow prevent the economy from stalling out. Virtually everyone that speaks about issues regarding the economy has an agenda. Let's first start with the government wonks that have an obligation to say nothing bad about the economy for fear of embarrassing the current administration. It's funny, because rising unemployment, rising inflation, and sky high energy prices do little to change the government line.

Next we have the parade of so called experts on the financial networks that must defend their positions. Imagine one of these so called experts is long financials in the middle of the sub-prime debacle, the expert will no doubt explain the incredible value in such equities and will throw in how its a long term play. They are convincing but think about who pays these experts.

You truly get nothing free. The only person you can trust is yourself. If one keeps an eye out on the major economic factors that are neatly quantified for us on practically a daily basis, you will know the raw data that is not hard to understand. It really boils down to healthy levels of employment and stable inflationary pressures. Search economic reports in your favorite search engine and learn the truth about the economy. Here are my favorite websites to get this information. www.economicreporter.com
online.wsj.com/public/resources/documents/b-econoday.htm

The Technical Definiton Of Market Confusion

Tue, 06 Nov 2007 01:45:00 GMT

Megaphone Chart Pattern

A Megaphone is also known as a broadening pattern. This pattern describes a market in confusion with no probable direction up or down. This pattern may suggest one to sit on the sidelines until the market resolves itself. A trader may trade this pattern but must understand the implications of such a trade and the potential erratic price movements that are likely to happen.

The bigger move takes precedence which is a move done on this chart, consequently, the bias is for a downward movement, but to a far lesser likelihood than other patterns like and ascending or descending triangle for example.

Why Traders and Investors Should Understand Volatility

Thu, 25 Oct 2007 21:55:00 GMT

Understanding market volatility can help get more profit by using bigger profit targets than if volatility wasn’t considered. The Chicago Board Options Exchange (CBOE) reports a Volatility Index that quantifies the market's expectation of 30-day volatility. Losses can also be reduced by improved risk management using market volatility data. The Volatility Index (VIX) can also suggest how quickly a market may move from one price level to another.

Implied volatility is mostly used with options but is also used to calculate the VIX Index. The VIX Index is constructed using the implied volatilities of a wide range of S&P 500 index options. Implied volatility is calculated by the current price of an option based on Black Scholes Pricing Model. The solution of this pricing model calculates a mathematical volatility based on option price. The VIX is widely used measure of market risk and is often referred to as the "fear index”.

The other type of volatility is Historical Volatility, which is a measure of price fluctuation over time. Historical volatility uses historical (daily, weekly, monthly, quarterly, and yearly) price data to empirically measure the volatility of a market or instrument in the past. The value rendered by a historical volatility study is the standard deviation of bar-to-bar price differences.

Sitting On The Sidelines

Tue, 11 Sep 2007 11:25:00 GMT

There are times in a high volatility market when there are no buy or sell signals. While the markets may be active it may lack direction and produce large losses if you are wrong. You may even be right but wild price swings often hit your stops causing a losses. Whenever your edge is reduced its prudent to step aside and let the market work itself out. Patience is always rewarded in the trading business more.

The Counter Trend Trade

Thu, 16 Aug 2007 18:10:00 GMT

Countertrend trading is the practice of trading against the prevailing trend of the market. The countertrend trade tries to capitalize on imbalances that regularly occur in financial markets. Frequently, strong price moves up or down in a relatively short period of time are likely to be over done. This condition is commonly referred to as overbought or oversold.

This trade is often compared to standing in front of a bus and hoping you don’t get run over. This can be true if the necessary elements aren’t implemented at the time of the trade. The necessary elements are:

Money Management – Put position on in 1/3 blocks. If conditions materially change that changes original premise in which trade was made, don’t discontinue buying the remaining 2/3 and take your loss on just a 1/3 position.

Maximum Trade Size – No more than 10% should be committed to any single trade.

Use Options for Countertrend Trades – Options limits total losses to the cost of the option, but you can exit a option position at a small loss if conditions change that make getting out the best choice at the time.

Buy options that have a premise that makes sense. For example, many strong stocks will get hit hard by indiscriminate selling that happens in a market in steep decline. Steep declines are usually caused by some shock event like 9/11 or most recently sub-prime woes. There will be countless opportunities in companies that have little or nothing to do with this financial contagion. In a sup-prme concerned market, a long position in a insurance company like Met Life (MET), a good company that has increased revenue every year since 03 with matching increases in net income. Cash (net income) will always be king.

Use simple Technical Analysis to confirm entry of position. Particularly use chart patterns in conjunction with market dynamics and fundamentals. The chart pattern for Met Life shows a double bottom which creates a price specific price for entry.

How To Lose In A Rising Market

Fri, 20 Jul 2007 11:25:00 GMT

With record highs being reported on all the indexes and stocks motoring up to new highs, it would seem everyone must be making money. Unfortunately, this is not the case. The manner in which markets goes up can be gut wrenching, because its far from linear and just when the market seems paused to go down, it rockets to new highs. In this process, many traders go for what appears to be an easy ride to new highs, but get stopped out when normal retracement occurs.

Traders must put on trades with reasonable stops with the big picture in mind. The best way to stay objective about a trade is to risk the proper amount on any given trade. If you are excessively worried about the consequences of a trade , you likely have on too much size. As a trade proves itself right, you may add to your position to further capitalize on your position.

Markets that move a great distance in a short span of time are vunerable to deep pull backs which can happen very quickly. This will be an opportunity in a bull market to enter the market if you are flat. Of course as always, have your stop in place with any trade.

What's Your Opinion On The Current Market?

Mon, 04 Jun 2007 16:50:00 GMT

The most helpful opinion you can have on the markets is to not have one. Not only will you make more money, but all the time spent forming an opinion can be saved for making profitable trading decisions and managing trades.

The movement of any market is beyond the complexity of even the most powerful super computer to analyze. Markets are commonly described as chaotic and non-linear. With this said a trader must accept probability in the world of trading. This can also be expressed as a statistical probability that you will be right and you will be wrong with a distribution between the two which defines your edge.

Assuming you are able to make money in a rising or falling market, there should be no real bias as to the direction of the market. The only concern is trading the direction that statistically gives you the best odds of making a profit. Making statistical bets over a series of trades will make profits assuming positvie expectations. Having a winning trading method isn't difficult, It's difficult following the trading method. If a method has a postive expectation and is followed with discipline, profits will follow.

Why You Must Be Able To Short The Markets

Wed, 16 May 2007 10:15:00 GMT

You must be able to short the market or buy puts. Not only to take advantage of all trading environments, but to acknowledge that the markets can do anything. We don't care about direction, We only care about holding true to method and managing positions.

Buying Time Has Arrived Again

Thu, 03 May 2007 12:55:00 GMT

In the last post 4/20 we said "stop buying" because the market was overbought. Since that entry, the S&P 500 has gone on to make new highs confirming a bull market. But then most important, the S&P 500 tested the lows on 5/1 and has established support and is now back on a run. 3/4 of the market moves together so if you pick the direction correctly, your probabilities for success rise greatly. Use you watchlist and go long. Always use stops and practice sound money management.

Dow Breaks 13000 Stop Buying ......

Thu, 26 Apr 2007 13:05:00 GMT

Yes you heard it right. Stop buying at least for now. Hopefully you have profited as we have touted the bull market here for sometime. However, the market is overbought and a pull back is eminent. Take some or all of your profit and wait for re-entry. When the market likely retraces and finds new support levels, we will get back into the market. This might take a couple of days or a couple of weeks but you will have locked in your profits and should be ready to objectively analyze your next entries. You may even find better plays from your watchlist as some of the high flyers like energy lose some steam. For aggressive traders, a counter trend move may be appropriate. As always be patient and let your setups develop.

The Bulls Have Created A Great Market For Active Traders

Fri, 20 Apr 2007 12:05:00 GMT

The market has shown great resiliency in the past several weeks. Even less than stellar economic news doesn’t stop the market from making new highs. Current market conditions will attract money that has been on the sidelines. This can be seen in rising volume across the board for the major indexes. For those already in winning positions, be sure to set stop losses and not to give too much back when the inevitable retrace comes. It’s bound to be brutal: as quick as investors pile in they’ll be running for the exits twice as fast if there is any hint of even a slow down. If your still flat, it’s time to put your watchlist that we have encouraged you to create to good use. And if you don’t have a watchlist create one.

The Running Of The Bulls!

Tue, 17 Apr 2007 12:30:00 GMT

You can look back several months and see that we have been very much a bull, but have always stressed caution. It has not been easy to stay long with geo-political pressures, war and energy prices escalating.

Getting the direction right isn't as hard as it may seem, but sticking with the direction is harder than it seems. A method coupled with money management will steer you through hard times and likely make you money. Invest in good tools and invest in yourself and you will be consistently profitable.

Not So Fast With Them Bulls

Thu, 05 Apr 2007 11:00:00 GMT

We remain firmly on the side of the bulls but we mentioned a critical juncture earlier in the week before a real strong move up. Now the market is digesting those gains and may be due for a normal retracement. Long entries should be done after the retracement or risk difficult holds that may challenge even the widest stops.

Recent adds to watchlist:AXS, DAKT, DBRN and HLTH