Selecting Rules for Investing and Trading
September 28, 2008
There are three important differences between investing and trading. Overlooking them can lead to confusion. A beginning trader, for example, may use the terms interchangeably and misapply their rules with mixed and unrepeatable results. Investing and trading become more effective when their differences are clearly recognized. An investor’s goal is to take long term ownership of an instrument with a high level of confidence that it will continually increase in value. A trader buys and sells to capitalize on short term relative changes in value with a somewhat lower level of confidence. Goals, time frame and levels of confidence can be used to outline two completely different sets of rules. This will not be an exhaustive discussion of those rules but is intended to highlight some important practical implications of their differences. Long term investing is discussed first followed by short term trading.
Trading Systems
September 19, 2008
A trading system consists of a set of rules for viewing markets and making trades. The advantages of trading systems can be hidden when they become associated with trading platforms involving trade order submission and processing. A clarification of their roles can help explain the benefits of using a trading system. This can be done without identifying a particular platform or system. Once the platform infrastructure is isolated, a brief look can be taken at why a trader can benefit from a trading system.
An online trading platform consists of the infrastructure for viewing market prices and making trades. While platforms make use of user provided hardware and the internet itself, platforms consist of software linked to a database while displaying price quotes, enabling order entry and routing orders to an exchange. A platform of software and order routing services is provided by many brokers. It often includes programmable charting software that allows a user to select from an array of formats for price, volume and technical indicators. Links to real time databases are used by day traders while free delayed quotes are quite adequate for position traders who analyze data after the markets close to minimize the emotional stress of changing prices. Platform software saves time and reduces errors by automating repetitive tasks.
A Secret Revealed: Why Most (Day) Traders Fail
September 8, 2008
The following perspective on (day) trading comes from my many years of experience of active day trading or being the moderator of one of the largest day trading chat rooms on the Internet.
One of the biggest problems I see with new traders (and even some old ones) has nothing to do with the software or the broker they are using. Nor is the problem a result of buying too high or selling to low; or not having enough money. The problem isn’t any of those things.
It has to do with not having a trading plan. A good trading plan will go a long way towards solving the problems mentioned above.
Ted Williams was once asked how he hit the baseball so much better then everyone else. He said he had no idea and that he just went up to the plate and swung at the ball. There has only been one Ted Williams and as great as he was at hitting a baseball, I don’t think he would have made a great day trader with that approach. Most great hitters have an idea what they are going to do every time they step up to the plate. Traders need to know exactly what they expect every time they enter a trade.
Copy Cat or How to Use a Successful Trading System
August 30, 2008
How many books have you read about successful traders? How they did this or that and made a fortune and are still doing it. You say to yourself, "I’m going to follow his method and get rich".
So you subscribe to his newsletter (they all have one, $250) and buy his course on CD Rom ($495)and next time he is anywhere near you attend his seminar with a $500 discount for only $2495. You do understand you must do exactly as he does and you try your best to follow the directions, but for some reason you still are not making money. At least you are not losing as much as you did before (I hope).
Go look in the mirror. You are not Richard Russell, Richard Wyckoff, Bill O’Neil or any one of the great gurus of the market place. Each one of them has devoted every minute of his life to understanding the market. Each one is very successful and each one has a completely different way of approaching trading. Can you copy any one of them? It is very doubtful.
The Perfect Mutual Fund
August 21, 2008
The Perfect Mutual Fund is the one you build yourself!
The perfect Mutual Fund you build should have the objective of owning no more than 12 to 15 companies; owning shares in 12 companies would allow the diversity needed to sleep well at night and would provide a cash dividend every week of the year.
The 12 companies (with staggered dividend payout dates) in your perfect Mutual Fund should not only provide a cash dividend every week of the year, the companies should also have a historical record of raising their dividends every year for at least the past 8 years (to eliminate risk).
The perfect Mutual Fund would have no fees attached, every cent put into the Fund would work toward your return on investment (ROI).
There would not be any commission fees, load fees, management fees or advertising fees, and there would be no illegal trading practices, hidden fees abuses or any type of hidden fee. The perfect Mutual Fund would benefit you and your family and no one else.
Building The Foundation For Wealth
August 9, 2008
You wouldn’t build your home on anything less than a solid foundation. Similarly, you can’t build wealth and financial independence without first having sound foundational principles to build upon.
I have found that many people are working on wealth building strategies such as maximizing their 401K returns, aggressive stock trading, and real estate investing without such a foundation.
Most of my clients are coming from a "one step forward, two steps back" cycle of wealth building that gets them nowhere in the long run.
There are steps you can take to make sure that you are maximizing and protecting your gains at the same time. Without these steps, you are destined to experience the gain-loss cycle which, in the end, is like spinning your wheels in the mud.
Discover how your employment circumstances affect your wealth building strategy and have more of the things you want by identifying your biggest expense and managing it without having to make more money.
Most people take gains in their cash flow to mean they can spend more on things they don’t need. It is human to want to surround yourself with the things you want to match how you feel about your new income from investments or a raise at work.
Types of Investment
July 31, 2008
The word ‘investments’ is one that most of us are familiar with hearing in financial context. For many of us, it may make us thing of big business and vasts sums of money, but there’s much to the world of investments than multi-million dollar deals.
Although it’s true that, at the top level, investments may run into many millions, it is possible for the average person in the street to invest smaller amounts of money and to invest it wisely. If you’ve ever thought about trying to help your money to grow, then maybe you’ve wondered what opportunities are available.
In truth, investments can cover a wide range of options. One of the most traditional types of investing is in the stock market. This has been viewed by some as being a difficult type of investment to get into, but times are changing. The new range of online stockbrokers available mean that it’s now easy (and fairly inexpensive) to get involved in buying and selling shares. If you’re interested in share dealing yourself, then you’d be wise to remember that there is a risk involved (”shares may go down in value, as well as up”). It’s vital that you investigate the area thoroughly before taking the plunge and you should view shares as a medium to long-term investment. If you invest expecting to make a quick buck, then you’re likely to be disappointed.
Trading For A Living - Part 2
July 22, 2008
In part 1 of this article I started to look at the financial implications of giving up the day job to instead start trading full time for a living. There are more than just monetary considerations as we will see later, but for now, there are some more costs to ponder.
More Costs!
Let’s move on to equipment. Presumably you already have a PC and internet connection by virtue of the fact you are reading this on the internet. But are these both up to the job of trading full time? Again the specifications for both hardware and ISP will depend largely on your trading style, but if you’re relying on a 100Mhz Pentium II and a dial up service, you’re setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too ? expect the unexpected.
Many traders make the mistake of saying "This will do me whilst I start out, and I’ll get something better when I make some real money". This is quite simply false economy, you are unlikely to ever make real money with a substandard setup (and this applies equally to substandard software and data feeds). This is a cut-throat business and 95% fail, you must give yourself every advantage you can. You wouldn’t enter the Indy 500 in a go-kart with the intention of buying a better car when you’ve won a few races, and the same thing applies here.
The Realities Of Market Timing
July 11, 2008
Market timing systems are based on patterns of activity in the past. Every system that you are likely to hear about works well when it is applied to historical data. If it didn’t work historically, you would never hear about it. But patterns change, and the future is always the great unknown.
A system developed for the market patterns of the 1970s, which included a major bear market that lasted two years, would have saved investors from a big decline. But that wasn’t what you needed in the 1980s, which were characterized by a long bull market. And a system developed to be ideal in the 1980s would not have done well if it was back-tested in the 1970s. So far in the 1990s, any defensive strategy at all has been more likely to hurt investors than help them.
If your emotional security depends on understanding what’s happening with your investments at any given time, market timing will be tough. The performance and direction of market timing will often defy your best efforts to understand them. And they’ll defy common sense. Without timing, the movements of the market may seem possible to understand. Every day, innumerable explanations of every blip are published and broadcast on television, radio, in magazines and newspapers and on the Internet. Economic and market trends often persist, and thus they seem at least slightly rational. But all that changes when you begin timing your investments.
Investing Online Has Its Rewards: Find Out How To Take Advantage Of Them
July 1, 2008
Computerized investing. Online investing. Have you taken the next step yet? These days among savvy investors, online investment resources are synonymous with opportunity.
The capabilities that we currently have at our fingertips were unavailable just ten years ago. The speed at which you can invest with an online broker, along with ease of use (you can trade in your underwear), makes traditional local brokers seem obsolete.
More and more people are taking to "active investing" rather than just sticking money in mutual funds recommended by their advisors. This means atypical investors are now taking active roles in their portfolios and seeing greater returns, if they know what they are doing.
In order to become an active investor, you must know what you are doing. It is your money we are talking about here. The thing is, once you know that there are ways to net up to 18%+ returns on investments that are hardly more risky than what most people consider safe today (mutual funds, diversification), you can hardly live with yourself by leaving your money in a "safe" 4% fund.
