Alan's Finance Blog

My 20 Rules for Trading

Asset Protection and Wealth Creation Strategies – Trading 101

I usually try to catch three or four trend changes a year, which might generate 50-100 trades, and often come in frenzied bursts.

Since I am one of the greatest tightwads that ever walked the planet, I only like to buy positions when we are at the height of despair and despondency, and traders are raining off the Golden Gate Bridge. Similarly, I only like to sell when the markets are tripping on steroids and ecstasy, and are convinced that they can live forever.

Some 99% of the time, the markets are in the middle, and there is nothing to do but deep research, looking for the next trade. That is the purpose of this letter. Over the four decades that I have been trading, I have learned a number of tried and true rules which have saved my bacon countless times. I will share them with you.

Don’t over trade. This is the number one reason why individual investors lose money. Look at your trades of the past year and apply the 90/10 rule. Dump the least profitable 90% and watch your performance skyrocket. Then aim for that 10%. Over trading is a great early retirement plan for your broker, not you.

Always use stops. Risk control is the measure of the good hedge fund trader. If you lose all your capital on the lemons, you can’t play when the great trades set up. Consider cash as having an option value.

Don’t forget to sell. Date, don’t marry your positions. Remember, pigs get slaughtered. Always leave the last 10% of a move for the next guy.

You don’t have to be a genius to play this came. If that was required, Wall Street would have run out of players a long time ago. If you employ risk control and stops, then you can be wrong 40% of the time, and still make a living. That’s little better than a coin toss. It you are wrong only 30% of the time, you can make millions. If you are wrong a scant 20% of the time, you are heading a trading desk at Goldman Sachs. If you are wrong a scant 10% of the time, you are running a $20 billion hedge fund that the public only hears about when you pay $100 million for a pickled shark at a modern art auction. If someone says they are never wrong, as is often claimed on the Internet, run a mile, because it is impossible.

This is hard work. Trading attracts a lot of wide eyed, naïve, but lazy people because it appears so easy from the outside. You buy a stock, watch it go up, and make money. How hard is that? The reality is that successful investing requires twice as much work as a normal job. The more research you put into a trade, the more comfortable you will become, and the more profitable it will be. That’s what this letter is for.

Don’t chase the market. If you do, it will turn back and bite you. Wait for it to come to you. If your miss the train, there will be another one along in hours, days, weeks, or months. Patience is a virtue.

When I put on a position, I calculate how much I am willing to lose to keep it. I then put a stop just below there. If I get triggered, I just walk away. Only enter a trade when the risk/ reward is in your favor. You can start at 3:1. That means only risk a dollar to potentially make three.

Don’t confuse a bull market with brilliance. I am not smart, just old as dirt.

Tape this quote from the great economist and early hedge fund trader of the thirties, John Maynard Keynes, to you computer monitor: “Markets can remain illogical longer than you can remain solvent.” Hang around long enough, and you will see this proven time and again (ten year Treasuries at 2.4%?!).

Don’t believe the media. I know, I used to be one of them. Look for the hard data, the numbers, and you’ll see that often the talking heads, the paid industry apologists, and politicians don’t know what they are talking about (the Gulf oil spill will create a dead zone for decades?).

When you are running a long/short portfolio, 80% of your time is spent managing the shorts. If you don’t want to do the work, then cash beats a short any day of the week.

Sometimes the conventional wisdom is right.

Invest like a fundamentalist, execute like a technical analyst.

Use technical analysis only, and you will buy every rally, sell every dip, and end up broke. That said, learn what an “outside reversal” is, and who the hell is Leonardo Fibonacci.

The simpler a market approach, the better it works. Everyone talks about “buy low and sell high”, but few actually do it. All black boxes eventually blow up, if they were ever there in the first place.

Markets are made up of people. Understand and anticipate how they think, and you will make a lot of money.

Understand what information is in the market and what isn’t and you will make more money.

Do the hard trade, the one that everyone tells you that you are “Mad” to do. If you add a position and then throw up afterwards, then you know you’ve done the right thing. This is why people started calling me “Mad” 40 years ago.

If you are trying to get out of a hole, the first thing to do is quit digging and throw away the shovel. A blank position sheet can be invigorating.

Making money in the market is an unnatural act. We humans are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old, but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment. In the market, this means that if a stock has gone up, you believe it will continue. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability, while others can only learn it through decades of training. I am in the latter group.

by John Thomas, The Mad Hedge Fund Trader

A Four-Chart Lesson in Spotting Trade Setups

By Elliott Wave International

You can find low-risk, high-probability trading opportunities by trading with the trend. The trick is to find the end of market corrections, so you can position yourself for the next move in the direction of the trend.

This excerpt from Jeffrey Kennedy’s free 47-page eBook How to Spot Trading Opportunities explains where to find bullish and bearish trade setups in your charts and how to zero-in on these opportunities. If this lesson interests you, the full 47-page eBook is free through July 6.

On the left-hand side of the illustration below, there are two bullish trade setups. As traders, we want to wait for the wave (2) correction to be complete so we can catch the move up in wave (3) – this is the trade. What we are trying to do in this bullish trade setup is anticipate the potential for profits on the buy-side as prices move up in wave (3). Another bullish trade setup is at the end of wave (4).

As traders, we are looking to buy the pullback and position ourselves within the direction of the larger up-trend. Remember, three-wave moves are corrections, which means that they are countertrend structures. On the other hand, five-wave moves define the larger trend. As traders, we want to determine what the trend is and trade in the direction of the trend. Our buying opportunity to rejoin the trend is whenever the trend pauses and forms a correction.

Now, let’s look at the right-hand side of the illustration where we see two bearish setups. When a five-wave move is complete, it is retraced in three waves as a correction. The end of the five-wave move presents the first trading opportunity that we can take advantage of the short side (or the sell side) as the wave (A) down begins.

Notice the second bearish trade setup gives us another shorting opportunity as wave (B) tops.

So, within the classic wave pattern of five waves up and three waves down, we have four high-probability trading opportunities in which we are either positioning ourselves in the direction of the trend or identifying termination points of a trend. I want to share with you some tricks I have picked up over the years about how to analyze corrective waves and their termination points. The single most important thing I’ve learned from analyzing corrections is that corrective or countertrend price action is usually contained by parallel lines.

As shown above, draw the parallel lines by beginning at the origin of wave A and going to the extreme of wave B. You draw a parallel of that line off the extreme of wave A. So basically you have a small, slightly angled downward price channel. This will show you the containment region for wave C. It also shows you an area toward the bottom of the lower trend line where you can expect a reversal in price.

Here is another example. Again, you draw the parallel lines off the origin of wave A, the extreme of wave A and the extreme of wave B.

Toward the upper end of the upper trend line, you will usually see a reversal in price.

This example shows how countertrend price action is contained by parallel lines in the British pound, 60-minute, all sessions. Why is it important to know parallel lines contain the corrective or countertrend price action? Number one, it will increase your confidence that you are indeed labeling a countertrend move properly. Number two, it identifies areas where you will likely see prices reverse. For example, we see this reversal up near the top.

This brief trading lesson is just a small example of the opportunities you can find once you learn to identify key market patterns. Learn more in your free 47-page eBook, How to Spot Trading Opportunities. This valuable eBook is regularly $79, but you can get it free through July 6. Download your free copy of How to Spot Trading Opportunities now.

The Economic Crisis No One Saw Coming: A Convenient Untruth

The Economic Crisis No One Saw Coming: A Convenient Untruth

August 9, 2010

By Elliott Wave International

The single most convenient untruth about the 2008 (and counting)
financial crisis is that it was unforeseen. For two years policymakers
have insisted “There was no way to know ahead of time” that
the liquidity boom would come to a screeching halt. Back in November
2008, in fact, the usually tight-lipped Queen of England herself
publicly described the turmoil of international markets as “awful” and
openly asked a panel of experts from the London School of Economics “Why
did nobody notice?“

Her Majesty is right: Most financial authorities did
NOT notice the crisis before it was too late. Comedy Central’s “The
Daily Show with Jon Stewart” of all places provided the
most poignant evidence: A March 2009 video montage
shows executives and economists from the world’s leading financial
firms repeatedly forecasting continued upside strength in stocks,
plus renewed bull market growth in financials — right as debt
markets came unhinged and the US stock market headed into a 50%-plus
selloff.

Dubbed the “8-Minute Rap” (after the “18-Minute
Gap” of Nixon’s Watergate tapes), the Daily Show video feature
sent an equally powerful message, as the clip
below makes plain.

Yet even as the mainstream authorities failed to detect the
economic earthquake moving below their own feet, somebody did “notice” well
in advance. That person was EWI’s president Bob Prechter.

The clip below is from a 2007 Bloomberg interview.
Clear as PLAY, the foreseeable nature of the crisis emerges from
Bob’s October 19, 2007 interview.

As the historic trend change began to unfold, Bob issued this
timely insight:

“We’ve seen the first crack in the credit structure
with a huge drop in commercial paper… These are the harbingers
of a change toward the downside for the stock market, commodities
including oil, and the debt market itself.”

Don’t believe the convenient untruths. Get objective market
analysis today. Download
this free report that contains valuable market forecasts directly
from the desk of Bob Prechter.

Four best debt consolidation moves

You may be considering debt consolidation if you have accumulated a significant amount of debt and cannot afford to make the payments. Having huge amount of credit card debts with high interest rates can sometimes be very expensive and confusing. Consolidating them into a single monthly payment can create a streamlined process of repayment. There are several options of consolidating your debt. Have a look at the four best debt consolidation moves that you can take to successfully pay off your debts.

• Take a HELOC: A home equity line of credit (HELOC) is a loan taken against the amount of equity in your home. If you have built enough equity in your home, you can easily consolidate your debts by taking a loan against your home value. Your house will be used as a collateral and consider using this option as debt consolidation only if you think that you can make the payments on time. If you fail to pay on time, you may run the risk of losing your home to foreclosure. You can enjoy lower interest rate than on credit cards. The interest rate and some fees associated with HELOC will be tax deductible.
• Do “cash-out” refinancing: This can be considered another best way of debt consolidation. You can opt for “cash-out” refinancing. If you have enough equity in your home, than you can refinance your home for a value more than what you owe on your mortgage. This will help you access easy cash, which can be utilized to pay off debts. You get very low interest rates but make sure that you will be stretching your payments to over 15 or 30 years. This may increase the actual amount you are paying back due to the added interest rates over the term of the loan.
• Get your car loan refinanced: If you paying huge amounts on your car loan, then go for a car refinance. By refinancing your car loan, you can save the extra dollars every year. This money can be used to pay off your debts comfortably.
• Obtain personal loans: A personal loan can also be obtained to consolidate your debts. If you do not have enough equity in your home and if you do not qualify for a HELOC, then you can get personal debt consolidation loans. Such loans will offer you low interest rates than the outrageous rates of credit cards. Such personal loans are most often-unsecured debt.

Thus, there are different ways of consolidating your debts and paying them off. Consider the four best debt consolidation moves mentioned above before deciding to consolidate your debts.

Author bio: Neil R Williams is a financial consultant and writer. His niche of articles comprises some core financial subjects, such as debt consolidation, debt settlement, credit repair, credit counseling and so on. He also consults people in financial jeopardy.

How to ‘Fast Filter’ the best stocks daily (new)

Have you been keeping up with the new “Market Mastery” training
videos I sent you so far that reveal the 4 low-risk,
high-probability “profit pockets” that can occur on almost ANY
stock chart?

Well, I just got ANOTHER quick video update from the developer,
Bill Poulos, that shows a handful of GREAT trades you could’ve
gotten in on as a Market Mastery student over the past week or
two.

Watch as Bill shows you a great short trade using the “Profit
Pipeline” method that potentially pulled in 10% on the first
half & 13% on the second half in a matter of days…

…and then how his “Velocity Method” got right back in for
another great short trade which already hit the 10% target.

Trades like this can set up all the time, and when you know how
to grab them, it gives you a definite edge over most traders.

See the trades here:

http://www.marketmastery.com/z/?i=773362&l=f42

Pay careful attention to his comments about what most other
traders probably would have done in these markets, and see how,
using the Market Mastery methods, you have a leg up on them.

Good Trading,
Alan

Stock market mastery in action (video ‘dissection’)

Wow, it looks like the “Market Mastery” Discovery training video
I posted yesterday over here really “struck a cord” with folks.

The 35+ year market veteran, Bill Poulos, who recorded the video
has been receiving a lot of great feedback on his new training
website.

And from the comments received so far, it looks like most
people really “get it” and understand the importance and sheer
POWER of the 4 low-risk, high-probability stock trading methods
that help reveal the “profit pockets” you can find on nearly ANY
stock chart.

Naturally, traders are looking for more detail on these 4
specific methods.

Well, Bill’s working on some really cool materials for an
interactive online training session he’s going to be holding
next Tuesday. He’ll be showing you his thought process as he
trades each of the 4 methods against the “hard right edge”,
where you don’t know what the next day will bring. (Plus a ton
more.)

But in the meantime, he just recorded another quick new video
for you that “dissects” some of the trade examples in
yesterday’s video…

(PLUS, it shows you how he uses his “Fast Filter” technique to
quickly help select only the best stocks to consider on a daily
basis.)

See his “trade dissection” video here:

http://www.marketmastery.com/z/?i=773362&l=f41

Good Trading,
Alan

Raising The BAR: Bar Patterns & Trading Opportunities

How a 3-in-1 formation in cotton “triggered” the January selloff
April 17, 2010

By Nico Isaac

For Elliott Wave International’s chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE– and no, we’re not talking business casual versus sporty chic. Trading “style,” as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is (and always has been) a “trend” trader, meaning: he uses the Wave Principle as his primary tool, with a few secondary means of select technical studies. Such as: Bar Patterns. And Jeffrey counts one bar pattern in particular as his favorite: the 3-in-1.

Here’s the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the “set-up” bar) engulfs the highs and lows of the last three bars. When prices penetrate above the high — or — below the low of the set-up bar, it often signals the resumption of the larger trend. Where this breach occurs is called the “trigger bar.” On this, the following diagram offers a clear illustration:

Now, how about a real world example of the 3-1 formation in the recent history of a major commodity market? Well, that’s where the picture below comes in. It’s a close-up of Cotton from the February 5, 2010 Daily Futures Junctures.

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the New Year. Within a few day the trigger bar closed below the low of the set-up bar, signaling the market’s return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

February arrived, and with it the end of cotton’s decline. In the same chart you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a reliable for impulse patterns. Since then a winning streak in cotton has carried prices to new contract highs.

This example shows the power of a fully-equipped technical analysis “toolbox.” By using the Wave Principle with Bar Patterns, one has a solid, objective chance of anticipating the trend in volatile markets.

And in a 15-page report titled “How To Use Bar Patterns To Spot Trade Set-ups,” Jeffrey Kennedy identifies the top SIX Bar Patterns included in his personal repertoire. They are Double Inside Days, Arrows, Popguns, 3-in-1, Reverse 3-in-1, and Outside-Inside Reversal.

In this comprehensive collection, Jeffrey provides each pattern with a definition, illustrations of its form, lessons on its application and how to incorporate it into Elliott wave analysis, historical examples of its occurrence in major commodity markets, and ultimately — compelling proof of how it identified swift and sizable moves.

Best of all is, you can read the entire, 15-page report today at absolutely no cost. You read that right. The limited “How To Use Bar Patterns To Spot Trade Setups” is available with any free, Club EWI membership.

Blaming “Market Manipulators” For Losses is a Huge Obstacle to Success

To win, you must accept the fact that losses are part of the game.

In 1984, Elliott Wave International’s founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account in 4 months. In the average 4-month contest, over 75% of contestants, mostly professionals, fail to report profits.

In November 1986, in his monthly Elliott Wave Theorist Prechter published a Special Report titled, “What A Trader Really Needs To Be Successful” and gave 5 important tips to would-be market speculators. You can read them now, free (details below) — but here’s Bob’s fourth point:

4. Accept the Fact that Losses Are Part of the Game.

There are many denials of reality which automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that “pools,” “manipulators,” “insiders,” “they,” “the big boys” or “program trading” (known today as “high-frequency trading” — Ed.) are to blame for one’s losses is a common fault. Anyone who utters such a conviction is doomed before he starts. But my observation, after eleven years “in the business,” is that the biggest obstacle to successful speculation is the failure merely even to recognize and accept the simple fact that losses are part of the game, and that they must be accommodated.

The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Speculation is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! He even strikes out often. But he still earns six figures a year, because although not perfect, he has approached the best that can be achieved. You don’t have to be perfect to win in the markets, either; you “merely” have to be better than almost everybody else, and that’s hard enough.

Practically speaking, you must include an objective money management system when formulating your trading method in the first place. There are many ways to do it. Some methods use stops. If stops are impractical (such as with options), you may decide to risk only small amounts of total capital at a time. After all is said and done, learning to handle losses will be your greatest triumph.

The last on my list is [the point] I have never heard mentioned before. …

Keep reading this free Special Report titled, “What A Trader Really Needs To Be Successful” now — all you need to do is create a free Club EWI profile.

Forex Smart Start Profit Strategies

(This post contains your access instructions
to a ‘closed-door’ Forex group coaching
training session on Wednesday.)

Over the past year, one of the top Forex educators has
quietly coached a handful of regular folks just like you on how
to become what he calls “Independent Master Forex Traders”.

His goal is to take average, ordinary traders who are among the
90% that consistently LOSE…

-and turn them into independently-thinking, precision trading
MACHINES that are among the 10%… the 5%… or even the top 1%
of Forex traders on the planet.

But here’s the problem for most people: 1-on-1 coaching can be
downright EXPENSIVE, like $15,000… $20,000… or MORE.

That’s just not realistic for most people.

HOWEVER… what if you could be a “fly on the wall”, listening
in to a private, closed-door Forex coaching training session,
picking up the “tried & true” profit strategies the “elite” hold
close to their vest…

Well, that’s what’s happening on Wednesday, March 3rd.

This 35+ year market veteran is giving you a sneak peek inside
his “trading vault” on a brand new, complimentary training
session he calls:

>>> Forex Smart Start Profit Strategies <<<

He yanked his most popular Forex tips & techniques straight out
of his high-end coaching program, and he’ll be revealing them
all you to on Wednesday.

You’ll learn the top 4 instant tweaks you can make TODAY to
protect & grow your Forex portfolio FOREVER, including:

* How the crummy economy & chaotic world events create MASSIVE
amounts of profit potential in the Forex markets (including at
least 5,604 potential pips in just the past few months using
these specialized techniques)…

* How to dramatically reduce your “time in the trenches” trading
Forex by spending only 20 minutes a day. These 2 discoveries
make it all possible…

* How to reduce your risk in a trade to ZERO with this simple
profit-taking trick (HINT: it’s the complete opposite of how
most traders think about going after a profit)…

* How to automatically get an edge over other traders by
entering the market at these high-probability “sweet spots”…

* The telltale signs a market “hurricane” is about to hit, & how
to protect your portfolio by avoiding these dangerous & risky
market conditions…

* The simple, time-saving, step-by-step mechanics of placing a
trade using real broker-provided trading software…

…and much, much more…

The information in this training session is so critical, that
it’s being held 3 different times on Wednesday, March 3rd in
order to fit your schedule:

* 12:00pm Eastern (New York Time)
* 4:00pm Eastern (New York Time)
* 9:00pm Eastern (New York Time)

WARNING: Each session can only accommodate a limited number of
attendees, so to reserve your place, make sure you register here
right away:

http://www.forextrainingmaterial.com/y/?i=773362&u=1&l=f85

Good Trading!

p.s. I don’t think I’m supposed to tell you this, but I found
out that if you attend any one of the 3 training sessions on
Wednesday, you’ll get a chance to download some additional
complimentary training videos & ‘action manuals’ torn straight
from the presenter’s high-end coaching program.

Pick your time & grab your spot here:

http://www.forextrainingmaterial.com/y/?i=773362&u=1&l=f85

(if you see a blank page, that means the registrations are full)

Streaming Seminar Breaks Down “Greeks”

No matter what the investment, an investor needs to know and fully understand the potential risks of the investment prior to committing capital to that investment. In the options market, the Greeks define and quantify the risks of your position before you commit to the investment. Understanding the Greeks is a must for proper risk management. Further, the Greeks can also help you identify and select not only the proper strategy to fit the opportunity you selected, but also which specific options to use to create that specific strategy.

Today you need to watch this complimentary seminar covering the Greeks…

http://www.ino.com/info/36/CD3336/&dp=0&l=0&campaignid=9

Without a full understanding of the risks of an investment, an investor should never commit hard earned money. If you do not know your Greeks, you have no business being in the options market!

Good luck to you all!

Alan

http://alansfinanceblog.com