I entered a paired trade in February where I went long short-term corporate bonds and shorted long-term government bonds. This has been doing pretty well so far. Over the past two days however, Treasuries have spiked. Ouch! Check out this interesting article about treasury prices in the latest issue of Barrons.
Treasury Yields Leap to Fair Value
By RANDALL W. FORSYTH
THIS HAS BEEN THE WORST TREASURY bond market ever, at least by some measures. Yet, the reasons aren't what you hear from the Howard Beale-style rants from Chicago futures pits.
While there are legitimate reasons for concern about the Treasury's trillion-dollar borrowing needs, the reluctance of creditor nations to accommodate them and the Federal Reserve's money printing, the recent back-up in yields largely reflects other, less fundamental reasons.
From a hair over 2% at the beginning of the year, the benchmark 10-year Treasury yield surged to a high of 3.70% Wednesday. And the 30-year long bond vaulted more than two full percentage points from their December lows to 4.63% Wednesday.
That doesn't sound like much except to bond geeks, but in price terms, the iShares Barclays 20+ Year Treasury Bond exchange-traded fund (ticker: TLT) lost 25% of its value over that time. That was nearly as big as the plunge in Dow Jones Industrial Average from the turn of the year to its early March lows.
What's extraordinary is that this jump in long-term bond yields came as the Fed pinned its federal-funds rate target at close to zero. Other back-ups in bond yields came when the market anticipated future hikes in the overnight rate, but the Fed has made it clear it will hold its funds rate target at virtually nil for as long as it takes to jump-start the economy.
Moreover, on March 18, the central bank said it would buy an additional $1 trillion of U.S. agency debt, agency mortgage-backed securities and Treasuries to push longer-term rates down to lower borrowing costs, in particular on mortgages.
That clearly hasn't happened; just the opposite. The Treasury yield curve (typically described as the difference between the two- and 10-year note) steepened to a record 2.77 percentage points Wednesday, according to Stone & McCarthy Research Associates.
Part of the back-up reflects the low absolute level of rates earlier this year. Indeed, 10-year Treasury notes yielding only 2% -- as they were around the turn of the year—were attractive only relative to other assets that were collapsing under fear of an economic apocalypse.
With disaster averted and the sighting of the so-called green shoots of growth, stocks had a bungee-jump rebound from their previous nosedive. And low-yielding Treasury notes, which were clutched as life preservers in the storm, were cast off.
But, contends Lacy Hunt, chief economist of Hoisington Investment Management, an Austin, Texas, manager of $4 billion in assets, "The sharp rise in Treasury yields is not a result of an economic recovery. That occurs when income, production, employment and sales, simultaneously, turn higher. Presently, these indicators merely show a lessened rate of decline."
Nor can the burgeoning Treasury borrowing needs fully account for the rise in yield. The ratio of government debt to gross domestic product showed massive increases in the U.S. during the 1930s and 1940s and in Japan since the 1990s, yet yields continued to decline. Indeed, Hunt argues, the shift in productive resources to the government sector from the private sector doesn't stimulate but stymies economic growth.
Finally, the Fed's expansion of its balance sheet doesn't translate into monetary stimulus if the liquidity merely increases excess reserves in the banking system or increases sterile holdings of money balances. Bank credit continues to contract sharply, Hunt points out.
So, what's to account for the sharp rise in Treasury bond yields? Blame it on the intricacies of the mortgage market.
There's a reason that Wall Street hired "rocket scientists" with math PhDs to analyze mortgages. The ability of homeowners to pay off home loans with little or no penalty makes them devilishly difficult to figure out, unlike bonds that commit the borrower to a fixed repayment schedule. Obviously, homeowners will repay or refinance when it's most advantageous for them, which is the worst time for investors in mortgages.
To offset this problem, they hedge with noncallable Treasuries -- buying when they brace for a wave of refinancings and selling when rates rise. Refinancings leave investors with short-term securities when rates fall—exactly what they don't want. Conversely, rising rates encourage homeowners to hang onto their low-cost loans, resulting in the lengthening of the maturity for investors -- again, the last thing they want..
While mortgage investors previously had bought non-callable Treasuries to offset the risk of their mortgages, mortgage investors have unwound that hedge, selling their Treasuries.
This sounds like so much inside baseball but it amounts to huge sums. According to an estimate by mortgage-securities-market veteran Alan Boyce, writing for Drobny Global Advisors, these hedge sales are equivalent to issuance of $1.1 trillion (with a "T") of 10-year Treasury notes, compared to expected sales of $250 billion of that maturity this year.
Clearly, Treasuries were in a bubble when they yielded just 2% for 10 years. Technical factors have nearly doubled that yield from the lows, but not fundamentals -- which still reflect a recessionary economy and debt deflation. As a result, Treasuries are back to fair value for these conditions.
Showing posts with label trading. Show all posts
Showing posts with label trading. Show all posts
Trading Lessons From Nicolas Darvas
Nicolas Darvas, who studied to be an economist, was an infamous stock trader during the fifties and sixties. He wrote a book called How I Made $2 Million in the Stock Market
that was widely discredited because the US attorney general said he actually didn't make that much money. The case was eventually dropped. Regardless of whether Darvis actually made as much money as he claimed, there was still some good trading tips that we can learn from him.
Darvis's Trading Lessons:
* There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
* "You can never go broke taking a profit" is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
* There is a "follow-the-leader" style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
* The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
* It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. "You have to find out what the public wants and go along with it. You can't fight the tape, or the public."
* One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
* Losses are tuition on Wall Street. Learn from them.
* You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. "I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?"
* Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
* The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
* The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
* Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
* It is difficult to be profitable on the short side of the market versus the long side - trading in rising or bull markets will give you the best chance for success
* Most, if not all stocks, will follow the general trend of the market
* To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
* Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
* Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is "no other reason worth considering."
* Darvas used his "box theory" to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box). For more info on using Darvas boxes, visit these two websites: GerryCo & Sethi
* For new trades, Darvas used "pilot buys" which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
* He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. "I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality."
* Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. "I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride."
* Trade only when the environment is in your favor. Darvas' strategy kept him out of poor and bear markets because he wouldn't trade stocks that didn't fit his requirements which were only found in raging bull markets
* Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
* While his trading approach was very technical, after studying the market's winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important
* Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb's books & approach served as key inspiration
* No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away
that was widely discredited because the US attorney general said he actually didn't make that much money. The case was eventually dropped. Regardless of whether Darvis actually made as much money as he claimed, there was still some good trading tips that we can learn from him.Darvis's Trading Lessons:
* There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
* "You can never go broke taking a profit" is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
* There is a "follow-the-leader" style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
* The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
* It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. "You have to find out what the public wants and go along with it. You can't fight the tape, or the public."
* One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
* Losses are tuition on Wall Street. Learn from them.
* You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. "I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?"
* Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
* The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
* The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
* Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
* It is difficult to be profitable on the short side of the market versus the long side - trading in rising or bull markets will give you the best chance for success
* Most, if not all stocks, will follow the general trend of the market
* To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
* Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
* Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is "no other reason worth considering."
* Darvas used his "box theory" to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box). For more info on using Darvas boxes, visit these two websites: GerryCo & Sethi
* For new trades, Darvas used "pilot buys" which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
* He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. "I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality."
* Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. "I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride."
* Trade only when the environment is in your favor. Darvas' strategy kept him out of poor and bear markets because he wouldn't trade stocks that didn't fit his requirements which were only found in raging bull markets
* Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
* While his trading approach was very technical, after studying the market's winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important
* Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb's books & approach served as key inspiration
* No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away
How Traders Make 28% Returns In A Day
Friday's stock market had a distinct sense of deja vu about it. Even though it was down overal, I was reminded of the crazy dotcom days in late 1999 when any tech stock could rally 25-50% in a single day!
One of my friend's subscribes to a stock newsletter. Periodically he gets an email alert informing him when a stock is about to make a significant jump. He often sends them to me and I usually look at them and then ignore them. Yesterday he sent me an email about a China Clean Energy Inc (CCGY.OB).
By the time I got the email, it had already jumped 30% that day, but I really liked the chart. It had retreated about 15% from the highs of the day and looked like it was ready to make a move back up to the $2 range.
This is what the chart that I follow looks like.
The image is bit hard to understand since they're aren't any notations on it. The first chart is the intra-day stock price of CCGY.OB for September 28th 2007 using Candlesticks. It also has the bollinger bands and exponential moving average lines.
The 2nd chart with red and blue vertical lines denotes the volumne. The 3rd chart is the Relative Strength Index (or RSI) with oversold and overbought indicators.
The 4th chart is the Moving Average Convergence/Divergence indicator orMACD.
The last chart is the Slow Stochastic.
From these charts I felt that there was sufficient momentum in the stock to carry it higher, despite it having already jumped 30%. I was able to buy in at $1.73 around 12 pm EST (which was 9 am for me) and sure enough it continued higher throughout the day.
It closed the day at the highest price of $2.23, for a stunning 28.9% one day gain! Although the stock was up ~60% for the entire day, I was very happy with my 28%. Made me feel like I was reliving the good old dotcom (or dotbomb) days.
Here's a much better daily chart.
Very rarely do I buy stocks based on tips and without looking at any underlying fundamentals. Usually, the newsletters that I subscribe to, will recommend a stock based on good, solid fundamentals and I will use the charts to determine the market sentiment for that stock and a good entry point. Recently, Freight Car America (RAIL) was recommended, but the chart looked terrible and I didn't buy it. Sure enough it dropped from it's recommended price of $48 and is now trading at $38. Here what the chart looks like. I'll wait until the technicals improve before I jump in on that one.
Sometimes this strategy will backfire because some breaking news will come out that will send the stock shooting the opposite direction than expected, but it doesn't happen often enough. And unexpected news can make value investors look like fools too!
Most traders use some form of technical analysis. Many investors believe that technical analysis is rubbish and doesn't work, but they probably feel that way because they don't understand it. Its basically a representation of the current market sentiment based on price and volume action.
Most traders use some from of it and it can get fairly complex. Studies have shown that currency traders use it a lot (or atleast the successful ones!). I've attended several currency traders meetup sessions and they all use some sort of technical analysis to trade in and out of their positions. That and proper money management is the key to succesful trading.
I strongly recommend at least learning the basics and deciding for yourself whether to use it or not. Getting Started In Technical Analysis is a really good book that's fairly easy to read.
If you're interested in learning about trading, I strongly, strongly recommend Trading for a Living: Psychology, Trading Tactics, Money Management. By far one of the best introductory books on the subjects. You'll get more out of it than a $5,000 seminar!
If you like to day (or swing) trade, you'll also enjoy An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund. A fascinating story about Timothy Sykes, a college student who made a million dollars day trading and started his own hedge fund.
![p[Get 77% returns with this stock newsletter]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_t04QiuitixcPAUWoDsoofCa1iG9yvXSeiSdkCP79Xmr9ocdvGIt1hS9KRli2y-MaIdBcvOabxGcvRAAmOJD63lLyihf6JdlMDDFQJlDjlxxw3daMYAbBhSjT5uN0YWzLpZ2X_cSUdh=s0-d)
One of my friend's subscribes to a stock newsletter. Periodically he gets an email alert informing him when a stock is about to make a significant jump. He often sends them to me and I usually look at them and then ignore them. Yesterday he sent me an email about a China Clean Energy Inc (CCGY.OB).
By the time I got the email, it had already jumped 30% that day, but I really liked the chart. It had retreated about 15% from the highs of the day and looked like it was ready to make a move back up to the $2 range.
This is what the chart that I follow looks like.
The image is bit hard to understand since they're aren't any notations on it. The first chart is the intra-day stock price of CCGY.OB for September 28th 2007 using Candlesticks. It also has the bollinger bands and exponential moving average lines.
The 2nd chart with red and blue vertical lines denotes the volumne. The 3rd chart is the Relative Strength Index (or RSI) with oversold and overbought indicators.
The 4th chart is the Moving Average Convergence/Divergence indicator orMACD.
The last chart is the Slow Stochastic.
From these charts I felt that there was sufficient momentum in the stock to carry it higher, despite it having already jumped 30%. I was able to buy in at $1.73 around 12 pm EST (which was 9 am for me) and sure enough it continued higher throughout the day.
It closed the day at the highest price of $2.23, for a stunning 28.9% one day gain! Although the stock was up ~60% for the entire day, I was very happy with my 28%. Made me feel like I was reliving the good old dotcom (or dotbomb) days.
Here's a much better daily chart.
Very rarely do I buy stocks based on tips and without looking at any underlying fundamentals. Usually, the newsletters that I subscribe to, will recommend a stock based on good, solid fundamentals and I will use the charts to determine the market sentiment for that stock and a good entry point. Recently, Freight Car America (RAIL) was recommended, but the chart looked terrible and I didn't buy it. Sure enough it dropped from it's recommended price of $48 and is now trading at $38. Here what the chart looks like. I'll wait until the technicals improve before I jump in on that one.
Sometimes this strategy will backfire because some breaking news will come out that will send the stock shooting the opposite direction than expected, but it doesn't happen often enough. And unexpected news can make value investors look like fools too!
Most traders use some form of technical analysis. Many investors believe that technical analysis is rubbish and doesn't work, but they probably feel that way because they don't understand it. Its basically a representation of the current market sentiment based on price and volume action.
Most traders use some from of it and it can get fairly complex. Studies have shown that currency traders use it a lot (or atleast the successful ones!). I've attended several currency traders meetup sessions and they all use some sort of technical analysis to trade in and out of their positions. That and proper money management is the key to succesful trading.
I strongly recommend at least learning the basics and deciding for yourself whether to use it or not. Getting Started In Technical Analysis
is a really good book that's fairly easy to read.If you're interested in learning about trading, I strongly, strongly recommend Trading for a Living: Psychology, Trading Tactics, Money Management
. By far one of the best introductory books on the subjects. You'll get more out of it than a $5,000 seminar!If you like to day (or swing) trade, you'll also enjoy An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund
. A fascinating story about Timothy Sykes, a college student who made a million dollars day trading and started his own hedge fund.Closing Out JRCC
In an earlier post on investing on news, I had sold puts on JRCC.
Well JRCC was up sharply in the past few trading sessions. I closed out my position by buying back my naked puts and netted a 38% profit (sold the puts for 1.95 and bought them back for 1.20).
There's a chance the stock might go higher. But, I bought puts because it was a speculative trade and the idea was to make a quick (or somewhat short-term) buck. It went up, I made money so its time to get out.
Thats the good thing about options. They prevent you from getting married to your positions. That can be a dangerous thing if the market turns against you (speaking of which, I'm really glad I closed out my Countrywide puts after they started going against me. When I closed my puts, the stock was at $37 - now its almost $42).
Now if I could only figure out a way to make 38% returns EVERY 2 weeks!!!!!
Well JRCC was up sharply in the past few trading sessions. I closed out my position by buying back my naked puts and netted a 38% profit (sold the puts for 1.95 and bought them back for 1.20).
There's a chance the stock might go higher. But, I bought puts because it was a speculative trade and the idea was to make a quick (or somewhat short-term) buck. It went up, I made money so its time to get out.
Thats the good thing about options. They prevent you from getting married to your positions. That can be a dangerous thing if the market turns against you (speaking of which, I'm really glad I closed out my Countrywide puts after they started going against me. When I closed my puts, the stock was at $37 - now its almost $42).
Now if I could only figure out a way to make 38% returns EVERY 2 weeks!!!!!
Profiting From Investment News
I read an email today that mentioned China (who is already the planet’s largest coal consumer) claims it will need an extra 80 million tons by next January. India is also estimated to need an extra 120 million tons, and most other Asian countries are expected to increase demand by 7%.
According to Kevin Kerr, “Coal prices are going much higher than I thought. Keep an eye on those diesel prices too, they are already creeping up. These two markets are going to surge this summer, absolutely.”
Since I like to take advantage of investment opportunities whenever I come across them, I placed an order to sell PUT option contracts on James River Coal Company (JRCC). Its essentially a long position on the companies stock, which has nicely trended up 50% in the past several months.
If the order is executed tomorrow (the order was placed after hours) I get a net credit of $195/contract. By september, if the stock trades above $8.05, I'll have made a profit. My maximum profit is $195/contract and it occurs at stock prices over $10.00. If the stock drops below $8.05 I will either have to buy it or sell my option before expiration date at a loss. But I'm bullish on the stock so the loss would be smaller than actually buying the stock outright.
If the stock stays at the same $9.50 price, I'll still make $145/contract at expiry. Both my upside and my downside are limited, but I think there's a great chance I'll make more money selling the puts with a lower risk than by buying the stock outright. Plus for each contract instead of putting up nearly $1000, I'm collecting $195 instead. It does use up my margin limits, but it does mean I don't need to pay interest on the amount, since I'm not borrowing any money.
Of course you manage the risk here by not betting the farm. If the stock moves against me and my option moves against me 50% (ie, I'm down $100/contract) I'll close out my position. Since this total draw-down is only 0.33% of my portforlio, it doesn't give me ulcers. And while the total profit is only 0.66% of my total portfolio and isn't exactly an earth-shattering return, its a 2-1 risk-reward scenario that I'm comfortable with.
If the stock goes BK overnight and I lose the max $805 per contract, it still only 2.66% of my portfolio, which is a bearable loss. Remember, risk management will determine whether you succeed or fail in the long term.
According to Kevin Kerr
, “Coal prices are going much higher than I thought. Keep an eye on those diesel prices too, they are already creeping up. These two markets are going to surge this summer, absolutely.” Since I like to take advantage of investment opportunities whenever I come across them, I placed an order to sell PUT option contracts on James River Coal Company (JRCC). Its essentially a long position on the companies stock, which has nicely trended up 50% in the past several months.
If the order is executed tomorrow (the order was placed after hours) I get a net credit of $195/contract. By september, if the stock trades above $8.05, I'll have made a profit. My maximum profit is $195/contract and it occurs at stock prices over $10.00. If the stock drops below $8.05 I will either have to buy it or sell my option before expiration date at a loss. But I'm bullish on the stock so the loss would be smaller than actually buying the stock outright.
If the stock stays at the same $9.50 price, I'll still make $145/contract at expiry. Both my upside and my downside are limited, but I think there's a great chance I'll make more money selling the puts with a lower risk than by buying the stock outright. Plus for each contract instead of putting up nearly $1000, I'm collecting $195 instead. It does use up my margin limits, but it does mean I don't need to pay interest on the amount, since I'm not borrowing any money.
Of course you manage the risk here by not betting the farm. If the stock moves against me and my option moves against me 50% (ie, I'm down $100/contract) I'll close out my position. Since this total draw-down is only 0.33% of my portforlio, it doesn't give me ulcers. And while the total profit is only 0.66% of my total portfolio and isn't exactly an earth-shattering return, its a 2-1 risk-reward scenario that I'm comfortable with.
If the stock goes BK overnight and I lose the max $805 per contract, it still only 2.66% of my portfolio, which is a bearable loss. Remember, risk management will determine whether you succeed or fail in the long term.
Gartman's Rules of Trading
Every year Dennis Gartman publishes his "Rules of Trading." Here they are.
DENNIS GARTMAN'S NOT-SO-SIMPLE RULES OF TRADING
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position... not ever, not never! Adding to losing positions is trading's carcinogen; it is trading's driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. "Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent." These are Keynes' words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! And when they are yellin', you should be sellin'!"
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a "secret" to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken.... but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
DENNIS GARTMAN'S NOT-SO-SIMPLE RULES OF TRADING
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position... not ever, not never! Adding to losing positions is trading's carcinogen; it is trading's driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. "Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent." These are Keynes' words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! And when they are yellin', you should be sellin'!"
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a "secret" to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken.... but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
Bank of America Announces Free Online Trading
According to Bloomberg.com
"Bank of America Corp., seeking to attract new clients, offered free online stock trades to customers with accounts of at least $25,000, sending shares of discount brokers lower.
The second-largest U.S. bank said customers in New York, Boston and other cities in the northeast U.S. will get 30 free trades a month so long as they maintain the minimum balance in any combination of accounts. Such trades usually cost $5 to $10, meaning customers may save as much as $3,600 a year. Bank of America said the program, which is effective immediately, will be extended nationwide over the next few months."
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