Stock Markets


Here’s a simple question-what is trading? To answer, perhaps not so simply, we first need to understand what trading is NOT. Trading isn’t about buying the fanciest chart, hanging on to something because it is a good buy, or feeling good about yourself because you can go to a cocktail party and relate to what everyone else is saying. Trading is about making money.

nice.jpgThere are software systems that create pretty colors and tell you which stocks are safe to buy because they have moved a certain way in the past. If one particular stock has been going up and up and up, a trend follower concludes that the stock should continue moving UP! However, in order to follow a stock’s true potential progress, would you rather wait for a computer program, or be actively and directly involved in its ascent?

Picture an apple in the center of a room, surrounded by 10 traders. Consider for a moment, each trader buying the apple until everyone has owned it. What is that apple worth? It is worth ONLY what someone will pay for it. Person #1 buys the apple for $1 and takes a bite. Person #2 then pays $2 for the same apple and takes another bite. Person #3 pays $3, and so on until finally, the last person takes that final bite. Yes, the apple is STILL worth only what the next person will pay for it-no more, and certainly no less. The only person left to sell it to is the one who walked into the room an hour late, looks at the apple’s past price history, consults his software that says the smelly apple has had a great price performance, and determines that it’s a worthwhile buy. That is precisely the definition of trend trading.

Make no mistake, successful trading is about you versus the guy sitting next to you with the pretty software. Don’t waste your time trading with charts, spend your time leaning how the stock markets really work.

Fear is a huge issue with a lot of traders. And interestingly, not just fear of failure but also fear of success.

I think there are two keys to taming fear, you can never eliminate it so don’t even try. The first and most critical is the one noted above – action. Action can tame fear in an instant. But it needs to be the right sort of action.

robin_bungee41.jpg____I personally have a fear of heights; so going bungee jumping may not have been the best way to address it! But that’s exactly what I did. There I was on a platform 250 feet above water, cursing why I got into this, but the only way to conquer fear was to jump and that I did. Do what you fear and the death of fear is certain.

In the same way, if you have a fear of losing your trading account, trying to face it down by putting it all on the line in one trade is not the best sort of action. But taking considered, appropriate action, like the strict use of stop losses is a way of taming fear and getting past the paralysis stage that fear can create.

The second key is focus. By this I mean keeping in the moment and concentrating on the immediate action that is required to move you forward.

If your focus is too broad you can become overwhelmed by the possibilities. Or you might start to worry about things that are beyond your control or simply don’t matter – like whether interest rates are going up or not.

But when you narrow your focus and remain “in the moment” in regard your trading, fear will be sidelined. The simple reason for this is that you can’t concentrate on two things at once!

And again, this will help overcome the paralysis that can be created by fear. So if you suffer from fear in your trading – action and focus are the only keys!

There is an old saying on Wall Street that the market is driven by just two emotions: fear and greed. Although this is an over implication, it can often be true. Succumbing to these emotions can have a profound and detrimental effect on investors’ portfolios and the stock market.

pokerchips.jpgInvesting in conservative blue chip stocks may not have the allure of a hot high-tech investment, but it can be highly rewarding nonetheless, as good quality stocks have outperformed other investment classes over the long term.

Historically, investing in stocks has generated a return, over time, of between 10 and 15 percent annually depending how aggressive you are. Stocks outperform other investments since they incur more risk. Stock investors are at the bottom of the corporate “food chain.” First, companies have to pay their employees and suppliers. Then they pay their shareholders. After this come the preferred shareholders. Companies have an obligation to pay all these stakeholders first, and if there is money leftover it is paid to the stockholders through dividends or retained earnings. Sometimes there is a lot of money left over for stockholders, and in other cases there isn’t. Thus, investing in stocks is risky because investors never know exactly what they are going to receive for their investment.

What are the attractions of blue chip stocks?

Good long-term rates of return. Unlike mutual funds, another relatively safe, long term investment category, there are no ongoing fees. You become a part owner of a company. Very actively traded so, easy liquidity.

So much for the benefits – what about the risks? Some investors can’t tolerate both the risk associated with investing in the stock market and the risk associated with investing in one company. Not all blue chips are created equal.

If you don’t have the time and skill to identify a good quality company at a fair price don’t invest directly. Rather, you should consider a good mutual fund.

Selecting a blue chip company is only part of the battle – determining the appropriate price is the other. Theoretically, the value of a stock is the present value of all future cash flows discounted at the appropriate discount rate. In reality supply and demand for a stock sets the stock’s daily price, and demand for a stock will increase or decrease depending of the outlook for a company. Thus, stock prices are driven by investor expectations for a company, the more favorable the expectations the better the stock price. In short, the stock market is a voting machine and much of the time it is voting based on investors’ fear or greed, not on their rational assessments of value. Stock prices can swing widely in the short-term but they eventually converge to their intrinsic value over the long-term.

131_0.jpgThe term “risk” describes the probability of an undesirable event happening as a result of a present decision or of some future event. In life, we face multitudes of these risks. Financial risk is something you can never eliminate, you can however minimize risk, diversification is one way.

The worlds of business and finance are not much different from our lives when it comes to risk-taking. In any business venture, owners or shareholders are bound to face risks. Like the risks we face in everyday life, some of these business risks can be easily handled and some cannot, and the process of deciding which is which belongs to the practice of risk management.

Risk management refers to the entire process of identifying, analyzing, evaluating, and treating risks. But since businesses are faced with many different types of risks, risk management specializations have also been created to deal with them.

And then there’s financial risk management, which is very similar to general risk management with a specialization in a business’s finances. Financial risk management also follows the processes of risk identification, analysis, evaluation, and treatment. Financial risk management, however, is more focused on finances and makes use of financial instruments to manage a business’s exposure to risks.

Instead of leaving businessmen with a variety of choices for risk treatment, financial risk marketing is focused primarily on hedging, which is the use of two counter-balancing investment strategies to offset the negative effects of price fluctuations. Aside from these differences, everything else is essentially the same.

Business men don’t have much choice but to face risks.It is for this reason that knowledge about financial risk management is very important in the business world. The practice won’t help businessmen avoid risks, but it gives them a chance to counterbalance the negative effects of risks whenever they have to take one.

main_our_products.jpgAt some point you will need to make changes to your investment portfolio. Often, investors and their advisors make wholesale changes all at once.

But that’s not really in your best interest. Read on to find out how to successfully adjust your portfolio. Using the wrong strategy at the wrong time can be devastating.

P
erhaps you’ve decided to make changes to your portfolio. It may be to take advantage of some strategies or it could be because your life situation and needs have changed. Or it might be that you’ve neglected your portfolio garden and there are as many weeds as vegetables.

Regardless of the reason, keep these steps in mind. They’re the ones I follow when transitioning a client’s portfolio.

You need to analyze your existing portfolio. Take a close inventory of your investments and research their performance. The last thing you want to do is to cut down the wrong plants while you are weeding your garden!

I
t takes more work but it’s better to calculate your actual return. Subtract what you invested into a particular holding from what it’s worth now. Look at that return in relation to the length of time you’ve held it to determine whether or not it needs to go.

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pr80915.jpgYou have heard it often buy dips in bull markets and wait for the market to rise but buying dips is not as easy as it first seems and most traders lose. Let’s look at how to buy them correctly, avoid losing trades and pile up some good profits.

Ask yourself this question. If you see a level of support and prices are moving down towards it – price momentum and the trend is against you. So why do you want to buy? Most traders will say support “should” hold, so get in just above at support and you’re in with good risk reward.

No your not – The markets are not as easy as that. The fact is that levels of support that “should” hold more often than not don’t hold. Trader gets stopped out as support is taken out. Doing this in leveraged markets will soon see your equity wiped out.
The better alternative. Is to look at price momentum and get confirmation that the support level HAS held and prices are moving up again after TESTING support. You’re not predicting – you’re acting on CONFIRMATION and trading with the trend. The way do this is top use an indicator that measures price momentum and near term strength.

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Bull Market

Firstly the bull is a buyer and the bear is “always” a seller. The bull buys because he wants to make money, (don’t we all?). In a “bull market” novice traders rush into every reasonable opportunity they can afford. These trades are not based on good management or risk control.
Please try not to get caught up in this market hype. If you start to chase prices upwards there is a very good chance you will pay too much for them, only to watch the share price start to recede when the buying panic is over.

A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of further capital gains. In describing financial market behaviour, the largest group of market participants is often referred to, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also described as a bull run.

Bear market

The bear is more complicated and can sell for different reasons. This can be just to lock in a profit because he thinks the share price is about to go down. The most fearful of the bears sets the lowest price for the day. This is done by offering to sell his shares at this level.

A bear market tends to be accompanied by widespread pessimism. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time. By one common definition, a bear market is marked by a price decline of 20% or more in a key stock market index from a recent peak over at least a two-month period. However, no consensual definition of a bear market exists to clearly differentiate a primary market trend from a secondary market trend.

hourglass.jpgMore than any other factor, it is the primary, or underlying, direction of the stock market that will determine the success or failure of a trading position. A stock can have a fabulous story, great fundamentals, a good technical position, strong sponsorship and yet turn into a bad trade if you are going long and the market is headed down. The same is true of an undistinguished stock that just goes up because it is being carried along in a strong up market. Stock Market Timing is a Stock Market direction system that forecasts the future short term direction of the market.

Isn’t it a smart play to cash in your stocks and ride out a down market? You can preserve your capital and jump back in when stocks begin moving up again. As logical as that strategy sounds, it is fraught with peril for most investors. There are several problems with “playing it safe” by cashing out and you may, in fact, create additional risks in doing so.

The first problem is knowing for sure that the market is turning bearish and not just in a temporary bad mood. A prolonged downturn doesn’t announce itself with great clarity. If you are wrong and the market shakes the blues and rebounds, you’ll be stuck on the sidelines buying back in to rising prices. You sold because prices were dropping and now you’re buying back in to rising prices.

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