When we talk about trading precious metals most of the time people think about gold and sometimes silver.  These are just a couple of the precious metals that can be traded.  In addition to gold and silver there is platinum as well as palladium that can be traded.  There are other non-precious metals such as aluminum and copper that can be traded as well.

Gold is the most commonly traded precious metal.  Gold is use not only in jewelry but also has many other industrial applications especially in the field of electronics.  Gold is also used by traders and speculators to hedge against currencies due to poor economic conditions.  Gold can be used as an alternative to currencies and when economic conditions are pour gold tends to become more valuable.  Unlike cash, gold is a real commodity with actual value.  This actual value is attractive to investors that want to preserve their financial resources until the economy improves or until other investments become more attractive.

Let’s take a look at the daily chart for gold (see below).  As we look at this chart of gold notice the swings that we have seen since the end of last year.  Gold hit a high of around $1800 back in November of this last year, then it dropped down to around $1500 in December then backed up to around $1800 again in February.  Currently the price of gold is in the mid $1600’s.

As we look for opportunities to trade gold we want to take into consideration the current trend and the areas of support in resistance.  In the chart below we have added a 40 period simple moving average to the chart to show us the direction of the trend (currently down).  We have also placed horizontal lines indicating the most recent areas of resistance and support.  Just as with any other type of charts knowing the trend and knowing where support and resistance is located can help us identify when to enter and when to exit a trade.

Currently, over the past week, we have seen gold move up from $1612.36 to a high of $1679.87. With this move up we have run into an area of resistance on both the horizontal line as well as the 40 period Moving Average.  We will look for this area to act as a barrier for the price to move any higher.  Should the price break through this resistance we will look for the price to continue to move higher to the next level of resistance around $1700.  If the move continues lower we will look for it to move to the prior low.

As always, keep an eye on the charts to help you identify the best times to enter and exit your trades.  In addition, keep your risk at appropriate levels to offset any adverse moves in the market.

 

“Forget Gurus”

You’ve read about the Gurus of trading.

There’s a group of them that started with their last few dollars and ran it up to millions because of a simple strategy they can teach you.

There’s another group of Gurus that claim hard work, long study and signing up for their newsletter will lead you to where you want to go. All Gurus want you to “learn from their mistakes.” They ask, “Why should you make all the mistakes I’ve made, when you can benefit from my experiences?” Now being somewhat of a Guru myself, I think there IS a certain truth to this query, but not the way you probably think.

Other trader’s experiences can make you aware of what to expect as you embark upon your trading.

Knowing what to expect should translate into having less “blindside” occurrences.

However, when you come across the forewarned learning experience, emotions will come up. These emotional situations (fear, overconfidence, freezing) are up to YOU to handle.

Here, if you’re going to be a successful trader, is where the learning takes place…in dealing with your emotions so that you can follow your trading plan.

If you blow the situation, your supposed learn from it and go on.

In fact, you MUST learn from it… or even the best trading system won’t save you from doom.

Your Mental Toughness is going to be the key to whether you make it or break it as a trader. I know of two MAJOR things that you can do to develop your Mental Toughness for trading.

The first is to keep a journal.

I know that sounds like work, and who wants more paperwork at the end of the trading day?

However, soon after you force yourself to start writing down your day’s trading experiences; you will see the power of the technique.

It becomes the place where you will be honest with yourself.

You’ll find after just a week or so of keeping a journal of your trading experiences, mistakes and all… especially mistakes… that when you are confronted with a trading situation that you blew before… in the back of your head you’ll know that if you do the same stupid thing again you’re going to have to report it to yourself…in your journal… and… THAT will give you the strength to “do the right thing.”

That’s the power of keeping a journal. Whether you just buy a spiral notebook and start writing, or you make it a religious experience and buy something leather-bound… You will find that the discipline of keeping a journal, is a practice that will flat-out make you a better trader.

The other way to get Mentally Tough is to train your mind. There are a few psychologists I’ve bumped into over the years who seem to have enough of a handle on what trading is … so they may be qualified to help a trader.

But I prefer the process of literally programming the mind for discipline and focus, via putting the mind in an alpha brainwave state and then submitting the right suggestions to it.

If you were to learn the simple rudiments of self-hypnosis, for instance, that, in my opinion, would be a great way to go.

This way you could tell yourself exactly what you wanted!

This is what Tiger Woods does for his golf game. He started self-hypnosis when he was very young. Why not do something similar with your trading?

Mental Toughness is my business. Make it part of yours.

ONE: Keep a journal.  TWO: Feed your mind.

So, until next time… Stay Disciplined!

Remember the little “rant” I went on last time? Well I wasn’t quite finished yet, so I’d like to bring up a few more points that can really help you improve your financial future.

Now, last time I wrote you, I discussed how our world economy, sovereign debt and poor growth of the markets (like the disappointing long-term growth of the S&P) is having a profound effect on our long term investments. All of these world events are basically spelling the death of “buy and hold” investing.

The solution I gave you was: Take personal responsibility for your financial future and become a trader.

So now what? How will being a trader help me generate income and improve my financial future?

All right, let’s look at some real life examples. Take gold for instance because as I said, this principal of being a real “trader” applies to any market.

If you look at a chart of GLD, which is an Exchange Traded Fund, an ETF, that tracks the price of gold bullion, you will see what a wonderful market it was to be in during the gold rush of late 2008, early 2009. It was in a magnificent upward trend that seemed like it would grow forever… until it didn’t.

You see, if you look at the price of gold for any length of time you’ll see it has patterns. It moves up. It levels off and goes sideways for a while (this is were all the “experts” are telling us that gold had topped out), maybe corrects a little, and then it continues up. So while the prices are rising, most people think “I can’t buy it now, it’s already too high.” Only to see it level off again, and then go back up.

And the story repeats.  It’s always too high to buy gold.  And it just keeps going up.  Now, the advantage the trader has is that the trader knows when to get into a market and when to get out…  and when to get back in.

An independent trader doesn’t care that the market’s already gone up from an extreme low all the way up to a record high.  Because if the trader is following a good trading method, then the trader will say: “You know what? Conditions are right to get back into the market.  Buy gold right here and sell it when it reaches here.  You see it doesn’t matter to the trader.  He gets in.  Why?  Because he knows where he’s going to get out if it goes against him.  He’s got a carefully planned stop to limit losses.  And two, he knows where he’s going to get out at a profit… ahead of time.

So he’s not worried about, “Is it too late to buy?”  Like a buy-and-hold investor would be. “Should I wait?” or “If it goes down, will I lose everything?”  A trader doesn’t have these dilemmas.  Because even if gold, or basically anything he’s trading crashes, he’s going to get stopped out with a small loss, if it goes against him.  So being a trader, I believe, is the way to go.

This same rationale goes for foreign currencies. Take the Euro / US Dollar Forex pair as an example.

Let’s say you bought this pair back in 2009.  Well, where is it right now?  It’s actually down from there.  And if you bought it when it was in a rally, then you’d be at break-even.  That’s just two and a half years.  But you’d sit with that currency position for two and a half years, and you’re at break-even.  Or maybe you’re at a loss.

Now does that mean there was no opportunity for trading the Euro/US Dollar?  Of course it doesn’t mean that.  As a trader, you take advantage of the nice swings that are so prevalent in currency markets. With a trusted trading method, you can buy when a currency pair is about to launch, and sell when it’s on it’s way down: Profiting, and taking advantage of all these swings. Now doesn’t that sound better than sitting on something for two years, tying up those precious funds… just to break even?

Some people will say this is easy, because it’s in hindsight and we don’t know what the future holds. Well, yes, it is in hindsight.  But with a good trading method, together with strong risk management principles, together with discipline on your part, you can take advantage of these swings, where others don’t. The market will always be moving. And it doesn’t matter what direction it goes, because you’ll have the right tools to take advantage of the moves.

The point is if you want to free yourself from most of the uncertainty out there in the financial world, and are tired of sitting there with a buy-and-hold fully diversified financial portfolio, hoping against hope that the markets don’t collapse, then become a trader.  Like I said, it’s not going to take you a lot of time.  It’s not going to interfere with your personal life, your work life.  Anybody can do it that has the focus, discipline, and the opportunity to spend at least ten minutes a night after the markets close – ten minutes, once you get the hang of this! That’s all you’ll need to manage your trades.

That means you need to take personal responsibility.  Stop blaming the politicians.  Stop blaming the banks, the states, the cities, the companies, Wall Street, the Republicans, the Democrats.  Stop blaming them.  It doesn’t do you any good.  Just take responsibility, learn how to trade, and what you do is you turn this thing on its head.  Because all this uncertainty out there, and all these deficits and so on and so on, they’re driving great trends in these markets.  Sometimes down….  a lot of times down.  But that’s okay, you can sell short.  It’s easy to do, as long as you follow the good risk management principles.

So you take a very tough situation, you turn it on its head, so that it’s in your favor, instead of against you.  You take control. You sleep well at night.  So if any of this resonates with you, I would seriously consider doing what needs to be done, to learn how to become an excellent, effective, disciplined trader.

While Exchange Traded Funds are not new (they have actually been around for about 20 years,) they’re certainly getting a lot of attention lately.  This is due to the ability for an individual investor to easily combine index investing with the convenience of the individual stock ownership, is a formula hard to resist. ETF’s are a collection of shares that follow a particular index, industry, or commodity, like a traditional mutual fund does, however, that is where the similarity ends.

There are several advantages ETF’s have over Mutual Funds for stock investors, because of the fundamental difference that ETF’s trade like individual exchange traded stocks.

The Differences vs. Mutual Funds:

1. When a new investor buys shares in a mutual fund, he or she pays the end of day NAV (net asset value).  Since ETF’s are traded on the exchange,  they act just like any individual stock issue, and can be purchased any time at the current price during the market hours.
2. When an investor purchases shares in ETS’s, unlike mutual funds, they may use pending limit orders, stop loss orders, and take profit limit orders just like stock trading.  Also with ETF’s, you may go long or short, just like stocks.
3. With exchange traded funds an investor can also buy or sell any and number of shares that, she would like, even down to one share, if desired.    This is a real advantage for the investor with a small portfolio, as many mutual fund, have much higher minimum requirements.
4. For investors with experience trading options, you can trade puts and calls on many ETF’s just like any other optionable stock.
5. The management fees are generally smaller in the ETF world, as they just need to pick the basket of shares that follow their sector or specialty, and are much less likely to have highly paid fund managers (expensive stock picking gurus.)

There you have it, the major differences between the two kinds of funds in a nutshell.   Also, many say that there are tax advantages to ETF’s (mainly the EFT underwriters.) This is a complicated topic that the Mutual Fund and ETF industries don’t seem to agree upon.  All I know is that if we are successful and make some money, just like the “death thing,” Uncle Sam will always get his “Capital Gains” in the end.

Anyone who’s ever traded stocks or is a stock investor has at one point or another asked themselves: What really drives the prices in a stock market?  What makes the individual stock prices and the index as a whole move up and down? We might think we know, but in my opinion the answer to both of these questions is largely fear and greed.  Buyers or sellers, long term or short term, investors or traders… the result is almost always the same.  We buy based on greed when we believe that a particular issue of stock may go up or if we believe that the market as whole will rise and we can take advantage of the movement and we sell when we become fearful that the rally is over or may be ending soon.  It is inconsequential if anyone believes that fear and greed are good or bad from a moral standpoint because these are the two human emotions that fuel the market, they always have and they likely always will.

There is an old saying, “The stock market climbs a wall of worry”, which simply means that as the stock market rises as a whole there are more and more investors that believe the existing rally will come to an end but the higher it goes greed takes over and more and more investors jump on board and invest along the way, which of course fuels the fire of the rally and extends it.  This is somewhat of a self-fulfilling prophecy in the respect that though many investors believe that it will end, they do not want to miss out on the potential for making a profit, so they become greedy and add money to the system.  Of course the simple principle of supply and demand means that as money is pumped into the market and shares are bought there will be fewer and fewer shares available which of course means that stock prices will rise.  The more this happens the more prices continue to rise fueling the rally which at some point becomes based more on price movement than fundamental value of the underlying stock.  In a way we have a subtle but very real bidding war or auction type mentality when this happens.

This isn’t necessarily a bad thing, it is just the reality of how the markets work.  The interesting thing about the current rally that has been going on in the stock market since the last quarter of 2011 is that volume has been surprisingly low which is a clear indication that many smaller or individual investors and traders have been sitting on the sideline and have not participated in the current rally.  Though the current rally has been very impressive it seems that many people have not been convinced that it is real or sustainable which is somewhat ironic because it has sustained itself for quite some time.  When you put it in perspective and look at a chart of the S&P 500 over the last 30 years or so it does become evident that market has largely moved sideways for approximately the last 12 years.  There have been some very nice runs both up and down but it has not nearly moved on the same upward trajectory that it moved in the years before and it may be very difficult to ever repeat that kind of the movement simply because we are now in a world economy rather than a world with a group of individual economies in it.

The news reports I hear keep talking about how great the latest rally is and how the market is hitting its highest levels in the last few years and how we are back at the levels we were at before the economic crisis began in 2008.  This is all true and very nice to hear however many investors are not feeling the same euphoria that the news is projecting.  When the economic bubble burst many people were caught holding long term investments in their portfolios which of course includes holdings in retirement accounts such as 401ks and different types of IRAs.  The market made a severe drop at the end of 2008 and fortunately has since largely recovered but many of the accounts are simply moving back to their former levels.  As long as the investments were not liquidated they are just now getting back to where they started from, the people that really benefitted from the drop and subsequent rise are the investors that had cash and foresight at the time and were able to move into the market when the bottom was reached and at points when prices were still low along the way as it began to rise.  I previously stated volume has been low during the current rally meaning that many smaller investors are not participating for a number of reason the least of which is that many people simply do not have the cash available to do so.

We do need to be very cautious in the current market environment, just because the debt problems in Europe are not in the news as heavy as they were several weeks ago does not mean that the problems have been resolved it simply means that there are more news worthy stories that the media can report and sell to us.  The debt problems in the US are far from over, we need to make sure that we are not the next big economy to default and potentially fail.  Right now what we are hearing allot about is the economic slowdown in China.

The bottom line is that we as investors and traders need to take control of our portfolios and make our own decisions based the information that is currently available.  In today’s economy we cannot get married to an investment regardless of if it is an individual stock, ETF or a mutual fund.  We need to be very nimble in the management of our portfolios ready to act and move our assets as the economy and the perception of the economy dictates.  Unfortunately the passive buy and hold days may be over to a large extent because of the flatness of the market.  Placing money in a longer term investment and letting the market take it up and down and up and down accomplishes very little over the long term.  We need to manage our assets in a manner that gets us out and in cash when the market is high and gets us back in when it is low.  This is very easy to say but knowing when the market is high and when it is low and when to make a move is the real challenge.

A lot of people who want to learn forex trading can really benefit from moving averages. Now, a few of you veteran trader out there might already know a lot about this, but it’s always a good idea to brush up on your fundamentals. And if you’re still relatively new to forex, then this trading trick can really help us in identifying the momentum in the Forex Market and the currency pairs we are trading. And it doesn’t matter if you trade the USD/EUR, USD/CHF, USD/JPY, AUD/USD, or the GPB/USD… this works with all pairs!

One of the most important things that we need to identify when determining to buy or sell a currency pair is the direction that it is moving.  Once we identify this we can then determine whether to go long or short.  One of the simplest ways to help us identify and visualize the direction the market is moving is by applying moving averages to our charts.

To begin, let’s start by defining what a moving average really is.  Moving averages tell us how the price of the currency pair has been moving.  It does not tell us where it is going to go for sure, just where it has been.  It is therefore considered a lagging indicator.  Even though it is lagging it can still give us some valuable information.  The Simple Moving Average indicator is calculated by taking the closing price of the pair over a specific time period and then averaging the price for that time. This average price is then plotted on the chart to come up with a moving average line. This line can then give us an idea whether the average price has been going up or the average price has been going down. The direction of this line can show us whether we should be focused on buying or selling the currency pair. This is a basic definition of a Simple Moving Average. There are multiple other ways moving averages can be calculated, including exponential,  weighed and smoothed moving average… to name just a few.  For our discussion here we will focus on the Simple Moving Average but just so you can see the difference, take a look at how these moving averages lineup on the charts below.

You can see that with the same moving average period each one of these looks a bit different. Green – Exponential, Red – Simple, Black – Smoothed:

Now, let’s take a look at the 40 period Simple Moving Average to see how it can help us identify the trend of the pair. Notice in the chart below that as the price goes down, the Simple Moving Average line will follow it and as the price goes up the line will follow it up.

This can be very valuable information as we look to determine whether we should be buying or selling. When you have a currency pair that has the moving average going up and the price is above the moving average you want to look for buying opportunities.  When the moving average is going down and at price is below the moving average you want to look for selling opportunities. Take a look at the chart below and see where we have identified the areas for buying and selling based off of the direction the moving average is heading.

You can see where the circle is at the top of the chart that the price begins to move down and so does the 40 period Simple Moving Average.  When the line is going up we would be looking to buy and when it is going down we would be looking to sell.

In addition to using a single moving average, you can use multiple moving average to help you identify when the trend has begun to change direction. Looking for the crossover of the short-term moving average with the long-term moving average is a good way to know when the trend has changed. Take a look at the chart below where we have added a 20 period simple moving average along with the 40 period simple moving average. Look at how when they cross the price tends to move in that direction. Once the moving averages cross we can then look to enter a trade in the direction that the price is moving.

In the chart above you can see the areas that have been circled.  These are the areas where the moving averages have crossed.  You can also see that once they cross the price of the pair will try and move in the direction.  As these crossovers occur we can use that signal to begin to look for trades to occur in the direction of the move. Take some time to look at the moving averages and see how they can help you in better identify the trend of the pair you are trading. Whether you use one, two or more moving averages, they can give you some visual clarity into the trend of the currency pairs you are trading. They’re simply not something you want to trade forex without!