Financial Wisdom From Three Wise Men

Some of us are more disciplined than others. Shortly after we are born, we start to learn the rules of life. Some of these rules we had to learn the hard way, through trial and error. Others we learned from our parents. Learning from others in this way is often easier, however, we seem to do a better job of remembering the lessons we learn the hard way. As investors, we have a choice. We can learn the hard way and hope that we'll survive our lessons and not run out of money, or we can learn from the following three wise men.

Three wise men - Warren Buffett, Dennis Gartmen and Puggy Pearson - found very different methods to achieve financial success, but they all share a common trait - their success came by following a strict set of rules. In this article we'll show you nine rules that three wise investors live by.

The World’s Greatest Investor
Warren Buffett, the "Oracle of Omaha," is considered by many to be the greatest investor ever. He is also known for giving much of his $40 billion fortune to the Bill & Melinda Gates Foundation, which is dedicated to bringing innovations in health and learning. Buffett is primarily a value investor that closely follows Benjamin Graham's investing philosophy after having worked at Graham's firm, Graham-Newman. (To read more about Buffett, see Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?)
Buffett has several excellent investing rules. You can read about many of them in his company's (Berkshire Hathaway) annual reports, which are an excellent source of investing knowledge.

Here are three of Buffett's rules:

1. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. If you lose money on an investment, it will take a much greater return to just break even, let alone make additional money. Minimize your losses by finding quality companies that are temporarily selling at discounted prices. Then follow good capital management principles and maintain your trailing stops. Also, sitting on a losing trade uses up time, money and mental capital. If you find yourself in this situation, it is time to move on.
2. The stock market is designed to transfer money from the active to the patient.The best returns come from those who wait for the best opportunity to show itself before making a commitment. Those who chase the current hot stock usually end up losing more than they gain. Remain active in your analysis, look for quality companies at discounted prices and be patient waiting for them to reach their discounted price before buying.
3. The most important quality for an investor is temperament, not intellect.You need a temperament that neither derives great pleasure from being with the crowd or against it. Independent thinking and having confidence in what you believe is much more important than being the smartest person in the market. Most of the time, the best opportunities are found when everyone else has given up on the stock market. Over-confidence and emotion are the enemies of a high quality portfolio.

The Great Trader Gartman
In the October 1989 issue of Futures magazine, Dennis Gartman published 15 simple rules for trading. He is a successful trader who has experienced the gamut of trading from winning big to almost losing everything. Currently, he publishes The Gartman Letter, a daily publication for experienced investors and institutions.

Here are three of Gartman's best rules:

1. There is never one cockroach.When you encounter a problem due to management malfeasance, expect many more to follow. Bad news often begets bad news. Should you encounter any hint of this kind of problem, avoid the stock and sell any shares you currently own. (For related reading, see Evaluating A Company's Management, Get Tough On Management Puff and Putting Management Under The Microscope.)
2. In a bull market only be long. In a bear market only be short.Approximately 60% of a stock's move is based on the overall move of the market, so go with the trend when investing or trading. As the saying goes, "The trend is your friend."
3. Don't make a trade until the fundamentals and technicals agree. Fundamentals help to find quality companies that are selling at discounted prices. Technical analysis helps to determine when to buy, the exit target and where to set the trailing stop. A variation of this is to think like a fundamentalist and trade like a technician. When you understand the fundamental reasons that are driving the stock and the technicals confirm the fundamentals, then you can make the trade. (For more insight, see Fundamental Analysis For Traders and What Can Traders Learn From Investors?)

The Gambler
The wisdom of the late two-time champion world poker player Puggy Pearson offers our last set of rules to follow. "Only three things to gamblin'," Puggy once said, "knowing the 60/40 end of a proposition, money management and knowing yourself." Well, those rules apply to investors too.

Here are Pearson's all-encompassing rules:

1. Knowing the 60/40 end of a propositionUnderstanding the odds of drawing a winning hand is essential to poker. The 60/40 bets are those that offer the best chance of winning given all the options available. If you only play hands that have these odds or better, the statistics are on your side.As investors, we should strive to put the odds in our favor with every trade. Finding the best 60/40 opportunities takes time and research, as there are many ways to find good candidates. These can be identified through individual stock selection, top-down or bottom-up approaches, technical or fundamental analysis, value-based pricing, growth-oriented, sector-leaning or whatever approach works best for a particular investor. The point is that investors must be constantly working toward finding and recognizing opportunities as they present themselves. Once you have been dealt the right cards, it's time to take the next step.
2. Money ManagementManaging money is an ongoing process. The first tenet is to minimize losses on each opportunity. Fortunately, investors do not have to ante up to play, as in poker, though investors must work hard to find good opportunities. Once you have a good hand, it is time to decide how much money to commit to the opportunity.While much is written on this topic, let's keep it simple. Basically it is a risk-reward decision. The more money you commit, the greater the possible reward and the higher the risk of losing some of that money. However, if you do not play, then you cannot win. (For more on this, see Determining Risk And The Risk Pyramid.)Basically, when the best opportunities present themselves, it is usually wise to make a significant commitment. For good (but not great) opportunities, committing smaller amounts makes sense as the potential reward is less. As in poker, most of an investor's money is made in small increments with the occasional big win coming along every once in a while. This requires that an investor evaluate each opportunity compared to others that have shown themselves in the past. Experience is an excellent teacher. Finally, investors can use a stop-loss strategy to mitigate greater losses should their assessment of the opportunity prove to be wrong. Too bad gamblers don't have such a tool! (To read more, see The Stop-Loss Order - Make Sure You Use It.)
3. Knowing YourselfThe last gambling rule, knowing yourself, means doing everything you can to stick to your discipline. Everyone wants to get on with it to make the next trade, but if that opportunity does not fit within your measure of a good 60/40 opportunity, then you must force yourself to pass. While you will miss some good gains, this will also save you from some hefty losses. Following your discipline is essential for success as a gambler as well as an investor. You must be extraordinarily patient in your search for the right opportunities and then aggressively go after the best ones.

Conclusion
Each of these three wise men excels by following his rules. In this way, they have succeeded where many others have failed. While we might not be as wise as these three men, we can learn from the best.

The market (YM) drops today as shown from this 5-min. chart.

Will pass out this market today...not a good environment to trade...

This time it really got hit for a break even...the market is very volatile...

Stop almost got hit...

Moving the stop to break even at 12028...

Bought YM at 12028 with stop at 12010...

Buy stop hit at 12063 to break even...suddenly the market turns around in the regular open...not advisable to trade in the Globex...

Moving the stop buy to break even at 12063...putting buy limit to 12010...let's see if it will work in the Globex market...

Stock futures slip with commods after yen intervention

(Reuters) - U.S. stock index futures fell on Monday, following four weeks of market gains, as a spike in the U.S. dollar weighed on commodity prices and dried up bids on other risky assets.

U.S. stocks closed out a fourth week of gains on Friday, with the S&P 500 on track for its best monthly performance in more than two decades.

The greenback shot up to a three-month high against the yen early Monday after hitting a record low as the government of Japan intervened in the market to curb its currency's appreciation, which is hurting the export-based economy.

The higher dollar pressured commodity prices, with copper off 2.4 percent. Shares of Freeport-McMoRan Copper & Gold dropped 3 percent to $41.55 in light premarket trading.

"After a solid month of gains, the (higher) dollar is giving traders a reason to shy from the risk trade and take some profits," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

S&P 500 futures fell 11.8 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures lost 83 points, and Nasdaq 100 futures dropped 19.25 points.

S&P 500 futures held just under their 200-day moving average (MA). On the cash market, the index's 200-day MA is at 1,274.25, or 0.84 percent below its close on Friday.

The New York Federal Reserve Bank suspended MF Global Holdings Ltd from doing business with it. The troubled brokerage neared a deal to file for bankruptcy protection and sell assets to Interactive Brokers Group Inc , the Wall Street Journal and Financial Times reported.

The Institute for Supply Management-New York releases the October index of regional business activity at 8:30 a.m. EDT (1230 GMT). In September, the index read 538.0.

At 9:45 a.m., the Institute of Supply Management-Chicago releases its October index of manufacturing activity. Economists forecast a reading of 59.0, compared with 60.4 in September.

Japan sold the yen for the second time in less than three months after it hit another record high against the dollar, saying it intervened to counter speculative moves that were hurting the economy.

(Reporting by Rodrigo Campos; editing by Jeffrey Benkoe)

Sell short (YM) at 12063 with stop buy at 12085...will test the market if it will work at the short side...

Stop loss at 12060 got hit...20 point loss...trade failed...it did not turn around...

Bought YM at 12080 at the Globex market with stop at 12060...testing the Globex trading time relative to the regular open if it will hold through...

Though the market (YM) is down as shown from this 5-min. chart, but I am looking for a turn around through the regular open.

Let's see if it will...

NEW YORK | Mon Oct 31, 2011 5:27am EDT

NEW YORK (Reuters) - Stock index futures pointed to a weaker open for equities on Wall Street on Monday, with futures for the S&P 500, the Dow Jones and the Nasdaq 100 down by between 0.6 and 0.9 percent.

The Institute for Supply Management-New York releases the October index of regional business activity at 8:30 a.m. EDT. In September, the index read 538.0.

The Dow Jones industrial average finance/markets/index?symbol=us%21dji">.DJI gained 22.56 points, or 0.18 percent, to 12,231.11. The Standard & Poor's 500 Index .SPX.INX added 0.49 point, or 0.04 percent, to 1,285.08. The Nasdaq Composite Index .IXIC shed 1.48 points, or 0.05 percent, to 2,737.15

The market (YM Futures) is declining as shown from this 5-min. chart from the Globex market.

Let's see from the regular open if it will turn around.

Investor Types to Avoid
Barry Ritholtz
RealMoney
April 19, 2005

Has this ever happened to you? You’ve been waiting to deploy some fresh capital capital. You’ve done your homework — checked the charts technical-analysis, looked over the fundamentals fundamental-analysis. You are ready to make a buy.

But moments before you pull the trigger, someone casually mentions something negative about this new target. It could be a coworker or some talking head on TV. Regardless, you hesitate, decide to do some more research, just to be sure… and the next thing you know, your stock pick is off to the races — without you.

All you can think is, thanks for nothing, buddy.

Apprenticed Investor: 6 Investor Types to Avoid

We’ve all had chance encounters like this. They can cause self-doubt, make you second-guess yourself, wreak havoc with an investment strategy.

There are two solutions to dealing with this kind of distraction: One is to become more confident in your own skills. This will occur as you continually educate yourself, which is what “The Apprenticed Investor” is all about. The more confidence you develop, the easier it is to stick to your investment plan and not let third parties bump you off track.

The other solution is simpler: Learn to recognize destructive investor personalities — and stay as far away from them as possible.

Last week, we discussed why gains and losses are ultimately the investor’s responsibility. But there are some people who can temporarily knock you off your game: These are people to avoid.
The Dirty Half-Dozen

• The Enthusiast: He’s always breathless; his companies are always on the verge. “Big news is due any day now.” There’s always someone about to “snap these guys up.” He’s entranced with new management, i.e., “The new CFO was employee No. 12 at Dell (DELL)!”.

At one time or another, we’ve all been bitten by the infectious salesmanship of the enthusiast. The story always sounds great… yet somehow, the stocks never seem to work out.

• The Tipster: The easiest of all the archetypes to recognize, this guy always has a hot story that simply cannot wait. It’s about to happen any minute — a deal to be announced or an imminent takeover.

While the “enthusiast” is all excited about the company, what gets the tipster jazzed is the source of info. “This guy I know is (choose one) head trader at a hedge fund hedge-fund/runs a major wire house desk/at the FDA/on the board of directors.”

[In 2004], biotech was hot and the tipster talked a lot about new drugs that were just about to get FDA approval (none worked out). [In 2005], the tipster [was] been big into government and military contracts; apparently, he gets to brunch with Donald Rumsfeld.

For a person who supposedly has information that — if true, is likely illegal — the tipster’s trading record is surprisingly bad. With all of his connections and illicit info, it turns out that the tipster is little more than a rumor monger — and one who’s usually late to the party at that.

• The Liar: Most industries have their fair share of B.S. artists. But there is a very special type of liar attracted to trading.

You know these guys; they never seem to have a losing trade. When they discuss their executions, they consistently manage to buy at the low tick of the day. When they sell, their executions invariably are the very best possible print — and on almost every sale.

Think about how often you’ve managed to get the very best print of the year — or even the day. Over the past decade, I can count on one hand the number of times I’ve top-ticked stocks on the way out: Iomega (IOM), Micromuse (acquired by IBM) and Qualcomm (QCOM). Meanwhile, I’ve had countless sells at the day’s low print.

Somehow, the liar manages to accomplish a decade worth of statistically aberrant prices each day, before lunch.

I never call these clowns out. Why show your hand? But I make a mental note who the liar is, and judge all future statements accordingly. You should do the same thing.

• The Permabull or Permabear: Among the most dangerous and costly clowns in the circus, these guys are responsible for more destruction of wealth than any other player.

You doubtless recall the permabulls from the late 1990s. Most are little more than slick salesmen. They do not do much in the way of original research, but you can imagine the inner workings of their minds, sifting through reports looking for just the right bullet points.

The permabull uses all of the right buzzwords, his patter is polished, his manner impeccable. By the time he’s done with his bullish sales pitch, you’re reaching for your checkbook — and historically, big trouble.

Some of the permabulls used to be on TV a lot. One in particular was a frequent TV guest, extolling the virtues of the Goldilocks economy and the ever-rising bull market at Nasdaq 5000. Then the bottom fell out, taking the Nasdaq down a mere 80%. He never changed his tune the entire way down.

On the flip side are the permabears, of which there a few classic examples. They’ve been bearish for as far back as I can remember. They may have avoided the drop from Dow 11,000 to 8,000, but they’ve been waiting for that drop ever since Dow 3,000.

Avoid these broken clocks like the plague.

• The Exotician: The more obscure, the better: that’s the motto of this creature.
Fascinated by exotic charts and little known indicators, the exotician changes methodologies as often as he changes his underwear.

Flitting from style to style like a butterfly, his enthusiasm for the esoteric merely masks the lack of conviction he holds for his previous theory.

Last week it was a combination Bollinger Bands and McClennan Oscillators. Before that it was Elliot Waves. This week, its MACD and Fibonnaci. Next month, it’s the Kondratiev Long Wave theorem.
It’s not that these techniques don’t have value, but the exotician simply can’t seem to stick with any one long enough to test their validity. The exotician is on a futile search for the magic elixir — which, unfortunately, does not exist.

• The Know-It-All: I love listening to people talk about stocks at cocktail parties. One of my favorite players is the guy who knows all the obscure details on a company: When they were formed, who sits on the board, the model numbers of new products, all sort of useless minutia. At his fingertips is an unholy checklist of data, all of which is completely irrelevant to the investment process.

This is especially true with tech companies. Their products are complex and ever-changing; the networks they sell into are even more complicated. The technical attributes of their products are way beyond the comprehension of the average investor whose VCR clock has been flashing “12:00″ since 1994.

Actual language overheard at a barbecue [in the summer of 2004]: “Wait till you see the new 2200 dynamic cross circuitry router — it’s going to kick Cisco’s (CSCO) ass.”

Now, I’m pretty tech savvy: I hooked up my own TiVo (TIVO), and I can swap out a hard drive or add RAM by myself. But comparing the technical attributes of high-end switching equipment, and then doing a cost benefit analysis of the technical advantages of that product line (relative to the rest of the marketplace for that equipment) is far beyond my expertise.

I’ll wager it’s beyond your ken also.

Be wary of these characters. They remind me of the kid in grade school who couldn’t hit, throw or field, but he memorized the stats of all the players on his favorite baseball team.

Folks like that often lack an appreciation for the game. It’s no different with investing.

This column was originally published on April 19, 2005.

The market (YM) was choppy today and both protagonist were pulling each other till the market close.

The market pause a little bit for it pulls away yesterday.

Some participants take (took) advantage to take their profits early.

How To Draft A Perfect Trading Plan

This 8-step approach to planning paves the way to profitable stock trading.

(RightLine) -- When it comes to trading stocks, it's not about how hard you work. It's about knowing the right things to do, and putting that knowledge to work. Making money in the stock market isn't so hard when you apply a simple skill essential to converting the power of knowledge into profits ... planning!

"Plan Your Trade and Trade Your Plan" is a mantra you should print out and frame for your wall. Why? Because stock traders who carefully plan have a much better chance of making money than those who don't. In fact, the simple act of drafting a plan can significantly increase the odds that your trade will be profitable.

A successful trading plan doesn't have to be complicated. Many traders draft their trading plans in a notebook or on index cards, while others use word processors and spreadsheets. Regardless of the method you choose, every trading plan must include certain components to be effective.

1. Choose Your Style
Before drafting a plan of action, traders will want to decide what style of trading they prefer. A broad generalization of "buy and sell stocks" doesn't work - the criteria needs to be specific. Successful traders make money in different ways, but each has a well-defined method. On the other hand, a losing trader's plan is always vague and ambiguous. In trading, it pays to be precise, so decide what you like to do and build your plan around that style.

2. Commit To Your Trading Rules
The best plans always include a set of solid rules that never get broken. These same rules should also address how real-time decisions will be made when managing your stock positions. Your judgment will improve as you gain experience, so it's good to allow some flexibility in less critical areas of your plan. At the same time, maintain strict rules in the more sensitive parts of your plan - such as Risk Control.

3. Determine Your Time Frame
The type of trading you prefer usually defines the time frame. Short term traders who enjoy a fast paced style won't find much action in weekly or monthly time frames, while less active traders generally find that the extremely short time horizons require too much time at the computer. Decide which style best suits your personality, and then select the corresponding time frame. It's usually a good idea to start by spending a few minutes each day. Begin by managing the trades using daily charts, then see if you want to shorten or lengthen the time frame. The RightLine Report offers a variety of stocks in different time frames. Due to the way these stocks are selected and the type of exit strategy used, most of the picks will work for traders who plan to hold positions anywhere from a few hours to a few weeks.

4. Locate The Best Stocks to Trade
Choose a method to determine which stocks to trade. If you are experienced in the markets you probably already have a number of ideas and sources. To make it easier for our subscribers, the Right Line Report presents a wide variety of good stock choices in every issue. They are based on an assortment of trading strategies and tactics that take advantage of predictable market behaviors.

You may also want to develop your own new methods for locating stocks. The RightLine educational section on our website at www.RightLine.net presents numerous market concepts to help traders understand the nature of price movement, identify trends in every time frame, and choose the tools needed to capture profits.

5. Determine Entry Points
This can be a challenge, for there are almost as many different ways to determine entries, as there are stocks. Again, in an effort to make it easier for our subscribers, the Right Line Report presents specific entry points for every stock in each issue. The exact level to buy or sell short is based on a wide range of technical factors used by our analysts to reduce risk and optimize the potential gain. If you choose to select your own entry points, we provide a large assortment of articles to assist you in developing your own personal methods.

6. Use An Intelligent Method to Select the Number of Shares to Trade
Very few traders and investors realize the importance of balanced "Position Sizing." Most make the mistake of ignoring the size of their trading account when taking on new positions. As a result, many unknowingly join the ranks of high-risk over-traders, and soon find themselves in big trouble. Don't worry, it's easy to avoid when you have the RightLine Risk Manager to help! This simple tool is free to subscribers, but if you prefer to do the math yourself, here are the basics:

"Never risk more than 2% of your trading capital in a single trade or more than 6% of your capital at a time. For example, if you have $100,000 in your trading account, the most you should be willing to risk is $2,000. Before buying a stock, review the chart to locate the best place to put a stop loss order. If you determine that the stock requires 5-points to keep you in the trade while it is trending up, the maximum number of shares that you can afford is 400. ($2,000 maximum risk divided by 5-points = 400 shares.)"

You can see that although doing the calculation isn't terribly hard, the Risk Manager makes the job a whole lot easier!

7. Determine Your Exit Strategy
After you've entered a position in a stock and it starts moving, then what? Traders have a lot of different choices when it comes to exiting trades, and the method used can make a world of difference. Some traders routinely use "trailing" stops as their exit strategy of choice, while others choose to exit when the stock hits a certain price, or breaks through a support level, or approaches a resistance level. Other traders will choose to exit based on intra-day swings or expected news releases. When choosing an exit strategy, remember to plan not only for the upside, but the downside too. The exit strategy is one of the most important parts of any trading plan, and it is fundamental for traders to select an exit plan before entering a trade.

8. Manage Risk With Stops
You may already know, but a "stop" is an order to buy at a price above or sell at a price below the current market price. Stops, or stop orders, are used to protect our capital and lock in profits. Placing stops is easy, but locating the best place to put them can be quite challenging. To assist traders with stop placement, every stock entry in the RightLine Report includes a suggested stop level. And of course, we offer plenty of help on our website for anyone who wants to learn more about managing risk with stops.

Taking Precautions

by: Bill ZimmerFriday, October 28th, 2011 at 9:51 am

Have you ever had one of those days when everything went wrong? Of course you have, everyone has had such a day. Maybe a string of losing trades, a bad dream, in any case, you’re on edge in the morning. When you are on edge and anxious, it seems like everything can start to go wrong. Suddenly, you’re unable to regain your composure and trade in a focused, logical state of mind. At times like these, the only way to recover quickly is to take precautions to prevent a worst case scenario getting the better of you. In his book, “Mastering the Trade: Proven Techniques for Profiting from Intraday and Swing Trading Setups,” John F. Carter shares his office arrangement, and how he takes precautions.

The office consists of multiple computers. One dedicated to emails, instant messaging, and searching the Internet. This computer is more likely to be attacked by viruses and spyware, but since it is not used to execute trades, when it becomes disabled it has no bearing on execution. In addition there is a backup laptop, attached to a dialup modem connection. Should the electricity go out or the broadband Internet connection fail, he still has access to his accounts and price quotes. Mr. Carter represents the trader who is prepared for any circumstance. Should one of his computer systems fail, he has a backup system.

The motto, “be prepared” is tantamount to success, when it comes to trading, . While there are many things that can certainly go wrong, why worry about your computer equipment failing? When you concentrate intensely on how earnings reports, media coverage, or world events may ruin your trading plans, why spend precious time worrying about what you can control interfering with your trading?

The winning trader takes precautions to control the things that can be controlled, he/she therefore has enough mental energy to focus on events that cannot be controlled. What can you control? You can control your energy level by eating right and getting enough sleep. You can control your feelings of anxiety by avoiding caffeine and exercising regularly. And you can avoid serious losses by managing risk.

It may seem obvious, but many traders fail to take precautions. They trade by the seat of their pants and when something goes wrong, they blame it on anything or anyone but themselves. Take responsibility, you can’t control everything. It is however, critical to your survival to control what you can, and accept what you can’t. Taking precautions is a significant way that you can increase your chances of achieving financial success.

Trade Summary

Exited the trade at the upper arrow because of the big red bar signalling the price is dropping...the entry was at the lower arrow...that's how trading is all about...bailing out too early to avoid losses...no need to be greedy...as the saying goes...bulls make money...bears make money...pigs get slaughtered...and I don't wanna be a pig...

Exited the trade at 12155...just gain 25 points...it turns out the price action turns south...

Moving the stop to 12150...doesn't look good...

Moving sell limit to 12195...price action is on the climax...

Remember this quote fellow traders..."I made my money by watching and sitting tight"- Jesse Livermore, and  "I made my money by selling too early" - Bernard Baruch... so be patient while trading fellas...

There is a tendency the market, YM, will reach 12200...current price action is quite sustainable on the long side...let's see if turns out right...

Putting sell limit at 12185...

The market, YM, starts to climb up the ladder...moving the stop to 12140...

The market is consolidating tightly...a little bit choppy...let's see if the trade will turn out profitably...

Moving the stop to 12131 to make a positive outcome in case the trade go south...

Bought YM at 12130 with stop at 12110...let's see how it goes...

Not a good sign...trade failed...lost 25 points...will wait for the next location...

Putting sell limit to 12200...

Bought YM at 12145 with stop at 12120...

The market is dropping as shown from this 5-min. chart from the Globex market.

A sign that a profit taking mode as the usual "modus operandi" every Friday.

Futures falls on profit-taking after rally

On Friday October 28, 2011, 7:27 am

NEW YORK (Reuters) - U.S. stock index futures fell on Friday as investors took profits a day after a rally that pushed the S&P to close above its 200-day moving average for the first time since August.

On Thursday, the market soared 3 percent after a long-awaited agreement was struck to help contain the region's two-year debt crisis. The S&P 500 is up more than 13 percent this month, on pace for its biggest monthly gain since October 1974.

The head of Europe's bailout fund played down hopes of a quick deal with China to throw its support behind efforts to resolve the debt crisis but said he expects Beijing to continue to buy bonds issued by the fund.

S&P 500 futures fell 5.1 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 69 points, and Nasdaq 100 futures fell 7.25 points.

U.S. President Barack Obama said Thursday the Europe deal had calmed global markets, adding it was now important that the countries follow through on its implementation.

As earnings season rolls on, Merck & Co Inc, the No. 2 U.S. drugmaker, announced quarterly results early Friday.

Chevron Corp, the second-largest U.S. oil company, is expected to show a sharp increase in quarterly profit, boosted by a $500 million gain on the sale of its Welsh refinery and British and Irish marketing assets. Its profit is expected to jump to $3.46 per share from $1.87.

The Commerce Department releases September personal income and consumption data at 8:30 a.m. EDT (1230 GMT). Economists expect a 0.3 percent rise in income and a 0.6 percent increase in spending. In August, income fell 0.1 percent and spending was up 0.2 percent.

Also at 8:30 a.m. EDT, the Labor Department issues its Employment Cost Index for the third quarter. Economists see a rise of 0.6 percent versus a 0.7 percent increase in second quarter.

At 9:55 a.m. EDT, the Thomson Reuters/University of Michigan Surveys of Consumers will release its final October consumer sentiment index. Economists expect a reading of 58.0, compared with 57.5 in the preliminary October report.

Exxon Mobil Corp awarded two engineering contracts to build floating storage and offloading facilities at the Banyu Urip oilfield and said this will lead to full production of 165,000 barrels per day at its Cepu block in Indonesia in three years.

Samsung Electronics Co overtook Apple Inc as the world's top smartphone maker in the July-September period with a 44 percent jump in shipments and forecast strong sales in the current quarter.

Brocade Communications System Inc may looking again at prospective buyers, the Wall Street Journal reported, citing sources.

Some customers are moving money away from struggling futures brokerage MF Global Holdings Ltd, according to hedge fund officials, rivals and analysts, though the extent of the outflows is unclear.

Shares of Baidu Inc rose 6.5 percent to $147.35 in premarket trade after the company reported earnings late Thursday.

The Dow Jumps 300 Points on Scarface High

Posted October 27th, 2011 by theStockMasters...

in Financial News

 

All the major indexes are up over 2%, the S&P 500 is almost up 3%. Pardon the Masters for not believing the rally is going to last as the high frequency trading robots enjoy a coke fueled Tony Montana kind of euphoria.

We are all for equities going higher, its why we started this site back in 2006. However it pays to be sensible and the news of the EU breaking bread isn't what it seems -- the details are not final. What it proves is that U.S. equities are dependent on the EU fixing the EuroTrash situation.

Jens Larsen, chief European economist at RBC Capital Markets in London said it best -- . "It remains a deal long on intentions and short on details...Until we know how the mechanisms will work, it will be hard to judge whether this will be sufficient to entice investors to provide support to European governments."

For more on what happened at the EU meeting, visit Bloomberg.com -- European leaders bolstered their crisis-fighting toolbox with a plan that may generate only limited relief for stressed sovereigns unless it can be fleshed- out within weeks.

MASTERY Bottom line: The EU debt problems are far from over. Sell on this news without second thought.

There is no bullish rally, just bullshit.

We would love to be wrong on this, we even hope we are. However headlines are ruling the markets, not fundamentals.

Showing the image (DIA) of the trade conducted relative to the YM futures...the lower arrow shows the entry and the upper arrow shows the exit trade...a nice move by the market today...

Selling point got hit at 12100...gain of 70 points...

Looks like the market is moving (consolidating tightly) up slowly...let's see if it meets my selling point to 12100...

Moving the stop to 12050 to make it safe...

Putting sell limit to 12100...

Moving the stop to break even at 12030...

YM is now building momentum...looking to exit the trade to 12100...

Will try again at (YM) 12030 with stop at 12010 for a long trade...

Trade failed...lost 25 points...suddenly the market turns south...

Bought YM at 12045 with stop at 12020...let's see how it goes...long trade..

The market is going up while traders are asleep as shown from this 5-min. chart in the Globex market.

Let's see if it will follow through in the regular open.

How To Be An Entrepreneur In The Modern World

 

Lewis Humphries, On Wednesday October 26, 2011, 11:45 am EDT

We live in strangely contrasting times, where recession is prominent and yet the expansion of online resources has created an empowering environment for those who wish to become entrepreneurs. For example, unemployment stood at 9.1% in the U.S. at the beginning of September, while our cousins in the U.K. recorded their highest unemployment figures in more than 17 years. Despite this, there remains a world of opportunity for those who have the foresight to create their own destinies. With this in mind, how can you capitalize and create new or additional revenue for your household?

Freelance to Make the Most From Your Skills

Freelancing is on the rise across the globe, and it is a combination of social issues and technological innovations which have led to this state of affairs. Just as outsourcing non-strategic tasks to freelancers has helped to save U.S. businesses earn money during periods of recession, so too have remote technology and online collaboration resources emerged to create the ideal platform for those with a tangible skill to market. Whether you have a knack for web design, IT support or a flair for the written word, there has never been a better time to market and sell this skill to businesses.

The statistics back this up. U.S. freelancers were able to work a total average of 39 hours a week in 2010. This shows the true level of demand for freelance service providers, and that freelancing provides a more than viable outlet for those who are out of work and wish to earn a living, and for others who simply want to make additional money. A further 22% of freelancers even claimed that they earned more through working remotely on tasks that were outsourced, so there are significant money making opportunities for anyone who has a marketable skill.

Become a Virtual Assistant

Even if you do not have a specific skill that you consider to be marketable, you can still capitalize on your workplace experience or organizational attributes to create a revenue stream. Virtual assistants (which are not to be confused with automated online assistants) are self-employed individuals who offer professional services and administrative services to businesses, but they do this remotely from a home-based office. As long as you are organized, boast some administrative experience and have a fully functioning internet connection, then you can offer this type of service for a negotiated fee.

Once again, companies employ the services of virtual assistants for several purposes, most pointedly because it saves them from being responsible for any affiliated taxes and also means that they can expand their volume of staff without committing to additional office space. The role of a virtual assistant is becoming increasingly popular, especially amongst females and mothers who are looking to work from home while raising their children. Interestingly, more than 43% of VAs in the U.S. work during the weekend, which suggests that it would be ideal for an individual looking to create an additional and part-time revenue stream.

Pursue Your Creativity

There was a time where creatively minded individuals were hamstrung in their attempts to turn their passion into a business, simply because it was too difficult to source investment and the expert guidance required to make this happen. The online revolution has changed this, as it is now easier than ever to bring a product to market or deliver a home based service. While e-commerce has helped to make retail an online market place and created the opportunity to sell from home, social media has served to narrow the gap between organizations and consumers to create a truly global consumer base.

Most significant is the concept of crowdsourcing tasks, which has emerged to help creative people fund and develop their businesses. In today's market, anyone with a flair for design or the ability to create a viable product can tap into this resource to gain the assistance that they need, whether it is with regards to marketing, packaging or the logistics of shipping. It's now possible for a creator of a product to focus solely on this or her strength and engage the help of others to turn that talent into a part- or full-time venture. Remember, 44% of established corporate U.S. organizations utilized crowdsourcing to improve business. Imagine the impact it can have on smaller firms or evolving entrepreneurs

The Bottom Line

The truth remains that regardless of the strained economic climate, there is a whole world of opportunity lurking beyond the pages of the World Wide Web. Whether you boast a marketable skill or otherwise, working remotely or delivering services online can help make you significant money, whether you are out of work or simply looking to create an additional revenue stream to improve your household income. Evaluate your skills and mindset, and take advantage of the significant advances in online technology to help ease your financial burden.

Trade Summary

Showing today's trading activity that was shown/posted in real time.

Showing in here the chart from DIA (etf) which is equivalent to YM Futures.

Note that the trading instrument is the YM, a futures market.

In this trading scenario, a "short" trade was conducted.

Entry Price: Sell short at 11730; 7:33 am. PT
Stop Buy: 11760 (in case the market turn against the trade, a protection is a must to avoid further losses)
Exit Price: 11690; 7:45 am. PT
Gain: 40 points ($5.00 x 40 = $200.00)
Duration: 12 minutes

Buy limit got hit for a gain of 40 points...

Putting buy limit at 11690...

Looking for an exit at 11700...or 11690...

Sell short YM at 11730 with stop buy at 11760...let's see how it goes...

A day to day activities for the market

Showing this daily chart from the YM futures, Dow Jones, it is still a day to day status about where the market is going/heading.

There is no clear cut idea because of the unpredictable news events that is coming from different parts of the continent.

One thing for sure is that the market is still a traders market, a day to day activities.

The market is a news driven action, but that is already given since the bear market started in 07'.

It's an unsettling market behavior the past five years, same year started doing full time trading.

The chart below is in the range mode, and notice the bar size are full of longer ones.

A sign of unpredictable outcome or happenings in the market.

Let's see and always keep watching when the market settles.

10 rules for rookie day traders

Set limits, stay focused, and use your money wisely

By Michael Sincere

MIAMI, Fla. (MarketWatch) — If you are going to day trade, it’s essential to have a set of rules to manage any possible scenario. Even more important, you must also have the discipline to follow these rules.

Sometimes, in the heat of battle, traders will throw out their own rules and play it by ear — usually with disastrous results.

Although there are many rules, the following are the 10 most important:

1. The three E’s: enter, exit, escape

Rule No. 1 is having an enter price, an exit price, and an escape price in case of a worst-case scenario. This is rule number one for a reason. Before you press the “Enter” key, you must know when to get in, when to get out, and what to do if the trade doesn’t work out as expected.

Escaping a trade, also known as using a stop price, is essential if you want to minimize losses. Knowing when to get in or out will help you to lock in profits, as well as save you from potential disasters. Read more: 4 big risks to your investment portfolio now.

2. Avoid trading during the first 15 minutes of the market open

Those first 15 minutes of market action are often panic trades or market orders placed the night before. Novice day traders should avoid this time period while also looking for reversals. If you’re looking to make quick profits, it’s best to wait a while until you’re able to spot rewarding opportunities. Even many pros avoid the market open.

3. Use limit orders, not market orders

A market order simply tells your broker to buy or sell at the best available price. Unfortunately, best doesn’t necessarily mean profitable. The drawback to market orders was revealed during the May 2010 “flash crash.” When market orders were triggered on that day, many sell orders were filled at 10-, 15-, or 20 points lower than anticipated. A limit order, however, lets you control the maximum price you’ll pay or the minimum price you’ll sell. You set the parameters, which is why limit orders are recommended.

4. Rookie traders should avoid using margin

When you use margin, you are borrowing money from your brokerage to finance all or part of a trade. Full-time day traders (i.e. pattern day traders) are usually allowed 4:1 intraday margin. For example, with a $30,000 trading account, you’ll be given enough buying power to purchase $120,000 worth of securities. Overnight, however, the margin requirement is still 2:1.

When used properly, margin can leverage, or increase, potential returns. The problem is that if a trade goes against you, margin will increase losses. One of the reasons that day trading got a bad name a decade ago was because of margin, when people cashed in their 401k(s) and borrowed bundles of money to finance their trades. When the bull market ended in 2000, so did many traders’ accounts. Bottom line: if you are a novice trader, first learn how to day trade stocks without using margin.

5. Have a selling plan

Many rookies spend most of their time thinking about stocks they want to buy without considering when to sell. Before you enter the market, you need to know in advance when to exit, hopefully with a profit. “Playing it by ear” is not a selling strategy, nor is hope. As a day trader, you’ll set a price target as well as a time target.

6. Keep a journal of all your trades

Many pros swear by their journal, where they keep records of all their winning and losing trades. Writing down what you did right, or wrong, will help you improve as a trader, which is your primary goal. Not surprisingly, you’ll probably learn more from your losers than your winners.

7. Practice day trading in a paper-trading account

Although not everyone agrees that practice trading is important, it can be beneficial to some traders. If you do open a practice account, be sure to trade with a realistic amount of money. It’s not helpful to practice trade with a million dollars if the most you have in your account is $30,000. Also, if you do practice trade, think of it as an educational exercise, not a game.

8. Never act on tips from uninformed sources

Most pros know that buying stocks based on tips from uninformed acquaintances will almost always lead to bad trades. Knowing what stocks to buy is not enough. You also have to know when to sell, and by then the tipster is long gone. Legendary trader Jesse Livermore said it best when he wrote this about tips: “I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.”

If you can’t trust your own judgment, you may want to avoid day trading altogether.

9. Cut your losses

Managing losing trades is the key to surviving as a day trader. Although you also want to let your winners run, you can’t afford to let them run for too long. It’s more art than science to get it right, but learning how to control losses is essential if you are going to day trade. Once again, never forget the three E’s: (enter, exit, and escape).

10. Be willing to lose before you can win

Although many traders can handle winners, controlling losing stocks can be difficult. Many rookies panic at the first hint of losses, and end up making a series of impulsive trades that cost them money. If you’re day trading, you must be willing to accept some losses. The key: know in advance what you’ll do if you’re confronted with losses.

Although anyone can learn to day trade, few have the discipline to make consistent profits. What trips up many people are their emotions, which is why it’s so important to create a set of flexible rules. Your goal: follow the rules to help keep you on the right side of any trade.

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” – Jesse Livermore

The Science of Irrationality

A Nobelist explains our fondness for not thinking

By JONAH LEHRER

Here's a simple arithmetic question: "A bat and ball cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?"

The vast majority of people respond quickly and confidently, insisting the ball costs 10 cents. This answer is both incredibly obvious and utterly wrong. (The correct answer is five cents for the ball and $1.05 for the bat.) What's most impressive is that education doesn't really help; more than 50% of students at Harvard, Princeton and the Massachusetts Institute of Technology routinely give the incorrect answer.

Daniel Kahneman, a Nobel Laureate and professor of psychology at Princeton, has been asking questions like this for more than five decades. His disarmingly simple experiments have profoundly changed the way that we think about thinking. While philosophers, economists and social scientists had assumed for centuries that human beings are rational agents, Mr. Kahneman and his scientific partner, the late Amos Tversky, demonstrated that we're not nearly as rational as we like to believe.

When people face an uncertain situation, they don't carefully evaluate the information or look up relevant statistics. Instead, their decisions depend on mental short cuts, which often lead them to make foolish decisions. The short cuts aren't a faster way of doing the math; they're a way of skipping the math altogether.

Although Mr. Kahneman is now widely recognized as one of the most influential psychologists of the 20th century, his research was dismissed for years. Mr. Kahneman recounts how one eminent American philosopher, after hearing about the work, quickly turned away, saying, "I am not interested in the psychology of stupidity."

But the philosopher missed the point. The biases and blind-spots identified by Messrs. Kahneman and Tversky aren't symptoms of stupidity. They're an essential part of our humanity, the inescapable byproducts of a brain that evolution engineered over millions of years.

In Mr. Kahneman's important new book, "Thinking, Fast and Slow," his first work for a popular audience, he outlines the implications of this new model of cognition. What are the most important mental errors that we all make? And can they be overcome?

Consider the overconfidence bias, which drives many of our mistakes in decision-making. The best demonstration of the bias comes from the world of investing. Although many fund managers charge high fees to oversee stock portfolios, they routinely fail a basic test of skill: persistent achievement. As Mr. Kahneman notes, the year-to-year correlation between the performance of the vast majority of funds is barely above zero, which suggests that most successful managers are banking on luck, not talent.

This shouldn't be too surprising. The stock market is a case study in randomness, a system so complex that it's impossible to predict. Nevertheless, professional investors routinely believe that they can see what others can't. The end result is that they make far too many trades, with costly consequences.

And it's not just investors who suffer from this mental flaw. The typical entrepreneur believes that he or she has a 60% chance of success, though less than 35% of small businesses survive more than five years. Meanwhile, CEOs who hold more company stock—taken here as a sign of self-confidence—also tend to make more irresponsible decisions, overpaying for acquisitions and engaging in misguided mergers.

Even consumers are hurt by this bias. A recent survey of American homeowners found that they expected, on average, to spend about $18,500 on remodelling their kitchens. The actual average cost? Nearly $39,000.

We like to see ourselves as a Promethean species, uniquely endowed with the gift of reason. But Mr. Kahneman's simple experiments reveal a very different mind, stuffed full of habits that, in most situations, lead us astray. Though overconfidence may encourage us to take necessary risks—Mr. Kahneman calls it the "engine of capitalism"—it's generally a dangerous (and expensive) illusion.

What's even more upsetting is that these habits are virtually impossible to fix. As Mr. Kahneman himself admits, "My intuitive thinking is just as prone to overconfidence, extreme predictions and the planning fallacy as it was before I made a study of these issues."

Even when we know why we stumble, we still find a way to fall.

Know thyself

The noise across the venture investing landscape is deafening. Is there a valuation bubble? Is the boom in angel investing about to tip? Should large venture funds be doing seed stage investing? Is small-ticket Micro VC a legitimate strategy? Can new venture managers get funded? Blah, blah, blah. Bottom line: I don’t care and neither should you.

Whether you are building a new business, investing as an angel or deploying the capital of others, the guiding principles are the same:

1. Have a plan
2. Speak to lots of smart people about the plan
3. Iterate the plan
4. Execute the plan
5. Constantly critique the plan
6. Adjust the plan as necessary
7. Rinse, repeat

In short, know thyself and stay true to the mission. Just because someone else’s mission looks cooler and more successful than yours doesn’t mean that yours sucks; it may just take longer to play out. And if you try and adopt someone else’s mission, odds are that people will know you’re faking it and lack the true passion necessary for its successful execution. And if your mission, over time, proves to truly suck, then it’s time to ditch the mission and reassess: the market has spoken.

There is a huge difference between incorporating the feedback of smart people while preserving your core philosophy and changing missions as the wind blows. I can tell you that such a lack of rootedness will invariably lead to failure. Whether a business builder, an investor or both, it takes maniacal focus, passion and intensity to be successful. Only you can find your way; you simply can’t dial in the mission.

Worried about the macro environment? If you’re a company then raise 2-years of cash, not 9-12 months. If you’re a fund, make sure you are properly reserved for a hostile fund-raising environment where you’ll need to step up and support your companies until the market thaws. Otherwise, you’ll likely get jammed in pay-to-plays and get flushed at the worst possible time. These are things you can plan for and they don’t involve rocket science. Just plain good judgment and planning. It is perfectly reasonable to take a different view and be more aggressive, either by raising less and taking less dilution now (if a company) or by making more investments with lower or no reserves on the theory that the strong start-up market will continue to run (if you’re an angel or a fund). As long as you go in eyes wide open, I’m cool. You might get carried out in the end, but you took a calculated risk and lost. In my book that’s fine. Unfortunate, but fine. You proactively made the decision and followed through.

In short, I think both founders and investors are, in many cases, paying way too much attention to reverberations within the venture echo-chamber instead of just making good, sensible plans consistent with their missions. If a certain set of investors don’t like it, too bad. Find some others. If LPs don’t like your approach? Either take friends-and-family money or execute your plan as an angel and prove out your thesis. It’s within your control. Don’t cede control of your destiny to the oscillating waves of popular thought. Who cares what’s popular? Often what’s popular today falls out of favor tomorrow, so giving up on what looks like a contrarian strategy might be the worst decision you could possibly make.

Every trader must believe in God.

Written on October 17, 2011 by Eli Radke

 

Ok, not God but you have to have a believe in something you can’t always see, profits and progress. This is a big problem I see with traders. Either they are new to trading or they have gotten beat up in the past. They do not know what hard work is or how to not self destruct. They are uncommitted.

Hard work (new trader)

They see other people making money and they think it is easy. It takes awhile to become an overnight success. It takes even longer if you start from scratch and without help. I am perplex to find that many traders have not done the first thing required to be successful, a trading plan. We define a trading plan as a set of rules applied to a strategy. However you define it; it should shift the focus away from you and unto the market, answer the questions the market answers, and strategy must be repeatable and improvable. If you do not have plan it is hard to make money because you are always doing random things for random reasons, there is no constant and every experiment needs a constant.

Self destruction (older trader)

A trader can be his own best friend or worst enemy. At some point he will become his own worse enemy. Undoing days, weeks, or months of psychological and financial progress in a single trading session. When you lose “too much” , you probably have not stopped losing. Take a deep breathe when you are hurting, take some time away. I said it before but the bad does become worse with frightening regularity. When it is hardest to be discipline, it is the most important time to do so. As my mentor always told me, be able to trade tomorrow whenever tomorrow is.

Why belief is important.

You have to be committed to accomplish anything that is a difficult. There are times when it is going to be bad. There are times when you have to pick yourself up. There are going to be times when you figure it all out and it changes the next day. There are many times when you are going to question whether it is worth it, if you are asking that question the answer is always no. It is not worth it; you have not reached your goal, yet. The better question is, will it be worth it? You can’t be half pregnant when it comes to trading, in the times when you are in front of the screen you have to be 100% committed.

If you are new, believe the work you are doing has value. If you have lost a lot, that is in the past and believe you will put yourself in a situation to make it back. In order to sustain belief you have to see progress but to progress you need to start with belief. Does God exist, I am not sure. Do I believe in God, yes I do. The problem with not believing in God is that you may be wrong. Upside of believing in God is you might be right, if not you are dead anyways. Trading is the same, yes you are going to have to do some extra work but it beats the alternative which is not giving yourself a chance.

Do You Know Your Edge?

Obviously, you need an edge with your trading methodology or you’re not going to make it. If you haven’t back-tested it or cannot articulate it, you may not have one. But many traders who do happen to have an edge with their methodology are still not performing well. I sometimes refer to this as the ‘profit gap’ – the difference between your plan/method and your actual results. As a trading psychologist and an active trader myself I have a different view of “edge”.

As traders, we use logic and data and a method to justify our decisions, and we spend lots of time looking at charts….but at the crucial moment, where the rubber meets the road, it’s our emotions/feelings that actually provide the fuel to pull the trigger or not, whether it’s an entry or an exit, a winner or a loser. See my recent webinar where I show why your emotions can not be ignored and how they play an important role in your trading decisions.

The reality in trading is that you are your own edge. It’s in the gray matter between your ears. More specifically, your edge is your ability to adapt to whatever you see in the market. Call it cognitive flexibility, or whatever you want, but this is the reality of trading.

For example, when it comes to entries, one’s ability to adapt is critical, especially for the discretionary trader, because set-ups often don’t look neat and clean. Mixed signals and some degree of ambiguity are common. Ability to tolerate ambiguity is a psychological skill. Part of your personal edge.

And when it comes to exits, adaptability is even more critical. While entries and trade location are important, its ultimately your exits that will determine how much success you experience as a trader. Dealing with losers effectively and maintaining flexible expectations is a function of adaptability, your personal edge.

Trading involves a lot of disappointment (entries are not always perfect, targets not always reached, we exit and then see it go on to work, etc), and that disappointment often puts traders on tilt causing emotions to trump will power, paving the way for traders to veer from their plan and break their rules. Resilience in the face of disappointment is your personal edge.

Most people focus on what causes the market to move, but the harder part of trading is knowing what causes YOU to move. Once you have a handle on understanding on what causes the market to move you need to work on understanding yourself to know what causes you to move. This is how is how you develop your personal edge.

Was not able to post this week and the market (YM) made an unusual move as shown from this 60-min. chart.

It drops more than 200 points last Monday and move up a little bit early Tuesday, then stays sideways for three days.

It went up today, Friday, the last trading day.

Not quite a tradeable week for the traders.

Adjusting Day Trading Strategies For Different Market Conditions

For active stock traders, having different strategies for different market conditions is a crucial factor. Trends emerge, fade, reverse and ranges develop, all playing out in ever broader trends and ranges, all within a single trading session. Thus, the trader is faced with a choice: trade one strategy and profit only at times that suit the strategy, or trade several strategies that allow them to trade profitably, in an array of market conditions. Different times of the day pose different opportunities and threats, and must be accounted for. Once several strategies have been adopted, it is crucial that the trader know when to implement each type of strategy.

Three Types of Trading Strategies

For day traders, strategies will generally fall into three types of categories: scalping, trending and ranging. "Scalping" includes all trades where the trader is trying to capture a profit on order flow, such as making the spread, collecting ECN credits or riding the coat tails of a large order. "Trending" includes all strategies where the trader attempts to profit from a sustained move in one direction. Lastly, "r anging" strategies are used when the market is moving back and forth between resistance and support; profits are made inside this band, instead of on a stock making new highs or new lows (as in trends).

All traders will benefit from having trending strategies and range trading strategies in their arsenal. These are then combined with scalping strategies, to provide methods which are more likely to be profitable at all times of the day.

Adapt Strategies to Time of Day

The morning, lunch hour and afternoon are very different, and require different strategies.

The morning is volatile and big moves occur quickly. This means a trending type strategy is likely better. The trader may have to aggressively enter (remove liquidity) positions in order not miss out on the largest and/or quickest moves of the day.

The lunch hour, between 11:00 a.m. and 1:00 p.m. EST, is usually a quieter time. The market generally has a more ranging quality to it; moves are smaller, volume has decreased and big money is not aggressively moving stocks. This is a time where traders should focus on adding liquidity at the extreme edges of the established range, or even slightly outside. Trades should only be taken with a very high probability of success. While there are exceptions, most days will not require removal of liquidity to enter positions, during this time. Rather, traders should wait for the price to come to where they want and if it doesn't, don't make the trade. Due to the fact that there is less volume, and trades are likely to last longer than in the morning or later in the day, traders should make sure their reward/risk compensates them for this. Thus, trades will likely be few during this time.

As traders return from lunch and the close is within sight, volume and movement usually pick up. This will occur anytime from 1:00 p.m. EST. Continuing with the noon time strategy of being very selective on entry points, the trader will be wary that trends may once again start to emerge. Breakouts from lunchtime ranges can be swift and aggressive, therefore, exit losses quickly and move to a trending strategy. Patience is still required here. Exit losses quickly and attempt to see where the trend is going, towards the close. Remove liquidity if required, but since moves may still be questionable, add liquidity when possible, until definitive trends emerge.

The three times of day can be summed up by the aggression style that should be used to trade them:

• Morning – Aggressively join momentum moves that are starting. Removal of liquidity is often required. Use tight stops, as a change in direction can happen swiftly.
• Noon – Very conservative. Use range trading type strategies. Always try to add liquidity, unless a loss is escalating. Be very patient, let price come to the order, instead of removing liquidity to enter a position.
• Afternoon – Watch for breakouts of lunchtime range, if there was one. Join trending moves, attempting to add liquidity if markets remain quiet. Exit noon trades quickly, if the price moves against those positions in the afternoon. Look for points where the morning trend is likely to re-emerge or reverse.

When to Shift Strategies

The times of day are only rough approximations; what really matters is noticing when the market shifts from ranging to trending and vice versa, then adjusting to it. When this shift is occurring, is much easier to see if charts are continually updated with trendlines, and horizontal support and resistance lines, as shown in Figure 1.

Figure 1 – General Electric (GE) 5 Minute Chart – July 13, 2011

Source: ThinkorSwim – TD Ameritrade

In the morning, there is high volume at the open, which even increases as the trend accelerates. In order to take part in a move such as this, the trader needs to be aggressive, removing liquidity to get on board with the trend. The trader can add liquidity to capture a retracement, but may miss the swiftest move of the day.

As the day progresses, by 11:00 a range has established, with an upward bias and a false breakout occuring at 11:30. At this point in the day, though, a trader should be less aggressive, adding liquidity and focusing more on a range-type strategy, until the market gives signals otherwise. Volume is declining and false breakouts are a high probability, therefore, this breakout is more likely to be "faded," than to be seen as the continuation of a trend.

At just after 13:00 the market breaks lower. Volume remains low, so there is no need to get aggressive on entering; however, if the trader is long they should look to exit immediately, as trends can develop quickly after lunch. Through the afternoon the trader combines patience and a trend following strategy, if a trend develops; otherwise they will stay with the conservative ranging strategy, waiting for entries (potentially on pullbacks) into the overall trend.

By drawing trendlines and horizontal support and resistance, the type of environment the stock is in will be much more visible. As exemplified in the chart, trendlines should be drawn and when that trend line breaks down, a horizontal line should be drawn at the most recent swing high and swing low. In this way, we can see if a trend is reversing, or simply entering a ranging period. Horizontal lines can also be drawn during trends at reversal points; this will aid in seeing if the trend is slowing or potentially entering a range. During a range, a trendline can be drawn if price movements are biasing one direction, as we see in Figure 1 from 10:30-11:30 a.m. EST.

The Bottom Line

Day traders can benefit from having multiple strategies for different market conditions. Being able to range and trend trade successfully, will allow the trader to profit more readily, as well as know when to be aggressive (remove liquidity) and when to let price come to them. When trading multiple strategies, a trader must know the times when a particular strategy is likely to be the most useful. By continually marking the stock chart with recent price highs, price lows and trendlines, a deeper understanding of what stage the market is in, will be attained and, thus, what type of strategy to use.

 

The Rise Of The Rogue Trader

 

Amy Fontinelle, On Monday October 17, 2011, 4:29 pm EDT

With the recent scandal in which trader Kweku Adoboli lost 1.3 billion pounds for his employer, the Swiss investment bank UBS, rogue traders have been in the news. A rogue trader is a trader who takes unauthorized investing risks to attempt massive gains, but makes reckless choices in the process. These professionals may work as fund managers, at trading desks or in other capacities where they can invest large amounts of other people's money.

Playing by Their Own Rules

What makes these traders "rogue" is their unethical behavior. They may act without the authorization of their companies or supervisors, or exceed the limits they are given. Their investment styles might be more accurately described as speculating, betting or gambling. They may use enormous amounts of leverage or take high-risk positions in derivatives or currencies. Rogue traders often seek huge profits for themselves, but these individuals' professional positions and trading behavior, not their motivations, are what define them as rogue traders.

Rogue traders are usually willing to circumvent government regulations and company rules. These traders might initially be successful and emboldened by their results. They may take larger and larger risks to maintain or improve their track records. Ultimately, their risky bets can cause major losses for the companies they work for and bring criminal charges for fraud, collusion, breach of trust and more. These charges can bring jail time and fines to rogue traders.

Rogue Traders In Recent History

Over the last 20 years, we've seen a handful of major rogue trading scandals. In 1992, Harshad Mehta and other brokers colluded to manipulate the Bombay Stock Exchange. In 1995, Nick Leeson incurred a $1.4-billion loss for Barings bank that brought down the centuries-old institution. Trader Jerome Kerviel incurred a $7-billion loss for French bank Societe Generale, the largest uncovered thus far. Other rogue traders have been caught in Japan, the United States, Australia and the United Kingdom. There may be more rogue traders than we know about. Those who have been successful or who have avoided getting caught in unauthorized or illegal trading activities might be considered investment superstars or be quietly going about their business.

Some rogue traders are infamous not just for their scandalous trading behavior, but for their personal behavior. Stockbroker Jordan Belfort, the "Wolf of Wall Street," was convicted of money laundering and fraud in a relatively small pump-and-dump scheme that lost $200 million, but he is also known for reckless and outlandish acts, including organizing a trading floor midget-throwing contest, using massive quantities of illegal drugs and destroying a yacht and other vehicles.

A Rogue Trader's Downfall

A sudden, major loss usually triggers a rogue trader's demise. Complex trading strategies can go bad when something unexpected happens in the markets. In Leeson's case, nature intervened. A short straddle he placed on the Nikkei became a huge loss after an earthquake in Kobe.

Rogue traders might also be caught if a co-worker reports their behavior or if regulatory authorities catch on, as happened with Peter Young and an SEC investigation. An exchange may notice a particular trader's behavior or be tipped off, which occurred in the case of Jerome Kerviel and the Eurex derivatives exchange. Adoboli tried to hide his massive losses, but got caught falsifying accounting records.

The Fallout of Rogue Trading

A single rogue trader can bring down an entire company, no matter how well established it is or how successful it has been in the past. A rogue trader's influence can easily extend outside of his or her company. When a rogue trading scandal comes to light, it can cause a major drop in the share price of the bank or investment company associated with the scandal, which happened in September with UBS. Furthermore, a company with a tarnished name may have trouble retaining existing clients and attracting new ones. Top executives can also be forced out of the company for their failure to catch the problem before it exploded, or as part of a company's attempt to regain the public's trust.

The Bottom Line

Losses from rogue trading can be far reaching and extend worldwide. In the aftermath, victims and fearful onlookers may call out for increased government regulation, such as the recent suggestion to ban ETFs, in an attempt to prevent the next fraud. Regulations cannot put a stop to human ingenuity or fallibility. It will only be a matter of time before the next rogue trading scandal emerges.