I don’t go on “rants” very often, but I’m finding it very hard to hide my anger about today’s current economic crisis. Let me start by talking to you for a minute about the economy and the financial situation in the world as it impacts you and your personal situation.

Let me ask you a few questions.  How confident are you that the politicians will be able to bail us out of this mess that we’re in – this fiscal mess that we’re in?  If you’re like me, you’re not very confident.

Because you see at the national level here in the United States, the total public debt is north of $15 trillion, the annual deficit, I think, is $1.5 trillion.  Hard to keep track of numbers so big.  Plus, the actual total debt of the United States is far greater than that.  Interest rates are at an all-time low, and really at a level that’s unsustainable.  That means the debt service, or the interest that the US government pays on that $15 trillion, percentage-wise, is at an all-time low.  Can you imagine what happens when interest rates get back to normal?  The interest on the debt alone will consume a very large portion of the federal budget… if we had one.

Now, what about the state level?  Well, I know several states are in very dire financial straits.  What about at the city level?  Well, there are many, many cities likewise in dire financial straits.  So how comfortable are you that the politicians on all those levels – I don’t care which party it is – are going to solve the problem?  Remember these are the same folks that got us into this mess.

How about the banks?  How comfortable are you with them?  You know, the “too big to fail” banks that got bailed out?  The ones that have yet to be bailed out, that we don’t even know about?

How about the future of the US dollar (which looks to me to be precarious?)  And of course, I’m not alone in that view.  When you’ve got these massive deficits that can never be repaid – you know, you could double the income tax rate, just double it, and we’d still run a deficit, an annual deficit in this country?  That’s how far gone the finances are.

So let’s look to Western Europe.  That must be a safe haven over there.  Of course not!  As you know, they’re in very serious trouble as well.  Some are technically bankrupt, as well as the big banks in Europe.  Many of them are in a precarious position.  So there’s no safe haven over there.

What about the currencies in Europe?  The Euro, the British pound, the Swiss franc?  Well, none of them seem to be a viable alternative to the dollar.  Actually, that’s what I believe is extending the viability of the dollar, because there are no good alternatives, except possibly gold and silver.

Well, why am I telling you all this?  How does this affect your financial situation?  Well, a lot of folks traditionally are in a diversified portfolio, “buy and hold” kind of mode.  That’s been a proven approach to participating in the markets, trying to minimize risk and eke out a profit.  However in the last ten years, the S&P 500 basically hasn’t moved. So ten years have gone by and the S&P 500 is right where it was.  So if you were to have bought and held the right stocks to even do this well, you would be at break-even.  After gut-wrenching months in the red.  Big time red, right?  You went from 1500 S&P all the way down to 600.  That’s a 900 point drop.  You can do the math… that’s sixty percent.  Who wants to sit through that?  And of course it dropped, going back into 2000, a similar amount.

Then we hve a really nice rally again and we all start thinking everything’s going to be fine.  Whoops!  Nope.  There’s another sell-off. This pattern continues over and over again.

The point is, if you’re going to rely on buy-and-hold in a diversified portfolio, you’re going to be disappointed.  Certainly in the last ten years.  Given all the financial stresses, the poor state of the economy all around the world… Buy and Hold is simply not something we can count on anymore.

Now, were there any opportunities though, in the stock market?  Well, sure there were.  You could there were MULTIPLE places where you could have gone long or short pulling in lot’s of profit. The key is to not buy and hold but to trade. When the market is trending down, go short, and when the market is trending up, go long. It’s a simple as that. If you had done that from the beginning, you would have  made a bushel of money, like many hedge funds did.

Buying and selling stocks is NOT what a buy an hold investor does. It’s what a trader does.  And I think THAT is the solution to finding financial success in the world we live in today.  Now traditionally, only a few people would consider themselves traders, or “swing traders,” where they trade in and out of the markets in a matter of days, or a couple of weeks at the most.

But given the state of affairs today, I don’t see how anyone can sit idly by and let the politicians try and solve these problems that they’ve not been able to solve up until now.  And they’ve made matters only worse, year after year after year, regardless of party.  If you’re going to rely on them, you’re going to be waiting a long time.  In the meantime, would it be okay if the market dropped back down to 700?  Of course it would not.  I’m not saying it’s going to do that, but could it do that?  Of course it could.  What’s your plan in the event that occurs?  If you’re buy-and-hold, you don’t have one.

Now, I love this, “I’m a long-term investor, so I don’t care.”  Well, here’s another tidbit: When the market peaked in 1929, it took how long before it got back to break-even?  What year do you think it was, when it finally got back to the peak of 1929?  1954.  Twenty-five years.  Now that’s a long time to be a long term investor, just to break even.

Now, we still haven’t gotten back to the peak of ’00.  2000.  On the S&P and certainly not on the NADSAQ.

So what I’m encouraging you to do is take control of your financial future.  Learn how to become a trader.  Now a lot of people think, “Oh, I don’t have time for that.”  But if you trade daily stock charts, or daily Forex charts, or daily Exchange-Traded Funds charts, or daily gold and silver fund charts, or daily bond charts, you only need ten minutes a night.  After the market’s closed.  But what you do need is to take personal responsibility for your financial situation? You need to apply a disciplined approach to managing risk, first and foremost, and only then, going after profit.  A good trading method will show you exactly how to do that.

So with that combination, what you can do is stop fretting and worrying about the future, take control and do well, no matter what happens.  Whether the market drops off here like a stone, or whether it rallies nicely.  Because, you know, we don’t know what the truth is.  No one knows what’s going to happen.  You can have all the smart people in the world forecasting for you, but the truth is, they don’t know.  If they knew, there would be no market.  And if they really knew, they wouldn’t be telling you.

So armed with a good trading method, though, you don’t care.  Because a good trading method is going to have you on the right side of the market.  So that you will never experience a sixty percent drop in your portfolio.  In fact, you stand it on its head, you get short, and grow your portfolio.

One thing that I have learned about trading and investing many more times than I should have over the last thirty years is that there needs to be a reason to trade or to invest, there should be a specific point to it or a specific goal.

Making a trade for the sake of trading is not a good enough reason to trade. What makes you want to enter the market at a particular time in a particular stock?  If there is no identifiable reason it is probably better to leave your money in cash until there is a more clearly defined purpose behind it.  Reasons for trading often times come from the basic financial goal setting process that hopefully we all are doing annually and monitoring regularly.  More generic goals may include simply to increase ones personal wealth or net worth, retirement, making a major purchase affordable or to provide a college education for a child.  Once you have determined your financial goals you can then determine what action needs to be taken to reach them in an amount of time that is consistent with reaching the goal.

There is a wide array of financial products that you can use to achieve your financial goals so first identifying the goals and then mapping your course of how to achieve them is essential.  The old adage “If you do not have a specific goal you will always achieve it” is very true when it comes to creating and building wealth.  Once you have defined financial goals you then need to determine what financial vehicle is the most appropriate one to get you there.  This may in some cases come down to the specific type of financial assets you are building because there can be restrictions around this.  If you are saving and building retirement dollars in a company sponsored retirement account such as a 401k plan the company will dictate what investments are available so of course you will need to make the best choice from the options available.  The IRS will also set guidelines for what IRA accounts can and cannot be invested in so you need to be able to work within the parameters that are set for you.

When building an account that consists of regular dollars, after tax dollars, there are far fewer restrictions so you really do have a very wide range of opportunities however in most cases there almost has to be some type of stock trading that is done in at least a part of the portfolio.  The reason of course is that there is a far greater opportunity to make consistent above average returns while trading in individual stocks than there is in most other opportunities.

Generally speaking the return on cash instruments is clearly defined by the bank or financial institution that is offering it but interest rates have been very low for many years so this really isn’t a viable opportunity.  Banks are great for exactly what their purpose is which is to hold on to small amounts of short term cash.  When we deposit money into a bank they are taking the money in one window and giving us a stated rate of return and then they loan it back out charging many more times than what they are paying us for it.  This is an excellent system that has worked well for them for many years but this system will typically not help us achieve our financial goals.  The only good news about having money in banks over the last several years is that inflation has been low as well so we have not really lost any purchasing power.  Money deposited in bank instruments is generally thought of as lazy dollars because they are not doing much for us.  Based on what has happened in the banking industry since approximately 2008 we really can’t even get excited about our banking deposits being guaranteed.  There have been record numbers of bank failures which obviously puts our “guaranteed” or “safe” money in jeopardy.  Money in banks is generally only a good investment if you own the stock of the bank becoming part owner of it rather than being a depositor and being a low interest rate loaner to it.

Mutual funds are another possibility, they are financial vehicles that are commonly used to invest longer term dollars whether the account is a retirement account or a regular account but they have had severe drawbacks over the last 10 or 12 years.  Mutual fund companies will pool investor dollars together and use the money to purchase securities in particular types of investments such as stocks, bonds or municipal securities providing capital growth or cash flow to the investors.  One of the main purposes of a mutual fund is to give the average investor a place to park money for the long term while hopefully adding to it over time and achieving a decent positive rate return.  The thinking of course is that what is called a “buy and hold” strategy will work over a long period of time because growth mutual funds are invested in the stock market which of course always goes up over a long period of time.  This is where things have changed over the last 12 years.  The “buy and hold” strategy has actually turned into the “buy and hope” strategy because the stock market, represented by the Dow Industrial 30, stopped going up in the first half of 1999 and has largely gone sideways since then.  It has drifted up and it has drifted down having many runs in each direction but it has not had the steady upward trajectory that it had for the seventy years before that time that made the “buy and hold” strategy work.

The investment world has grown tremendously in the past decade or so.  From an investment standpoint we not only need to be concerned with economic conditions in our own country we also need to be concerned with economic conditions in Europe, Asia, North America, South America and all parts of the world because all of our economies are very integrated.  What happens in one area of the world can and often time’s does effect what happens in other parts of the world and there can be a global effect from certain events.  Information is disseminated so quickly today that the markets react almost immediately.  This of course can be looked at as good or bad but the bottom line is that the world had changed in this regard and it is not likely to return to how it was in the past.

If for no other reason than the speed at which information moves today today’s investor must be very nimble and agile and must be able to react quickly to any number of a wide variety of events.  This may actually sound a little overwhelming and time consuming but it is actually very achievable for the average investor.  Once you have mapped out your broad financial goals you will likely see that they may be almost impossible to achieve without trading individual stocks in at least part of the portfolio because that is where you are likely to see your most profitable investments.  To achieve this you will need to be educated on how to accomplish this and you will also need a good solid trading strategy to get you there but the sad truth is that if you don’t do it there most likely isn’t anyone else that will.  Even if you do have a financial professional assisting you there is a good chance that they are uneducated in this area and will be of little help to you.  The more time you have between now and when your financial goal must be realized the more time you have to tolerate lazy dollars and advice that is unlikely to help you reach your goals but as your time decreases over the years your efficiency and therefore your return on your investments must improve by increasing dramatically.

The more I trade Forex, the more I realize that keeping things simple is really the way to trade.  It’s easy to make things complicated with all the indicators available with today’s trading software, but more is not always better.

In fact, on my own trading platform I counted over 75 standard indicators and this did not include any custom indicators that can be found online.

Now, maybe having more money or more ice cream is better, but using that same idea on our charts just messes things up.   Take a look at the chart below.   You can see what happens when you apply multiple indicators.  This chart only has 6 indicators but is so confusing that it would be almost impossible to trade.  I’m not saying you can’t have multiple indicators, just make sure they all have a purpose that clarifies, not confuses when to trade.

The idea that many traders have is that if they add enough indicators or have the right combination of indicators they will find some magical formula that will bring them success.  Remember, with charting and trading more in not always better.  As you learn to keep it simple you will realize that focusing on the most important aspects of trading will allow you to achieve the success you desire.

Now, in comparison, take a look at the chart below where you can see how simple and clean it looks.  This chart only has one indicator, the CCI.  This simple chart allows you to see what the price is doing and allows you to trade accordingly.

A chart like this will keep you focused on the most important aspects of trading.  Simple and clean looking charts will allow you to see your entry and exit points clearly.  Having clarity in your charts will make your job as traders more enjoyable.

So with all the indicators available, how do you know which ones to use and which ones to eliminate?  Let me give you something to follow that will help you in determining which ones to use.  There are three areas to consider when setting up your charts.  First is price action or knowing the trend.  Second is identifying support and resistance, and last but not least, knowing when you will be entering and exiting your trades.

Each one of these three areas has multiple indicators that can be used.  The key is to use as few indicators as needed to help you identify these three important areas.  Take a look at the chart below to see how you can use one indicator to address all three areas.

In this chart we use the Simple Moving Average to help us identify the trend, support and resistance, and entries.  Now, I’m not suggesting that you use this to trade but rather as an example of how one indicator may be able to accomplish many things.  In the chart below we have the 40 period Simple Moving Average on the chart.  This indicator looks at the closing prices of the last 40 bars to come up with the average price.  This average price is then drawn on the chart as the dark blue line.

You can use this moving average to help you with the first thing you need to know – what is the trend?  If the price is above the moving average and the moving average is going up, then the price action is trending up.

You can also use this same moving average to help you see where there may be some support.  Here you can see that the support moves up as the moving average moves up.  This is often a good area to place your stops.

Finally, by using this moving average you can identify when to enter a trade.  For example, you could say you are entering a trade after the price moves back towards the moving average, and then buying as it begins to bounce up off of it.

Although this is not to be considered a complete way to trade, you should be able to see how keeping things simple can make your trading clearer.  Take some time to evaluate what your charts look like to see if you can make things simpler for your trading.  In future articles we will spend more time on the individual areas of trends, support and resistance and entries, but for now try to keep things as simple as possible to see if it clarifies your own personal trading.

 

Hi, I’m Jim Scharman and my specialty is trading ETFs. And today, I just wanted to share a quick tidbit I’ve learned that I really wish someone would have shared with me a looooong time ago!

Over years of working with traders, I firmly believe that successful trading in the long run always begins with risk management.  Many equity investors have tales of how they made lots of money on one or two great stock moves.  Now while I believe that (some) of these guys may be telling the truth, but if they are, they’ve proved only one thing: Luck. They were either lucky picking a stock, or lucky with timing. But the word “luck” should not be in any trader’s vocabulary. If it is, then pack up and head to the casino, because that’s all you’re going to be doing: Gambling.

Long term success, much more often comes down to consistently following a good system and using strict risk management.  It is very important to trade proper position sizes and to use the stop loss and profit target strategies to manage our risk.   I like investing in Electronic Traded Funds (ETF’s) because,  they are often less volatile than stocks, are often less expensive than traditional mutual funds and may be subject to less taxation than traditional stock investing.

With ETF’s we also get the benefits of trading individual stocks, in that they trade all day long on the exchange as opposed to trading only end of day like traditional mutual funds.   This allows us to apply trading strategies to reduce our risk on each trade by  applying  our risk management rules that we can use on  individual stocks such and setting specific stop loss orders and profit targets for our EFT positions. The reason that I am so happy to trade ETF’s, is in short, trading ETF’s give us the diversification benefits of a mutual fund,  and the benefits of trading individual exchange stocks all day.

The bottom line is ETF’s allow us to manage our risk like stocks and become successful traders over the long haul.

Who would have ever thought gold at $1,722 an ounce would seem like a screaming deal?  Well, after a drop of more than 80 dollars on Wednesday it might be just the thing to consider.

For the last several years, gold seem to be the talk of the town, so to speak.  I’ve even read where some think gold may run up to $6000 an ounce.  Sounds crazy but right?  Well, who’s to say it couldn’t happen.

Take a peek at the weekly chart of gold since 2009.  It doesn’t seem so crazy now does it.  Look at the growth in gold that has occurred during this time.  Back in January 2009 the price of gold was sitting around $850 an ounce.  So in 3 years we have seen a doubling in the price of gold.  If that trend continued we could see $6,000 an ounce in the next 6 years.   Now I’m not saying it’s going to happen but……who knows?

You can also see that gold is off of the all time high just above $1900 an ounce.  That is nearly $200 from where it was.  As the price of gold continues to trend up, you may want to consider gold as a trading opportunity as is pulls back towards support.  As buyers come back into the market you will see the price continue bounce back up off of these support areas.

So, in the end we don’t know for sure what will happen, but just don’t be surprised when you are sitting at home in 6 years and see the price of gold at $6,000 an ounce or more.