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Figure this out and you can trade the markets successfully

Posted April 24, 2012 at 12:31 am

by Darrin Donnelly

People enter the trading world eager to multiply the money they’ve earned from their other career.  However, the crucial skill (productivity) that helped them earn all that money outside of trading doesn’t translate to success as a trader.

The reasons are obvious.  You can’t force a winning trade the way you can force yourself to finish a task.  You can’t create more winning trades the way you create more widgets for your company.  You can’t fix or improve a trade the way you fix or improve the product or person you were hired to fix.

New traders rarely adapt well to this fundamental difference.  The most common response to a dwindling trading account is to change the trading system.

It’s easy to see why this is such a common response.  In other careers, where all success hinges on production, if something isn’t working, we continuously make changes until the final product is working the way we want it to.

But in trading, constantly tweaking our strategies is a recipe for disaster because we’re not building a final product.  Put another way, we can’t force the market to behave exactly the way we want it to.

Successful trading is about reading and reacting, not changing and creating.  It’s about coming to terms with the fact that we have very little control – actually, none whatsoever – over what opportunities the market will give us on any given day.

[ Details / Source: Above is our hand-picked KEY excerpt(s) from this full article: "Why Most People Fail As Traders" ]

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How to invest in China the easy way

Posted April 20, 2012 at 3:00 am

Contrary to popular belief, the potential investment gains of a future event do not become instantly priced into a stock the moment that future event becomes reality.  Usually there is an initial pop, followed by a quick pull back, and then the larger move emerges.

So let’s talk about China.  The big fear gripping China traders right now is that Chinese growth is slowing and that their economy may experience what is called a hard landing.  A hard landing is when economic growth suddenly and swiftly drops.  For instance, China GDP is currently on an 8% pace, and a drop to 5% would be considered a hard landing.

What If…?

So if the Chinese are successful and can pull off a soft landing, it could potentially ignite a powerful rally as the central planners start loosening monetary policy.  This will immediately benefit Chinese financial services stocks.

Under this “what if?” scenario, the best play would be through the ETF iShares Trust FTSE China 25 Index (symbol: FXI).

52% of FXI’s exposure is to financial services, 18% is committed to Telecom, and the balance is in Basic Materials and Energy.  The bottom line is that if the Chinese are successful in containing inflation, then they will eventually loosen monetary policy and that will unleash massive economic growth.

[ Details / Source: Above is our hand-picked KEY excerpt(s) from this full article: "Here's How To Work Less and Make More" ]

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Investing risk: you can manage it, but never escape it

Posted April 12, 2012 at 2:37 am

by Jason Zweig

Often, understanding where a word came from can help us understand what it does – and even what it should – mean.

In his brilliant book Against the Gods, the investment writer Peter L. Bernstein said:

The word “risk” derives from the early Italian risicare, which means “to dare.” In this sense, risk is a choice rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about. And that story helps define what it means to be a human being.

In most dictionaries, however, the standard derivations of the word don’t explain where the Italian root came from: Greek? Latin? Sanskrit?

Nor do most dictionaries give a satisfying explanation of what the root word might have meant. The Collins English Dictionary speculates that the original Italian verb, rischiare, “to be in peril,” stemmed from the Greek rhiza, or “cliff,” since sailing along rocky shores was supposedly dangerous.

But, given the range of real and imaginary hazards that ancient sailors feared (storms, diseases, sea monsters), it’s hard to see why Greek navigators would have regarded sailing past a cliff face as the epitome of “risk.” And the Oxford English Dictionary notes that this derivation is “unsupported by documentary evidence.”

The language blog odamaki recently drilled down deep into the origins of the word “risk.” The likeliest explanation: It came into Italian from the [continue]…



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Investment lessons from Spartacus

Posted April 6, 2012 at 12:12 am

by Charles Sizemore

One of my guilty pleasures is watching the Starz series Spartacus.  As a history buff, I am well aware that the producers take sweeping liberties with the historical facts surrounding the slave rebellion, but I’m ok with that.  It’s great entertainment.

But even as you cheer for Spartacus as his band of escaped gladiators bests the hapless  Romans in episode after episode,  you know that the story won’t end well.  The historical Spartacus didn’t topple the Roman Republic, nor did he liberate all of its slaves.  Though he enjoyed a good run, his rebellion was eventually put down by a professional army led by Crassus, and he was either killed in battle or lived the rest of his life on the run.  His body was never found.

Though the “blood and gore” in the capital markets are rhetorical and not literal as it is in the gladiatorial arena, the investment game is a spectator sport that can [continue]…

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Why dollar stores continue to thrive

Posted April 3, 2012 at 3:18 am

They had a booming time during the recession, but dollar stores should have a reversal of fortune now that the economy is recovering. That’s not happening.

by Nin-Hai Tseng

FORTUNE – During the recession, the nation’s dollar stores suddenly became the “it” places to shop. The once frumpish retailers offering aisles upon aisles of heavily discounted products – everything from diapers to cereal to jeans – were the obvious answer for millions of jobless workers and struggling homeowners.

Now as the economy improves, albeit slowly, the question is could the momentum last?

It’s easy to assume dollar stores will lose their allure. But the story behind America’s big three – Dollar General (DG), Dollar Tree (DLTR) and Family Dollar (FDO) – isn’t just a recession story.

They’ve been growing over the past decade, making up a mere 0.5% of the retail market in 2000 to an impressive 1.5% today, says Craig Johnson, president of Customer Growth Partners, a Connecticut-based retail consultancy firm. And in recent years, they’ve undergone makeovers that have made them more competitive with the Wal-Marts and Targets of the world.

In essence, it’s no longer your grandma’s dollar store. Whereas years ago deep discounters were the place for [continue]…

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The most misleading ETFs

Posted April 2, 2012 at 3:11 am

by Vedran Vuk

Exchange-traded funds have been all the rage in recent years – they are easy to buy, easy to sell, and often have lower expense ratios than index mutual funds. But the Casey Research team dug deep into the complex world of ETFs and found that in many cases, their names can be utterly deceptive.

Here are a few excerpts of our revealing special report, The Top Ten Misleading ETFs.

Market Vectors Junior Gold Miners (GDXJ) – This ETF sure has a funny definition of a junior mining company. In my opinion, a junior miner is a small, speculative company just getting off the ground. Our publication, Casey International Speculator, specializes in this particular kind of company.

If I had to put a number on the market cap, I’d say that junior miners fall under the $500 million mark. If you really want to push the definition to its limits, maybe a market-cap ceiling of $1 billion could still qualify for junior status.

Regardless of the exact line of demarcation, most of us can agree that “junior” means “small.” Furthermore, most investors can agree that market caps over a billion dollars are anything but small. A billion isn’t a major, but it’s clearly in mid-tier territory. That said, the Junior Gold Miners ETF’s top 10 holdings are all over a billion dollar or more.

The top holding, with 5.23% of assets, even has a market cap of $2.4 billion – that’s not exactly a junior, to say the least, and neither are the other companies on the list [continue]…

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Trading currencies involves high risk but some are riskier than others

Posted March 26, 2012 at 12:03 pm

By Tom Cleveland

The Internet has revolutionized nearly every aspect of life that it has touched, but one area that has been truly revamped is the field of investing. 

No longer must you call your broker and place orders without the benefit of any key market data.  Besides convenience, the ordinary investor can now easily access all manner of investment vehicles, including commodities, options, and currencies.  

In the past few years, many investors, however, have shied away from stocks due primarily to the uncertainty brought about by the European debt crisis and the volatility that followed in market valuations. 

Currency trading has garnered enormous popularity as a result of disgruntled investors choosing to move to perceived greener pastures.  Forex, nonetheless, has a high-risk profile, and beginners are encouraged to gain ample knowledge from seminars and seasoned veterans and acquire substantial experience on free demo systems before ever putting any real capital at risk.

Impatience and inexperience, coupled with an inability to control one’s emotions, are the principal reasons for failure in this trading arena.  Casualty rates are as high as 65% by some reports, but not everyone is cut out to be a trader.  It is not gambling.  One must treat it like a business and rely on a “step-by-step” trading routine at all times.

Are some currency pairs riskier than others and are any immune to the travails in Europe? 

The first part of that question can be answered by the information in the following table:

There are seven “major” pairs, all connected with the U.S. Dollar, and a number of “crosses” among the other currencies, “EUR/GBP” for example. 

In the academic world, risk is often measured as the degree of change in value over a given period of time.  The figures above reflect this “risk” definition for each pair and illustrate the average daily trading range in “pips”, which roughly translates to basis points of change. 

By prudently employing “leverage”, a trader can convert these small changes into healthy gains, and, unfortunately, losses as well, if he is not careful.

All of the figures above are “inflated” to a degree by the uncertainty in Europe.  As one might suspect, the “EUR/USD” pair is higher than normal, just under 200 basis points, yet, a few years back, 120 “pips” was the rule.  Beginners are often counseled to begin with this pair since it has the highest trading daily volume and tends to have the lowest broker spread/commission.  Lower liquidity generally means a higher fee spread.

In this era of globalization, all of our financial markets are interconnected and interdependent in ways that can be confusing at best and difficult to rationalize when trying to make informed decisions.  One might think that the “USD/CAD” pair would rarely reflect any influences from across the Atlantic.  Its price path over the past few months, however, has correlated perfectly with the Euro.  The truth is that if Europe imports decline, the U.S. economy will suffer.  U.S. companies would then need less oil from Canada, leading to a decline in exports and a reduced value for the “Loonie”.

The “interconnectedness” of our modern financial markets are perhaps nowhere more apparent than when viewing the foreign exchange market.  Forex trading software can display the charts for all major pairs on one screen, and it is quite amazing to observe all of them move in tandem on each and every move, some obviously more than others.

In the forex world, each currency pair has its own “personality”.  The best advice is to focus on one pair, learn its nuances, and proceed from there.

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Fifteen questions to ask yourself before buying any stock

Posted March 25, 2012 at 11:26 pm

In Common Stocks and Uncommon Profits, legendary investor (and one of the rare people to influence Buffett’s investment style) Philip Fisher provides fifteen questions to ask yourself before investing in a company.

These are aimed at identifying the qualitative factors that are associated with well managed companies with strong growth prospects.

Here they are:

  1. Does the company have the products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
  2. Does the management have a determination to continue to develop products or processes that will further increase sales when the growth potential of current product lines has largely been exploited?
  3. How effective are the company’s R&D efforts in relation to its size?
  4. Does the company have an above average sales organization?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improve profit margins?
  7. Does the company have outstanding labor and personnel relations?

Continue to questions #8 thru #15 here…

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Musings on the “400% Man”

Posted February 21, 2012 at 2:29 am

by David Merkel

When I read the following article at SmartMoney, I said to myself. “I have done almost as well, I am more diversified, and I am willing to explain more of what I do.”

Truth is, clever investors, or lucky investors can get an attitude, saying that they don’t have to explain themselves to outsiders.  Not a good place to be.  I am not saying that the performance is due to luck but there is a certain amount of respect due to investors for investing with you.

Before I write more, let me state that I respect Allan Mecham.  He manages more money than I do, and has a better track record.  If I were in the shoes of the investors who were analyzing him, I probably would have placed $5 million with him, and would have watched what he did carefully.

Why would I take the risk?  It’s tough to find non-consensus views that make significant money.  I wouldn’t want to make it a huge allocation initially, but I would put a toe in the water to see what he would actually do.  If it didn’t work over 5 years, I would pull the plug.

All that said, when you run a very concentrated portfolio, it is possible for a few decisions to [continue]…

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The beliefs that make a successful trader

Posted February 16, 2012 at 1:59 am

by Janice Dorn

“One bright day in the middle of night two dead boys rose to fight. Back to back they faced each other, drew their swords and shot one another. A deaf policeman heard the noise, and saved the lives of the two dead boys. If you don’t believe this lie is true, ask the blind man, he saw it too…” -Unknown

We are hard-wired to believe and hold to these beliefs, often in the face of contradictory evidence. In life outside the markets, this may achieve many purposes and actually be a source of strength. This does not, however, serve a trader well.

One of the most important questions for the trader to ask every day is “What do I believe that is not true?” And how do we know the truth? The markets tell us. It really is that simple, and yet so difficult for most to accept and practice on a daily basis.

It is important for a trader to assess beliefs regularly, because at any given market moment, the trader is [continue]…

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