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12 Basic Stock Investing Rules Every Successful Investor Should Follow

2008-07-07T09:08:00.001-07:00

There are many important things you need to know to trade and invest successfully in the stock market or any other market. 12 of the most important things that I can share with you based on many years of trading experience are enumerated below.

1. Buy low-sell high. As simple as this concept appears to be, the vast majority of investors do the exact opposite. Your ability to consistently buy low and sell high, will determine the success, or failure, of your investments. Your rate of return is determined 100% by when you enter the stock market.

2. The stock market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the stock market is going up and you are short, the market is right and you are wrong.

Other things being equal, the longer you stay right with the stock market, the more money you will make. The longer you stay wrong with the stock market, the more money you will lose.

3. Every market or stock that goes up will go down and most markets or stocks that have gone down, will go up. The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as "the trend always changes rule."

4. If you are looking for "reasons" that stocks or markets make large directional moves, you will probably never know for certain. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move.

A huge mistake most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know that markets are moving - not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with the whys.

5. Stock markets generally move in advance of news or supportive fundamentals - sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late.

You need to get positioned before the largest directional trend move takes place. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.

6. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizeable money. The key is to know when to get aboard a trend and stick with it for a long period of time to maximize profits. Contrary to the short term perspective of most investors today, all the big money is made by catching large market moves - not by day trading or short term stock investing.

7. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. This is a stock trading “system” in itself.

8. The Efficient Market Hypothesis is fallacious and is actually a derivative of the perfect competition model of capitalism. The Efficient Market Hypothesis at root shares many of the same false premises as the perfect competition paradigm as described by a well known economist.

The perfect competition model is not based on anything that exists on this earth. Consistently profitable professional traders simply have better information - and they act on it. Most non-professionals trade strictly on emotion, and lose much more money than they earn.

The combination of superior information for some investors and the usual panic as losses mount caused by buying high and selling low for others, creates inefficient markets.

9. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets. Successful market timing is possible but not with the tools of analysis that most people employ.

If you eliminate optimization, data mining, subjectivism, and other such statistical tricks and data manipulation, most trading ideas are losers.

10. Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years.

Note those that have traded successfully over very long periods of time are very few in number. Keep in mind that Wall Street and other financial firms make money by selling you something - not instilling wisdom in you. You should make your own trading decisions based on a rational analysis of all the facts.

11. The worst thing an investor can do is take a large loss on their position or portfolio. Market timing can help avert this much too common experience.

You can avoid making that huge mistake by avoiding buying things when they are high. It should be obvious that you should only buy when stocks are low and only sell when stocks are high.

Since your starting point is critical in determining your total return, if you buy low, your long term investment results are irrefutably better than someone that bought high.

12. The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.

C.C. Collins is a Financial Planning Advisor and Author of “Scientific Wealth Strategies” at http://www.wealthscientist.com Find more information at http://www.stockinfo4u.com

Why the Majority Fail at Stock Investing

2008-07-07T09:06:00.000-07:00

The gleam and bright lights of Wall Street lure in many new investors each year, only to send them home crying to their friends and family. Why do so many people fail when it comes to the stock market? The reason is very simple: Hard work! Most people are looking for a quick buck or a fast path to riches. This is not the case when it comes to investing in individual stocks. If you wish to invest in stocks, treat it like a business, NOT A HOBBY. For example: A retail outfit can’t make money if it doesn’t have goods to sell, the same goes for investors, without cash, you can’t invest. What do I mean? All investors need rules and you need to follow these rules or money WILL be LOST. If you lose your initial investment, you are out of business (just like the retail store). I don’t necessarily care what your rules are but they need to be proven and then followed to a "T".

Think about this for a moment: How much time do you spend researching and following up on your investments? Most people will spend more time researching their next car to buy, their next pair of sneakers, the best suit, the best dress, the best pasta sauce, etc. but these same people rarely spend more than 15 minutes a month researching their own stocks. I know of a person that spends hours clipping coupons (saving cents to a few dollars) but just minutes investing thousands in stocks.

This is why the majority of people FAIL at investing, because they don’t know what they are doing, they don’t care to know where their money is and they don’t know who to hire to invest their money. If you are not interested in learning how to invest properly using your OWN system of trial and error over many years, I suggest that you invest in mutual funds or similar diversified vehicles. Over the long run (minimum 20 years), mutual funds and dollar cost averaging will give you favorable results with minimal worries. I will elaborate into methods that can be used to invest successfully in individuals stocks in following articles.

About the Author:

Chris Perruna

http://www.marketstockwatch.com

Chris is the founder and CEO of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Play another Day

2008-07-07T09:05:00.000-07:00

Money management starts with protecting your capital, realizing profits and cutting losses. As I have stated in the past, without cash, you can’t invest. Cash is king and learning to manage your money is the most important aspect to investing in stocks. The game is won by lowering your risk by properly turning the numbers in your favor. Cutting losses is the best insurance to keeping your cash.

Emotions fuel the decisions of many investors; leading the pack is hope, fear and greed. In order to control these emotions, proper money management skills must be developed through a defined set of rules. How do you know if an investment is working and moving in the right direction? If it shows a profit, you are correct, if it shows a loss, something is wrong and it may be time to protect your capital.

Most investors develop the emotion of hope after a stock has declined from the initial purchase price. They hope that it will rebound and make promises to themselves that they will sell at breakeven. If and when the stock rebounds, they break the promise and become greedy and decide to hold on for a profit instead of selling. Typically, the stock will start to decline and the investor will start to accumulate losses. Investors are full of pride and will not admit that their judgment is wrong, so instead, they decide to hold on and accumulate additional losses.

When a stock is purchased and starts to decline, especially on heavy volume, it is time to admit that you may be wrong and sell before the loss is too steep. If the stock rebounds after you sell, you can always re-enter your position. Cutting losses is the best insurance an investor can have in their portfolio. By developing rules and eliminating emotion, investors can start selecting high quality stocks and buying them at their proper purchase points. This will lower your risk and help prevent you from using insurance. In my previous post, I explained how to develop a watch list of high quality stocks using fundamental and technical analysis.

About the Author

Chris Perruna

http://www.marketstockwatch.com

Chris is the founder and CEO of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Stock Market Strategies Comments Off
Making a Stock Watch List
Posted on Mar 13th, 2008I am taking the time to help others learn the basics in evaluating stocks for investment using both fundamental and technical analysis. Both tools are equally important in making serious decisions with your hard earned CASH!

If you wish to invest in stocks, treat it like a business, NOT A HOBBY. (ex: a retail outfit can’t make money if it doesn’t have goods to sell; the same goes for investors, without cash, you can’t invest). You need rules and you need to follow these rules or money WILL be LOST. Once proven rules have been established, they cannot be broke or you will lose money. Everyone loses money in investing but we must learn to cut losses quick and allow gains to develop. Small losses are acceptable because they teach us lessons that allow us to win big!

Start your search by looking for stocks with superior fundamentals. After fundamentals are established, look to see if this particular stock is in good company, by this I mean a strong industry group - similar stocks, historically move in the same direction (this is fact not opinion). This is not to say every stock in the industry group will move higher or lower because a sister stock is going in that direction (this is a generalization rule). After the industry group has been confirmed strong, determine if overall market is in a specific trend (up, down or sideways).

If you are long a stock, the market must be in a confirmed up-trend, if you are short a stock, confirm a down trend. Note that 75% of all stocks will follow in the direction of the overall market. Don’t fight the trend, the market is always RIGHT.

Let the market and the stock dictate how long you will be in a position. Don’t worry about time frames; price and volume will tell you when to exit the position as long as you follow rules.

After fundamental have been established, you must study the technical side of each individual stock, the specific industry group and the general market trends. Record if the stock is forming a proper base, if it’s about to break out of a base, if it’s extended or if it’s pulling back to a key support line.

At this point, add any qualifying stock to your watch list or buy the stock according to the technical entry signals (remember the fundamentals have been established earlier).

Key numbers to use in fundamentals:
Earnings (current, past: quarterly, yearly and future estimates)
Sales (current, past: quarterly, yearly and future estimates)
Return on Equity (ROE)
Price/Earnings Growth (PEG)
Price/Earnings Ratio (rise over time of base)
Debt/Equity
Assets, Liabilities
Accumulation/Distribution ratio
Up/Down Volume over past several months
Number of Institutional Holders (is this increasing or decreasing recently)

Key things to use for technical analysis:
Look at the 1 year daily chart
The 1 year weekly chart
Check volume action when bases are formed
Look at Point & Figure charts for support and resistance lines
Look for new 52-week highs

About the Author

Chris Perruna

http://www.marketstockwatch.com

Chris is the founder and CEO of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

3 Components Needed for Beating the Market

2008-07-07T09:03:00.000-07:00

This is time to seriously look at performance of your personal investment, such as mutual fund, or individual stocks holdings, etc. Does your fund beat index last year? Does it beat index over past many years? How are you doing with your own stock investment comparing to SP&500 index?

If the answer is "great", well congratulations. You have your own way of beating market and making big money already.

If the answer is "not so great", or "failed to beat index". You have got a problem. You need to look deeper into the investment strategy you used or your fund used. You can not pretend that there is no problem when in fact there IS a problem. I know there are just so many people out there that can not face this. Let’s face it, Almost everyone, include myself have ego that we JUST do not want to admit failure or mistake or any hint of it. Here comes the 1st Component below.

Component # 1 - ego, gut, perseverance

Value investing or investing in general is all about psychology, ego, attitude, and gut.

Investing is serious business. It is our money, our life savings at stake. Sometimes biting the bullet with pain to trash the ego is worth the pain if that makes you more money. Ego is one thing that we must avoid in stock market investing business in order to make big money ahead. You can not hide, you have to compare your own performance of past many years to SP&500 index. Of course, I am not saying that you should be comparing every month. It is OK to make some mistakes, here and there for certain months. However, it is NOT ok if the performance year over year has been bad. You have got to change if that is the case.

Although ego is something you should all avoid, perseverance is something you must treasure if you want to be that marathon winner. When you finished your due diligence and you have calculated your risk reward ratio and intrinsic value, go for it and stick with it. Do not be scared of negative comments or negative press, even if the source is from a famous author or from your close family. Value investing is lonely business. I know this for years. I have been criticized over past many years for numerous reasons, for not beeing able to sell at top, for not beeing able to buy at bottom, for picking a risky bankruptcy related stock, or for buying a low float small cap stock , blah blah. You know what? in the end, my investment performance is better than most of folks out there in the market, including those "pro" mutual fund managers.

I have got comments like this before: "Blast, I like your method, I know you are making big money. But, I can not do as you are doing. I can not hold. Especially bad news hit, I just have to sell, and my performance sucks".

Well, if he/she do not have gut to hold like I hold during bad time, she/he can not make big money with value investing. One can be all right in paper, right with value calculation, right with timing of purchase. However, if you can not fight against panic during minor negative news, you are out in the investing marathon.

Component # 2 - right method

Many investment methods are flawed, period. This is especially true for many short term oriented trading methods. Many mutual funds preach long term holding for their fund investors, but the fund managers themself engage in short-term trading like mad men. Performance of many momentum based growth funds or tech funds looked horrible for past 5 years. The reason for that is very simple: the investing method itself. Growth investing or short term trading sometimes can be very speculative and dangerous.

Wall street has famous theory that "the more risk, the more reward". Therefore, yeah, growth funds are risky, but if you want to have more reward, you have to chase risky stuff.

Wrong. The truth actually is "the more risk, the less reward".

I know I am going to be hammered by saying above non-conventional statement. I put out below example to back up my point.

Las Vegas is world famous place for gambling. As an average investor, you visit Las Vegas looking for opportunities to make big money with $50,000 investing capital. Let’s assume the theory "the more risk, the more reward" is correct. Where are the riskiest opportunities out there in LV? Of course, Gambling. The potential reward can be astonishingly high. Black jacket, slot machine all have huge potential with 1000% or even more within minutes. You can make millions if you are lucky with your $50,000 principal at slot machine. Actually, it is FACT there are small group of gamblers who made millions in gambling in LV.

However, If you are sensible person, you know the answer. As high as the potential reward can be, the most likely result from gambling with $50,000 principal at LV is WIPEOUT. You lose all your hard-earned money.

If you are a rich investor with multi-million dollar capital looking for investment opportunities in Las Vegas. Certainly casino company stocks and bonds or private offering might be worth looking. However, the sad news is that no matter for stocks or bonds or private offerings, the investment reward is only around 10% to 20% yearly. Well, maybe it is not so sad at all. 10% or 20% of return is certainly a lot safer than gambling. Which reward is better, 10% - 20% return or wipeout?

Well, I know you may want to protest against my above example. Stock market can not be as bad as Casino, right?

It depends. Although casino gambling does not provide real investment opportunities as stock market provides, sometimes stock market can be even worse than casino due to insider manipulation, cheating books, etc. Over the past couple of years, I have heard so many negative news from stock market: Enron, Worldcom, mutual fund scandals, market timing, etc. But I have not heard of news of slot machine cheating by Las Vegas Casino company. Casino does not need to cheat to make money, the odds are against gamblers. Although stock market does offer real investment opportunities for businessman-like investors, stock market is also a place for gamblers to place their bet just like a Casino.

In stock market, the odds are against speculators.

Well, I know you may have more questions. Why Casino bonds or stock offerings or even private offering is only offering 10% to 20% returns?

Casino business is just another business. Numerous academic study has shown that in US history of past many decades, majority of companies can not maintain more than 20% of return on equity over the long run. Many companies are operating under loss, a negative return on equity. If you read books on Warren Buffet method of Philip Fisher method, you will know that they are experts in identifying those small group of high return on equity stocks. But for most companies, they are not as good as the stocks in which Buffet or Fisher invested.

Competitive economics is also at play here. If a company can make more than 20% of return consistently, the competition will heat up and more smart businessmen will enter this field to drive down the return.

If you think of value investing as special kind of business, you will realize how hard it is to maintain 20% return for the long run, as Warren Buffet achieved over past 50 years. Very few investors can do that. Value investing business is just as competitive as other business. Let’s face it, if value investing is not competitive and easy to make big money consistently, many smart business guys out there in US will liquidate their own company and start their investment firm instead.

Component # 3 - right tools - new way to find great picks

Peter Lynch mentioned many methods to get the stock leads and identify the big winners in his book "One up in Wall Street". Tips from wife, tips from friends can land you the great stock idea. Although his methods are very valid, there are new ways to find that great pick in this internet stage: Software Data Mining.

It is quite fortunate that I am a data mining expert myself. If you are good at data mining, you can do yourself well too. You can design and fine-tune your data mining tools to get the leads you want and make big money by getting ahead of crowds.

A successful value investor really has to find great pick ahead of big guys and move fast in order to make big money. In this internet stage, big guys such as mutual funds or hedge funds really have no advantage over small guys or small firms such as BlastInvest. At BlastInvest, we do stock data mining with our in-house software just as good as those big guys, if not better. Sarbane Oxley new law also helped individual investors and small firms like BlastInvest a lot because most of public companies now disclose information to public and to big institutions simultaneously through conference calls or press releases. Insiders now also have to report insider buying and selling within couple of days of transaction instead of several months before. Whenever insiders buy or sell, You need to know that immediately within a few days. You want to buy when insiders buy and you may want to sell when insiders are selling too.

Don’t despair if you do not know how to program software yourself. There are lots of tools and services out there to help you out. Here I want to talk about the most useful tools out there.

(1) Valuation screening tool. You need at least one tool for screening against value metrics for you. Yahoo stock screening is very useful tool and it is free.

(2) Insider buying tool. This is must-have tool to get you the latest insider buying stocks. There are many offering there, fee-based or free. We offer free insider-buying weekly service as well at BlastInvest.

(3) Strategy screen. Validea.com offers an interesting stock screening tool that can screen based on methods of Ben Graham, Warren Buffet, or Peter Lynch. It has limitations too. I have used it and found that its Warren Buffet tool is not working well and its Ben Graham strategy screening is only looking for "defensive" type of stocks, not the "enterprising investor" type of stocks. My BIRTP newsletter is really geared toward "enterprising investor" type of stocks rather than "defensive investor" type of stocks. Heck, still Validea is best kind of tool available at affordable price in this category.

Final thought

If you follow up with my above 3 components of value investing, you are on your path for financial freedom.

However, if you can not do as I stated above, do not naively believe that you can make big money alone in stock market mainly by hunch. Buy the stock screening tools if necessary, get the professional help from real experts and consider my newsletter BIRTP as well.

Webmasters and Ezine Publishers: Free professional content - pre-licensed to you..

You are invited to use any or all of these value investing articles in your publication or website. The only requirement is the inclusion of the following, after each article…

* Article by Henry Lu of BlastInvest LLC, a premium investment newsletter publisher in Connecticut. Visit http://www.BlastInvest.com for FREE "how-to" investing assistance, web services and more.

Stock Market Strategies Comments Off
Can’t Stand The Heat
Posted on Mar 10th, 2008It seems that every day I turn on the TV and find a Poker game. Texas No Limit seems to be all the rage these days. I love watching it. When I discuss this with others, their response is always the same, “You should play.” Ah, but what they don’t know is I stay out of the kitchen. As far as risk to reward ratio. That’s a gamble I’m not willing to take. I prefer to invest my money. Sometimes I gamble in the stock market, but as long as I stay within my comfort zone (long term), I don’t mind.

Tolerable risk should be the goal of every investor. Know your limits! Here are my big three don’ts:

Don’t invest more than 30% of your portfolio in risky ventures;
Don’t let your broker/advisor talk you into an investment;

Don’t gamble with money you’re not ready to loose.

Here’s a poem I wrote about a real person.

There once was a man from the North East Who thought he could tame the great beast Money in hand, he headed to Wall Street A Bull market it was, an IPO investment he couldn’t beat The morning bell rang and he started to buy…

Drug store, MP3, Martha Stewart, and Be Free, Flashnet, Redhat, Eloan, and Goldman Sachs, Foundry Networks, Agilent, NextCard, and JNI corp, Goto, PCOrder, Free Markets, and Intertrust technologies, Ivillages, Keynote Systems, Radware, and Women, Kana, The Street, Internet Initiative, and Insweb, WWE, TicketMaster, CitySearch, and Ziff Davis.

He felt so good, like a young man and spry The days rolled along and the market did swell Up 80% by the close of the bell.

It was over the next few days that reality hit home The stocks started to plummet like the downfall of Rome A huge loss was incurred, sell everything without care Along with riding the bull you get tamed by the bear!

This real man I’m speaking of has class action law suits against every one of these companies and the underwriters of the IPO. Here’s a link to the law firm, Lovell Stewart Halebian LLP http://www.lshllp.com/homejump.ihtml?page=classaction.ihtml that happens to be representing this man in all these cases. To this gentlemen I have 6 words…if you can’t stand the heat.

About The Author

Brian Weiss is owner operator of www.InvestmentRunner.com a specialty search engine with free investors software, spread sheets, investors dictionary, and financial weblog.

admin@investmentrunner.com

Why stocks become over/under valued

2008-06-22T11:33:00.000-07:00

Over the course of the past several decades, the term “investor” has been used for anyone who owns a share of stock. It is important that you understand this is not the case. When a person buys a stock, they are doing it as one of two people: either an investor or a speculator.
What’s the difference?
An investor is someone who carefully analyses a company, decides exactly what it is worth, and will not buy the stock unless it is trading substantial discount to its intrinsic value. They are able to say, for example, that “company ‘X’ is trading for N48 per share, but it is worth N62 per share.” They make their investment decisions based on factual data and do not allow their emotions to get involved.
A speculator is a person who buys a stock for any other reason. Often, they will buy shares in a company because they are “in play” (which is another way of saying a stock is experiencing higher than normal volume and its shares may be accumulated or sold by institutions).
They buy stocks not on the basis of careful analysis, but on the chance it will rise from any cause other than recognition of its underlying fundamentals.
Speculation itself is not necessarily a vice, but its participants must be absolutely willing to accept the fact that they are risking their principal. While it can be profitable in the short term (especially during bull markets), it very rarely provide a lifetime of sustainable income or returns. It should be left to those who can afford to lose everything they are putting up for stake.
How do these two different types of activity affect stock price?
The speculator will drive prices to the extremes, while the investor (who generally sells when the speculator buys and buys when the speculator sells) evens out the market, so over the long run, stock prices reflect the underlying value of the companies. If everyone who bought common stocks were an investor, the market as a whole would behave far more rationally than it does.
Stocks would be bought and sold based on the value of the business. Wild price fluctuations will occur far less frequently because as soon as a security appeared to be undervalued, investors would buy it, driving the price to more reasonable levels. When a company became overpriced, it would promptly be sold.
Speculators on the other hand, are the ones who help create the volatility the value investor loves. Since they buy securities based sometimes on little more than a whim, they are apt to sell for the same reason. This leads to stocks becoming dramatically overvalued when everyone is interested and unjustifiably undervalued when they fall out of vogue. This manic-depressive behavior creates the opportunity for us to pick up companies that are selling far less than they are worth.
This leads to the fundamental belief among value investors that although the stock market may, in the short-term, wildly depart from the fundamentals of a business, in the long-run the fundamentals are all that matter. This is the basis behind the famous Ben Graham quote “In the short-term the market is a voting machine, in the long-term, a weighing one.” Sadly, some reject this basic principle of the stock market.
Several months ago, I received an email form a reader who asserted that “the economic fundamentals of a company have no relation to the stock price.”
This is completely false. My response was a simple message that read “If the fundamentals don’t matter, what if NBC Plc never sold another bottle of coke? How long do you think the stock price will stay at its current level?” When put in this light, the folly of the “fundamentals don’t matter” becomes evident.
The next time someone preaches this, simply ask “what happens to the stock if the company can’t make its payments and defaults on its loans?” When they answer “it goes bankrupt”, simply smile and walk away. Fundamentals do matter.
Unfortunately, countless investors believe the myth this gentleman does. The perfect example of this is this dot-com boom of the late 1990’s. Companies with no profit in their financial report at the end of the year, and had very little, if any, book value were selling at astronomical levels. “Surely this will prove that fundamentals mean nothing,” some will argue. On the contrary, it proves our point entirely. Only a few short years after the initial stock market bonanza, the economic realities of those companies came back to haunt them. Most fell 90% or more form their highs, with many more going bankrupt, ultimately worth less than the paper their stock certificate were printed on.

From Joshua Kennon,
Investing for Beginners.

Investing Mistakes and How to Minimize Them

2008-06-17T05:38:00.000-07:00

Ah, those investing mistakes that everyone wishes hadn’t happened to them. Not all losing ventures in the stock market are due to foolishness.

For a plethora of reasons, including reckless advice from the “experts”, emotional trading, misapplication of the basic stock investing concepts, and failure to follow a proven stock trading system all can lead to the same end. Here is a list of common errors to avoid, improving your results and limiting those investing mistakes:

1. Never invest without a clearly defined stock trading plan. A well-conceived plan will include considerations of time, risk-tolerance, and future income….and a proven system for success (such as the Japanese Candlestick stock trading method). A plan that follows these guides will steer clear of most investing mistakes.

2. Investors don’t stick to their best investment plan. All too often, investors will feel changes in the market and not have faith in their plan. Although investing is always referred to as "long term", it is rarely dealt with as such by investors who would be hard pressed to explain simple stock market basics. Again, a good investment plan including a strong system can help to evade most investing mistakes.

3. Investors fall prey to the “one-trick pony” method of investing. To think that a rising stock will continue to rise indefinitely, especially if it is a company to which the investor has ties, is fool’s gold. Remember, portfolio diversification is a hedge against investing mistake. Follow your system and take your profits according to your plan.

4. Too often, investors are stricken with "analysis paralysis”, overdosing on stock market information. Such an approach is confusing, frustrating, and leads to more investing mistakes. Something else is good to remember; sales pitches do not constitute research! Technical analysis can be dirty work, but the end result is usually worth the effort.

5. Investors frequently are looking for the “home run”, that shortcut to a huge profit which usually only leads to more investing mistakes. A beginner investing in the stock market will abandon a profitable investment plan to take a chance on securities that cause nothing but trouble. The fact is, a solid plan will likely improve risk reward ratios faster, and more securely, than that swing for the fence.

6. Many investors fail to respect the cyclical nature of the markets and buy the latest fad in securities at its highest price. They will abandon the plan and system that was improving their stock market results and in turn, create a “buy high, sell low” trend in their investing. Such investors usually don’t have to suffer long; a trend like this will quickly eliminate the beginner investing in the stock market and their investing mistakes!

7. Many investing mistakes will involve some form of unrealistic expectations for an investor’s portfolio. Successful traders find that the most consistent success in investing requires a trip down the path of reasonable goals and steady growth. Trusting your plan and system make this trip more enjoyable.

A mitigating factor in the problems that cause investing mistakes is frequently the sensationalism that follows investing.

Media coverage of stock market data analysis has become akin to the sports coverage; somehow investing has been marketed like a sporting event, with winners and losers.

While investors “win” or “lose” their profits or even their investment, the market is not competitive in that sense. An informed investor, with his plan and system in place, competes for profits, not a spot on the evening news. Picking stocks that make a profit, not winning or losing, is the ultimate reward for avoiding those investing mistakes.
Source: http://www.candlestickforum.com

9 Deadly Trading Mistakes!

2008-05-31T05:14:00.001-07:00

The following are a list of nine things you want to avoid at all costs. Anyone of them can literally destroy your financial dreams and goals!

1. Trading with money you can’t afford to lose.

One of the greatest obstacles to successful trading is using money that you really can’t afford to lose. Examples of this would be money that is supposed to be used to pay the mortgage, bills or your child’s college tuition. This is sometimes referred to as “trading with scared money” and there is a very good reason for that. Ultimately what happens is that when someone knows in the back of their mind that they are risking the rent money, they trade out of fear and emotion versus logic and no emotion.

If you are in this situation I highly recommend that you stop trading until you earn enough to put into an account that you truly can afford to lose without causing major financial setbacks. You can start with as little as $2000 and trade stocks under $30.

2. The need to be “certain”.

We all have the need to make sure that the trade we want to make is going to be a good one. Therefore we look for signs that will give us a confirmation to enter. This can come in several forms, for example… Tuning into CNBC or the Wall Street Journal to give us news that our stock is on the move or waiting for a couple of extra days to make sure that the stock is really flying and just not on a false breakout. Other traders will get opinions from friends, family or broker. Others will wait for ten technical indicators to line up and give the “green light”.

All of these are okay to a point, however the big mistake to avoid is taking so much time that you let the trade take off without you. Interestingly, what ends up happening as a result of waiting too long is that you actually increase your risk. This is because as a stock moves higher and higher there are fewer buyers left in the market and it can come tumbling down until more buyers step in. It is like a game of musical chairs; eventually someone gets caught without a chair.

Traders who wait and wait and wait to make extra sure are usually the ones buying the top tick just before the stocks sells off. They then beat themselves up thinking they picked the wrong stock. Odds are it had nothing to do with their selection, just bad timing.

The thing to keep in mind is that there can be no absolute certainty in any given trade. All we ever can do is take a very educated risk along with a leap of faith!

3. Spending profits before you make them.

Nothing is more exciting then getting into a trade that blasts off and puts you into a highly profitable situation. This can cause major problems however, because this type of trade puts you in a highly euphoric state and leads to daydreaming about the huge profits still to come. You say “Wow I’m already up 15% in two days; I’ll be up 50% in a week and probably double my money in no time!” Then the next thing that happens is you are deciding on the great new car you are going to buy or perhaps telling your boss that he can stick it… Well you get the idea!

The real problem occurs as you get caught up in the daydream and expectations. This causes you to not be prepared to get out as the market sells off and eats up your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation.

The simple remedy for this is to know where and how you will take profits once you enter the trade. Also, realize that the market will only go up as long as it wants and not how high you think it should go.

4. Forming an opinion.

I’m here to tell you that the market does not give a damn about you or your opinions. Even if they are based on painstaking research or from a “Wall Street Guru”, it doesn’t matter!

Maybe your opinion on market direction for the long term is correct, but it doesn’t mean that in the short term things can’t move against you. Remember that there are tens of thousands of traders out there who also have an opinion. It is all these different opinions that can cause great fluctuations in price on any given day or week regardless of your outlook

5. Three 4-letter words that will kill you! HOPE—WISH—PRAY

If you ever find yourself doing one or more of the above while in a trade then you are in big trouble! As I have already said, the market doesn’t give a damn. All the hoping, wishing and praying in the world is not going to turn a losing trade into a winning one.

When you are wrong just use a simple 4-letter word to correct the situation-SELL!

6. Not sticking to your plan

A big source of trouble arises when a trader starts to deviate from their strategy. Maybe for a week they will trade according to one set of rules and the next use something entirely different.

This flying by the seat of the pants always ends up backfiring. This is because the trader can never be certain what is working and what is not.

You must never deviate from your methodology once you start. As long as it is a good one statistically there is absolutely no reason to change it. The way to make money from it is to trade it over and over again to exploit the edge it gives you.

One thing to also be aware of is that a trader is most vulnerable to switching approaches after a few loses. So, pay special attention at these times.

7. Not knowing how to get out of a losing trade.

It’s amazing how many people I have talked to who don’t have any clear escape plan for getting out of a bad trade. Once again they hope, pray wish and rationalize their position. As I keep saying the market does not care what you think. It does what it does and when you are wrong you are wrong!

The easiest way to keep a bad trade from going really bad is to determine before you get in, where you will get out. You can use a dollar amount or at some target point such as the low of the previous 15-minute bar.

***Make sure you don’t get the “stunned deer in the headlights syndrome”. This is where you see the stock fall to your stop loss point, but you are unable to take action. Maybe this is due to fear or disbelief that you are wrong, but unless you get out ASAP you could end up I major financial trouble!

8. Having an ego.

I have seen a number of individuals enter the trading game that were extremely successful in other business ventures. Because of this they had a fairly big ego and thought they couldn’t fail. Their egos became their downfall because they couldn’t except that they were wrong and refused to bail out of bad trades.

Once again, whoever or wherever you came from does not concern the markets. All the charm, powers of persuasion, number of diplomas on the wall or business savvy will not budge the market when you are wrong.

9. Falling in love with a stock or trade.

Let me give you an example of what I mean. Back in the spring of 1999 EFAX was a really hot stock. I waited to buy it on a dip and did so at $19/share. It started to move up strongly and life was great!

After a while though, it started to come back to my entry point and then below it. Here’s the problem. For some reason I really liked EFAX and sort of became attached to it. Ultimately I couldn’t let go of it even though I knew I should. I justified and rationalized why my dear friend should bounce back, but it never did. I finally had to break off my love affair when the stock hit $9. (Ouch!)

The moral of this story is never fall in love, let alone get married to any stock. It can cost you dearly!

I can’t emphasize enough the importance of the principles in this article. Whether you are a position trader, swing trader or day trader, these principles can help you avoid some costly and painful financial mistakes. As they say, smart people learn from their mistakes and brilliant people learn from the mistakes of others.

Dr. Jeffrey Wilde, a trading veteran with 16 years of experience is a trading coach to over 3500 traders in 63 countries. His new blog http://www.askjeffwilde.com offers free trading articles, tips and advice. He also teaches a variety of courses found at http://www.win-at-trading.com and http://www.fastforexprofits.com

Stock Trading Secrets?

2008-05-31T05:05:00.000-07:00

How often have you come across an advertisement or e-mail proclaiming to "teach" you the stock trading secrets that Wall Street Insiders don’t want you to know? Usually included in the descriptions of these trading products are claims such as "Make 10K monthly in minutes per day", or "Learn the secrets of Professional Stock Brokers", etc. etc. So what are these "secrets" that they are SELLING?

And if the Wall Street Insiders and the Professional Stock Brokers didn’t want to reveal these trading secrets with you, then how come the companies or individuals selling you these products are so quick to give up these "Never before revealed" techniques?

Is it because they don’t work, or are their products just the basic rules of trading rewritten (once again) in a new and thought provoking way? Or, if you believe everything you read, is it really some highly classified and secret method for trading stocks that is being SOLD here?

Stock Trading Secrets Revealed

In its most simplified form, the real trading secrets of the institutions and professional traders fit into at least one of the areas below…

1) A well developed trading system that has proven itself to profitably work over and over again in real-life trading

2) Knowing which trading strategies work best in which markets

3) The role of the Market Makers and how they use their influence to control the market and how you can use this to your advantage

4) What trading indicators are actually reliable

5) Which trading patterns are worth using, and when

6) Proper Money Management techniques, Money Management, and Money Management (note the emphasis here)

7) How to take advantage of margin

So, contrary to what they want you to believe, this is what they are selling you. I’m not saying that all of these trading products out there promoting unknown trading secrets are not worth the money, but quite the opposite. If they can provide you with truthful advice about any of the above areas, AND this advice is not easily accessible or publicized, then their product may greatly benefit your trading results.

But, if they are simply selling you generalized trading information that you can learn from any basic trading book, perhaps your money is better spent elsewhere. Buyer beware.

Frank Soler is a successful trader and Registered Investment Advisor. His company, Soler Investments, provides trading advisory services for stock traders and currency traders. Visit SolerInvestments.com today to find out how he can help you become a successful trader.

Copyright @ 2005 Soler Investments All Rights Reserved. Reprint of this article is allowed as long as due credit is given to the author and links are left intact.

The Stock Market Investor’s Worst Enemy

2008-05-31T04:59:00.000-07:00

Every stock market investor faces one primal enemy. An enemy so perverse, it will drive thousands of investors from the stock market through its ability to defeat even the most practiced investment strategy. Who is this enemy you ask? Your arch nemesis, in this case, goes by the name E. Motions…don’t ask me what the “E” stands for.

Emotions are the driving force behind every stock market cycle. Quite simply, if they weren’t present in the stock market, investors could be reaping rewards based solely on the expanding or receding economy, and professional traders wouldn’t have any juicy profits from those emotional mistakes to grab.

Here is an example scenario:

Let’s say that you’ve done your homework, read the books, traded on paper, and now you’re making your fondest dream come true by investing in the market and making money!

You maturely approach losses as part of the learning curve. You’ve experienced your share of them but your wins are still in the lead, thanks to the commitment you made of not deviating from your chosen strategy. Euphoria sits on your shoulder.

One day, after 3 frustrating hours in traffic, you get home to find changes. You know that you should follow your strategy, but Stress and Greed are in charge. You’re buying and selling outside your strategy, but are confident that it will be ok – just this once.

Now prices are dropping and Fear enters the room.

Fear attacks every investor’s self-confidence with a voracious need for control. You spend sleepless nights listening to his mantra - you don’t know what you’re doing.

Fear and Greed are now dictating the strategy. Self-confidence is on the critical list. Reason and Caution are under attack and are losing.

You ignore the primary investment rule of buying low, selling high because you’ve lost too much and have to recoup. You close your eyes and dive in to recover your losses. “It will work,” says Greed on your right. “It has to work!” responds Fear on your left.

Your partner has now entered the fray and is hounding you about the lost money. Your capital is almost gone. You erred grievously and invested money that you need now. Margin calls are being made. You’re out of control.

While the components of the above scenario will change, the catalyst of this nightmare remains the same – emotions. You’ll survive the nightmare, but the experience will forever change you. Fear will shade every future stock market decision and severely limit your ability to objectively evaluate any investment opportunity out of fear that you’ll lose again. But, it doesn’t have to be that way.
Developing a strategy to deal with emotions can give you a winning edge.
Here’s how:

Don’t go into the stock market to feel good about yourself.

Always look outside of the stock market for self-gratification and affirmation.

Make a commitment to stick to your chosen action plan or strategy. Don’t deviate.

When a loss occurs, examine it and learn from it. Don’t try to get even.

Think before you leap into anything

If you are stressed out, vulnerable, or overly emotional (high or low), do not trade. It’s not worth the financial risk.

Remember, the key isn’t denying or curbing your emotions, but instead understanding how they impact your investment decisions and developing a strategy to work with them.

About the Author:
Jeff Fairchild is the publisher of http://www.best-stock-trading-systems.com
The site includes tips, techniques, strategies, and systems designed around improving your stock trading profits.

Picking Mutual Funds to Outperform the Market

2008-05-31T04:55:00.000-07:00

With over 6,000 mutual funds available, it may be tempting to pick funds from a popular star or index rating system. Savvy investors, however, balance multiple factors in their selection process. Ratings represent only the historical performance of funds and cannot predict the future. Performance consistency, management skill, and expense limitations are among the many factors that influence a fund’s prospects. Each must be carefully evaluated to improve your chances of finding a fund to outperform the market.

Create a plan
Define your financial goals. Are you saving for retirement? Putting money aside for a home? Funding a child’s college education? Your answer will have significant implications on your choice of mutual funds. More time gives you flexibility to use an aggressive approach. Immediate needs call for safety and capital preservation. Take careful consideration of your tolerance for risk. If the market dips, at what point would you lose sleep? Is it a 5% drop? 10% drop? An asset allocation plan will balance your portfolio and maximize return for your level of acceptable risk.

Dismiss recent results
Past performance is no indicator of future results. No truer words could ever be spoken and they are included in every mutual fund advertisement. But it’s extremely difficult to ignore these numbers which the fund companies conveniently place in big bold letters – immediately above the fine print warning us. Nothing is more attractive than a fund with a great record, especially given the dismal performance in the market.

Past performance can provide a good starting point, but nothing more. In fact, past performance predicts losers better than the winners. A 1998 study from fund-tracking firm Morningstar, demonstrated the top fund performers rarely hold their spot on the charts. The study also concludes bottom performers rarely did anything but continue to sink. Never assume the past will repeat itself, yet, ignore a fund’s historical record at your own peril. Avoid the perennial losers.

Seek consistency
Evaluate a mutual fund’s performance beyond just the recent year. Any fund can get lucky, but it’s the rare firm that prove themselves year after year. Examining a fund’s long term performance can answer the question of consistency. If the performance was good, was it repeatable due to skill – or merely a spike due to dumb luck?

Watch for a solid record of returns, rather than funds showing spurts of great years followed by fits of lousy ones. Compare the fund’s returns to a relevant benchmark index, (large-cap vs. S&P 500, small-cap to the Russell Index, etc.) Solid funds should not only consistently beat the benchmarks, they should also beat their peers.

Seek good managers
Always review the experience and performance of the fund’s managers. When you buy a mutual fund, you are actually investing in the experience, skill, and savvy that the manager brings to the table. When the manager leaves, the fund performance generally goes with him. How many years has the manager been leading the fund? The longer (if generating strong results), the better. And keep an eye out for the gurus. The industry’s better managers are well-respected, high-regarded, and often quoted in the press. You’ll find multiple articles and even manager profiles published in the popular financial magazines and newspapers.

Think cheap
Check out the fund’s cost of ownership. While you can not predict a fund’s performance, you can control the ongoing expenses. Since expenses impact your ability to grow investments over time, select a fund with low costs. Check the expense ratio, sales fees, trading costs, and 12b-1 fees charged to cover the marketing, distribution and sales. Everything counts against your bottom line – keep it small as possible. When possible, choose funds with expenses less than their category average.

Taxes are often overlooked and can substantially reduce your after-tax gain unless investing within a tax-deferred, retirement account. Avoid funds with large distributions (capital gain payments) by searching for funds with low turnover. Since buying and selling stock incurs transaction costs, lower turnover translates to lower expenses and lower capital gains’ taxes. Fund managers who seek to boost returns through repeatedly buying and selling securities are no friend of yours.

Putting it all together
Picking mutual funds is a challenging task. You will need to spend time learning, researching, investigating, analyzing, and comparing. The key is to develop your own methodology using some of the components listed here along with your own judgment and decision capabilities. Review your investment plan and fund selection criteria at least once a year. Make sure the plan still matches your goals and the funds match your expectations.

It’s your money. It’s your future. Take your time. Get it right.

Tim Olson

TheAssetAdvisor.com

Mr. Olson is the editor of The Asset Advisor, a financial investment service providing proven strategies for no-load mutual fund investors. He brings 26 years of education and experience from Stanford University, Ernst & Young financial consulting, personal wealth management, and venture capital investing.

Forces that Move Stock Prices

2008-05-31T04:45:00.000-07:00

Among the largest forces that affect stock prices are inflation, interest rates, bonds, commodities and currencies. At times the stock market suddenly reverses itself followed typically by published explanations phrased to suggest that the writer’s keen observation allowed him to predict the market turn. Such circumstances leave investors somewhat awed and amazed at the infinite amount of continuing factual input and infallible interpretation needed to avoid going against the market. While there are continuing sources of input that one needs in order to invest successfully in the stock market, they are finite. If you contact me at my web site, I’ll be glad to share some with you. What is more important though is to have a robust model for interpreting any new information that comes along. The model should take into account human nature, as well as, major market forces. The following is a personal working cyclical model that is neither perfect nor comprehensive. It is simply a lens through which sector rotation, industry behavior and changing market sentiment can be viewed.

As always, any understanding of markets begins with the familiar human traits of greed and fear along with perceptions of supply, demand, risk and value. The emphasis is on perceptions where group and individual perceptions usually differ. Investors can be depended upon to seek the largest return for the least amount of risk. Markets, representing group behavior, can be depended upon to over react to almost any new information. The subsequent price rebound or relaxation makes it appear that initial responses are much to do about nothing. But no, group perceptions simply oscillate between extremes and prices follow. It is clear that the general market, as reflected in the major averages, impacts more than half of a stock’s price, while earnings account for most of the rest.

With this in mind, stock prices should rise with falling interest rates because it becomes cheaper for companies to finance projects and operations that are funded through borrowing. Lower borrowing costs allow higher earnings which increase the perceived value of a stock. In a low interest rate environment, companies can borrow by issuing corporate bonds, offering rates slightly above the average Treasury rate without incurring excessive borrowing costs. Existing bond holders hang on to their bonds in a falling interest rate environment because the rate of return they are receiving exceeds anything being offered in newly issued bonds. Stocks, commodities and existing bond prices tend to rise in a falling interest rate environment. Borrowing rates, including mortgages, are closely tied to the 10 year Treasury interest rate. When rates are low, borrowing increases, effectively putting more money into circulation with more dollars chasing after a relatively fixed quantity of stocks, bonds and commodities.

Bond traders continually compare interest rate yields for bonds with those for stocks. Stock yield is computed from the reciprocal P/E ratio of a stock. Earnings divided by price gives earning yield. The assumption here is that the price of a stock will move to reflect its earnings. If stock yields for the S&P 500 as a whole are the same as bond yields, investors prefer the safety of bonds. Bond prices then rise and stock prices decline as a result of money movement. As bond prices trade higher, due to their popularity, the effective yield for a given bond will decrease because its face value at maturity is fixed. As effective bond yields decline further, bond prices top out and stocks begin to look more attractive, although at a higher risk. There is a natural oscillatory inverse relationship between stock prices and bond prices. In a rising stock market, equilibrium has been reached when stock yields appear higher than corporate bond yields which are higher than Treasury bond yields which are higher than savings account rates. Longer term interest rates are naturally higher than short term rates.

That is, until the introduction of higher prices and inflation. Having an increased supply of money in circulation in the economy, due to increased borrowing under low interest rate incentives, causes commodity prices to rise. Commodity price changes permeate throughout the economy to affect all hard goods. The Federal Reserve, seeing higher inflation, raises interest rates to remove excess money from circulation to hopefully reduce prices once again. Borrowing costs rise, making it more difficult for companies to raise capital. Stock investors, perceiving the effects of higher interest rates on company profits, begin to lower their expectations of earnings and stock prices fall.

Long term bond holders keep an eye on inflation because the real rate of return on a bond is equal to the bond yield minus the expected rate of inflation. Therefore, rising inflation makes previously issued bonds less attractive. The Treasury Department has to then increase the coupon or interest rate on newly issued bonds in order to make them attractive to new bond investors. With higher rates on newly issued bonds, the price of existing fixed coupon bonds falls, causing their effective interest rates to increase, as well. So both stock and bond prices fall in an inflationary environment, mostly because of the anticipated rise in interest rates. Domestic stock investors and existing bond holders find rising interest rates bearish. Fixed return investments are most attractive when interest rates are falling.

In addition to having too many dollars in circulation, inflation can also be increased by a drop in the value of the dollar in foreign exchange markets. The cause of the dollar’s recent drop is perceptions of its decreased value due to continuing national deficits and trade imbalances. Foreign goods, as a result, can become more expensive. This would make US products more attractive abroad and improve the US trade balance. However, if before that happens, foreign investors are perceived as finding US dollar investments less attractive, putting less money into the US stock market, a liquidity problem can result in falling stock prices. Political turmoil and uncertainty can also cause the value of currencies to decrease and the value of hard commodities to increase. Commodity stocks do quite well in this environment.

The Federal Reserve is seen as a gate keeper who walks a fine line. It may raise interest rates, not only to prevent inflation, but also to make US investments remain attractive to foreign investors. This particularly applies to foreign central banks who buy huge quantities of Treasuries. Concern about rising rates makes both stock and bond holders uneasy for the above stated reasons and stock holders for yet another reason. If rising interest rates take too many dollars out of circulation, it can cause deflation. Companies are then unable to sell products at any price and prices fall dramatically. The resulting effect on stocks is negative in a deflationary environment due to a simple lack of liquidity.

In summary, in order for stock prices to move smoothly, perceptions of inflation and deflation must be in balance. A disturbance in that balance is usually seen as a change in interest rates and the foreign exchange rate. Stock and bond prices normally oscillate in opposite directions due to differences in risk and the changing balance between bond yields and apparent stock yields. When we find them moving in the same direction, it means a major change is taking place in the economy. A falling US dollar raises fears of higher interest rates which impacts stock and bond prices negatively. The relative sizes of market capitalization and daily trading help explain why bonds and currencies have such a large impact on stock prices. First, let’s consider total capitalization. Three years ago the bond market was from 1.5 to 2 times larger than the stock market. With regard to trading volume, the daily trading ratio of currencies, Treasuries and stocks was then 30:7:1, respectively.

James A. Andrews publishes the Wiser Trader Stocks and Options Newsletter. Site contact, http://www.WiserTrader.com. © 2004 Permission is granted to reproduce this article in print or on your web site so long as this paragraph is included intact.