In some recent editorial I have referred to methodology and making sure whatever system you use is well founded and has been successfully tested. I would like to elaborate a little more on this.

Firstly let’s look at methodology. Basically these fall into four categories. The first is Fundamental and even though I don’t personally use this approach nevertheless it is used by the vast majority of investors - retail and institutional.

The next three are technical. The first are what I would call trend following indicators; the second range trading indicators and the third are what I would call pattern recognition such as Elliott Wave and Gann.

I personally use Elliott and have so for the last 15 years. Perhaps conservative at times but it does not lose you money in my view. If you are going to use technical’s then it is important to have at least a basic understanding of each of the three so you can make an informed decision. No approach is the Holy Grail. Yet I see many would-be successful investors waste effort searching for the easy route to riches. It does not exist. It is like the ‘Long March’ it is one step at a time. But with experience under your belt there are short cuts.

The reason I mention this is that I also see many study one approach, try it and give up as it does not bring the instant riches. And they then spend a fortune studying the next system.

But I also see others who are too mite minded to properly invest in education.

I will also say here that it does not matter which system you use as long as you use it with an applied approach and with discipline. They all work. I would say you could choose any approach and apply it in this way and you will succeed.

The other key point is that you must apply it in a measured way. That is, you try your new found knowledge steadily. Many investors jump in head first after a training seminar. You apply your learning in small easy comfortable steps at first using a small trading kitty.

The sleep test is important here but to mix my metaphors - you must at some point fully immerse yourself after putting your toe in the water.

It reminds me of that old adage ’slowly slowly catchee monkey’.

Well we know humans are living things and we know animals are and of course plants are too. But are markets really living things?

Most of you will have heard the expression ‘markets have memories’ and I am inclined to believe so. Because markets are made up of ‘humans’ and ‘humans’ have memories. And you may ask ‘what about the Instos?’ Well at times investors may have other adjectives for them but yes they are human too and their views are a part of the mass of opinion.

So if we as individuals have memories, can we collectively have a memory? Well I do not see why not and whilst many of you may not put too much store in that I am inclined to think the market memory is made up of collective human memories and this is a major subliminal driver of markets.

Our individual memories take many different forms. Some of us are painfully rational others can be totally subjective. Some of us have short memories – we forgive and forget easily. Some just never forget even the smallest of misdemeanours. I am sure we all can recall examples at both extremes. And of course there are a myriad of variations in between. We may also have biases about certain stocks because of past experiences – good and bad. We may have biases about types of markets and instruments and so on.

Our memories are multi dimensional and what may be important to you may not be important to me. Our memories can maintain a bias and sometimes I think to myself when it comes to trading I need to erase certain files in my memory or even defrag the brain or even format the memory space.

Of course that is really what technical analysis should be. It is supposed to strip away – lay bare if you like all our biases, subjectivities and emotions. And when I talk about emotions I include all within the range from ecstasy through to anger. And as an analysts and a writer I am aiming to provide each week something of value in all I do. And in this process I am on the receiving end of emails that cover the full range of emotions. That is part and parcel of a job that I enjoy enormously. In fact it is not a job and there is a blur between my job and fun. I digress. But I see your emotions in your emails. I am not talking about anyone in particular and please keep those emails coming! But there are very few emails that don’t show some degree of emotion. Some of it is well controlled some out of control!

It is not for me to see your emotions but. It is for you to see them, analyse them, understand them, and manage them. Because, unless you can do that I am not sure you can be a great investor.

Technical analysis can be like reformatting the disk, purging the soul – but only if we allow it to be. But many won’t allow the ‘technical’ process to be purely objective. They allow internal feelings and external information to interfere. We can all be guilty of seeing what we want to see sometimes – even unwittingly

I know pretty much all of the sins of investing. I am human. And you name it I have made all the mistakes at some point – including allowing emotion to get in the way.

Memory biases – whether short or long term – can create market mismatches and this is where the shrewd market players can take advantage of those who are allowing biases to rule their day.

A Question of Timing

This is exactly the same thing with stock markets. If you understand and anticipate the price action, if you know when you have to wait (hold) and you have to attack (place a trade), then you’re a potential winner. It’s a question of timing. Market timing. It doesn’t guarantee victory, of course. But it can put you in exactly the right position to profit, time after time.

I quickly found that technical analysis for market timing purpose would be my best friend when I started my career in the investment industry. I have been using technical analysis and chartist indicators for almost ten years now. I’m absolutely certain my gruelling cycling slogs through Pan, Jurancon, Gan and Coteaux de Lasseube gave me an edge in analysing the markets. In fact I’m surprised I’ve not heard the analogy before, as I know many traders who are avid cyclists.

I’ve profitably used my ‘Slipstream’ timing technique both as a trader for hedge funds and as an analyst for the Swarm Trader . The key is to detect what is the priority and what is of secondary importance when you trade.

The priority is to track what the crowd does. The rumours, the news, the statistics and all other pieces of data that constantly arrive on your screens are of secondary importance. These will be translated into price development regardless of what you make of them.

If you know how to “read” what the crowd does, then you can anticipate what the crowd will do. This relies only on the analysis of the price action. Indeed, you “read” the behaviour of the crowd through indicators and chart patterns.

To summarize: If you read this information correctly, you can position yourself in a slipstream - or ‘profit pocket’ - of an imminent price move. Professional cyclists call it “cheating the wind”. Here you could call it “cheating the market. Find the “bubble” in the price action and let the investors in front of you do all the work.

This is a remarkable way to detect perfect buying points in Australia’s top 200 stocks. It can help you make great profits in a short period of time off a blue chip stock. In some cases, the kind of gains many small cap gamblers would be envious of.

Of course, we’ve yet to cover the most important part: how do you know when a slipstream move is forming? Below, I’ll ‘lift the bonnet’ on my system, and give you a step-by-step look at how I integrate technical indications and chartist patterns to pick optimal trading points for ASX 200 stocks.

How Charts Can Position You in the Leading Pack

It looked like Mark Cavendish was simply going through the motions when he won Stage 10 of the Tour de France in July. He got a perfect lead-out from his Columbia-HTC squad. It propelled with great force the 24-year-old through two tight right-hand turns in the closing kilometre and safely on to the ramp of the 250m finishing straight.

Then, he exited the ‘Slipstream’ and his power took him away from his pursuers. Cavendish paid tribute to the way his team-mates had nursed him through three days in the Pyrenees: “I had eight guys trying to help me conserve my energy,” he said. This is the whole idea behind Slipstream trading, which we’ve covered above.

Let the rider - or stock buyer - in front of you cope with the headwinds. If you get into his “slipstream” you do less work. The less work you do riding in the “slipstream” the more energy you have later when you pick the right time to make an attacking move. Riding in the slipstream is a good strategy. Making the right “move” is the tactical aspect.

Taking this approach can help you, as an investor in large cap Australian stocks, answer many questions you may well have found yourself asking this year: When should you buy when a stock is riding a bull trend and is constantly rising? Should you at all? How do you avoid buying on tops? When should you take profits when a stock has had a surge? How do you avoid selling on lows?

Heads or Tails

At a recent trivia night the host offered free drinks to the person who could outlast everyone in a game of heads or tails. Everyone was asked to stand up and place their hands either on their head or on the backside. The host would flip a coin; those that guessed correctly would go on to the next round, the others were eliminated. As it turned out, a winner was selected from about 100 people in about 8 flips of the coin.

From a probability standpoint, the winner had managed to achieve a rather remarkable feat – the odds of guessing correctly 8 times in a row are 1 in 256 (or a 0.39% chance). However not a single person at the event was that impressed, and why should they be? After all, at each toss of the coin there was a mix of expectations, and it was inevitable that someone would be proven right. At the end of the day the winner just got lucky. Very few people would consider the winner to have been successful because of skill or intelligence.

Contrast this situation with those that make economic forecasts. At any given point in time there will be a wide range of forecasts, each provided by well respected experts and supported by solid arguments. Presently, economic forecasters are broadly divided into two camps: those that feel that the worst is over, and those that feel that this is simply the calm before the storm. Within each group there will be those that provide quite specific forecasts in terms of figures and dates.

As with the coin tossing game, we will discover that only a small minority of players will be shown to be right. Once again, it is inevitable. The problem is that the market takes this as ‘proof’ that these soothsayers have the uncanny ability to accurately predict the future, and they will do the usual round of interviews and presentations to adoring crowds who are eager to discover what the next premonition will be.

If you need evidence of this just consider the success of those economists who are reputed to have predicted the credit crisis and resulting GFC. Most were all but unknown prior to the event, and most will be forgotten within a few years. Furthermore, many that did ‘predict’ the correction were calling for it to happen many years prior to the actual event. The fact is that if you continually call for a correction after a prolonged bull market, it’s only a matter of time before you are proven right.

I don’t mean to belittle economists, after all the industry demands forecasts and they simply do the best they can at what is an amazingly difficult task. Rather, I want to caution investors to always take forecasts with a grain of salt and not to confuse them for immutable facts. Also, just because a certain economist got it right last time, does not mean they have any greater likelihood in being correct the next time (a view that is supported by contemporary research findings).

The ‘heads or tails’ phenomenon is in fact something that is exploited by con artists. Consider this well known con: a person sets up a stock market advisory service and purchases a large database of contact details, let’s say 100,000 people. To half you send a free report recommending you buy a stock because it is about to go up. To the other half you send the opposite advise, that is that the stock is about to go down. Regardless of what the stock actually does, you are guaranteed to be right in the eyes of 50,000 people. To these 50,000 you do the same thing a second time, that is, send 25,000 people a bullish call, and the other 25,000 a bearish call. The process is repeated a number of times.

You can see what’s going to happen here. After 10 rounds of this you will be left with about 100 people who have received a newsletter which accurately predicted the stock market 10 times in a row. At this stage, you request a high fee for your newsletter, and you will find that most will pay anything to continue to receive this amazingly accurate advice. Let’s face it, even those that saw a correct prediction most of the time, say 7 out of 10 times, will most likely consider your newsletter to be worth many times its weight in gold. The beauty of this con is that you are guaranteed to impress a large number of people, regardless of what the market actually does!

The reality is that for any predictive ability to validated, we should demand rigorous empirical evidence. In other words, you need to be able to verify whether or not chance alone can account for the observed accuracy of the forecasts. Unfortunately, the market rarely demands such validation. But let’s just be pragmatic about it all. Forecasts are useful in broad terms if we treat them as simply a gauge of general market expectations. They also force us to consider possible scenarios and allow us to put in place some contingency planning. The main thing to remember is that forecasts are just guesses, albeit educated ones. Those that treat them as fact will more often than not be disappointed.

Values, Singapore Investors ,australia investors,singapore stock market news,singapore stock market

Should you study the markets or watch football? Spend your spare cash or save it? Will you make your own decisions or trust a fund manager? Should you stay home and look after your kids or go to work and take them to day care? Will you do overtime at work or go home to your family? How you make your decisions and how you allocate your time and money depends on your values.

Have you ever been puzzled by others’ decisions? Have you ever said: “How can they do that? It does not make any sense.” They simply are using a different set of values. They may be putting people before profits, or the other way around. They may value money more than friendships or the other way around. They may value leisure more than study. They may be after short term pleasures and not care about long term plans.

Would you give up your life savings to help a family member? Then you value family more than money. Have you dealt with computer companies that make you pay for every support call? You are dealing with a corporation that has money high in their values.

Your decisions, especially when the pressure is on, when you are tight on resources, are filtered through your values. Different people have different values and each make their decisions based on their own values. Before you judge someone find more about their values. Before you align yourself with someone find more about their values.

What are your values? Where do they come from? Your values are derived from your needs. If you have had financial hardships, money would be fairly high in your values. You may be pursuing money every which way. On the other hand if you have experienced financial abundance all your life, then pursuing money may not be a big deal. Carrying this to the next level, if you’re trading requires a little bit of studying, charting, analysing you may find this too hard and give up very quickly.

Your decisions are filtered through your values. Different people have different values and make their decisions based on their own values. Before you judge someone, you better find more about their values. Before you align yourself with someone, you better find more about their values. It is equally important and useful to figure out your own values. Here is a list to choose from:

• Money
• Friendship
• Contribution
• Health
• Trading
• Family
• Career
• Leisure
• Spiritual
• Self improvement
• Health and fitness

Add to this list as you like and then put them in priority order. If you have limited time, if you have limited money or both, which one of these would you go for? Which one of these would you sacrifice? You will then know why your life is the way it is. Want to improve? Review your list of values.

Learning

“I am not good at maths. I just freeze in front of the computer. Numbers confuse me. Calculating when to buy when to sell is so hard, why doesn’t someone just tell me?” Does this sound familiar to you? Is someone you know in that situation? Is it you?

I had a fantastic history teacher. He weaved passion into the facts and figures that we had to remember. He used the human elements of kings and queens, armies and nations to tell us stories. Why did this country attack that country, why did the war go on for so long. The whole class sat mesmerised listening to the intrigue of history. We of course remembered everything.

People who did not like maths in school simply did not have a good teacher. Similarly if you hesitate at the words “Trading System” or “Trading Plan” it is probably for the lack of a good teacher. If you attend a course and do not take anything in, the course is useless. Why would you not take anything in? Learning is a two way street. You need a good teacher and you need a good student (that is you!)

Learning process is like market moves. You study, you attend a course and you go forward a fair bit. The course ends, the study ends. You pull back a little. If you do absolutely nothing with the information, then the pullback continues and takes you further back. If on the other hand you put in some time, energy and practice you reverse the pullback and start moving forward. Then you need another push so you do some more study and attend another course. Like the market you go beyond where you went first round.

The course ends and there is a little pullback. The same cycle continues. The markets need buyers and sellers to keep them active and liquid. Similarly you need activity in your learning to take you further, to keep you active.

If you have a good teacher, this process becomes easier. What is a good teacher? One that can relate the material to you and your life with examples, analogies, stories, a little humour, plenty of wisdom and experience. If you are a good student, this process becomes easier. What is a good student? One who has an open mind, gets involved, answers questions, asks questions, participates in activities and exercises.

If you like numbers, analysis, study, systems, plans, this is great. If you don’t, it is in your hands to change your story. Quoting W.D.Gann “if you want to make a success and make profits, your object must be to know more; study all the time”. Learning and its rewards are waiting for you.

Everyone knows that stop loss orders should be used for each and every active market position. The reasons which are usually cited revolve around risk mitigation, being free from watching the market 24/7 and even the psychological impact of consistent trade planning. Regardless of the reasoning, it is agreed across the board that stops are essential.

There are several different ways of setting a stop loss order and the methodology will be dependent upon the individual’s risk tolerance and time frame. For a investor, the stop loss is dependent upon fundamental factors and not on a falling price. For example, a company may drop 20% in price, but as long as it maintains dividend payments, it remains in the portfolio. If it rises 20% in price, but can no longer provide fully franked dividends, then a sales order is triggered. For a majority of shorter term traders, price, however, is the most important determinant of the stop and will dictate both the initial stop and any subsequent trailing or progressive stops.

The initial stop is vital for both quantifying risk and calculating position size, which should be a function of the risk capital (probably a percentage of the total account). This is relatively easy to calculate as:

Risk Capital
= The number of shares/CFD/Futures etc
Entry – Initial
Stop Loss

Most initial stops usually come in the guise of ‘technical stops”. These are placed based upon some degree of technical analysis derived from the predominant chart pattern. For example, in the image below the Elliott Wave trader has decided to place stops below the Wave Four. Technically this is a good position because it takes advantage of price support whilst also ensuring the trade is in the direction of the overall market trend. That is an upward trend is characterised by a series of higher highs and higher lows, a retreat in price below the Wave 4 low would represent the formation of a lower low – hence, a break in trend.

A technical stop can also be used in a progressive manner, trailing and locking in profits behind an advancing price. Gann used one such method in his original mechanical trading system, moving stop loss orders progressively higher behind each swing bottom (for a long trade).

Traders also employ volatility models when trailing stops. This might sound extremely complicated, but actually is quite a simple strategy. The advantage of volatility based stop losses is that there is a form of feedback between market action and the proximity of the stop loss to the actual price action. If the trading instrument is extremely volatile, the stop loss will be further away from the price, and if the volatility decreases, stops will be tightened – hence keeping the trader in the position longer.

Average True Range was developed by Welles Wilder and as per the following simple formulae that calculate the true range and then the average of that true range over a number of periods. The True Range is the greatest of either of the following:

Current interval’s High - current interval’s Low

or

Difference between previous interval’s Close and current interval’s High

or

Difference between previous interval’s Close and current interval’s Low

When the True Range is determined for each interval, they are then averaged to find the mean:

Average True Range (ATR) =
Sum of “X” True Range
(TR) values

“X”

At the day of entry in our example, we can use the indicator function in ProfitSource to see the ATR is around 27 cents.

Typically, traders will look for a multiple of the ATR and trail their stops accordingly, based upon optimisation in the back testing process. Currently for GUD in our example 2 times ATR is sufficent. Of course, it is still necessary to convert this figure into a price point. In order to do this, simply take the ATR mulitply by 2, and subtract this from the day’s low (but only on days that the market rises).

Entry at $5.37 on the 11th May, with the stop loss below the Wave Four ($4.86)

Market rises on the 12th (the low of that day is $5.50) stops moved to (ATR x 2= 54 cents), stop loss moved up to $4.96.

The stop loss is constantly moved up until the profit target is activated or the market returns and causes the stop to be taken out. In the following image, stops are trailed until the market corrects – causing the stop to be triggered on the 24th of April.

Using the “Trailing Stop” indicator in ProfitSource allows you to do this automatically. The image above shows the stop losses represented by purple dots calculated daily by the software. As you explore ProfitSource you will see several other different ways of setting trailing stops. For more information on these, simply select the ‘help’ function and learn all about them.

Investors Behaving Bad

There is a long list of academic theories and models that attempt to explain and understand the economy and markets. While none are perfectly infallible, many nevertheless have their merits and provide important practical lessons.

One of the most exciting and fastest growing areas of research is in the field of Behavioral Finance, which seeks to understand how we approach investing by applying the lessons of psychology. While most other economic schools of thought assume that investors are rational, sensible and well informed, behavioral finance acknowledges that we are emotional beings who often exhibit impulsive, irrational and sometimes self destructive tendencies.

While a thorough and detailed review of the field is not possible in this forum, I would nonetheless like to outline some of the major findings from this area of research. Hopefully this will allow us to better understand our motivations and allow us to avoid making poor investment decisions. (For those who are interested in a more detailed review, I highly recommend the book “Behavioral Investing: A practitioners guide to behavioral finance” by James Montier).

Below are some of the more common biases we tend to exhibit as investors.

1. Short term focus

Humans are highly focused on the short term, and will most often choose immediate satisfaction over long term gratification, even if the latter is objectively a more rewarding proposition. This means that we often opt to lock in small profits today rather than allowing our investments time to grow into something more substantial. Furthermore, it means we are easily scared off by short term losses even if there has been no fundamental cause for alarm.

2. Herd mentality

   We are all hard wired to go with the flow. None of us like to act in opposition to the general consensus, and find it much easier to behave in a way that is consistent with our peers. This means that we are easily carried away by irrational exuberance and overly sensitive to crippling pessimism. Although it has been repeatedly demonstrated that the best time to invest is during periods of great pessimism and the best time to sell is during periods of unbridled optimism, the vast majority of us do the exact opposite.

3. Overconfidence

   It is easy to demonstrate that most novice investors tend to fare very poorly, but this fact does little to discourage people from diving head first into the markets with little understanding or planning. We all tend to see ourselves as “above average” and assume that we will be smart enough to avoid the stupid mistakes made by others. Furthermore, when investments go our way we chalk that up to our amazing skill and insight. When the market moves against us, it is simply bad luck. This means we often fail to recognize mistakes as mistakes, and are doomed to repeat our past errors. The lesson here is to remain as realistic as possible, and don’t fool yourself into thinking that you have special abilities above that of the ordinary person.

4. Heads in the sand

   We all love to hear things that agree with our own opinions and reinforce our beliefs. More importantly we loathe anything that disagrees with our outlook and tend to dismiss it as unimportant, or often simply wrong. The truth is that we do ourselves a serious disservice by ignoring information purely on the basis that it disagrees with our own view. Investors who limit themselves in this way are destined to fail at evaluating events in an objective and considered fashion.

5. A focus on the irrelevant

   Our brains have evolved to identify patterns, and indeed this has provided us with an important survival mechanism. Unfortunately though, we are often prone to see patterns where none exist and in contradiction to what a more thorough and balanced analysis would tell us. Many people base their investment decisions on price alone, while others look to the heavens and use astrology as the basis for their decisions. Because unrelated phenomenon will inevitably align from time to time, we will most often view this as validation, and in conjunction with the previous point, will fail to consider anything that questions the assertion. Investors would do well to ignore any investment style or technique that is not strongly supported by evidence.

6. I know best

   Many experiments have shown that we tend to give more weight to our own experiences than we do to the experience of others, or even rigorous statistical evidence. The classic example is with someone who has smoked all their life and never gotten sick, or who has a parent who smoked 10 packets a day and lived to be 100. Despite the fact that the dangers of smoking are well established, they will disregard the facts because it doesn’t match their own experience. Similarly, if someone has lost money in the market then they believe that share market investing is a dangerous and reckless exercise. On the other hand, those that have done well recently will mistakenly believe that it is easy and relatively straightforward to make good money trading shares. The truth of course lies somewhere in between these two extremes, but few people are accepting of evidence that does not agree with their own experience.

7. The endowment effect

   It seems that ownership tends to drastically distort our perception of value. That is, we tend to attribute a greater than reasonable value to something purely on the basis that it is ours. This gets us into trouble when we own shares that are performing poorly. We tend to assume that the market has made a mistake, not us, and that the price will ultimately recover. Sometimes this will even cause us to buy more stock in the hope of “averaging down” our losses. Smart investors do not become emotionally attached to their shares.

We cannot change the fact that we are emotional beings, and nor would we want to. The point is that investment decisions should be driven primarily by reason and objectivity. That is, although it may be easier said than done, you should invest with your head, not your heart. The best way to do this is to establish a very clear strategy prior to entering the market. Map out in advance what it is you are looking to achieve and have a clear plan of action to respond to all likely scenarios. This way you will never be taken by surprise, and will be less likely to act irrationally and emotionally.

Make the markets work for you

Money Management as Your Trading Account Grows
One of the reasons that traders tend to overtrade is that they are trying to make too much money, too quickly, with a trading account that is too small.

During the online training sessions I run for new Safety in the Market students, I ask students to think about the financial goals they are trying to achieve from their trading during the year.

For example, let’s assume you aim to make $100,000 per year from your trading.

You have a $5,000 trading account, you will risk 5% of the account per trade and will aim to achieve a minimum of a 2 to 1 Reward to Risk Ratio. This means that your losses should be no more than $250 per trade (including brokerage) and your profits should be at least $500 per trade (after brokerage).

I encourage students to focus on 10 trades at a time. It doesn’t matter whether you take those 10 trades in one day, one week, one month… Just take 10 consecutive trades, and focus on the results. I suggest that new traders aim to have 4 winning trades, 4 losing trades, and 2 “breakeven trades” out of every 10 trades they take.

What does this mean for our trading account? Well, the 4 winning trades should return at least $2,000 (4 x $500). The 4 losing trades should lose no more than $1,000 (4 x $250). The 2 breakeven trades cost us nothing.

If you can achieve this mediocre success rate of 4 winning trades out of 10 with a conservative 2 to 1 Reward to Risk Ratio, then every 10 trades would be worth $1,000 to you.

This gives you a 20% return on your trading capital. Not bad.

So to make $100,000 profit, you would need to take 1000 trades (100 x 10).

We set our target low because if we know that 4 winning trades out of 10 will help us reach our goals, we don’t mind if the first two trades, for example, are losing trades, because we can see the big picture.

Contrast this with aiming for 7 out of 10 winning trades – if your first two trades lose, you can start to panic, and take trades that you shouldn’t.

You then need to ask yourself whether it is safe and reasonable to make 1000 trades during a year – after all, this equates to around 4 trades per trading day.

The answer for most people is probably not.

So we need to adjust the parameters of our trading system.

Many traders will look to increase their risk size – and maybe start risking 6% or 8% or 10%, in order to get where they want to go faster. This is dangerous and can lead to serious depletion of your trading capital if you have a bad run.

Or, they will aim for a higher success rate. While this is a good idea, the reality is it can take a few years in the market before you have the experience to be making, say, 7 winning trades out of 10 consistently. If you aim too high too early, you can find yourself disappointed, and “chasing” extra trades as you play catch up.

I suggest students work out a compounding plan instead.

For example, maintaining the same parameters as above, we know that every 10 trades are worth $1,000. So after 50 trades, we would expect our trading account to double in value from $5,000 to $10,000.

We can now risk $500 per trade, which is still only 5% of our new trading balance of $10,000.

Now every 10 trades is worth $2,000, so 50 more trades would see us at $20,000.

By risking 5% of $20,000, or $1,000, each 10 trades should now be worth at least $4,000 to us, so 50 more trades would see us at $40,000.

Risking 5% of $40,000, or $2,000, each 10 trades should now be worth at least $8,000 to us, so 50 more trades would see us at $80,000.

30 more trades from here would see us make $24,000, giving a profit of at least $99,000.

So by increasing our position sizes as our account grows, you can see that we can still risk 5% per trade, still only require a mediocre 4 wins out of 10, and still make around $100,000 profit in 230 trades.

230 trades in a year is less than one trade per day – this is far safer and far more achievable than taking 1000 trades in a year.

Remember too that 5% loss is our maximum loss, and 2 to 1 is our minimum reward. And we may well do better than 4 winning trades out of 10. In this case, we would achieve our final target well before 230 trades.

The point is, we have a minimum standard to aim at, and we know that if we reach this standard, it is simply a matter of finding and executing 230 trades in a year.

Having this rock solid plan in place will help to keep you from over trading, and help keep you focused on your goals.

Trading is a business – treat it like one.

As I said yesterday, Vanuatu is a group of 80 islands in the South Pacific Ocean, about three-quarters of the way between Hawaii and Australia.

And most recently, this small tropic paradise is gaining a new reputation as a “tax haven.” But does this island chain deserve that title?

we review the laws, political stability, economic climate, available legal entities, the tax situation, financial privacy rules, and the overall financial reputation of a jurisdiction. (Our top favorites remain Switzerland, Panama, Liechtenstein, and Hong Kong.)

For almost 40 years, Vanuatu certainly has been known to some as a tax haven. That explains why so many accountants, bankers, and lawyers are clustered in this small island nation.

But the archipelago’s reputation as an offshore financial center has been highly questionable, to say the least.

In 2000, the Asia-Pacific Group on Money-Laundering claimed the Russian mafia was laundering billions of dollars through offshore banking systems in the Pacific, including Vanuatu. There are about 2,000 registered institutions offering a wide range of offshore banking, investment, legal, accounting, and insurance and trust company services. Vanuatu also maintains an international shipping register in New York City.

In an unprecedented action in December 1999, a group of leading international bankers, pressured by the U.S., placed a ban on U.S. dollar denominated transactions involving three Pacific island nations - Nauru, Palau, and Vanuatu. The bankers accused them of laundering money for the Russian mafia and the South American drug cartels. At the time Vanuatu had 63 licensed offshore banks.

These bankers put a banking ban on these three countries because they were concerned about a report issued by the OECD’s Financial Action Task Force. The report called Vanuatu a “jurisdiction of prime concern” for money laundering because of these same mafia and drug cartel concerns.

Perhaps this small country is eager to distance itself from this past history, because the Vanuatu Government now welcomes outside investment to help develop their country.

The lack of income tax, capital gains tax, death and estate tax is an obvious attraction for outside investors. Plus, the country has no exchange controls. In 2002, following increasing international concern over money laundering, Vanuatu increased oversight and reporting requirements for its offshore sector.

But it was not until 2008 that Vanuatu agreed to release account information to other governments or law enforcement agencies. International pressure, mainly from Australian tax collectors, influenced the Vanuatu government to move to increased transparency.

Tax police raids in Australia this year have spurred a debate on whether Vanuatu will remain a tax-free haven.

Bottom line: We don’t recommended Vanuatu as an appropriate offshore financial haven, because of the history and other reasons stated above. But we also steer clear of this haven because it has a less developed offshore professional sector than other havens. Also, the government is not stable at all.

We wish the Vanuatu islanders well, and we remain open to change our current opinion. But in the meantime, there are too many other well-established offshore financial centers to choose from that deserve more serious consideration.

Depending on who you believe (and how they define them), there are any number of “tax havens” in the world.

“Tax havens” are defined as financially attractive jurisdictions that impose low or no taxes. They also typically roll out the welcome mat for foreigners willing to invest, bank or do business there.

With all the pressure put on European tax havens such as Liechtenstein in recent years, , some folks seem to be looking for alternative havens - especially the ones you might call the “far-out tax havens.” Perhaps these adventuresome folks think they can run and hide, but my advice is to be very careful where you go.

For instance, in the last few months I’ve received several inquiries about the Republic of Vanuatu. My readers want to know if it could be a good place for their offshore banking, asset protection plans and estate planning.

I can hear you now — where in the world is Vanuatu? — assuming it is in this world.

Vanuatu is a tropical archipelago group of 80 islands (about 65 of them inhabited). These islands cover 12,200 sq km (slightly larger than Connecticut) in the South Pacific Ocean, about three-quarters of the way between Hawaii and Australia.

The capital city is Port-Vila (on the island of Efate). Some 215,446 people live there, split between English and French speakers.

The different languages reflect Vanuatu’s colonial heritage when it was known as The New Hebrides. Multiple waves of colonists migrated to the New Hebrides in the millennia preceding European exploration in the 18th century. The British and French, who settled there in the 19th century, agreed in 1906 to an Anglo-French Condominium, which administered the islands until independence in 1980. At that time, the new Republic of Vanuatu was born.

At its height, about 12,000 expatriates lived in the islands. But after Vanuatu declared its independence, only people of Vanuatu could own land there. Therefore the mainly French and British expat community shrank to less than 3000.

Today, the expat population is about 8000 and growing, with heavily taxed Australians and New Zealanders in particular finding the island’s lifestyle — and lack of taxes — to their liking.

Inflation Story that Nobody Is Telling You

The vast majority of consumers see “inflation” as what we’re paying for groceries, gas, a Starbucks coffee, and electricity.

Yes, it’s true that rising prices for these necessities has been the poster child for inflation lately. But there’s much more to inflation than just forking over more at the gas station or coffeehouse.

When it comes to Europe, wage push inflation plays a crucial role.

Producers Pass the Inflation Buck

the Consumer

Producer prices are simply the costs required to produce goods and services. Naturally, when producers have to pay higher costs to produce goods, they’ll demand higher prices for the goods they’re selling. In other words, they pass their higher costs to you, the buyer.

Rising commodity prices tend to be a big reason why producers’ costs rise. More money spent in production means smaller profit margins at current prices. If a producer wants to make up for shrinking profit margins but can’t control his input costs, then he must pass on these costs in the form of higher prices. Excess money creation is what drives this type of inflation, affording higher prices.

No doubt, this is exactly why rising energy costs have been such a huge driver of the inflationary environment we’ve trudged through over the last several months.

The debate is heating up among whether this global inflationary period is coming to an end. I tend to believe it is. But, more importantly, economic growth and available credit across the globe is rolling over at the same time surging commodities have left inflation concerns on everyone’s mind.

For this reason central bank policy makers are struggling.

The cost of energy has buoyed the cost for producers, consumers, and everyone in between. But what happens when this pressure eases for a considerable stretch of time?

Inflation Is a Little Bit Different on the Other Side of the Pond

They don’t serve ice cubes in their drinks. They can drive on the left-hand side of the road. And inflation is also a little bit different in Europe. Despite this fact, inflation analysis in these respective regions often focuses on generalities and overlooks one particular difference. Let me explain…

Let’s focus only on two countries and two central banks: The Federal Reserve and the European Central Bank. If you haven’t been hiding under a rock for the last year, then you probably have some kind of idea how their respective policies vary.

The Federal Reserve has knocked off more than 3% from its benchmark interest rate in the last year. In that same time, the European Central Bank has mostly stood its ground, mixing in one rate hike of 25 basis points that brought its benchmark up to 4.25%.

And if you’ve been following my currency articles lately, you also probably know that this monetary policy discrepancy has been a boon to the euro, and a detriment to the buck. For many months, even years now, the relative performance of each currency has been primarily based upon expectations for this rate differential to change.

As you might imagine, inflation expectations play an enormous role in monetary policy expectations. Even though inflation has received plenty of attention over the last several months, many analysts have neglected an important difference between European inflation and U.S. inflation.

Now’s the time to pay closer attention.

What All the Analysts Have Missed Over the Last Few Months

In the last few weeks, commodity prices (particularly crude oil) have cracked. With that abrupt downturn also came a reprieve in inflation expectations. And that’s got many accepting the potential for a lasting shift towards even lower prices and less inflation pressure.

With that in mind, the dollar has managed to rally on two simple facts:

1. The U.S. Federal Reserve has already lopped off a considerable portion of its benchmark interest rate. So they’re now ahead of the rate-cut curve, which has helped maintain some growth in the U.S. relative to Europe.

2. The European Central Bank will be forced to bailout their deteriorating economy by cutting their benchmark interest rate.

Up until this point, the European Central Bank had a good reason to keep fighting inflation. But with commodity prices easing up, now may be the time for ECB policy makers to take action. Here’s why they’ve struggled…

Why Hasn’t the ECB Joined the Worldwide Rate Cutting Party Yet?

With many threats to global growth and concerns over several Eurozone member countries, many have been surprised the ECB has gone so long without letting up on the interest rate front. After all…

• The Federal Reserve has made several moves to lower rates
• The Bank of Canada has followed suit
• The Bank of England has gotten the ball rolling
• So has the Reserve Bank of New Zealand
• The Reserve Bank of Australia is likely next

If you’re wondering why the ECB hasn’t budged, look no further than labor unions. Simply put: Wage contracts put in place via labor unions have employees’ wages moving higher in lock-step with inflation.

There’s really no thought to profitability (the point when workers typically consider demanding higher wages). In other words, rising headline inflation fuels this wage-spiral. And this wage-spiral spurs greater headline inflation. And it continues on like this. That’s something Ben Bernanke hasn’t had to deal with.

You see, the Fed has been able to react to weakening growth by cutting interest rates. The plan: As growth moderates, or rolls over, inflation is likely to follow. But that assumption is more difficult to make when you’ve got rising wages keeping prices unnaturally high. The ECB hasn’t yet been able to make that assumption. Its interest rates remain high.
But here’s what you should expect…

When the ECB finally decides to cut rates, they will do so substantially and they will do so quickly. It will be their way of reloading. Because we know, with the labor unions continually eroding profit margins and forcing prices higher, the ECB will need some fire power for their next inflation shoot-out.

If they cut back rates now, they’ll be able to hike rates and combat inflation when the time comes again. All you need to do is be prepared to act accordingly.

Position Sizing is the part of the trading system that determines how large a position you will put on throughout the course of a trade

Professional gamblers have long claimed that there are two basic position-sizing strategies - martingale and anti-martingale. Martingale strategies increase one’s bet size when equity decreases (during a losing streak). Anti-martingale strategies, on the other hand, increase one’s bet size during winning streaks or when one’s equity increases.

If you’ve ever played roulette or craps, the purest form of martingale strategy might have occurred to you. It simply amounts to doubling your bet size when you lose. For example, if you lose $1, you bet $2. If you lose $2 then you bet $4. If you lose $4, you bet $8. When you finally win, which you will eventually do, you will be ahead by your original bet size.

Casinos love people who play such martingale strategies. First, any game of chance will have losing streaks. And when the probability of winning is less than 50 percent, the losing streaks could be quite significant. Let’s assume that you have a streak of 10 consecutive losses. If you had started betting $1, then you will have lost $2,047 over the streak. You will now be betting $2048 to get your original dollar back. Thus, your win-loss ratio at this point - for less than a 50:50 bet - is 1 to 4,095. You will be risking over $4,000 to get $1 in profits. And to make matters worst, since some people might have unlimited bankrolls, the casinos have betting limits. At a table that allows a minimum bet of $1, you probably couldn’t risk more than $100. As a result, martingale betting strategies generally do not work - in the casinos or in the market.

If your risk continues to increase during a losing streak, you will eventually have abig enough streak to cause you to go bankrupt. And even if your bankroll was unlimited, you would be commiting yourself to risk-to-reward strategies that no human being could tolerate psychologically.

Anti-martingale strategies, which call for larger risk during a winning streak, do work - both in gambling arena and in the investment arena. Smart gamblers know to increase their bets, within certain limits, when they are winning. And the same is true for trading or investing. Position-sizing systems that work call for you to increase your position size when you make money. That holds for gambling, for trading, and for investing.

The purpose of postion-sizing is to tell you how many units (shares or contracts) you going to put on, given the size of your account. For example, a position-sizing decision might be that you don’t have enough money to put on any positions because the risk is too big. It allows you to determine your reward and risk characteristics by determining how many units you will risk on a given trade and in each trade in a portfolio. It also helps you equalize you trade exposure in the elements in your portfolio.

Some people believe they are “doing an adequate job of position sizing” by having a “money management stop.” Such a stop would be one in which you get out of your position when you lose a predetermined amount of money - say $1,000. However, this kind of stop does not tell you “how much” or “how many,” so it really as nothing to do with position sizing. Controlling risk by determining the amount of loss if you are stopped out is not the same as controlling risk through a position-sizing model that determines “how many” or if you can even afford to hold one position at all.

TRADING DISCIPLINE– What to do right now to make yourself a stronger person and a better trader.

1. Develop Consistency - You can create a mindset of consistency by developing beliefs that support you in obtaining this result. In order to develop consistency, there are a number of things, which you must do, including identifying your edges, defining the risk in each trade in advance, and accepting the risk to be able to exit a position when a defined loss level is realized. These and key mindsets help traders work through the issues they face in taking a trade, making the trade and executing their exit from the trade

2. Trading is a Probability Game - You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you

3. Jumping In Too Soon or Getting In Too Late - These mistakes come from traders not having a well-defined plan of how they will enter the market. This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements. A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.

4. Not taking profits on winners and Letting winners turn to losers - Again this is a function of not having a properly thought-out plan. Entries are easy but exits are hard. You must have a plan for how you will exit the market, both on your winners and your losers. Then your job as a trader becomes to execute your plan precisely.

5. Great traders don’t place their own expectations on to the market’s behaviour, whereas poor traders expect the market to give them something. The market does not know who you are and owes you nothing. Period. When conditions change, a smart trader will recognize that, and take what the market gives.

6. Emotional pain comes from expectations not being realized - When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment. By not having expectations of the market, you are not setting yourself up for this inner turmoil. The market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks. It is how you perceive and respond to these upticks and downticks that determine how you feel. This perception and feeling is a function of your beliefs. If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally.

7. The Four Major Fears

• Fear of Losing Money
• Being Wrong
• Missing Out
• Leaving Money on the Table

All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time. If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.

How to Protect Your Life Savings When You’re Over the $100,000 FDIC Limit (Even if You Have a $50 Million Stash of Cash, Here’s How You Can Protect it All)

The government’s heroic plan this year has been to bailout the banks, brokers, speculators and sub-prime lenders with your money.

But who will save the savers? In other words, who will save you? They say the FDIC will be there to insure you in case the worst should happen. But what if your account balance is over the $100,000 FDIC insurance limit?

What do you do then? Answer: We’ve discovered a masterful solution to protect your savings, even if your personal or business account is worth up to US$50 million (yes, million).

I’ll explain how in just moment, but first: Do you know what you’re up against?

An Even Bigger Crisis Than the S&L

So far this year, eight banks have collapsed. At first blush, eight banks failing doesn’t sound quite as bad if you consider 834 banks went under during the S&L crisis from 1990 to 1992.

But if you want to know the real extent of this crisis, you need to look at the bottom line. Worldwide, the credit crisis has already cost US$476 billion in losses, write-downs etc.

Seventeen years ago, the Savings and Loan Crisis cost the global economy US$190 billion (or US$350 billion in inflation-adjusted dollars).

The Federal government already bailed out Bear Stearns Cos, Fannie Mae, and Freddie Mac this year to stop a systemic risk, but at a massive cost to taxpayers.

On top of that, the government’s actions did nothing to fix the credit crisis, which is still the big looming threat to all the other smaller banks and mortgage lenders that aren’t getting bailed out.

The Federal Reserve won’t dirty its hands or spend the money to bailout smaller lenders.
That means it’s going to be a long, painful recovery for the banks going forward. And a few banks won’t make it.

Take IndyMac for example…

When IndyMac’s clients got word that the bank was in trouble in early July, thousands of concerned depositors pulled their cash out of the bank to salvage as much as they could.
All totaled, depositors walked away with US$1.3 billion in 11 days.

That’s when the FDIC stepped in and shut IndyMac’s doors for good.

And the remaining IndyMac clients had to depend on the FDIC to recover their deposits - assuming their accounts were fully insured.

What Good Is FDIC Insurance in the 21st Century?

As I said, when a bank fails, the FDIC accountants swoop in to tally the books.

The FDIC agents officially close the bank. They freeze the accounts at the bank. Then they begin the long painful process to determine exactly which funds are insured or not.

In the meantime, if the FDIC is dismantling your bank, you’re stuck waiting to recoup what you lost. You can’t write checks. You can’t pay bills. You can’t use your debit card. You can’t even go to the grocery store to buy food unless you have cash lying around.

Technically the FDIC insures every account up to US$100,000, and every retirement account up to US$250,000. But the devil is in the details. It’s generally US$100,000 per holder of account.

So for example, if you and your spouse have a joint savings account, you could hold up to US$200,000 in a single account. Then in theory, if your bank failed, you would recoup your entire account.

But these limits get dicey when you’re talking about trusts, annuities and other accounts - depending on how the account is titled. (Get the full rules here.)

In IndyMac’s case, a whopping US$1 billion of the US$19 billion deposits was uninsured. According to FDIC, US$2.6 TRILLION is currently uninsured in the United States.

So the question is: What do you do if your accounts are simply too big for the FDIC to insure?

A Masterful Solution to This FDIC Insurance Problem

For years, we’ve recommended you seek refuge from possible bank failures by diversifying your holdings.

For example, you can hold up to US$100,000 at several U.S. banks, or invest your long-term safe funds in a bank account overseas where liquidity is much higher. And in our recommended jurisdictions, there hasn’t been a bank failure in over 125 years.

But now, we’ve discovered another unique solution.

Our friends at EverBank have devised a new “Insured Advantage Certificate of Deposit,” that protects your capital up to US$50 MILLION. You can literally park your funds in this CD and the FDIC will insure you up to US$50 million no matter what happens.
You can open this CD for yourself, your business, your non-for-profit organization, etc.

Also, you don’t have to hold this CD for years (unless you want to) for it to mature. You can hold this CD for as little as three months.

Plus, your funds receive high yields at the same time. EverBank is able to do this by spreading the risk out among many banks, to ensure your money is fully protected.

Please take a moment to review the balances and the title on your U.S. bank accounts. Make sure that you don’t exceed the FDIC limits in a climate like this. And, if you discover you do, find the time to find the right solution for you and your family.

The best time to do it is now before the next bank goes bust and takes your savings along with it.

Are You an Investor, a Speculator or a Gambler?

What exactly is an Investor, a Speculator or a Gambler in the context of the Stock Exchange Market or for that matter, any markets?

The Public as well as the Media have often loosely and interchangeably used these three terms. Comparisons are often made between their activities, but the terms are never explicitly defined.

You might ask if there is a need to be distinct on these terms. Well, there is definitely such a need simply because, if you want to profit from the market consistently, it is crucial to first, know who you are and how you are going to participate in the market. In fact, the mindset and methods employed by an investor, speculator or gambler differs extensively and greatly affect the profitability of participating in the market. How perilous it is to venture into the markets blindly!

The Public often called themselves Investors, perhaps, influenced by the Media. But how many of them are really Investors or even Speculators. Think about it, many of the self- acclaim Investors are actually habitual Gamblers, betting on the market on the slightest rumours, insider news, company news or fluctuations, hoping to get rich quick by chance. This is not a debate on whether gambling is good or bad, but if you’re going to gamble; don’t you think you have a better chance at the Casino, which is there for this purpose?

So, what are the differences between an Investor, Speculator and Gambler? In order to differentiate between them, we should start by defining them. If you’re sufficiently motivated, I encourage you to try to define the terms ’speculating’, ‘gambling’ and ‘investing’ before you continue reading this article… you may surprise yourself.

Consider the following.

Investor

An investor is an individual whose primary concerns in the purchase of a security are regular dividend income, safety of the original investment, and if possible, capital appreciation.

A person whose principal concern in the purchase of a security is the minimizing of risk, compared to the speculator who is prepared to accept calculated risk in the hope of making better-than-average profits, or the “gambler” who is prepared to take even greater risks.

In 1934, Graham and David Dodd addressed the issue and offered a definition of “investment” in their classic text book Security Analysis

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return.
Operations not meeting these requirements are speculative.”
- Graham and Dodd’s Security Analysis (original 1934 edition)

Speculator

Speculation is the buying, holding, and selling of stocks, commodities, futures, currencies, collectibles, real estate, or any valuable thing to profit from fluctuations in its price as opposed to buying it for use or for income - dividends, rent etc.

A speculator is one who is prepared to accept calculated risks in the marketplace for attractive potential returns.

Speculation: The activity of forecasting the psychology of the market.
Speculative motive: The object of securing profit from knowing better than the market what the future will bring forth.
John Maynard Keynes in The General Theory of Employment, Interest, and Money

Gambler

Gambling (or betting) is any behaviour involving the risk of money or valuables on the outcome of a game, contest, or other event in which the outcome of that activity is partially or totally dependent upon chance or on one’s ability to do something.

“A gamble is the assumption of risk for no purpose but enjoyment of the risk itself, whereas speculation is undertaken in spite of the risk involved because one perceives a favorable risk-return trade-off. To turn a gamble into a speculative prospect requires an adequate risk premium for compensation to risk-averse investors for the risks that they bear.”
- Investments by Zvi Bodie, Alex Kane, and Alan J. Marcus

Regardless of how you define the terms, it is likely to be a worthwhile activity to estimate your expected returns on both an absolute basis as well as relative to an appropriate benchmark. And if you find yourself enjoying the activity of investing or if you find yourself addicted to the speed and excitement of the trading game, perhaps you should seriously consider whether you’ve crossed the line between investing and speculation, or worse yet, maybe you are really gambling with your money.