Chartist’s Point Of View: Elliott Wave Targets On World Indices and Current World Trends

This Market Watch Weekly is for educational purposes only and is not to be interpreted as trading or investment advice.  See Terms Of Use here.

This week we look at the Fibonacci Price targets for world indices, as well as their current world trends.  The trend signals have performed well, and it is nice to look at where the world might head according to Elliott Wave.

Check out the video below!

Of course please do your own due diligence – a great place to start is the free trading and investment course on this site.  Check out the strongest sectors report to find out where the best places to be in the market right now, and our free Live S&P ASX 200 Shares list, Charts and Top Movers.

Share your Comments in the comments section below.

Happy trending,

Dave McLachlan

March 11, 2012  Tags: , , , , , ,   Posted in: Market Analysis, Market Watch Weekly  No Comments

On The Importance Of Understanding Risk

Risk is not a term retail investors are often familiar with.  Sure, they might know of Risk like an acquaintance, perhaps like a friend of a friend, but they don’t know it intimately.  They haven’t sat down and had dinner with it, gotten all deep and meaningful and found out all about it.

These investors might still think that buying more of a downward stock decreases their risk, or that they don’t have to worry about risk because they are “long term investors”, and the “stock market always goes up”.

Here’s the deal though.  One, the stock market doesn’t always go up.  And two, we are all long term investors.  We invest in our plan, our trading plan, day in day out and we follow it for the long term.  If we don’t follow our tested trading plan, we fail.  Maybe not monetarily (although that is likely) but definitely emotionally.  And as part of that long term plan we must understand Risk.

Getting To Know Risk More Intimately

So, Risk.  How much is enough?  How much is too much?  These are probably good questions and places to start.  First we need to define Risk.  For our purposes Risk is defined as the amount between our entry price and our stop loss price, allowing for some price slippage.

Then, how much Risk is too much?  Well simply ask yourself: how much would it take for me to lose before I start to get uneasy?  Is it 10% of my portfolio?  Is it 20% or 30% of my portfolio?  Research has shown that the most common point where traders or investors start to doubt their plan is a drawdown of around 20%.  This would mean, if we risk 2% per trade, that we would have 10 losing trades.

Knowing this and based on this scenario of 2% risk per trade, it would be prudent to have only 10 positions on at any one time.  But what if we want to make a higher return?  Often to do so we must make more trades.  How, then, do we make more trades?

We can make more trades by using margin (borrowings or leverage) in our account.  But, like a child with a sharp object, we shouldn’t use Margin carelessly.  To ensure we are acting carefully, then, we can take new positions (risking our 2% per trade) only once one of our original 10 trades has gotten to the point where its trailing stop loss is at break even: essentially at the point of a theoretical risk free trade.

At this point our total risk remains at 20% even as we take on new trades to try and increase our returns, and this will help us from being affected psychologically from too large a drawdown in keeping our total risk at around 20%.

Get To Know Your New Friend, Risk

While Risk has had a bad rap over the years, once you get to know her she really isn’t that bad a character.  In fact she is quite lovely, and will treat you to some amazing rewards in life if you get to know her and treat her right.

Which is what I suggest.  Use this article as a starting point, or as an addition to your current understanding of risk.  Deepen that understanding.  As many billionaires have said: Look after the downside (the risk) and the upside takes care of itself.  Do this correctly day in and day out, and the rewards will flow.

March 11, 2012  Tags: , , , , ,   Posted in: Articles On Building Wealth  No Comments

The Ebb And The Flow Of Trading And Investing

While there are many misconceptions when trading and investing, one of the deadliest to your trading account is that you have to be trading every single day.

When people first come from working the nine to five, they falsely believe that results are directly tied to the amount of effort involved in an endeavour.  In trading, this could not be further from the truth.

Another mistake is that they believe they should be fully invested all the time.  Again, this is a grave mistake because the market does not rise every day, in fact it only rises around one third of the time.  One third of the year the market will often go down, and one third it will go sideways.

Which brings us to the ebb and flow of the markets, and how to use it to your advantage.

Don’t Fight the Tide

If there is one thing they teach you when swimming in the Australian ocean, it is that if you are caught in a rip (a strong tide pulling you out to sea) don’t fight it, instead swim sideways and move out of the fast flowing tide, then swim to shore.

The principle is exactly the same in trading and investing: it is wise never to fight the current of the overall market and money flow.  Money flowing into a market (otherwise known as demand) is good for that market.  Wait for these times and it will help you prosper.

When The Market Begins To Ebb

It is not uncommon in the stock market (or any market, for that matter) to get periods of downward prices many months or even many years long.  When we have one of these periods, what will you do?  Will you simply keep buying that market and hope for the best?  Will you be able to recognise the signs of a falling market?

Or will you have the skill necessary to make money in a falling market, like only a small percentage of traders and investors do?

This is the ebb of the market, when the tide goes out.  Some people are left trying to swim with no water, while others have left the shore long ago.

It is not hard to recognise when a market is beginning to ebb.  The price of the market will be making lower peaks and lower troughs.  Money lending will be tighter.  Demand for that market will be poor, with little positive news about future demand.  It will be harder to get loans for that market, and it will be disappointing fundamentally (i.e. earnings).

In the Australian Stock Market, it is common for a confirmed downward market to last on average approximately 60 days.

When The Market Begins To Flow

Likewise, there are times when the market will begin to rise, and lift many stocks along with it.  As the famous saying goes: A rising tide lifts all boats.  The stock market is no different.  When the tide is flowing in and the market begins to rise, your chances of finding a winning investment are much, much higher.  If trading and investing is not so much about being certain of something, as of having a high probability of something, then we are giving ourselves a higher probability of success by investing when the tide, or the market, is rising.

Wait Out Or Learn To Take Advantage Of The Bad Times, And Invest In The Good

Trading every single day can lead to disaster in your portfolio.  It is far better to be a hunter for good opportunities and wait for them to appear before making an investment.  If you want more opportunities to trade, you can learn to make money in bear markets (heading down).

But there will still be times when the market goes nowhere, and you must be ready to put your cash on the sidelines and wait for the tide to turn.

March 11, 2012  Tags: , , , , ,   Posted in: Articles On Building Wealth  No Comments

Why Having ANY Opinion Can Be Deadly In The Stock Market

As human beings it is our basic right to have an opinion.  And often, having an opinion is something that we do very well.  In fact, if you stop to ask someone for their opinion on a subject you will likely have your ear talked off as they go through all the reasons why their way is right and another way is wrong.

We have opinions on football teams, on TV shows or contestants.  Opinions on money and opinions on our prime minister.  We have opinions on our spouse and opinions on our friends.

Opinions help us shape our view on the world, they help protect us from things we may feel are dangerous, and they help steer us towards people who share our same views.

But the one place in the world it is more dangerous to have an opinion than not is the stock market, even though it is the one place that draws more opinions than many others.

Opinions And The Stock Market Do Not Mix

Visit any public stock market forum, and you will see hundreds of opinions.  Which way is the market heading?  Where is it likely to head?  Which method is the best to invest with?  Which educator is the best to use?

But as we’re about to see, having opinions can be deadly to your investments and account balance.

Let’s say for instance you have been burned by investing in the Materials sector before.  Maybe you bought BHP during the financial crisis, or maybe you invested in a speculative small cap mining company that all but disappeared.  This experience caused you pain, the pain of loss, which will often result in you forming a negative opinion about the Materials Sector (if not the individual stock itself).

When you have a negative view or an experience of loss in a stock or sector, it is very hard to get back into that sector when it turns around again.

The Opinions Of Others

How many times in your life have you let the opinions of others affect the action you take?  Even if you said “not many” I bet subconsciously you have altered the action you took in more than one scenario.  The stock market is no different.  Trawling forums for stock market opinions, or even listening to a stock market “expert” (myself included here) can give you market opinions that may not gel with your tested trading plan.

Especially forums or blogs – “perma-bear” (negative outlook) blogs like zero hedge, while they are extremely entertaining, definitely do not help the readers make any actual money in the markets.  And while they talk on about doom and gloom, what about the markets that are taking off and heading for the moon?  You’ve missed out on the ride, simply because you let another’s opinion affect you.

Using A Tested Trading Plan That Is Right For You

One of the best, proven methods for making money in the stock market is to use a tested, profitable trading plan that is right for you, and follow it mechanically.  This helps you avoid forming an opinion or following others’ opinions, and helps you act on the facts in price only.

Also using the power of Yin and Yang when trading and investing can help.

March 11, 2012  Tags: , , , , ,   Posted in: Articles On Building Wealth  No Comments

Dave’s Trading Diary: A New Two Speed Economy (And It’s Not Resources)

This excerpt from the trading diary is for educational purposes only and is not to be interpreted as trading or investment advice.  See Terms Of Use here.

See The Trading Diary Here | See Live ASX 200 Prices, Charts And Top Movers Here

Managing risk is the name of the game.  When putting any money into the stock market our main aim should be to manage the risk: most everything else will take care of itself.

I say “manage” risk, because avoiding risk altogether is not possible.  To buy a company share is to put your money at risk of loss with the idea that its price will go up and you will make money.  So because we cannot avoid risk, we manage it.

How do we manage our risk?

Very simply, by risking only an appropriate amount in the market, and keeping a level in mind where we will get out if the trade goes against us (i.e. a stop loss).  I’m bringing this up because at the moment we are seeing some solid gains from stocks in the Industrials Sector (a sector we called as strong more than 6 weeks ago), but there are still risks about in countries like Greece, Italy, Portugal and the likes.  It it prudent to be in the market and enjoy these gains, while at the same time limiting our losses if things go bad.

The New Two Speed Economy

At least for now, we are seeing great gains in the Industrials Sector, while all other sectors are falling behind.

A Month Of Dividends

See The Trading Diary Here

In March a lot of companies go ex-dividend, so it will be interesting to see where the market goes during this time.

Our current trading diary holdings are performing exceptionally well.  Much better than anticipated, with only three losing trades out of 26 in total.  As the average over time is usually around 60% wins and we are currently sitting on 88% wins, I expect this will even out eventually.  No one gets an 88 percent win percentage forever, but occasional winning streaks are definitely possible.

BLY (Boart Longyear), TOL (Toll Holdings), IMD (Imdex) and CAB (Cabcharge) are all performing well.  Honestly, you will have to check out the diary to see for yourself, there are too many good trades to mention here.

New Additions To The Diary This Week

Cashing in on the Oil Price, I put some money into OSH (Oil Search), then SDM (Sedgeman) and SLX (Silex).  Frankly, I have no idea what these companies do, but the price action has prompted me to see a new uptrend in price and buy.  So far so good, but as mentioned above my stop loss is set if things go bad.

Hope this week’s market watch and trading diary have helped you in some small way.

Got an opinion on all of this?  Leave your 2c worth in the comments section below.

Happy trending until next week!

Dave McLachlan

March 4, 2012  Tags: ,   Posted in: Dave's Trading Diary  No Comments