Think Inside The Box (And stay there!)

In April 1956 the first ship of its kind departed the dock at Port Newark for the Port of Houston.  It was the Ideal X—the world’s first container ship.

That ship loaded with steel boxes was the brainchild of self-made transportation tycoon, Malcolm McLean.  He watched the inefficient process of loading and unloading individual cargo and realized that sealing cargo into standardized containers increased the amount of cargo carried with much less handling required.  Ships bearing the name of his company, Sealand, can now be seen on all the oceans of the world.

You may be wondering what this story has to do with trading.  Just like the efficient container cargo ship which uses standardized containers for very efficient and profitable shipping. If we can think of trading with many small fixed risk trades using a system with very defined and repeatable entry and exit rules and specific risk management rules. We will have more efficient and profitable trading in the long run.

One big problem with many traders (especially newer  traders) is the constant desire to find the “perfect system.”  This leads to continually moving from one system to another without ever really getting consistent results from any of them. There is no perfect system, it doesn’t exist, no matter what the ads say. When a trader stops looking for the “Holy Grail” and starts actually trading a solid system with a good track record consistently, we increase our chances to be successful, as opposed to constantly trying new systems and never letting one method work.

Risk management is also a critical element of any successful traders system.  With good risk management we are more likely to control the emotions that come with trading and put ourselves in a better position to be profitable.   Like the many containers on the ship, many small trades spread our risk out, instead of putting too much money into fewer, larger positions which may go against us and put our entire account at too much risk.  Keeping our position sizes small with only 1-2 percent risk per trade will keep our individual positions small and our risk at an acceptable level. By placing stop losses on each and every trade, we can limit the risk per trade.  In addition to small position sizing we should limit the total trades we have at any one time to 5 or so positions which will never allow our total risk to exceed 10% at any one given time, even if all of the positions go against us all at once.  We need to live with the possibility each time we trade that each trade could be a loser; therefore, we need to be aware of the specific percentage risk we take with each position.

Just like the consistency that the fixed size containers brought to the shipping industry, consistency using a specific method and using specific risk management rules is the key to successful trading, The trader that sticks to a specific set of rules has the best chance of success, like the container ship, we too can reach the port of our choosing by having many trades with a fixed risk which can add up to our total trading success.

A Picture IS Worth A Thousand Pips

Today we are going to spend some time discussing the importance of charting.  Charting is where you see what the market is actually doing and where you determine if you are going to place a trade.  We can spend our time listening to what the experts are saying might happen or we can spend our time with what really matters – Price Action!  This price action is visualized through the process of reading charts.  In fact, we can wish and hope and even pray that the market will do something but in the end those things have very little impact on how the market moves.  Our focus needs to be identifying what IS happening, not what we or someone else THINKS is going to happen.

Now, we need to be careful that we don’t get caught up in the idea that the more we have on the charts the better we are going to see the market.  In fact the opposite might be true, the fewer things we have on a chart the clearer thing may be.  Take a look at the two charts below.  The first one is a simple Candlestick chart without any indicators.  This chart shows us the most important thing we need to see – Price Action.  Understanding that price action is the key to long term success will force you to focus on those things that will make you profitable.  As we begin looking for our trading methods we need to see the price movement.  Without any indicators we can still see trends, support/resistance and our entry points.  As we begin to add indicators we want to make sure they help us, not hurt our decision making process.

In the next chart below you will see one that is cluttered with all kinds of indicators.  This type of chart doesn’t seem help the issue but rather it seems to make things more confusing.  In fact you can hardly see the price action at all.  We need to realize that the number or type of indicators that we have on the chart won’t make us successful.  The key is that we are actually using the indicators that we have and that they are not on just for looks.

In the end the goal is to find a chart that gives you the information that you need without making it too difficult to read.  If you can find a chart that can help you find the Trend, Support/Resistance and entry points you have all you need.  If you start to become confused, you have most likely placed too many things on the chart.  Remember to find that balance between to much and too little and you will be on tract to successful trading.

Take some time to review your charts to make sure you have a quality setup, not just a quantity of indicators.  Eliminate the ones you are not using and make your charts look clean.  If you can do this your charts really can be worth a thousand pips!

Why Trade Gold?

So did you know that of all the metals that are considered precious that Gold is the most popular to invest in? The question I have for you is why is this the case? You can’t eat it or drink it or plant it, so why is this precious metal so valuable? Many people have gold in their jewelry or computers or in some other form but they wouldn’t look at it as something the couldn’t live without. So there must be other reasons why this metal is so important.

One of the main reasons for people buying gold is to use is as a type of hedge against financial, political or economic problems, basically they buy it when they see fear in the markets. Currently, this is one reason why we might be seeing the price of gold continue to be so strong – fear. Of course gold is subject to speculation and we will see the price fluctuate as this speculation occurs. In the past the worlds financial systems were based off of the gold standard but in recent times this has been done away with. So I guess in the end the reasons why we buy gold are not so important but rather the important thing is “when” we buy gold.

If prices for gold are moving up, we want to look for opportunities to buy it, if the prices are going down then we want to sell (short) gold. In the end it does not matter if we think we are using it as a hedge or other financial factors as long as we know we are getting in and out at the correct times. Let’s take a look at the chart below to see how buying and selling gold at the correct times can help us.

First take a look at the dashed blue line.  This line is pointing down and shows that if we would have purchased gold at the beginning of the chart and just held it, we would be down about $60 per ounce.  Now if we look at the same time frame and looked to sell as the price goes down and buy as the price goes up our results would be drastically different.  Just looking at the moves that occurred (red lines) you can see moves of +124, +90, +230 and +220.  Even if you would have just captured half of these moves you would have picked up over $300 on those trades.

So, if you want to just buy and hold gold you may pick up some of the financial risk advantages but you are also missing out on some great opportunities to profit from this trading vehicle.  Take some time to evaluate why your are trading gold, then look at when you are making your trades to make sure you are taking advantage of this market.

“How Am I Going To Retire?”

If you’ve ever asked yourself this question, you’re not alone.

There is a report out that states that 28% of Americans do not have enough money saved to cover 3 months worth of bills, another study states that a huge number of Americans could not cover an unexpected $2,000.00 bill if one should occur, in other words they do not have enough money saved to financially survive a relatively small crisis.  There was another recent study done that states that the average family of 4 in the United States lives off of approximately $45,000 per year or less.  The poverty level for 2012 was set at $23,050 (total yearly income) for a family of four.  The disparity between the top 1% of earners in the US and everyone else is widening in fact due to the recent economic crisis middle income America has been set back 20 years in total net worth meaning of course that financially they are back to the mid 90’s level while during the same economic crisis the top 1% show an increase in their net worth.  There is yet another article that I just saw that states not only do many people in the US believe that we are headed for a modern day depression, some economists believe we are already there.   Most US companies do not offer a pension plan for their employees and there are perpetual calculations stating the Social Security will run out in X number of years.

I was trying to think of more negativity that I could pile on, and I’m sure I could if I thought hard enough about it, but the point I’m sure you’ve realized by now is that many Americans are not doing very well financially in fact many are stuck in neutral and may actually be in reverse at this point.  This of course brings up allot of questions whose answers are not the kind that we like to hear but just to take one aspect of the problems into consideration, “How are you going to retire?”.  Retirement savings throughout one’s life often times will be placed on the back burner in favor of more current needs such as saving for a new car, saving for a larger house, saving for a vacation or saving for a child’s college education.   So after the car and the larger house are purchased, you have seen the world and the kids graduate from college the question still needs to be asked, “How are you going to retire?”

Many people actually believe that they will need less monthly income during their retirement years than what they did when they were working but I’m not sure that is the typical case.  While it may be true that you will no longer have costs for commuting to and from work, you will not have to buy work related clothing and may no longer eat lunch out some or all of the work days of the week your mortgage costs or housing rent payment will likely be the same, your utility costs will be the same and may actually go up because you’re home more often, if you like to play golf you will likely want to golf more and if you like to travel you will likely want to travel more.  Don’t take my word on this though I have seen this first hand from working with many retirees, most of us know someone that has retired, ask them directly how much their costs have reduced since they were retired.  Most will likely say that their costs are about the same and some may say that they have actually gone up.

If you are old enough and have been working long enough you may be one of the lucky ones that will get a pension but the dilemma that faces you may be how you are going to live in retirement off of about half of what you couldn’t afford to live on when you were working.   If you are not going to be receiving a pension when you want to retire you may have a retirement account such as a 401k, 403b or some type of an IRA so your question will be have you saved up enough during your working life to perpetually fund your retirement or will you outlive your savings at some point and need an infusion of cash.  If you will likely need an infusion of cash at some point during your retirement years where will it come from; lottery winnings, inheritance, your children?  I really like the winning the lottery option but I’m not sure it is the best retirement plan that most people can come up with.

There is a huge percentage of the American population that will get a rude awakening when they do approach retirement years and begin to think about retirement someday so why not look at it now, right now in fact.  Unfortunately there isn’t anybody that is going to do this for you; the government seems as though they can barely help themselves, financial professionals may be an option but remember that most of them make money off of your money often times regardless of if you actually make money or not and though friends and family may love and care for you they have their own problems to worry about.

For the average person in today’s world there are about three things that you can do to help secure yourself during your retirement years which are; earn a superior income while you are working and save a high percentage of it, get a quick infusion of cash from winning the lottery or receiving an inheritance or you will need to take your existing assets and earn a superior return on them making them grow enough to secure your retirement for you.  The next question of course is which one is it going to be, if you can think of other options that may be available for you that’s great too but the same question still remains, realistically, “How are you going to retire?”

Predicting A Trend Is As Easy As…

Today we are going to look at the importance of identifying the trend on our charts.  Knowing the trend is one of the most important things we can find and use in our trading.  If we can find the direction price is likely to move we are going to be more likely to trade in the correct direction.  There are several things we can use and look at to help us determine the trend.

Price action is the primary thing we will look at to determine where the trend is moving.  As price moves in the pattern of higher highs and low or lower highs and low we will see trends develop a moving up or down.  Take a look at the chart below to see how this works.

As you can see in the above chart as the price makes higher highs and higher lows the trend is considered moving up.  As the price make lower highs and lower lows the trend is considered moving down.  Because price action is the primary determinant of trend, knowing how to identify this is critical in defining the trend.

Another simple way to identify the trend is to use an indicator such as the moving average.  Using a simple moving average such as the 40 period can help us visualize where the trend is headed.  There are several things that we need to look at for this to help us find the trend.  The first thing is to determine the direction the moving average line is actually moving.  If it is up, the trend is likely moving higher and if it is down the trend is likely moving lower.  The simple way to use this is to only buy when the line is up and only short when the line is moving down.  Take a look at the chart below to see how this looks.


Looking to sell (short) when the moving average is pointing down will place you in the correct direction and buying when the moving average line is moving up will do the same.  The second thing to consider when using the moving average to determine the trend is to see where the price is in relation to the line.  If the price is above the line, then it is more bullish and if the price is below the line it is more bearish.  The ideal situation is to have the line moving up and the price above it or the line moving down and the price below it.  This will give us some confirmation as to the direction and strength of the trend.

As we look to take trades in the Currency market we want to look for trades that are moving in the direction of the trend.  Knowing some ways to identify the trend will keep us trading on the right side of the market and give us a higher probability for success.  Take some time to review your strategy for identifying the trend to make sure you are trading on the right side of the market.