Speed and Resistance - A simple trading plan!

With the use of speed and resistance lines you can discover one of the more simple mechanical methods of trading. You just follow the signals as they are given. While this method is far from perfect, it is an excellent basis to start trading and can be combined with other market information to provide a reliable short to medium term trading method.

The idea behind the speed and resistance indicator is that markets and stocks that are in a trend will at some point have a decent size correction or retracement in price. The most important word of that previous sentence is the word TREND. The stock or market must be in a recognizable trend for this
method to be useful.

By recognizing a correction to the trend when it occurs, allows you to enter a position in that particular stock or market and participate with much less risk involved. This method is particularly suitable if you don't want to try to pick absolute tops and bottoms. You can wait for the trend to develop first, apply this method and still participate in a lot of the price action.

Another part of the theory of speed and resistance is that the markets and stocks will correct to somewhat predefined areas or prices. By having these price areas known to you beforehand gives you an upper hand in trying to trade profitably.

Again, in order to be able to fully utilize the speed and resistance indicator or method, you must FIRST find a stock or a market that is in a strong trend. It doesn't matter whether it is in an up trend or a down trend; only that a strong trend be present. If you only buy stock and never go short, you would only look for stocks or markets in an uptrend.

Once you have your trending stock picked, identify the bottom for the range of the trend and also the current high price. You now have to draw a line to connect those two points. Also draw a vertical line from the high price down to the price area of the low. Subtract the high price from the low price for the price range of the gain.

Take the price gain amount you figured above and divide it by three. On your vertical line from the high make a mark for the 2/3 point and also at the 1/3 point. Go back to the low and draw a line from the low through the 2/3 point and repeat it for the 1/3 point. When complete, you will have your trend broken up into thirds. You likely have this method already built into your stock graphing program which really makes this simple to construct.

One of the basic ideas of speed and resistance is that when a correction occurs, it will traverse at least to the 2/3 line that you have drawn. Any smaller price moves will not be enough to allow you to identify a tradable entry point using this method. If the price of the stock approaches the 2/3 line area on your chart you would want to watch it carefully. If it appears that it will not break the 2/3 line with a further downward move, you would enter a long position in the stock. Look at your
other indicators and at the volume to confirm what this method is telling you.

If the stock price does move below the 2/3 line price then you should expect the price to continue downward to the area of the 1/3 price line. Once again as the price approaches the 1/3 line area you may find yourself with a low risk buying opportunity. CAUTION: If the 1/3 line is also broken, you may be looking at an overall reversal of the major trend. The trend may have turned down with the high point that you previously found as the overall turning point.

The lines that you have drawn will offer resistance to any correction that occurs. Once the 2/3 line is broken and the price moves further down, the 2/3 line will offer resistance to the stock price when it moves back up. You have a somewhat mechanical method to tell you when and which way to trade.

Be sure to study the price action when the stock price nears one of your lines. If you can get confirmation from the price action and have your other indicators signaling similar action, you may very well have a profitable trade staring you in the face. CAUTION : One of the problems with this method of trading is the tendency to get whip sawed back and forth between buying and going short.

By using speed and resistance lines, you will have predetermined price areas that will help guide you in your trading. You will have a mostly mechanical trading method. No emotions required.

Is Technical Analysis the HOLY GRAIL or is it just another fools folly?

Technical Analysis - Is it the HOLY GRAIL to making money in the stock market?

Since the markets and most of the stocks have been in apparent free falls over the last several weeks, you may have been asking yourself if this technical analysis thing is the HOLY GRAIL or is it just another method that has no reason to it's madness.

If you were not able to predict the correction that we just underwent, could it be that you are questioning your methods, your work and maybe even technical analysis? If this is something that you are currently going through, consider it a good thing. You should always question what you do, how you do it and the conclusions your then draw from your work. The markets have a way of making us do just those things even if you don't regularly try to do it on your own..

Every type or method of analysis is supposed to help you see around the corner of time and get a glimpse of what is to come. Any method that helps you to understand and maybe get that glimmer of the future is a method worthy of your consideration. Is technical analysis the only way to make money in the stock market? By all means, no.

As I have discussed in a previous newsletter, some of my friends use nothing but their memory to aid them in buying and selling stocks. They can somehow keep in their minds the price levels and trading levels of the issues that they watch. When those levels are crossed they will then buy or sell according to some internal radar.

The people I know who use this method are by no means always right. And that's the important thing to remember; NO ONE using any method is always right all of the time. The good news is that you don't have to be. You just need to be right most of the time and learn some other money management methods to help with the errors that always seem to come up from time to time.

The very nature of the stock market makes it impossible to always be right 100% of the time. There are just too many individuals and institutions with their own agendas going against each other. And some of those agendas are specifically geared to pushing you to make the wrong decisions. They intend to make you sell out of positions at losses or buy into stocks when your best financial interest
would be served by doing just the opposite.

You must remember why people buy stocks. People buy stocks when they feel the price will go higher; the greed factor. Why do people sell stocks? There are many, many reasons for people to sell. They may very well have fear as the basis of their trading but they may just as well have other considerations. They may have to raise cash for some reason such as taxes, school or anything else imaginable.

Maybe their health just doesn't allow them to trade any longer and they are quitting the game. My point is, you do not know why prices go down because of selling but when prices are moving up you can be much more sure that it is the greed factor at work.

When you are doing your analysis, remember important dates and what may be happening on a national or international level that may affect prices and the supply and demand factors. We just passed through the US tax deadline for taxes to be paid on a lot of profits that were made last year. Many people had to sell positions just to pay those taxes; I did. Keep these kinds of things in the back of your mind as you do your analysis.

Don't forsake your analysis methods until you are absolutely convinced they deserve it. Expect to be wrong from time to time. Every method I know about is wrong some of the time. You should be able to trade using your method and be making money over the long term. Your method should serve you by helping you make the right decisions, more if not most of the time.

If your primary method is technical analysis and you have been wrong over the last several weeks don't just throw it all away. Learn from your mistakes and keep your errors in perspective; remember the times that your analysis work has been right on target and helped you to make money.

If you are just starting to learn technical analysis, the focus of your work should be on the longer term. As you gain confidence and experience, then and only then should you start to refocus more on the medium term. Eventually you, like everyone, will want to move to the short term and try to trade that period of time. The short term is also, of course, the most difficult to trade.

As the time period of your analysis grows shorter, you need to be able to more accurately do your analysis. If you have been drastically wrong over the last several weeks, maybe you should just move your time period out a little bit. As long as you are trading stocks and not time oriented investments like options, this may very well help you. You can always move back in to a shorter period of time as you regain confidence.

Lastly, if you are already well versed in technical analysis, you may want to find another method to help you. As you know, I use the Elliott Wave to help me see around those corners. I like to have both my technical analysis and the Elliott Wave counts showing me the same things at the same times. I can then trade much more confidently.

Gann analysis is also something that has always interested me but time has never been in enough abundance for me to get proficient with it to really use it to my advantage. It is something you may profit handsomely from learning.

There are many other methods which you should at least explore and learn a little about. You may find something that really interests you and therefore you find that you do well.

Invest in your mind as you invest in the markets and you will be rewarded many times over. Don't ever allow yourself to get complacent or allow your mind to stagnate. Stick with the methods that you have been using and that have worked for you in the past but always be on the lookout for new ideas and methods to help you. Always be straining to see around that next corner and one day you will be surprised at what you find.

Options Guide - An Introduction to Trading Options on Futures

Background to Options

A futures contract is an agreement between buyer and seller of the contract to buy/sell a certain amount and quality of a commodity at a certain time in the future, unless the contract is offset. Most futures contracts are traded by speculators so the contracts are usually offset before the expiration date. Trading futures options gives the buyer the right to buy or sell a a futures contract within a certain period of time.

The decision to exercise the option and buy/sell the underlying futures contract is entirely that of the option buyer. For the privilege, the option buyer pays the option seller a premium when undertaking the deal. The premium paid can vary depending on the amount of time left until the option expires (and for the opinion of the option buyer to be proved correct so he may exercise the option for a profit) and how far the current futures market price is from the option's "strike" price.

Strike prices are those set for exercising the option. They are spaced at specified intervals from the futures price, normally in nice round numbers. For example, the February Gold 2005 futures contract is trading at 443. There are options available to buy/sell the option (using a call/put) at 445, 440, 435, 430...all the way down to 300. There are also options to buy/sell the futures contract at a price greater than the current futures price: 445, 450, 455... all the way up to 600. Different markets have different intervals, for example, the US Dollar Index intervals are in single units (80, 81, 82, 83, 84, etc.) or Crude Oil contracts are in 50 cent intervals 40.00, 40.50, 41.00, 41.50... etc.

A buyer of an option can buy or sell the underlying futures contract depending whether he thinks the price of the futures contract will rise or fall. If he thinks the futures market will go up (bullish), he will buy a call option giving him the right to buy the futures contract at a pre-specified price (the strike price) under the futures market. He can immediately offset this by selling a futures contract at the higher futures market price. If he thinks the futures price will fall (bearish), he would buy a put option giving him the right to sell a futures contract above the futures market price. He can immediately offset the position by buying a futures contract below the option's strike price.

If the underlying futures contract is near to, or at, the strike price of the option, the option is said to be "at-the-money". If the option's strike price is below the futures price, a call option is said to be "in-the-money" because if you exercised it immediately you would have the right to buy the futures contract at less than the current futures price, and therefore sell it immediately for a profit. (The fact that you could do this means that the premium paid would be high - so you wouldn't be able to exit with an immediate profit.)

If the call option's strike price is above the futures price, the call is said to be "out-of-the-money". If you exercised the option immediately, you would do so at a loss because you would have the right to buy the futures contract at a greater price than the current futures market price. In this case, the premium would be lower.

Similarly, a put option is said to be in-the-money if the strike price is above the current futures price and out-the-money if the strike price is below the current futures price.

The seller of an option is obliged to buy or sell the underlying futures contract to the buyer of the option. If the seller is bullish and thinks the futures price will go up or stay roughly the same, he could sell a put option. He if is bearish and thinks the futures price will go down, he could sell a call option.

Options are wasting assets because they have a limited time before they expire. It may be days, weeks, months, even years away. After the expiration date, the option expires worthless because you no longer have the right to buy/sell the futures contract.

The Elliott Wave - Impulse Waves

I want to discuss some of the rules and guidelines involved with impulse waves and some of the problems you will encounter with them as well.

Impulse wave are always the five wave patterns on a chart. It does not matter if it is a tick by tick pattern or a daily chart. If it has five waves, it is an impulse wave. That means the trend of the wave to the next larger degree is in the same direction as the impulse wave. If this degree is also displaying a five wave impulse pattern then the trend of the next larger degree is also in that direction. This pattern continues throughout all the degree waves of the markets.

One of the primary ways I use to figure out the trend of the markets and the stocks by counting and recognizing impulse waves on my charts. When using the Elliott Wave, it is only necessary to know the degree in which you trade and the next higher degree. By knowing the next higher degree and its direction or trend, you can then more confidently trade the smaller degree that you actually use to trade. You will know ahead of time that you have either a five wave pattern to the upside or a three wave corrective pattern to trade. This makes it much easier to time your entries and exits.

Even if you have all of your Elliott Wave counting correct, it is still difficult to pick exact tops and bottoms. That's why I say 'the money is in the middle'. I always try to participate in the middle of the waves and not try to wring out every last cent from the tops. Too often, it will reverse and start a corrective wave before I can exit, so I am happy just making a profit. If you also use this method you can trade with more confidence because this is the easiest and the safest way to trade. Even
then, I find that I sometimes will have wave count changes that cause positions to be sold at a loss.

With impulse waves there are some rules which will help you even more in your trading. The most important rule to understand is that a wave 3 will never be the smallest wave of a five wave formation. Wave 3's are usually the largest in price terms and the longest in time terms of the impulse waves. You can make a lot of money by just watching for and trading the wave 3 of a five wave impulse pattern. Always, always try to trade the wave 3 moves.

Another rule concerning impulse waves is that a wave 4 can never overlap a wave 1. If it does, you have the counting wrong and you are not looking at an impulse wave. Go back to your counting of the waves and look at them again. You have an error somewhere.

A guideline but not an absolute rule of impulse waves is that the corrective waves 2 and 4 will alternate. If the wave 2 of the ongoing impulse wave is a sharp ABC correction down with a
large point move then wave 4 will likely be more of a sideways and time consuming correction. Another way in which wave 2 and four will alternate is by the counting of the respective wave
2 or 4. What I mean is that if wave 2 is a very simple and straightforward ABC correction it is likely wave 4 will be a much more complex formation. If wave 2 is complex then expect more of a simple wave 4 to take place. Again, these are not rules but guidelines that more often than not will play
out.

Finally, the last guideline for impulse waves that I want to get across this week is the idea of an extension. Many, if not most impulse wave patterns will have what is called an extension in one of the impulse waves. This means that this particular wave will show distorted subdivisions. When you
count the subdivisions you will find they are larger than the other subdivision waves in price and usually in time. Many times when looking at your chart the entire impulse pattern will more likely resemble a 9 wave pattern than a 5 wave pattern.

Extensions are supposed to be more likely to occur in the wave 3 of an impulse pattern but it seems to me as we move higher and higher in the markets, I have noticed a shifting of the extensions to the 5th wave. In other words, the wave counts are extending to the upside more and more as we
continue up to the ultimate wave top of this bull market we are currently enjoying.

One day the piper will have to be paid for all of those stock and market gains that are being racked up month after month and year after year. That's OK from my point of view because with options, I can make money with puts as well as I can with calls. Usually, even more and faster as the corrections always seem to travel father and in a faster mode.

The Elliott Wave - Breaking the wave down a little more

In previous post (The Elliott Wave - An introduction to this money making method of madness), we started with the bare minimum information about the Elliott Wave and presented the basic structure of two waves. As you recall, the Elliott Wave is a wonderful forecasting tool to use in the stock markets but that was not it's intent or original purpose. It is really a historical behavior study of human life and the cycles and the repetitions that occur within it. Only by understanding the past, can we learn about the future.

Since I have used the Elliott Wave, I have found it to be a wonderful forecaster of events as well as of prices. Many people watch the financial news everyday trying to figure out what is going to be hot tomorrow or next week. Or maybe you want to know what Alan Greenspan and his crew of mischief makers is going to do. What about the CPI or the PPI numbers before they are released to the public. These are all things it would really nice to know ahead of time.

With the Elliott Wave I can sometimes forecast what these numbers will be or at least how the markets will react to whatever is released. The result of this has been that I don't watch or read the news anymore. I don't need to know what the consensus is or what this or that commentator thinks this or that will be and what will ensue afterward. Many times, I can tell with the Elliott Wave how the markets will react, so I don't need all that extra effort and time to watch those things anymore. It allows me more time to concentrate on getting the wave counting right which is where the real money is made anyway.

Well, back to the Elliott Wave. The Elliott Wave forms patterns or progressions that unfold in certain ways and at certain relative times. The waves repeat themselves over and over and it is just a matter of getting accustomed to looking for them. Before long the patterns will seem to leap off of the graphs at you as you begin to see them without even trying.

There are mainly two different patterns of wave counts; the first is the five wave impulse pattern that was displayed last week. When you see a five wave pattern it means the wave of the next higher degree is in the same direction as that five wave pattern.

The other main pattern is the corrective pattern. It is a 3 wave corrective pattern and usually denotes the wave to the next higher degree is in the opposite direction as this 3 wave pattern. Last weeks drawing denoted both of these primary wave patterns.

Now I am going to get complicated a little bit with this. So far we have a 5 wave pattern to the upside and a 3 wave corrective wave after it. Pretty simple. The first wave of the 5 wave pattern is labelled as 1. Now, if this wave 1, was also subdivided, it would also form a 5 wave pattern within it. Think of it as zooming in on the wave 1 and showing more detail than was originally visible. Now you can see the subdivisions within the wave.

The next wave after the wave 1 is the corrective wave 2. This wave 2 could also subdivide into an ABC correction which when finished would be labelled as wave 2.

This pattern continues throughout the 5 wave pattern and then through the entire 3 wave correction after it. The 5 wave and then 3 wave corrective pattern is consistent throughout any degree you can find to look at it. Data can be used from the smallest you can get to the largest as well. It works on yearly or monthly data.

It also works down to the smallest degree that you can imagine. If you can find data for tick by tick you will find these Elliott Wave patterns in evidence. You will find waves within waves within waves within waves. Some are flowing in the same direction while others are moving in corrective patterns.

The basic structure of the pattern replicates itself in infinite degrees both larger and smaller.

The wave labelling of the Elliott Wave is of the utmost importance when using it to forecast stock prices and markets. It is not as important to know the name of which degree wave you are in as it is to understand that you are counting a particular size degree of wave. You must never confuse the degree counting.

The following are the degree names which were used by Ralph Elliott:

• Grand Supercycle
• Supercycle
• Cycle
• Primary
• Intermediate
• Minor
• Minute
• Minuette
• Subminuette

The way the Elliott Wave is counted, at least by me, is from the largest degree visible to the smallest. I start out on a chart and try to find the biggest waves. Then I work down in size to the smaller waves. As I approach the last few days of the chart, it is necessary to take it down as far as possible to obtain the best wave reading and therefore forecast.

The Elliott Wave - An introduction to this money making method of madness

The Elliott Wave was discovered by Ralph N. Elliott in the 1920's. His theory is based on crowd and social behavior patterns and trends. He found that these trends are quantifiable and that they can be charted and to a degree predicted.

He found these trends tended to follow mostly recognizable patterns and tended to repeat themselves over and over again. It's a revamp of the old saying that history always repeats itself. I think you would agree that the history of human life does seem to continuously repeat itself. The repetitions are rarely exact but the same patterns or trends seems to keep coming to the forefront.

Another relationship that Mr. Elliott discovered and is a part of the Elliott Wave is that human trends and thus the stock and market behaviors tend to reflect a compatibility with nature and some of the natural rhythms of life. His work revealed a set of rules to guide him in trading the stock market and
practically anything else which is freely traded in the open market without governmental interference and control.

He called the repetitive patterns he found waves and also discovered how the waves react with each other to make larger and smaller waves. Many of the patterns are identical only being different in the time or amplitude being used for the analysis. This is one of the beauties of the Elliott Wave. You
can use monthly data, weekly data, daily data, hourly data or any smaller data time that you can get access to. You will find Elliott Wave patterns in all data periods and can use them to help you in your trading.

In my opinion, the Elliott Wave Theory is THE best predicting tool available for the stock markets and the stocks that make them up but it is really not a predicting tool. The theory is a labeling of how the markets and stocks behave in the past. By learning the past with the Elliott Wave, you are then able to predict the future; with at least to some degree of accuracy.

One of the reasons the Elliott Wave is so difficult to use for most new analysts is the number of possible wave counts which are always present in any stock or market that you are trying to analyze. There are always different valid wave counts, some of which foretell of positive moves to come. At the same time and using the same data, there will also be perfectly valid wave counts which predict downward moves or wave.

The Elliott Wave is an art much more than a science. It has rules which could be considered science and are easily identified and used to your advantage. The correct counting of the waves is, by far, the most important part of the theory and that is much more of an art than science. If you can get the wave counts correct, most of the time, you will also be right in your trading most of the time. That can only lead to greater and greater profits building up in your account.

I have used the Elliott Wave for 20 plus years and feel that I am still learning. The most simple of rules are easy to see and follow but there are so many and with multiple possibilities always present, it is sometimes a study in frustration. This is especially true when you have your money backing what your wave counting predicts.

There are many computer programs available for hundreds to thousands of dollars to aid you in your counting of the Elliott Wave but I would ask that you do not use them. To fully understand the principle behind the waves, you need to look at the analysis and do the charting and counting for yourself. In this way you learn the basics and proceed up from there. By starting at the bottom and learning the principles yourself, you always have a base of knowledge you can go back to for help
and additional studies.

It is much like modern school children only learning to do multiplication and division with the use of calculators. They can learn to do it much faster and much more accurately but they will never really understand the concepts behind it because they have really never had to do the basics which are
necessary to understand the principles thoroughly.

With the Elliott Wave, I feel you MUST learn those concepts and the rules to fully put it to use. Learn it the hard way and you really will understand and just not have something or someone telling you what it or they think is correct.

The first and most simple rule of the Elliott Wave

The very first rule of the Elliott Wave Principle is the rule of 5 waves followed by a 3 wave correction.

For this example, I have used a pattern that is a 5 wave move to the upside. This 5 wave move actually consists of 3 up moves and 2 down or corrective waves. The first, which is labelled as wave 1, is an up wave followed by wave 2 which is a corrective wave for wave 1. Then wave 3 follows the bottom of wave 2 and is another wave to the upside. Wave 4 starts after wave 3 tops out and is a corrective wave for the previous wave 3. Finally after wave 4 makes a bottom, wave 5 takes
place to the upside.

This entire 5 wave move is then followed by a 3 wave correction to the downside. While the small waves 2 and 4 contained within this 5 wave structure only correct for the wave immediately preceding it, namely wave 1 and 3, the following move down corrects for the entire formation or all 5 waves of the previous structure.

This correction is labelled normally as an ABC correction. In this example, Wave A is a downward move and wave B then corrects wave A and moves in the opposite direction. Wave B will top and a wave C will take place

After this formation is completed there are multiple possibilities on the next sequence and we will get to those at a later time. For now, start to look at you charts and see if you can count the above wave pattern and recognize it. Sometime it literally blasts off the chart at you and at other times it is very much camouflaged.

How To Make Money In Commodities

Predictions are everywhere - I've even made a few myself. Every financial channel on radio and TV and every newspaper across the country love to quote the 'experts' and their predictions are often treated as if they came down from Mount Sinai. The market analysts that issue these predictions usually dress nice, sound impressive, and look smart. They have expensive offices and big titles with famous firms, but really, what do analysts know?

In the world of commodities there are two kinds of analyses, fundamental and technical. Fundamental analysis is the more traditional approach that focuses on supply and demand figures, production estimates, consumption trends, etc... Technical analysis describes a wide variety of approaches, most of which involve charts and focus on the movement of prices. Unfortunately, what many people do not realize is that neither method has any ability to predict the future. No matter what type of data you prefer, you are always studying the past. It does not matter how big your computer is, you will never find the future in the statistics. As far as the future is concerned, there are no experts.

But wait, you say, why are some investors successful and others not? How is it that some have made big fortunes while the rest of us struggle? Didn't they have to know something about the future to have done so well? Not necessarily. I am beginning to believe that the best investors are really 'money managers' in the best sense. They are not so much great predictors as they are effective decision-makers in a dynamic world. Their focus is fixed on the present as the future unfolds, not on some past prediction. And that, I am afraid, is the essence of where many of us go wrong. We study the markets and listen to the experts. As a result, we tie our hopes and our egos to our investment decisions. When the world changes, we can't handle it. We freeze, hoping that somehow we will still be proven right (how many out there are still waiting for their tech stocks to come back?). Our resources dwindle and opportunities pass us by, all because we did not recognize the significance of a new day.

A successful investor (money manager), as I see it, has to be continually focused on the present with an awareness of maximizing opportunities. He must have absolutely no sentimental allegiance to past decisions. The never-ending job is to keep his resources positioned in assets that are performing. As the new day unfolds, he has to know what is significant. What events will make him exit and what events won't. Losing trades must not be allowed to waste his financial resources or his mental resources through worrying. In the end, his success will come from the opportunities that blossomed and the dangers he avoided, not the predictions that he made.

As investors, we have a choice. We can keep listening to the analysts and act surprised when they're wrong. We can hang on to old predictions and watch helplessly while the world changes around us. Or, we can start seeing that investing is not an exercise in predicting, but a process that requires active monitoring in a changing world. We can quit fretting about what we did and start taking responsibility for today. We can stop playing the loser's game.

What is FOREX Trading?

Foreign Exchange is the simultaneous buying of one currency and selling of another. In the foreign exchange market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another.

The FOREX market is a cash inter-bank or inter-dealer market that became more and more popular after 1971 when exchange rates were first allowed to float freely. Since then trading volume has increased rapidly over time. Today the Foreign Exchange market is the largest financial market in the world with an estimated daily turnover of over $1.5 trillion; more than three times the aggregate amount of the United States Equity and Treasury markets combined.

Unlike other financial markets, the FOREX market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another. This lack of a physical exchange enables the FOREX market to operate on a 24-hour basis, moving from one time zone to the next, across each of the world?s major financial centres every day.

The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, the trader must sell the currency back in order to close the position, and hopefully to realise the profit.

Through Blue Index the individual trader can trade on the same terms as the major institutions, with inter-bank spreads regardless of trade size.

Trade on Margin
Most FX trades are done on margin. With margin trading, as with other CFD types, you do not have to pay the full value of the shares, instead you put up a deposit (margin) which, with FX, is normally between 5% - 1% of the full contract value. The deposit (margin) required will depend on the liquidity of the particular currency pair.

The contract is revalued at the close of business each day and any resulting margin calls are made. Alternatively, any profit as a result of the revaluation is paid to the client. These monies are credited or debited daily to your margin account.

While your position remains open, your account is debited or credited to reflect interest adjustments. If you are long you pay interest, if you are short you receive interest.

Unlike cash equities and spread betting, FOREX contracts (Rolling Spot Contracts) have no settlement period and you can keep the position open indefinitely, providing there is enough margin in your account to support the position.

Transaction Types
Trading FOREX is very similar to trading other forms of CFDs, there are a number of different ways to trade Foreign Exchange.

Spot
This is the most common Foreign Exchange transaction that describes a deal that will come to settlement in two days, this is then rolled forward at no extra cost to generate a Rolling Spot Contract that has no expiry date. Entering into an FX trade means that you are taking a decision on the relative value of one currency versus another, and whether those currencies will appreciate, depreciate or remain constant against each other.

Forward Outright
A commitment to buy or sell a currency for delivery on a specified future date or period following the spot delivery date. The price is quoted as the Spot rate minus or plus the forward points for the chosen period. The standard periods are 1 and 2 weeks, 1,2,3,6, and 12 months.

Broken Date Forward
A forward deal with a non-standard maturity. Forward contracts are normally based on standard quoted periods, such as one, two or three months forward. A forward contract with a maturity date in, say, seven weeks would be termed a 'broken date' contract. Terms also used include odd dates or broken period.

Option
A contract giving the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period. Traditionally, options were used to offset the risk of an underlying instrument. However, today many investors use Options to establish positions in the FX market. A Naked Option is an Option written by the client when s/he does not hold an FX position against it.

Momentum - Overbought and oversold, divergences

In previous post (Momentum - What it is and what it can do for you.) we reviewed a little bit about what momentum is by using the analogy of a sports event. By using that example, I think you have felt or experienced it or something very similar
even though it is something that cannot be measured or quantified. Just because you can't really measure it, under those circumstances, it doesn't make it any less real.

Momentum, in that setting, is just a feeling, a sensation or an awareness but it is still there and seemingly a fact. This week just ask any Miami Dolphin football player or fan. They know
what momentum is and also know they never had it last Saturday.

You are probably now asking if it CAN be quantified or measured. Surely it can, at least in most endeavors in life. In the stock market there are numerous methods and indicators used to measure momentum.

In the rocket car example from last week, I used probably the most common stock market method of measurement which is the rate-of-change indicator. The use of the rate of change oscillator will give you a workable measure of whether the momentum is increasing or decreasing for any time period you wish to analyze.

When using momentum oscillators and attempting to interpret them in stock analysis, you will constantly hear that this stock is over sold and that market is over bought. Most momentum oscillators are set up on a chart with a line drawn at an over bought number and another line at an over sold number. These are usually set at 80 and 20 but sometimes at 70 and 30. These numbers or lines, like everything else in technical analysis, are not absolute guaranteed points but are meant to be guidelines.

Over the years there has been much discussion and argument about the numbers that are used for these over bought and over sold levels. There has been enough written on just this one subject to fill up books. Some analysts have insisted on one and can back up their analysis with some cold and hard facts and figures. When you read the other group, they too have some facts which could very well be argued to convince a reasonable person that their figures and facts are the correct
ones.

What I am trying to convey to you here is that you really should take neither at face value. Don't arbitrarily use one over the other or any other number(s) for that matter. Look at your analysis yourself and use what YOU feel are the proper numbers. Test what you do and how it affects your work. What works for IBM probably won't work as well on Intel.

A concept I have stressed in the past that I want to emphasize again concerning an over bought or over sold indication is that just because your stock is over bought, it does not mean it will go down in price. If your stock is over sold it does not mean that the price will rise either. Markets and stocks can get to these two extremes and stay there for long periods of time. They may retrace a little while staying over bought or over sold and then just head higher or lower again.

Even in rare circumstances, I have seen the readings hit 100 or 0 and stay there for a few days using daily readings. Over bought and over sold are relative measurements and not guarantees. You will do well to remember that little tidbit of information.

It goes back to technical analysis being an art and not a science. If I could set up a black box with all the indicators and methods preset to work in all conditions with all stocks and markets this would indeed be a science and we would all be rich; most especially me. Unfortunately, I don't think it can
be done. Technical analysis, in my opinion, has to have the individual eye and mind involved to figure out what to do and when to do it. What's right for me may not always be right for you and vice versa. Don't rely on others to do your analysis for you. Spend the time necessary to learn it and practice it correctly. Even then, you must understand you will not be right all of the time. Thank goodness, to be profitable, you don't have to be.

Now on to some other helpful indicators or methods. The first I want to discuss is divergences. Divergences happen all the time in analysis; they are very common. The shorter the time frame you use to analyze, the more you will probably see. I do most of my work using daily numbers and I see them fairly often.

A divergence in a stock market momentum indicator is when the stock price makes a high along with a high in the indicator you are watching, say a rate-of-change (ROC) indicator. The stock and the indicator then turn down for a few days and retrace before stopping and heading again to higher numbers. The stock makes a higher high while the ROC does not, falling short of the previously mentioned indicator high. This is what is referred to as a divergence. It works the same way in a
declining stock price and indicator.

Sometimes these divergences will set up as a series of divergences. You would have a series of higher highs being made in your stock while the momentum indicator you are watching makes lower and lower highs. This generally predicts a large price trend reversal is on the horizon and you should
pay attention and not get caught off guard when it occurs.

Divergences are wonderful indicators to use to help you foretell if and when a change in direction is imminent. Used with other indicators and also verifying the trend change with the current price action and you will be much better able to trade successfully. You will be able spot and recognize trend
changes sooner, saving you money when you need to make a quick exit and making your more because I know you will then trade the change.

As you get more experience with divergences, how they set up and how they act and react, you will start to recognize the tops and bottoms much sooner than you thought was possible. Suddenly the trees won't be in the way of your view of the forest anymore.

Momentum - What it is and what it can do for you.

Most of you, understand momentum in a sports setting. It is the intangible feeling that everyone has that one team is more in control of the game and therefore most likely to have the outcome result in the way they prefer. With the ebb and flow of the game, the momentum may shift from side to side or it may be in the firm possession of one team for the entire game.

Momentum in a sports setting sometimes comes to a team when they are still losing the game. They just somehow sense that a turn around has taken place and that they will ultimately triumph. It may have changed with a particular play, series or inning but somehow everyone in the game as well as the spectators can just feel it.

Momentum in the stock market is much the same. It can be just a feeling, without any solid analysis, that a stock or a market is going to go higher or lower in price. Many, many people buy and sell stocks using these feelings alone to guide them. They just have the feeling that things will work out the way they want them to and are confident enough to put their money up to prove it.

I don't for an instant recommend this method of trading because I know that I am not comfortable trading in this way. I do know several people who do trade this way and are fairly successful with it. It amazes me how they do it and even how they can do it. I require more evidence for me to be willing to stick my neck and my money out on the chopping block. I want to see charts and figures or something solid I can work with.

If you are like I am and have to have something tangible you can look at and use, there are quite a few indicators and methods developed over the years designed to help you. To name a few of the momentum indicators used in technical analysis, remember this is about momentum, are the rate of change indicator, the MACD indicator and the relative strength indicator but there are many others.

A lot of the indicators used in technical analysis are trend following methods and indicators. Some of these are moving averages, trend lines and price recognition patterns. These can all be wonderful indicators and should be taken into consideration in your technical analysis but they will tell you about trend changes after the changes have already taken place. They don't help you in determining if a change is occurring right now.

Momentum indicators attempt, with varying degrees of success, to tell you about trend changes as they are taking place or even before the change of trend has started to occur. For this reason alone, momentum oscillators should be important to you in your stock analysis and something to consider when doing your analysis.

Let's think about what momentum is and attempt to describe it in a way that does not use the stock market or stocks. Imagine a rocket car sitting at a complete stop, slowly idling out in the desert on a perfectly flat track. There is no wind and no obstructions. There is nothing to impede the rocket car and nothing to help propel it other than the 1 gallon of rocket fuel in its gas tank. The car is sitting perfectly still so there is no momentum.

The driver is given the signal to start and floors the accelerator; off we go. The car gains speed until finally that 1 gallon of rocket fuel is gone and the engine shuts off. Does the car then immediately stop? No, certainly it does not. It may slow down for quite some distance before finally coming to a complete stop.

Now let's think of how we might measure the momentum of this rocket car. For this comparison, I will use the rate of change indicator to show us the momentum. As the car first starts down the track the rate of change continues to go up as the speed of the rocket car increases. The momentum and speed of the car will steadily gain until the vehicle's gas is exhausted. The instant the rocket fuel is exhausted is the point of the highest rate of change and the greatest momentum. After the fuel is gone and the engine quits, the car continues to coast down the track and the momentum is decreasing as the speed of the car decreases. Finally the car will come to a stop and there is no rate of change and no momentum; we are back where we started.

Stocks and markets act in much the same way, although with some uneven changes in the momentum thrown in along the way. After a change in trend or direction occurs the momentum of the stock increases steadily. Of course, this is also relative to the time period you are analyzing. As with our rocket car, when the stock has used up its fuel, the speed or momentum peaks and slowly starts to decrease. After the main part of the trend is over the stock slows its price movement as it loses more and more momentum. Eventually, just like the rocket car, it will stop but unlike the rocket car, reverses trend and starts to move in the opposite direction.

The easiest way to make money in the stock markets is to recognize these trends and periods of high momentum and trade with them. It's the trend is your friend, kind of thing. I also have a saying that I continually remind myself of and it is THE MONEY IS IN THE MIDDLE. What that means is that the easiest place to make money in the stock market is in the middle of the momentum moves or trends no matter what time period you are using. If you are a day trader and use hourly prices you can still profit the easiest in the middle of the trends within the 1 hour time frames. If you are much longer term and use only monthly data, you will still find the easiest profit in the middle of that time frame.

Everyone, including myself, are always seeking to find the top or bottom and a reversal of the trend so we can make our buys or sells. It is a good feeling and a matter of pride to be able to pick the tops or bottoms and make your trades appropriately.You will also make substantial money if you are able to do this consistently.

If you are newer or less experienced or just unlucky and not able to accomplish this, then the fact of the matter is, the easiest money is "IN THE MIDDLE". When you are in the middle of these moves you can be more certain the trend will continue and can profit handsomely from it. You also are able to do so with less risk. You may want to concentrate on just this area of the market moves. You could make your money when it's easy and stay on the sidelines for the rest of the time. You'll be able to sleep easier at night and not spend so much time trying to pick all those small tops and bottoms.

How to Use Bollinger Bands

Bollinger Bands were first created by and got their name from John Bollinger. I remember him well as a commentator on a financial news network. He has left the TV commentary business and struck out on his own as a financial analyst.

Bollinger bands are an indicator which is primarily intended to show you or warn you of an impending thrust in the underlying's prices. It does not give reliable indications about the direction of those price moves or thrusts nearly as often. Use of the bands can help you time your purchases when you are forewarned a thrust is expected shortly.

Bollinger bands are displayed on your chart as a 3 line envelope of prices. They have at their center for the middle line a normal moving average. This moving average is adjustable just as with any normal moving average. You can adjust how many days you wish to use and also how you wish the
average to be computed; simple, exponential or any other choice you may desire.

This is one of those places where knowing the cycle lengths comes in handy. You might want to find and use a prevalent cycle time period for the construction of the moving average in your bands. Set up the middle line or band, the moving average in the manner you wish and when the calculation is
completed and drawn on your chart you will have also displayed an upper and a lower band which is a standard deviation to compute them. This standard deviation component is another variable which you would set up in your initial construction of the bands. You can use one or more standard
deviations.

By using a standard deviation in the computation of the bands you get a measure of the volatility of the underlying security. These bands will constrict during times of low volatility and will widen when volatility increases.

Four of the indications or interpretations you will get when using Bollinger Bands is the following. #1 - It has been noted that when volatility of an underlying security is weak and the bands are constricted and narrow, there tends to be a break out or a period of sharp price changes and a resulting increase in volatility. The longer the bands constrict and prices remain within narrow bands the more likely a break out becomes. Note that this does not tell you which direction the increase in
volatility and sharp price changes will occur. Only that it is likely to happen in either direction.

#2 When security prices begin a move from one the the two outer bands, the price move of the security tends to continue until it reaches the other band. This is something to look for and use that is pretty straight forward and simple but is not as reliable as # 1 above.

#3 Another tendency of prices when they exceed one of the outer bands is that the trend in that direction will continue. It is a confirmation that this trend is in place and will likely continue for a longer period of time.

#4 When bottoms or tops occur outside the bands, which is then followed by another bottom or top within the bands is a trend reversal indication.

Using Bollinger Bands, as well as technical analysis in general, is much more an art than a science. Bollinger Bands do not provide much in the way of buy and sell point indications but if you have other indicators blaring buy or sell signals while the Bollinger bands are constricted, you have additional evidence to help you with the decision about a trade.

You should study Bollinger Bands and all the variables in the initial set up phase. Pick a stock you routinely analyze and adjust one of the components of the Bolliger bands and see what difference is displayed. Go back to the construction phase and change another variable and look at the same data
on your chart again. Study how to interpret the bands and it's likely they will improve your decision making and trading.

Fibonacci arcs, fans and time zones.

Fibonacci Arcs

As you recall, last week we discussed an amazing man by the name of Fibonacci and the principals of the series of numbers he is credited with discovering.

In this section, we will look at the Fibonacci arc and it's use in technical analysis. These are usually done with the aid of a computer program but if you keep your charts on paper you can still construct these with the use of a compass.

Arcs are drawn by first determining two distinct points on a chart. Usually this is a distinct low or bottom and a corresponding high or top. The difference between these two points must then be multiplied by the Fibonacci ratio numbers of 38.2%, 50.0% and 61.8%. The arcs are then superimposed on the chart with the corresponding arcs going through the numbers derived from the three ratios.

The interpretation of the arcs is to help locate support areas after a primary move up and resistance areas after a primary move down. When prices move to the area of the arcs you should expect support or resistance to take place in that area.

If the prices moves to the point where it is intersecting the arc, it may be enough to end the correction and send prices back in the direction of the primary move. Or it may just be a temporary change in direction with prices returning, passing through the arc line and moving to the next arc line for a test of the next arc line level.

Fibonacci Fans


Fibonacci fan lines are drawn in a very similar way as the arc lines. You must correctly pick the low and the high of the move you are analyzing and the 3 lines are then drawn using
the Fibonacci ratios of 38.2%, 50.0% and 61.8%.

As prices retreat, they are met by resistance or support in the area of the drawn lines. Many times prices will fall to the lowest area of 61.8% and then start back, resuming the primary trend or move only to meet resistance at the 38.2% or the 50.0% area.

Many technicians use a combination of arcs and lines to anticipate probable support and resistance areas. First you would plot the arcs and lines and study where the lines intersect or cross. You would anticipate a potential change in direction of prices where price meets the intersection of the
arc lines and fan lines.



Fibonacci Time Series

The Fibonacci time series is a method of timing the underlying stock or market by time; not by price. It is constructed with a low and a high being recognized by the analyst and then applying the Fibonacci numerical intervals of 1, 2, 3, 5, 13 etc.

The Fibonacci times series lines are drawn as vertically lines when displayed on a computer screen chart. The idea, in using this method, is you are looking for changes in price direction for the underlying at or near the time series lines.

If you have the bottom and the top correctly labeled these will quite often help you anticipate WHEN the security may reverse direction and resume the primary move. The Fibonacci time series lines tell you nothing concerning prices.



Using a combination of all the Fibonacci tools: retracements, arcs and fans, you have 3 methods to analyze possible price reversals and with the time series, one method for the length of time possibly required to reach those price levels.

You would also want to take into consideration additional indicators to aid in pinpointing a potential reversal point.

Knowing When to Sell

This is the toughest question every investor faces because buying is relatively easy. There's lots of enthusiasm when you find the stock that seems to have everything. You can't wait to put in the order and watch its meteoric rise. Sometimes it takes off, but sometimes it doesn't work out the way you hoped it would. Any way it goes, though, you have to decide what to do: nothing, buy more, or sell. Let's look at some reasons for selling.

1. The easiest decison to sell some of a stock comes when it's a major winner. It has done even better than you initially imagined. Absolute home run. Maybe a five or ten bagger, as they say on the Street (meaning it went up five or ten times what you paid for it). Hopefully you had the patience to let it do well. When you get a spectacularly performing stock, the last thing you should do is sell it. Don't be afraid of making big money. However, you should be aware of the stock's value in comparison to your overall portfolio. If the stock has taken over more than 10% of your investment dollars, you need to pare it back, say down to somewhere between 5% to 8% of your portofolio. You never want to have too much reliance on any one stock because it can make you very happy when it's going up, but when it goes down, your personality changes. Please note, the recommendation here is not to sell the whole position. In fact, you don't ever want to get out of a strong stock altogether unless it is warranted by fundamental changes in the company. Selling a winning stock because you've made money is like trading Kobe Bryant because you've won too many games. Stay on board your winners for the ride, but don't let them get so influential that any downdraft will alter your personality.
2. Invert your buying process to determine when to sell. Most investors develop a set of criteria for buying a stock: a certain P/E ratio (price to earnings), and/or a Price to Sales Ratio (PSR), and/or profit margins, and/or ROE (return on equity), a low PEG (Price Earnings ratio divided by the Growth rate), etc. You need to constantly monitor these ratios and data points over time, not just when you buy the stock. When a number of these ratios suggest the stock is getting expensive, as determined by your initial valuation, you need to sell the stock. But don't sell if only one of your variables is out of whack. There should be a number of them screaming that the stock is fully valued and that exiting would be the better part of investing.
3. Sell if there has been a dramatic change in the direction of the company. Many times a company will be successful in one business and then decide to enter another. This is usually a real problem. While the original success came from certain skills the management and the workforce possessed, a new area will likely require a different set. A recent example was a very successful company that manufactured airplane safety equipment and then decided to get into the light bulb business. The lights went out for the new endeavor, and the original business, while still prospering, was hurt dramatically by the drain the new business created. Watch out for the new adventures. If they aren't directly leveraging the expertise of the company, get out.
4. Sell if the stock isn't improving earnings. Understand that the accepted valuation of a stock is the discounted value of its future earnings. That means to get a higher price on a stock, it needs to constantly improve earnings, not just match past quarters. However, as an investor, you need to read the earnings announcements carefully and determine if there are one-time charges that are hurting current earnings for the benefit of future earnings. A good example would be the added expense of hiring new sales people. While expensive in the short run, and a hit to current earnings, these additions should add more sales, and more earnings in the future. Some investors don't look at earnings as much as they look at assets of the company, say a film library or real estate holdings, but individual investors usually don't have the acumen to determine these valuations. Stick to the earnings and if they aren't improving over two to three quarters, boot the stock.
5. Sell if you bought the stock for a specific announcement and it didn't occur. Most of the biotech stocks fall into this category. Many of them are on the verge of medical breakthroughs with various diseases. Sometimes the original hopes don't materialize into real medicines. If you buy a stock for an event which is expected and then it doesn't happen, the stock will go down because every one else is selling. Join them or hold the stock and hope. Earnings are better than hope in the stock market.

Many of you will be reading this and asking yourself: what percentage loss should I take before I sell the stock? Sorry, that's not the way to do it. Some investors have certain disciplines: take only a 10% or 20% loss, then get out. Cut your losses, let your winners ride, etc. The only problem with that is that you often get out just as the stock turns around and heads up to new highs. If you have done your homework on a stock, and particularly a small-cap or mid-cap stock (stocks with market values of $100 million to $5 billion), you will experience a great deal of volatility and a 10% or 20% move in the stock is part of the trading day. To simply get out of a stock that you've worked hard to find because it goes down, especially without any news attached to it, only guarantees you'll get out and lose money. Stay with a good stock. Keep up with the news and the quarterly reports. Know your stock well, and the fluctuations every investor must endure won't trouble you as much as the uninformed investor. In fact, many of these downdrafts are great opportunities to buy more of a good stock at a great price, not a chance to sell at a loss and miss out on a winner.

Chart Pattern Recognition - Gaps

A upward gap on a stock chart is formed when the security opens higher than the intra day high of the period before and
moves higher still. A gap is formed between the two days prices; an empty space . A downward gap is when the security opens lower than the intra day low of the day before and continues lower intra day and for the close.

Gaps are usually points of very high or very low demand and will usually signal a continuation or follow through of the
security in the direction of the gap. They are excellent for catching security price moves. This is particularly true when you have other confirming indicators signalling movement in the same direction as the gap.

Gaps should also be accompanied by a relatively high volume, but nothing is guaranteed in technical analysis. At some time
prices will also generally move back into the area of the gap; this is known as filling the gap. This follows along with trader's
remorse which was discussed in an earlier edition.

If, while filling the gap, prices remain on the side of the break out and trade on lower volume you may infer the gap is
signalling the price of the security will follow through in the direction of the gap. Gaps do fail from time to time so always be wary.

The particular area on the chart where the gap occurs is itself a signal. The first area we will discuss is called the breakaway
gap. This gap occurs at the end of a move in the security and is in the opposite direction of the previous trend.

It signals the end of the previous trend as prices start to reverse. This type of gap is also one of the easiest to identify. It can occur in either direction; at a top with a gap down signalling an end of the up move and a correction coming or at a bottom with a gap up. This signals an end of the correction and a new trend forming with prices heading higher.

The second type of gap is the exhaustion gap which also occurs at the end of a move or trend. Unlike the breakaway, the exhaustion gap will be a gap in the same direction as the primary trend.

Watch the volume on the next few days trading if it fills the gap and look for a failure or break down of the gap itself as prices move further opposite of the gap direction. Quite often with exhaustion gaps prices will never fill the gap. The exhaustion gap is a signal that the security is close to ending its move and a change of trend is eminent.

The most difficult to recognize and trade are called measured gaps. These occur near the middle of a trend move. They occur in the direction of the trend and it is initially difficult to determine if you are looking at a measured gap or an exhaustion type of gap.

The key with the measured gap is the follow through does not move back within the gap to fill it over the next several days
trading . In this situation, you would then feel fairly confidant you have a measured gap which has signalled the middle of the move and more price movement ahead in the direction of the gap.

Gaps are powerful moves in the markets and can give you fairly clear cut signals about how trading with that security will move in the near future. Use them with your other indicators and you can better trade some of the tops and bottoms which occur in all securities.

Directional Movement System - Trading Strategies

A simple DI+/DI- crossover could be an entry and exit system. However, used that way it produces frequent whipsaws and just as frustrating many of the stop and reverse points are way after the optimum time to take profits, in effect you are trading from one equilibrium point to the next which by definition leaves on the table that range between peak (trough) and the equilibrium point, this is often a fair piece of change

Entry The directional movement system is a trend following system that being so the entry signal should only be taken at the earliest indication of a trend emerging or in effect. Consequently the ADX should be pointed up at all times when entry is being considered. Welles Wilder's criteria were ADX up and at 25 or better (he recognized the dilemma of the grey area ADX up but >20 but < 25). Wilder later suggested the three consecutive up readings with the ADX at 20 or better as an acceptable criterion. My studies suggest a high probability of success if one has three consecutive up reading of the ADX above 15, after all trends emerge from non trends.

Exit

The turning points in markets are often heralded by turns in the DI+/DI- at upper and lower extremes shortly followed by a down turn in the ADX which is above both DI lines. This sign is near coincident with major turning points, usually a very short time lag. So this reversal of the ADX at these lofty levels is a good place to take profits and STAND ASIDE.

Entry Protective Stop

Welles Wilder recommended that the price bar of the period that the DI+/DI- crossovers occur (day bar if day chart, that hourly bar if an hourly chart) the extreme low of the price bar is the stop if you are going long and the extreme high is the stop if you are going short, and to hold your position regardless if there are a few subsequent DI+/DI- crossovers shortly afterwards. If stopped out a reverse should be strongly considered. This works well on daily charts but on intra day charts it is very frequently tagged by the floor traders before reversing and trending in the direction you had traded. This frustration may be overcome by adding 2 or 3 ticks to the indicated stop or taking the extreme high (or low) of the preceding price bar. I have found the latter to be the more reliable, if that is violated it is usually a sign to reverse the trade.

Confirmation of the trade and adding positions

a) Trading the New Trend. After taking the initiating DI+/DI- crossover with an appropriately scored, upward moving ADX from levels below 15 the ADX will track up and cross above the falling DI line () on this ADX/DI crossover the trend is very frequently confirmed and is a good place to add a position. Or if you failed to take the original DI crossover entry signal, then this is a good position to enter. One caveat sometimes the market at this time is short term over bought or over sold, if it is, wait for the likely retracement and consolidation then enter.

b)Trading at the end of a Trend. If, whatever reason you decided to trade a trend termination and possible reversal, you will have entered on the DI+/DI- crossover in high territory with ADX also in high, in fact higher territory, and having turned down. When the now declining ADX crosses below the falling lower DI line then this is a place to add to your counter trend trade.

Using the ADX to trade with other Technical Indicators

The ADX gives important information on the market environment. Without being acutely attuned to the market environment you are doomed to fail. The ADX gives you market environment information par excellence. The ADX tells you if there is a trend present or not. It also informs you if it is early or late in a trend. The end of the most recent thrust of the trend is heralded by the ADX. It informs of a de-trending (correcting market), of reversal and renewal. Wilder calculated that markets trend for 30% or less of the time and were non-trending or range bound for the other 70% of the time. Trend following indicators are lethal in non-trending markets and oscillators suitable to non-trending markets are murderous if used in trending markets. So with reference to the ADX you can readily determine which of the two main types of indicators you should be using in the current market environment. The table indicates the appropriate type of indicator for different ADX defined market environments.

ADX Score| ADX Direction| Appropriate Tech.| Indicator to Use

---

0 - 15 Up or Down Range - Use Oscillators
 16 - 20* Up Trend - Use Trend Following Indicators
 21 - 40 Up Trend - Use Trend Following Indicators
 > 40** Up Be Prepared For Trend To End
 > 40 - 25 Down De-trending - Use Oscillators
 24 - 0 Down Non-trending - Use Oscillators

 

• J.Welles Wilder originally suggested ADX of 25 or higher to indicat presence of trend. This is often late in confirming trend entry. Trends emerge from non-trends. I have found it appropriate if, in the range 16 - 20(25), you have three consecutive up moves in the ADX prior to a DI entry crossover, then the DI entry can be taken with a high degree of success. 
• The turn down of the ADX at these levels, when it above both DI lines, almost always means the end of that trend. It does not necessarily mean trend reversal, more likely a period of retracement and consolidation. Time to exit. Stand aside. Reverse only on other evidence of trend reversal.

Pennants, Flags and Wedges - Chart Patterns

Pennants look like pennants, flags look like flags and wedges look like wedges. Each are short lived periods of correction and consolidation of well established trends. Pennants and flags usually last from days to a few weeks so they are often seen on daily price charts, seldom on weekly charts and virtually never on monthly ones. Wedges are longer lasting periods of consolidation usually lasting from weeks to several months so are recognizable on daily and weekly price charts and even monthly charts on occasion. Usually volume dries up during the formation of these patterns of price consolidation, particularly with flag formations. In terms of their development, significance and prognostic value they are to be considered similarly. They are invariably brief, midpoint interruptions of the main trend.

Wedges look like triangles with the apex of the triangle pointing counter current to the main trend, i.e. in bull markets the wedge is made by connecting a series of lower highs and a series of lower lows of daily prices and vice versa in a bear market. Wedges can give the appearance of rallies against the trend and can appear as trend reversals, but they are not, they are periods of correction and consolidation during the relentless progress of the main trend, so beware. They are invariably associated with overall and progressive reduction of volume. On completion the volume expands rapidly, often explosively, and prices may progress rapidly, sometimes creating gaps on the breakout.

It is essential that you study the volume accompanying these patterns of correction and consolidation. They should show distinctly lower volume on their development, almost drying up as they approach their termination. If volume is unchanged or increases as these patterns develop beware, you may well be observing a period of major distribution prior to a reversal of the trend.

Chart Patterns - V Reversal Patterns

This pattern, also sometimes called a spike reversal, is easy to recognize in retrospect but difficult at the time. Formerly they were not too common in the stock market but they are common in commodity futures markets. With the increased trading of stock index futures, index and stock options we are increasingly seeing V formations in the stock market.

V reversals are quite obviously abrupt reversals of a trend with little prior warning. However, they are very frequently initiated by key reversal days or island reversals following a rapid, runaway trend which may well show several continuation gaps. An exhaustion gap prior to the reversal is common. It is as well to be on the look out for such a development in a rapidly progressing trend because these V reversals can rapidly lead to at least a 50% retracement before finding support or resistance. If you are fortunate enough to be holding a position in such a rapidly progressing trend use a trailing stop to lock in profits should a sudden reversal occur. If a key reversal day or island develops move that stop right in to the periphery of the possible exhaustion gap. If prices break the most recent and steep trendline exit the market immediately to assure that profit.

Investment Mistakes to Avoid !

UNDERSTAND WHAT YOU ARE INVESTING IN

This seems like a no brainer but you might be surprised to know how many people are willing to put up their life savings when they don't even know how the markets work or even what a stock, option or future contract really is. Be sure that you understand the basics of what you want to invest in
thoroughly before you put any of your money on the table. If not, you may as well go to a casino and play with it there. Besides, that way, you get free drinks and you may need them.

EMOTIONS AND THE EFFECTS THEY CAN BRING

Probably one of the biggest down-falls of most traders is letting their emotions get in the way of trading decisions. To be able to trade profitably you must be able to ignore what your emotions will assuredly be screaming at you.

While the overall perception of what drives prices higher and lower are greed and fear. You have to, in your trading, eliminate these emotions from your trading decisions.

You must be able to make intelligent decisions based on training, experience and analytical assessments. If you allow your emotions to creep into your trading they will likely harm your results.

BUYING THE LATEST HOT STOCK

Many people trade in the latest hot tip that they received from a co-worker, their dentist or friend. Don't do your trading in this way. Don't buy the latest fad stock or sector. Try very hard to diversify your investments among many stocks in many sectors. Diversify your risks as well as your profit potential. In this way, you can likely benefit when one sector turns down as another turns to the upside.

PUBLICATION BUYING TIPS

Many people wait every month for the latest monthly edition of Money Magazine, Baron's or many other publications about what hot stocks to buy. Usually, immediately after these publications hit the news stands, the stocks recommended in these publications will go up due to the numbers of people that follow these investment tips. Quite often, after the initial buying surge of demand has been met, these stocks will sink back down to their previous levels for some support tests.

Many of these publications are published now over the Internet as the latest and greatest hot buying tips. But did you know that most or at least a lot of these recommendations are made as a result of the newsletter being paid by the respective companies for the promotion.

Be very wary of any recommendations that you receive in the form of emails and through the more traditional, newsstand publications. Most publications follow or try to set the latest fads for the markets. Treat them as such. Many publications have very good ideas promoted within their articles and it is entirely healthy to garner ideas from them. Just don't fall into the error of trying to chase their latest recommendations on an ongoing basis. Use their information in your search for your own recommendations.

P STANDS FOR PROCRASTINATION

A lot of investors, particularly newer ones, tend to want to have proof of what a stock or market is going to do before they are willing to jump in and try to make some money. To be a successful trader or investor, you must be able to do your own analysis and then act upon it before the rest of the crowd gets the same ideas.

If you have to wait to fully know what a stock is going to do you will likely miss most or all of the opportunity that you have found. If you finally know, then it is likely that the rest of the world also knows and that will usually be too late.

You have to be willing to take risks in order to be successful in this game. These risks can and should be controlled but there is always some risk involved. The rest of the trading world won't wait for you to make up your mind.

TRADING THE NEWS

One of the most difficult ways to trade the markets is to trade on the latest news analysis, commentaries and earnings reports. If you want to get into some very volatile trading then this is the area for you. If you can accurately predict how these will turn out AND how the market will react to them, you can be very, very successful while making some very short term trades.

This area of trading is probably one of the most difficult to do and be successful. Just because the latest information is positive about a company or stock does not necessarily make the markets think this is so. Often companies publish information that appears to be very good and bullish and the
markets take just the opposite approach and sell the stock off. It is amazing how the markets react to news. Usually it results in big percentage moves that occur very quickly as the news is disseminated.

In this area of trading, because of the very fast nature of the moves, it tends to lead traders and investors down the road of fear and greed discussed above. Unless you have access to the very latest information and can do a very, very quick analysis in your head, you will generally miss these
opportunities.

I hope these ideas and this newsletter have helped you to understand part of what is necessary for you to be a successful trader or investor. Stick with what you know and know it better than anyone else.

A LOOK AT VOLUME AND ITS USE IN YOUR ANALYSIS

Many traders and investors, particularly new ones, get so involved in all of the different indicators that are available in the newer technical analysis programs that they forget or just plain ignore some of the more tried and true indicators.

Sometimes, you may find that this lack of fore site may hurt you in your trading. Don't ignore the simple stuff for the complex without giving the simple approaches at least a good look. A complete basic understanding of all the techniques available will serve you much better over the long haul.

Volume is really an indicator, in my humble opinion, and should be treated as such. In its most simple form, it shows buying and/or selling pressure in a stock in an ongoing self perpetuating manner. It can and often does show buying pressure in a stock near a bottom and also often points out possible tops as they are occurring.

Usually the volume of a stock or market, when available, is automatically down loaded with the usual price data points of open, high, low and close in almost all end of day type data programs. Don't ignore this piece of the puzzle just because it is something that is not often used in all of those other fancy and more complicated indicators that are available to you.

Simple volume figures can be very useful in your day to day analysis. When a stock is rising in price with expanding volume occurring simultaneously, you have an indicator that is confirming the price action. On the other hand, if the rise in price is occurring with shrinking volume figures then you would possibly do well to pay heed and treat the rise in price as suspicious.

Don't just follow volume in a day to day kind of way. Another way to compare volume is to compare it to itself during price rallies as well as during price down trends. Are the volume figures on this rally or decline greater or less than the last rally or decline? This gives you a way to make sure you are always comparing apples to apples and not confusing the issue. Make sure you are not lumping all of your fruit in together and comparing random or different elements.

Whenever you have a price break out from a trend line, moving average or some type of technical price formation, you should always look at the volume for confirmation that the price movements are justified. You may be able to move into your trade with a much higher degree of confidence than what the price action alone is telling you. If it is not confirming the break out with increased interest and therefore volume, then a failure is a much more distinct possibility.

An exception to the rule and it seems that there always is one, is that volume should contract after a selling climax. Volume will expand into the selling climax and will quite often peak very near to when the bottom is made. Volume should contract on the following rise in price. This is one of the few times in which declining volume accompanied by higher prices is considered normal and/or even desirable.

Consider looking at the volume figures as you do your day to day analysis and trading. When you look at a chart, trying to determine what the future holds, be sure to see what the volume has been doing in the last couple of days in conjunction with the price movement. Also look at the last rally and the volume participation or lack of it. Look at the last decline and look at how the volume acted then. Volume may provide you with another clue to the future price action in this stock.

If you scan a lot of charts looking for your next winner, try to look at the simple stuff first and one of them is volume. Then you will be able to make a more informed decision and determine whether to proceed with additional analysis.

Should you use fundamental analysis?

The short answer to that question is we believe you should, at the very least review, the fundamentals for any investment you are considering. We believe you can sprinkle in a little fundamental analysis along with your usual technical analysis and more than likely end up with a better overall investment decision than you might be able to come up with otherwise.
First look at the markets themselves. Do your normal technical analysis and see if you are interested in any one market more than the others. From your technical analysis point of view, does one market look more poised, to make a move in either direction? If you can find this situation then you can break that particular market down into it's individual sectors for further study. With your group of sectors, again do your technical analysis and see if any of these appear to stick out a little more than the others. From this group, you would then pick either the strongest in the case of going long or the weakest if you are interested in shorting.

Then you should do some basic fundamental research on that particular sector and group of stocks. If you are interested in possibly going long on a particular sector or a group of stocks, you probably would not want to do so if the fundamentals are absolutely horrible. This little bit of extra work just may give you some insight and some news items to watch for, so you have a better understanding about that sector. You may even find a sector that captivates your interest so much you may want to specialize in that sector alone. This is the way the major brokerage companies divide their analysts. They have some watching each sector and then the stocks contained within those sectors.

Using the method above, you would be your own sector analyst and expert. You would know how your particular sector acts and if it has any seasonal tendencies. You would also know which stocks within that sector influence the sector the most, the least and how all of the stocks tend to interrelate to each other. You may want to pick particular stocks and trade those stocks to stay within your sector but you can also participate by using some of the sector mutual funds that are now being offered. You have some options most investors do not have or take advantage of fully.

Next, we try to identify stocks we are interested in purchasing (going long) or selling (going short) first. We do this using technical analysis. Then we try to determine if the move we anticipate may warrant the purchase of options instead of the outright purchase or shorting of the stock itself. From our list of candidates, we will then do some fundamental research to determine if our technical analysis is in opposition to the fundamental point of view. If it agrees, we can then proceed with more confidence than we may otherwise have.

At the present time, our technical analysis of the NASDAQ is it will move lower. Again, using technical analysis, we have looked for the weakest companies and only then looked to fundamental analysis. We then select the companies we feel are the weakest technically as well as fundamentally and have recommended options on some of those companies.

You cannot use fundamental analysis alone to trade unless you have a lot of time and are very, very patient. You can trade on technical analysis alone but why would you want to exclude something potentially useful. Why not use all the bullets in your analysis gun?

Money Management Issues - How to use a set percentage of your trading funds

In the previous post we reviewed the more traditional approach to money management by placing stop on your stock trades or a mental stop using your own technical analysis on option trades. Just for a short review, these types of stops can be placed at certain percentages or by using your own analysis and critical points locations or levels. All of these methods will work some of the time and fail at others. There is no set formula or way to handle this issue that will always work 100% of the time without fail. It is just the nature of the beast.

This method and might I say simpler method is to use a set percentage of your trading funds for each and every trade. Never ever exceed this amount, no matter how good you feel about a particular position or trade. You could use about 4-5% of your tradable funds for each trade. This will allow you to make about 20 trades for some diversification and still have a manageable amount of risk assigned to each. Using this method, no stop loss orders are placed, so you too will have to be fairly confident in your analysis and trading abilities if you follow this method. Using this method would also requires having your own analysis as a back up. When the trade has gone against what you thought would happen - get out. When a level is penetrated further than what your analysis tells you should have occurred - then get out.

By using this method, you can also apply the same rules to options trading as well as the more traditional stock trading. The same rules apply. Make sure you never trade more money than is allowed under the system and spread your money out over 20 or so positions over time. There will be times when you only have a few positions and that's OK. As your analysis is confirmed by the markets continue to take on new positions always following the rule.

This is the very method and we have found that it works out the best over time. Even with both of these safeguards in place there will be times when mistakes are made and the result will be trading losses. This just happens from time to time as we do not have a crystal ball either.

By using this method, it limits your exposure on each trade, whether it is a stock or an option trade. It still allows for a decent amount of diversification and still has a theoretically unlimited profit potential on each and every trade.

Give this method a thorough look and think about some of those past trades you have made that did not turn out as they might have. Think about adopting this method or some variation that suits you and your trading if you tend to put too much money into some of your positions. This will help to prevent just this kind of mistake.