Frequently Asked Question

Topic Covers | Checking Account, Retail Banking, Savings Account



If I want to have some cash in a liquid account for unexpected emergencies, what is best? A savings account or another type?


It's always a good idea to keep some money set aside in a liquid form, but it's a double-edged sword, because the more liquid your money, the less it's earning. If you never have an emergency, then you can miss out on the chance for substantial earnings by keeping that money in a simple savings account. For more aggressive growth without losing the liquidity, you can consider a money market account or a high-yield savings account. A high-yield savings account may require you to maintain a certain minimum monthly balance.

If you are concerned about liquidity but don't feel like you need your money all in cash, you can also consider bond or certificate of deposit (CD) ladders. When you create a ladder of bonds or CDs, you invest in instruments with varying maturity dates so that you regularly have funds converting to liquid cash while also taking advantage of the higher returns that these instruments offer.

Mutual funds and money market funds are another option, but these generally require liquidation and three days or so to settle and make the funds available.

It's one thing to keep a few hundred dollars sitting in an emergency savings account with a very low interest rate, but if your emergency account has several months' worth of expenses, then you might consider mixing and matching many different instruments so that your savings are still accessible (possibly on a graduated timeline), you avoid penalties for withdrawal and you maximize the growth opportunities available.

 

What is market cannibalization?

Market cannibalism is defined as the negative impact a company's new product has on the sales performance of existing products. This is best illustrated by the "Cola Wars" - the marketing fight between Pepsi (NYSE:PEP) and Coca-Cola (NYSE:COKE), which lasted most of the 1970s and 1980s. The soft drink rivalry pushed Coca-Cola Co. to make one of the most famous marketing blunders in financial history. In the process of creating Diet Coke, the company's chemists discovered a new formulation for Coke. The new concoction was sweeter and smoother than the century-old formula upon which Coke had been built. In fact, it was similar to Pepsi - the drink that was eating away at Coke's domestic market share.

On April 23, 1985, Coca-Cola Co. announced that New Coke was on its way. Because of a strong preference for New Coke in consumer taste tests, Coca-Cola decided to pull the old Coke formula from the shelves. Essentially, the company was throwing away a century of branding by favoring the new, relatively unknown formula over the one that consumers had grown up with. For Coca-Cola executives, this made sense. Much like with software companies that pull old versions from the shelf when a new one is released, they didn't want their old product line to keep consumers from buying their new one. Unfortunately, this bold move backfired horribly.


Consumers rebelled and flooded Coca-Cola with angry letters and phone calls. Coke's stock and market share took multiple hits and Pepsi even proclaimed victory in the Cola Wars now that Coca-Cola had copied its taste. The influx of complaints led to a "We've heard you" marketing reverse. On July 11, 1985, mere months after its sudden exit, the old formula was re-introduced with "Classic" added to the title - probably better than "Old Coke". Coca-Cola Classic quickly ate up the sales of New Coke in a textbook case of market cannibalization, but the company's stock did recover for the most part. The marketing blunder may not have been as much of a disaster as it appears. The controversy and media attention attracted some fence-sitting consumers back to the Coca-Cola brand.
Nevertheless, the saga of New Coke turned off many investors and resulted in Coca-Cola becoming an undervalued wallflower that nobody wanted to touch. Due to the strong international presence of Coke, however, investing sage Warren Buffet started buying significant amounts of Coca-Cola stock in the late '80s, which proved to be one of his most profitable buys. Despite its flirtation with a branding disaster and market cannibalization, Coke remains one of the world's strongest brands and a stalwart company to boot.

 

Tips That Will Land A Finance Job With A Bachelor's Degree

Topic covers: Careers, CFA, Corporate Culture, Finance Careers, Internships, Lifestage - Career, Post-Secondary Education

Finance is an extremely competitive profession, especially at the entry level. The desks of investment professionals' are piled high with the resumes of students who have dreams of big money, nice cars and getting on the path to being Masters of the Universe by the time they are 30. Finance is also a cyclical job market: when the stock market is booming, finance jobs boom as well, but when returns dwindle, so do the job listings. And even when the market is flush with jobs, finding a good job is key. Follow these five tips to dramatically increase your chance of landing a finance job even before hitting graduation.

Tip No.1 - Land An Internship

For entry-level positions, interviewers do not expect candidates to know much. Many companies have orientation and training programs that teach new recruits the specifics of what they need to know, but having background knowledge is still expected. An internship can help to fill in for the lack of full-time experience and is not as difficult to get as a real job. Internships do not generally require much, if any, prior knowledge. They will likely be based around grunt work, performing tasks that anyone can do, such as making copies. But they provide learning experiences, references, networking opportunities and something tangible to talk about in an interview. Doing several internships also provides a great display of work ethic, which is a sought-after quality in the finance industry.

Tip No.2 - Start Early

If you start in the summer before your first year in college, you can have a total of four summer internships before senior year. Is it necessary to do that many? No, but why not? Many finance internships are paid, so there are no excuses. If you are going to get a summer job anyway, it is better to do something that will further your career instead of just flipping burgers. The same holds true when attending college in a metropolitan area. Instead of working part-time at the local clothing store during the school year, file papers for a local investment advisor.

Tip No.3 - Diversify Your Experiences

Don't do five internships for equity traders unless you're 100% sure you want to trade for a living. Try to switch it up a little and land internships around the industry. This will help you gain a better perspective in different areas and help you figure out what you really want to do. If you want to research bonds, an interviewer is likely to ask why. If you had an internship in fixed income and another in equities, you can give a more eloquent answer than, "I just like bonds." Also, the different branches of finance are generally interconnected somehow. Portfolio management makes use of trading and research, for example. Knowing a little about how the different sectors of finance work can give you an edge in the job market.

Finally, work hard at any internship you land. The references can be valuable no matter what, but more importantly, impressing your bosses during an internship can be a great way to open doors for a future full-time job with that company. Many of the summer analyst/internship programs at big banks are created to look for entry-level hires for the next year.

Tip No.4 - Learn to Talk the Talk

To get a job in finance, you should ideally pick a business-oriented major like finance or economics. Many companies say that this does not matter, and it is very common to hear, "We hire all majors - we even have art history majors working at XYZ Company." All is not lost for the art history majors, but it is still certainly better to apply for finance jobs with a finance degree.



Another great way to learn is to make reading the financial news part of your regular routine. Pick up a subscription to The Wall Street Journal and/or the Financial Times and read it every day. As a student, you can normally get discounted subscriptions for these publications. Picking up a weekly magazine like The Economist or Barron’s will help expand your knowledge as well.

Immersing yourself in financial reading will help you get used to the terms and jargon of Wall Street, which is one of the biggest hurdles to cross. Do you know what MBS, CDS, BPS, EBITDA and federal discount rate mean? Regularly reading the financial news throughout college will help you pick up all the basics in due time. Even if you are studying this vocabulary in your courses, reading more about finance will help you to solidify that knowledge and feel more comfortable discussing it. Other ways of picking up financial knowledge are reading investing books, from basic to advanced topics, and reading tutorials and guides from financial websites (looks like you're already on the right track there). Treat learning the financial language the same as learning a foreign language. Instead of ignoring words that you don't understand, look those terms up to help broaden your knowledge.

 

Tip No.5 - Start Your CFA

As stated earlier, the job market in finance is always very competitive. Many applicants will have high GPAs and degrees from good schools and will have done the things listed above. It is always good to go above and beyond to differentiate yourself from the pack. One way of doing this is to take the Chartered Financial Analyst (CFA) Level 1 exam. The CFA designation is well respected in the financial industry. You'll need to pass three exams and have four years of eligible work experience to obtain the designation, but the first exam can be taken in the final year of a bachelor's program, either in December or June.
Financial professionals know the amount of time and dedication that the program entails (a minimum of 250 hours of study is recommended per exam), so coming out of an undergraduate program having passed the first exam will certainly make you stand out among other job candidates. The commitment to the program will display your work ethic and dedication to finance.

The Bottom Line

In both good and bad times, it is difficult for undergraduates to land a good entry-level position. Your resume is going to get lumped in with hundreds of others from candidates with strong credentials. The competitive nature of the finance job market means that focusing early, gaining experience with internships and gaining knowledge from following the news and reading will help you stay at the front of the pack. Finally, doing something to break off from the pack, like entering the CFA program in your final year of college, can better your chances of landing a good job. Work hard and good luck!
 

See How To Transition Into A Finance Career

Topic Covers:  Career Advancement, Finance Careers, Personal Development
 

Transitioning into a finance career after you've spent many years in another industry may seem exciting to some and daunting to others. The world of finance may offer a greater challenge as well as potential improvements in compensation, among other benefits. If you are pondering a midlife career change that involves a transition into finance, then here are a few tips that will help you make the transition.

Take an Assessment of Personality Traits and Professional Skills

A career in finance requires quite a few professional skills, such as a working knowledge of finance and accounting, as well as comfort with a computer and various software programs (Excel is a good example). Those who successfully transition into finance also possess certain non-financial skills, such as the ability to communicate well and good interpersonal skills. To ensure that a career in finance is right for you, a great first step is to assess your skill sets and personality traits.
This step can be accomplished by completing an online career assessment or by contacting your alma mater's career services office. You may even wish to engage a professional career consultant, who should be able to point you in the right direction when it comes to sizing up your strengths, weaknesses and personality traits. Whichever method you decide to pursue, the goal is to determine how well your knowledge, skills and abilities match the requirements of a finance career.

 

Perform Research and Conduct Informational Interviews

The next step in your transition into a finance career is to learn as much about your field of interest as possible, ideally by speaking with somebody who has the career that you are interested in pursuing. These conversations, also called "informational interviews," help you to learn more about the options available to you, given your experience and your area of interest.
You may be wondering, "How do I find somebody with whom I can conduct an informational interview?" Start by asking people within your existing professional and social networks, and expand your circles from there. Rest assured, most people enjoy speaking about their professions and are happy to help if they can. Other options that may lead to informational interviews include becoming a member of a career-specific organization, networking through your alumni association, attending a business networking meeting or cold-calling professionals. Networking is as important as everyone tells you. The more people that you talk to, the more well-informed you will be regarding your options.

Prior to conducting an informational interview, it is important to do as much research as possible so that you can demonstrate your knowledge by asking intelligent questions during the interview. Online resources are aplenty, as are career libraries at universities and public libraries. A little bit of due diligence goes a long way in terms of credibility. A well-conducted informational interview may turn into a job - you never know!
Another important "must do" prior to conducting an informational interview is to craft a professional resume that showcases your knowledge, skills and abilities. Again, there are several online resources that can guide you through this process. Be sure to have your resume ready, just in case the informational interview results in a request for your resume.

Remember: Patience and Perseverance Pay off

Today's job market presents challenges, so do not get discouraged if your efforts to transition into finance do not immediately bear fruit. Continue to network, conduct informational interviews and apply for relevant positions. Solicit feedback from everyone who speaks to you, as their feedback may help you to adjust your approach as needed.

Finally, You're Hired!

Getting hired is probably the hardest part of transitioning into the world of finance. Once you are hired, ensure your success by working hard, being proactive and engaging in appropriate networking activities. To that end, be sure to find a mentor once you arrive in your new career, perhaps a senior person who can relate to your experience, either personal or professional. This person can guide you in regards to the the ins and outs of your new career and offer pointers regarding how certain situations should be approached.

The Bottom Line

Though transitioning into a finance career is exciting to some and daunting to others, particularly if such a transition is executed in midlife, rest assured that it is doable. Careful research and effective networking are crucial to a successful transition - just remember to be patient. Finally, once you make the change, be sure to find a mentor who can guide you as you move up on your career ladder.
 

High-Yield are Bonds Too Risky?

Topic Covers:  Auto Insurance, Bonds, Credit Ratings, Fixed Income, Interest Rates, Junk Bonds, Portfolio Management, Risk Management, Warrants

It may surprise you to know that some of the top companies in the Fortune 500 have had debt obligations that were below investment grade - otherwise known as "junk bonds." For example, in 2005, automotive icons Ford and General Motors both fell into junk bond status for the first time in either company's history. Many investors would not pass up the opportunity to buy common stock in these companies, so why do so many avoid these companies' bonds like the plague? It may have something to do with price fluctuation and with the fear that past abuses, like those of Michael Milken - the controversial financial innovator also known as "The Junk Bond King" - might be repeated.
Although they are considered a risky investment, junk bonds may not deserve the negative reputation that still clings to them. In fact, the addition of these high-yield bonds to a portfolio can actually reduce overall portfolio risk when considered within the classic framework of diversification and asset allocation. We will explain what high-yield bonds are, what makes them risky and why you may want to incorporate these bonds into your investing strategy.

Why the Bad Reputation?

During the 1980s, Michael Milken - then an executive at investment bank Drexel Burnham Lambert Inc. - gained notoriety for his work on Wall Street. He greatly expanded the use of high-yield debt in corporate finance, and mergers and acquisitions, which in turn fueled the leveraged buyout boom. Milken made millions of dollars for himself and his Wall Street firm by specializing in bonds issued by "fallen angels" - companies that experienced financial difficulty, which caused the price of their debt, and subsequently their credit rating, to fall.

In 1989, Rudy Giuliani (then the U.S Attorney General of New York) charged Milken under the RICO Act with 98 counts of racketeering and fraud. Milken was indicted by a federal jury. After a plea bargain, he served 22 months in prison and paid over $600 million in fines and civil settlements. Today, many on Wall Street will attest that the negative outlook on junk bonds persists because of the questionable practices of Milken and other high-flying financiers like him.

Defining High-Yield Investments

Generally, high-yield bonds are defined as debt obligations with a bond rating of Ba or lower according to Moody's, or BB or lower on the Standard & Poor's scale. In addition to being popularly known as "junk bonds," they are also referred to as "below-investment grade." These bonds are available to investors as individual issues or through high-yield mutual fund investments. For the average investor, high-yield mutual funds are the best way to invest in junk bonds, as these funds were formed to diversify a pool of junk bonds and reduce the risk of investing in financially struggling companies.

Advantages of High-Yield Bonds

Many good companies run into financial difficulty at various stages of their existence. One bad year for profits or a tragic chain of events may cause a company's debt obligations to be downgraded to a level below investment grade. Because of these additional risks, high-yield investments have generally produced better returns than higher quality, or investment grade, bonds. If you are looking to get a higher yield within your fixed-income portfolio, keep in mind that high-yield bonds have typically produced larger returns than CDs, government bonds and highly rated corporate issues.

Growth Stock Pick (CTLE)

High-yield bonds do not correlate exactly with either investment-grade bonds or stocks. Because their yields are higher than investment-grade bonds, they're less vulnerable to interest rate shifts, especially at lower levels of credit quality, and are similar to stocks in relying on economic strength. Because of this low correlation, adding high-yield bonds to your portfolio can be a good way to reduce overall portfolio risk when considered within the classic framework of diversification and asset allocation.
Another factor that makes high-yield investments appealing is the flexibility that managers are given to explore different investment opportunities that will generate higher returns and increase interest payments. Finally, many investors are unaware of the fact that debt securities have an advantage over equity investments if a company goes bankrupt. Should this happen, bondholders would be paid first during the liquidation process, followed by preferred stockholders, and lastly, common stockholders. This added safety can prove valuable in protecting your portfolio from significant losses, thereby improving its long-term performance.

The New High Yield

If you're looking for some big yield premiums, then emerging market debt securities may be a good addition to your portfolio. Typically, these securities are cheaper than their U.S. counterparts are, because they have a much smaller market, yet they account for a significant portion of global high-yield markets. What else could you be purchasing when investing in high-yield funds? One addition is a leveraged bank loan. These are essentially loans that have a higher rate of interest to reflect a higher risk posed by the borrower. Some managers like to include convertible bonds of companies whose stock price has declined so much that the conversion option is practically worthless. These investments are commonly known as "busted convertibles" and are purchased at a discount, since the market price of the common stock associated with the convertible has fallen sharply.

To help diversify their investments even further, many fund managers are given the flexibility to include high-yielding common stocks, preferred stocks and warrants in their portfolios, despite the fact that they are considered equity products. For portfolio managers looking to tailor duration and short the market, credit default swaps offer a credit derivative that allows one counterparty to be long a third-party credit risk and the other counterparty to be short the credit risk. In essence, one party is buying insurance and the other party is selling insurance against the default of the third party.

Risks of High-Yield Investing

High-yield investments also have their disadvantages, and investors must consider higher volatility and the risk of default at the top of the list. Fortunately for investors, default rates are currently around 2.5 to 3% (as of August 2012, according to Fitch Ratings), which is near historic lows. However, you should be aware that default rates for high-yield mutual funds are flawed. The figures can be manipulated easily by managers because they are given the flexibility to dump bonds before they actually default and get downgraded and to replace them with new bonds.

How would you be able to assess more accurately the default rate of a high-yield fund? You could look at what has happened to the fund's total return during past downturns. If the fund's turnover is extremely high (over 200%), this may be an indication that near-default bonds are being replaced frequently. You could also look at the fund's average credit quality as an indicator; this would show you if the majority of the bonds being held are just below investment-grade quality at 'BB' or 'B' (Standard & Poor's rating). If the average is 'CCC' or 'CC,' then the fund is highly speculative ('D' indicates default).

Another pitfall to high-yield investing is that a poor economy and rising interest rates can worsen yields. If you've ever invested in bonds in the past, you're probably familiar with the inverse relationship between bond prices and interest rates: "as interest rates go up, bond prices will go down." Junk bonds tend to follow long-term interest rates more closely; these rates have recently stabilized, thus keeping investors' principal investment intact.

During a bull market run, you might find that high-yield investments produce inferior returns when compared to equity investments. Fund managers may react to this slow bond market by turning over the portfolio (buying and selling to replace the current holdings), which will lead to higher turnover percentages and, ultimately, add additional fund expenses that are paid by you, the end investor.
In times when the economy is healthy, many managers believe that it would take a recession to plunge high-yield bonds into disarray. However, investors must still consider other risks, such as the weakening of foreign economies, changes in currency rates and various political risks.

The Bottom Line

Before you invest in high-yield securities, you should be aware of the risks involved. If, after doing your research, you still feel these investments suit your situation, then you may want to add them to your portfolio. The potential to provide attractive levels of income and the ability to reduce overall portfolio volatility are both good reasons to consider high-yield investments.

Is Apple Finally Going To Announce The Apple TV In 2013?

Is Apple Got Somthing To New Announce In 2013?

Topic Covers: Investing Basics, Investing News

Maybe, maybe not. That seems to be how Apple (Nasdaq:AAPL) operates, although some of that is changing. Apple is finding it increasingly difficult to keep a secret these days. With everybody from the smallest tech blogger to the largest media outlets fighting to get the first glimpse of a new Apple product, "anonymous" overseas informants in Apple's supply chain have leaked everything from pictures of pieces and parts of Apple products to the newest patents filed by Apple. The new Apple TV, called the iTV by some, should not be confused with the Apple TV that is already on the market. Now in its second generation, the current version of Apple TV connects to your TV and allows you to download movies, stream music and use your TV as a monitor for your MacBook among other features. Although the second generation sold 2.7 million units in the first five months of 2012, by Apple standards, that is not wildly impressive.

If we assume that the iTV does (or will) exist, it may use many of the features that come with the current Apple TV, but insiders are hoping that the iTV is actually a TV. The Wall Street Journal recently reported that Apple is working with Sharp (OTC:SHCAY) and Hon Hai Precision (better known as Foxconn) to produce a prototype, flat-screen HD TV, but it is unclear how far along Apple is in the process. Some analysts believe that the Apple TV would likely hit shelves in 2014 or 2015, while others point out that rumors of an actual TV set have been swirling since 2009, making all of the buzz and industry noise largely that: noise.

 

The Problem with a TV

Some say that it is hard to believe that Apple would simply build a TV with an Apple logo and some nice-looking Apple icons on it. That is not Apple's style, according to a Forbes article. Apple wants to disrupt the market with everything it does. Think of the iPod, iPhone and iPad. These products were new and innovative, and along with these products came deals with the music and cellular industry that would make it advantageous to Apple not only to sell the product, but profit off the industry.
In order to do that with a TV, Apple will have to strike lucrative deals with cable and satellite providers, content creators and others in the TV business. If history is any guide, coming to any kind of "disruptive" deal like it did with the music and cellular industry will be quite the tall order. Consumers who have read the scrolling messages on their TVs about content negotiations know that TV execs do not play well with each other or with others.

Not everybody agrees. PC Magazine suggests that all Apple has to do is make a better TV. Maybe something lighter and more easily hung on a wall even if the TV is large. To the list of improvements, the magazine adds OLEDs for a sharper picture and a way to receive signals wirelessly, cutting down on the need for the mass of cables that now sits behind most TVs.

What About a Set Top Box?

CNN recently reported that Steve Jobs believed that producing an actual TV was a low-margin, slow-turnover business and isn't exactly what Apple is looking for out of its next big item. CNN also reminds us that many of Apple's best products are innovations of earlier products. The iPad came from the iPod Touch and the iPod Touch evolved from the iPhone, for example. Maybe the Apple TV that everybody is waiting for is already sitting next to millions of viewers' TVs. Maybe it will be a large-scale improvement on the current Apple TV. Like most things Apple, however, it is only a rumor.

 

The Bottom Line

Long before announcement of the iPhone 5 and iPad Mini, consumers knew a lot about the products due to leaks in Apple's massive international supply chain. It is for this reason that many now believe the Apple TV is not close to being complete. If it were in production, we would likely know about it.

5 Tips For Diversifying Your Portfolio

 Diversifying Your Portfolio

Topic Covers:  Bonds, Financial Theory, Index Funds, Investing Basics, Portfolio Diversification, Portfolio Management, Risk Management, Stock Analysis, Stocks

For establishing a strategy that tempers potential losses in a bear market, the investment community preaches the same thing that the real estate market preaches for buying a house: "location, location, location."

Diversification is a battle cry for many financial planners, fund managers, and individual investors alike. When the market is booming, it seems almost impossible to sell a stock for any less than the price at which you bought it. When the indexes are on their way up, it may seem foolish to be in anything but equities. But because we can never be sure of what the market will do at any moment, we cannot forget the importance of a well-diversified portfolio (in any market condition).

Looking Back: A Lesson in the Importance of Diversification

With the luxury of hindsight, we can sit back and critique the gyrations and reactions of the markets as they began to stumble after the '90s, and again in 2007. Diversification is not a new concept. We should remember that investing is an art form, not a knee-jerk reaction, so the time to practice disciplined investing with a diversified portfolio is before diversification becomes a necessity. By the time an average investor "reacts" to the market, 80% of the damage is done. Here, more than most places, a good offense is your best defense and in general, a well-diversified portfolio combined with an investment horizon of three to five years can weather most storms. Here are some diversification tips:

1. Spread the Wealth

Equities are wonderful, but don't put all of your investment in one stock or one sector. Create your own virtual mutual fund by investing in a handful of companies you know, trust, and perhaps even use in your day-to-day life. People will argue that investing in what you know will leave the average investor too heavily retail-oriented, but knowing a company or using its goods and services can be a healthy and wholesome approach to this sector.

 

2. Consider Index or Bond Funds

Consider adding index funds or fixed-income funds to the mix. Investing in securities that track various indexes make a wonderful long-term diversification investment for your portfolio. By adding some fixed-income solutions, you are further hedging your portfolio against market volatility and uncertainty.
SEE: Why It Pays To Be A Lazy Investor

 

3. Keep Building

Add to your investments on a regular basis. Lump-sum investing may be a sucker's bet. If you have $10,000 to invest, use dollar-cost averaging. This approach is used to smooth out the peaks and valleys created by market volatility: you invest money on a regular basis into a specified portfolio of stocks or funds.

 

4. Know When to Get Out

Buying and holding and dollar-cost averaging are sound strategies, but just because you have your investments on autopilot does not mean you should ignore the forces at work. Stay current with your investment and remain in tune with overall market conditions. Know what is happening to the companies you invest in.

 

5. Keep a Watchful Eye on Commissions

If you are not the trading type, understand what you are getting for the fees you are paying. Some firms charge a monthly fee, while others charge transactional fees. Be cognizant of what you are paying and what you are getting for it. Remember, the cheapest choice is not always the best.

 

The Bottom Line

Investing can (and should) be fun. It can be educational, informative and rewarding. By taking a disciplined approach and using diversification, buy-and-hold and dollar-cost-averaging strategies, you may find investing rewarding - even in the worst of times.

Important Forex News & Tape Bombs

Important Forex News & Tape Bombs

As the market began to crash in 2008 everything began to change. Through 2006-2008 we had some of the best most consistent price action in the forex market in and around financial news. Not only did the brokers have no idea how to stop spike trading auto click software, but the overall reaction to market news was very consistent. More often than not it would spike, retrace 6.18% of the move which would give a great chance for an entry, and then continue off in the original direction of the spike. Trading forex news was extremely straight forward and quite frankly many made a small fortune. During this time I was using the original piece of spike trading software. Brokers were completely caught off guard and really had no way to stop it. To fight back they began much more aggressively using the dirty tricks you see as common place today today. Until that time massive spreads, re quotes, and huge slippage was more of a rarity than a market standard. Now a days however those things are the market standard, with honest forex brokers being the rarity. We have moved from a much more “simpler” trading environment to a dynamic one that is always changing to say the least. How can you stay on top of forex news important to you?

First of all not all financial news is important, and just because ForexFactory labels it a “high impact” news release doesn’t mean it will necessarily move the marketplace. Times are changing and the impact financial news has on markets will change even faster. What’s important today will not necessarily be important 6 months from now. How can you keep an eye on a market changing so fast? One way is to keep up to date on the response you should expect with each release. As we mentioned an important piece of financial news will not necessarily move the market, and therefore it is critical we understand how a specific piece of news will move the market, and what type of deviation does it take from the expected number to do it. We can do this by using tools such as ForexPeaceArmy News Calendar which is able to show you actual charts of all past releases. This is critical information as you can see how the market responds to the news.

Additionally the current days forex news is covered in the daily market commentary. What is nice about the commentary is how all the information is already boiled down for you. Hours of research go into each daily market review saving our 12,000+ monthly readers massive amounts of time they can spend elsewhere. Remember the second part of this sections heading….”tape bombs”. What is a tape bomb? A tape bomb is an unexpected major news release that was not scheduled. Often comments from influential financial leaders, or comments from a central bank can makes massive spikes in the market leaving traders more often than not frustrated. You will never be able to avoid every unexpected news release. With that being said you can however take certain steps to be as prepared each trading day as possible. How so?

Knowing what is happening in the financial world can keep you abreast of the potential for a tape bomb. More often than not meetings between financial heads cannot be found on news calendars. Not knowing when these meetings are to take place can be devastating as you are left not knowing the cause of the massive market move or major volatility increase. Because of this I always start my trading day by first reading through Chad’s commentary, and as a general rule of thumb the most important information I need to know is covered saving me a huge amount of time daily.

Happy Trading,

Picking Your Entry Points

Picking Your Entry Points
 

As a day trader in the forex market your success or failure relies not only on understanding the most likely direction in the market (trend), but it also relies on precise trade entries. Without precision day trading forex profitably becomes nearly impossible. As a short term trader our advantage comes from our ability to place tight stop losses. Without a tight stop you lose your ability to achieve high risk/reward ratios which is key to day trading successfully. Although precise entries are more often related to short term trading strategies, all trading styles (swing traders & position traders alike) can benefit from selecting better entries points. How then can we select better entry points?

Because banks move such massive positions they struggle for liquidity. This struggle for liquidity makes them predictable which is a massive advantage for us….but only if we know how to use it.  To understand this we must first understand how any transaction in all markets actually takes place. If for example you are looking to buy the EUR/USD you must find someone willing to sell an equal amount of EUR/USD. You cannot buy what someone is not willing to sell, and you cannot sell what someone is not willing to buy. Because banks move such large positions they have to create a massive supply to satisfy their demand. Often this is done through what is know as a “false push” or a stop run reversal. Essentially by pushing the market in the opposite direction they can either sell into artificially created buying pressure, or buy into artificially created selling pressure. This is why so many traders feel like they get into the market at exactly the wrong time. This is neither a coincidence nor does it happen by accident, rather it is a well executed plan banks repeat over and over on a daily basis.

Why is that information important in regards to selecting better entry points? It is really quite simple. If you understand where there will be a massing of orders you will have a good indication of where the banks are likely to drive the market, in an effort to accumulate those orders before reversing the price. The beauty is retail forex traders are predictable, and most place not only their stop orders but entry orders as well in very predictable spots. A few of these key price points are covered in the daily market commentary, with the complete list and further detail outlined in the video daily market review. However the entry is not taken blindly as price reaches these levels. It is critical that we see the market break through and then reverse back below or above that price point such as you would see in a stop run reversal setup. Our daily market analysis will point out multiple manipulation points with a high probability of seeing a positive response. Once you spot the manipulation around these key price points covered in the daily commentary it will allow you to take more precise entries, therefore enabling you to maintain a much better Risk/Reward ratio.

Understand Forex Market Daily Trends

Understand Forex Market Daily Trends
 

The basic starting point for anyone’s day regardless of your trading strategy or system is overall market direction. Understand market direction is essential in order to avoid figuratively ”swimming upstream”. It is unfortunate but determining market trend is not always the easiest task as you more than likely well know. Why? The classic definition of an uptrend for example is higher highs and higher lows and the opposite for a down trend. Many try to use this in their trading but always seem to sell near the bottom of any down trend, and buy near the top of any clear uptrend. This is not uncommon, as the classic definition of a trend often means you will identify a nice move near its ending point rather than near its beginning. This can be extremely frustrating as well as discouraging to struggling forex traders. With over 10 years of market experience and a proper understand of how the banks tend to move the forex market, Chad has a nose for market trends.

Everyday the expected direction of both the EUR/USD and the GBP/USD is discussed in the daily market commentary. For many beginners to the forex market this can be a great starting point to begin your trading day. If you as a retail trader get the direction right, you have essentially won half the battle! For those already experienced, it can be a great second opinion you can use to cross check with on a daily basis. It is important to remember that the banks rule the forex market. 10 banks control well over 70% of the daily volume, and therefore they dictate intra-day trend. If you can identify the next direction of the mega banks, you can identify the next direction of the market with a high degree of certainty. This tracking of the banks is at the core of our daily market analysis, and thus why it is so powerful when it comes to giving us probable market trend. How else can you benefit for this daily commentary?

Trading Forex Trend Reversals – End Of Day Forex System

Trading Forex Trend Reversals – End Of Day Forex System

Knowing when a trend is going to end can be a very powerful and profitable piece of knowledge. For those with even a limited knowledge of the trading strategies that we teach you probably notice how consistently Smart Money (banks) tend to cycle the market is pushes of three over the span of 3-4 days. Understand just this small piece of information can keep you from placing a trade when the market has a higher probability of reversing. But what else can we use to more effectively predict when the weekly trend is going to reverse? This forex training article is going to be extremely valuable. In it we are going to completely cover a forex trading strategy that can stand alone, or you can use it along side any trading system you are already using. The strategy is what I call the Weekly Trend Exhaustion Reversal. Learning how to spot reversal is critical for many reasons. One key reason we all need to know how to spot reversals is to avoid fighting shifts in the trend that wipe out other traders. Second these reversals often get us in near the beginning of the three to four day trend thus allowing us to take high risk/reward trade setups.

Criteria For The Trend Exhaustion Reversal Setup

Before we discuss the criteria for this specific reversal trade setup we need to lay the foundation. For those familiar with our forex bank trading strategies much of this information will be familiar. If you are new however, you may want to read other training article and videos on the site covering how to determine market trend. So then what criteria do we generally look for before considering market reversal?

1.) Do we have 3 clear cycles?

2.) Are those cycles moving at least the Average Daily Range (ADR), and preferably 90 pips or more each?

3.) Have these 3 cycles occurred over the course of 3 or 4 days?

4.) Was the overall move (From the start of the first cycle to the end of the third) at least 150 pips?

Once this criteria has been satisfied the foundation for an “exhausted” market becomes established, and the possibility of a reversal begins to rise. Its important to remember that in trading we must be adaptable. There will be slight variations from the four points listed above and using some common sense goes a long way in those circumstances. Let’s say for example that we see only 2 cycles but they are much larger than average both moving 160+ pips each, and it occurred over 3 days. We have to remember that some level of human intervention in trading is always necessary. It is important to remember why those rules are in place. They are in place to give us a set of guidelines as to how the market tends to trend on a weekly basis. Since all trends in the forex market are not the same it is more important to understand the principle behind the rules rather than a strict adherence to the rules no matter what. In general the most important part of the above rules are numbers 3 & 4. These two rules alone tend to more often than not make an adequate foundation to move forward from when determining possible forex trend reversals.

Identifying Market Exhaustion

We have to this point laid the foundation of when we should begin looking to trade a forex trend reversal. When though is the trade taken and what exactly are we looking for to signal a trade entry. One thing I always say to members is “we need to see manipulation at a high probability point” before taking a trade. In the example of a exhaustion setup I do as well prefer to see a high probability point (Major previous S/R level, 200EMA, Daily Pivot, ADR, 61.8% Fib, Cross Pair Confluence, Ect) being broken and then rejected away from. Unlike any other setup I take however, I will take these reversal trades without a high probability area….let me explain why.

To explain why we do not have to have a high probability level during an exhaustion reversal setup we first must understand what the setup itself is, and what it looks like. Lets assume we have the “foundation” already set in place as we discussed earlier. In order to be an exhaustion candle I want to see a 1 hour candle that is at least double the 21 period Average True Range to begin. There are times where the candle following the exhaustion candle will move up slightly, but in general to have a valid setup I want to see the market retrace the entire exhaustion candle before the following days Asian session ends at 2:00 AM Eastern. In the picture above the arrow second from the right marks the grey Asian box. The end of that box marks the end of the Asian session. Above is a perfect setup, and a great recent occurrence of this trend reversal strategy. The exhaustion candle is well over twice the 21 period ATR. Immediately after it closed the market begins to retrace, and easily retraces the entire candle.

In the example above you can see I labeled a previous major daily high. As you can see the exhaustion candle breaks through that high, takes the stops, and then quickly gets rejected back down away from that level. Preferably there will be a major resistance or support level where the stop run can take place, but as I mentioned earlier that is not essential in this trade setup. Now that we have a basic understanding of what an exhaustion candle looks like lets explain why seeing that manipulation is not necessary in the trading strategy. This question is answered once we understand what is happening during this move and what the purpose of it is.

 

Why Does The Market Frequently Create Exhaustion Type Trend Reversals

In an earlier article series entitled learn to trade forex with smart money we broke down the very basic foundation of how the banks MUST trade. They first begin accumulating positions over the course of hours. Next they create manipulation in the form of a false push or stop run reversal. After this they then quickly snap the price back and start the trend in their direction, and the rest of the market begins to pile on after fueling the trade all the more. Therefore when they complete their weekly trend and the profit targets have been achieved they now have to exit this large position. Remember how it took them hours, and a manipulation move to enter their position? Wouldn’t it take the same to exit that position? Of course it would! How does moving the price up help allow them to exit their long position? If you are long how do you close out that position? Anyone in a long position must eventually sell that position back, and therefore they must have buyers to sell their position to. By allowing the price to move up it creates more buyers as it looks like the market is going to just make another push up in the already established up trend. This however is the trap!

These manipulation moves are often created near the beginning of a major session opening. Generally from 2-5 AM Eastern or during the NY Session from 8-11 AM Eastern. Why is this done? In order to drive the market up they use what is referred to as general order flow. Remember banks primary job is to exchange money for global commerce to take place. During the overnight sessions massive amounts of general order flow (money that needs to be exchanged for general world wide commerce to take place) stack up and needs to be processed. On days where they look to create the trend reversal and in the example above exit their long position they simple begin aggressively pouring all the buy orders (client general order flow) into the market creating a rapid spike up. When this happens the rest of the market begins to pile on to the aggressive buying thinking they are missing the boat. Guess who is more than happy to sell to all those buyers?:) You guessed it the banks! The trap has been set, and the traders took the bait. They have done it in the past, they do it now, and traders will continue to take the bait in the future.

Now that you know what happens during these exhaustion reversal setups you now know why it is not critical that a high probability manipulation point is broken. Banks break through high probability levels to take out stops and accumulate or exit positions. In these day trading setups however the move itself creates enough liquidity for them to exit their position therefore breaking through a high probability level is not essential.

How To Ride The Wave The Banks Create

Its important to not be greedy. We could try to figure out a way to catch the exhaustion move itself but in general its much easier to take the trade the following day. Not only does taking the trade the following day give us time to really be sure were not forcing a trade, but it also gives the market time to provide even more confirmation of direction. How then is the entry taken the following day. In the chart below the grey box to the left is the same Asian session box you see in the charts above. The taller/skinnier box is the 8-11 AM Eastern NY session time block.

In the chart above this is the 15 minute chart the day after the 1H exhaustion candle setup the day before. The trade is taken when we see a proper stop run or stop run topping formation above the Asian highs. If you are unfamiliar with the criteria needed for these two entries you can check out the forex training video on timing your entires. Within this trade setup we see a massive amount of confirmation. Not only did the initial exhaustion trend reversal itself show you the change in market direction, but the following day smart money creates the stop run or false push which validates the day trading setup and entry even more.

At best you should expect to see this once a week per pair. It you to trade forex and work a full time job, and do so with a sound and logical trading strategy. For those who cannot be around the following day to place entries manually, pending orders can be used above the highest probability manipulation points. This allows you to look at the market once a day after coming home from work. Like anything else it will take practice. Forex is anything and everything BUT a get rich quick scheme. It takes a logical and sound forex trading strategy to trade forex profitably. If you would like to learn how to trade the Trend Exhaustion Reversal setup you can check out our advanced forex bank trading course. Additionally in our members daily market review we list the highest probability manipulation points each and everyday. If you are struggling with doing so yourself you might find our daily market reviews useful. Next week I will more than likely be doing a training video on this strategy so make sure to look out for that. I hope you all find this trading strategy useful and I wish you all the best…Happy Trading!

7 Easy To Understand ETFs To Replace A Savings Account

Understand ETFs To Replace A Savings Account

Topic Covers:   ETFs, Personal Savings

If you have a savings account or certificate of deposit (CD), you're probably not making much more than 1% each year from interest. That's better than spending the money, but in order for it to truly to grow in value, it has to perform better than the rate of inflation. According to the U.S. Bureau of Labor Statistics, the 2012 average inflation rate was 2.1%. Most financial planners use 3.0% as the historical average.
Investing in exchange traded funds (ETFs) is the hottest trend since the mutual fund. There are 1,445 U.S.-listed exchange traded products with a total trading volume of $1.2 trillion monthly. A 2011 Charles Schwab study found that 44% of investors planned to expand the use of ETFs in their portfolios.

Within these 1,400-plus product offerings, there are many easy-to-understand ETFs that have the potential to outperform inflation. To yield better results, you have to take on more risk, but some ETFs offer much lower risk than individual stocks. For investors with a longer-term time horizon, these ETFs can build long-term savings better than a savings account or CD.

Index ETFs

Index ETFs follow a large market index. Investors use these funds as core holdings along with bond ETFs, which are explained later in this article. When developing an investment portfolio, it is important to take a balanced approach. Some financial planners recommend that the younger you are, the more weight stock market index ETFs should have in your portfolio.

 

Here are three index ETFs to take a closer look at:

SPDR S&P 500
The SPDR S&P 500 (NYSE: SPY) is an index fund that mirrors the performance of the S&P 500. It is the largest ETF in the world, as well as the oldest. The fund's fees are only 0.09% - far below the category average of 0.35%. Over the last five years, this fund has quadrupled the performance of most savings accounts each year: SPY yields 2.1%.

 

iShares Russell 2000 Value Index

If you want to capture the performance of smaller companies, you need the iShares Russell 2000 Value Index ETF (NYSE: IWM). With an expense ratio of 0.2%, its cost is still below the industry average, and this fund is a favorite among small cap investors. IWM yields 2%.

Vanguard Total Stock Market ETF

If you want the broadest representation of the U.S. stock market, consider the Vanguard Total Stock Market ETF (NYSE: VTI). The fund follows an index that invests in a sample of stocks from the New York Stock Exchange and the NASDAQ. Like any Vanguard product, it is inexpensive, with an expense ratio of just 0.05%. VTI yields 2.1%.

 

Bond ETFs

Bond ETFs allow you to invest in the safety of bonds without the risk of holding one or two individual bonds. These funds invest in hundreds or thousands of bonds at the same time, making your money relatively safe. Don't expect to see big price gains in these ETFs. It's the dividend yield that should interest you. The older you are, the more your investment dollars should be in bonds.

 

Here are two bond ETFs to consider:

iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG)
This fund gives investors exposure to the higher-yielding corporate bonds on the market. It has a yield of more than 5% and an expense ratio of 0.5%.
iShares iBoxx $ Investment Grade Corporate Bond ETF

Higher yields come with higher risk. To capture the returns of higher-rated bonds, look at the iShares iBoxx $ Investment Grade Corp Bond Fund (NYSE: LQD). This ETF not only gives you the safety of investing in a large basket of bonds, but all are highly rated with little chance of default. The expense ratio is only 0.15%, and the yield is 3.1%.

Sector ETFs

Sector ETFs are riskier than the index ETFs discussed previously. Investors use these securities to add more weight in an area of the economy that they believe may outperform the rest of the economy in coming years.

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
If you are interested, consider these two:

Financial Select Sector SPDR

With an average trading volume of 51.5 million shares, the Financial Select Sector SPDR (NYSE: XLF) is the most popular sector ETF. The fund invests in a basket of stocks that represent the financial sector.

The largest holdings in the fund are Wells Fargo (NYSE: WFC) and JP Morgan Chase (NYSE: JPM). Expenses are a respectable 0.18%. The fund yields 1.7%.
STRONG>PowerShares QQQ Trust Series 1

Although not technically a sector ETF, the PowerShares QQQ (NASDAQ: QQQ) is the ETF of choice for investors who want to capture the performance of the technology sector. Of the fund's assets, 63%, including all of the top 10 holdings, are invested in technology stocks. The fund has an expense ratio of 0.2%. This fund has no yield.

The Bottom Line

Keeping money in a savings account might feel safe, but its value is eroding due to inflation. That might change in future years as interest rates rise, but for now, a relatively safe way to put your money to work is through ETFs.
Use this article as a guide to start learning more. Take a look at each fund's website and learn all you can about each security you are interested in adding to your portfolio. You should be able to talk to your friends or family about the details of the fund before investing real money. If you can't do that, you're not ready to invest.
 

Take Your Pennies To The TSX Venture

Take Your Pennies To The TSX Venture

Topic Cover:  Investing Basics, Investment, Stocks, Volatility

 The U.S. Securities and Exchange Commission (SEC) defines a penny stock as a "low-priced (below $5) … speculative security of very small companies." Penny and micro-cap stocks trade on mini-exchanges that are loosely referred to as "junior markets" or "junior listings." These markets are typically hosted by larger exchanges and rarely have physical locations, relying mostly on online brokerage platforms to service investors. They play an important function in financial reporting; depending on the exchange and overarching regulatory body, it may not be mandatory for small-cap firms to report even their basic financial statements.

Penny Stock Risk

Because of the nature of the penny stock market, potential investors should beware: penny stocks are notorious for the relative opaqueness of their issuing companies as well as for the many cases of fraud within the market. An investment in a penny stock is intrinsically speculative in nature and highly risky. Famed trader Nassim Taleb championed penny stocks for their high upside, however, citing their lower valuations as an opportunity for investors to capitalize on black swan events as opposed to being destroyed by exposure to them. While some penny stocks certainly have this kind of upside, most are toxic and extremely dangerous investment vehicles. Investors should proceed with caution.

 On the whole, start-up companies are desperate for more reputable junior markets and listings that will grant their ownership shares legitimacy and inspire investment and active trading. Quite simply, issuing companies want these items to be fulfilled so they can quickly and easily raise equity capital. Enter the TSX Venture.

 

Not Just Any Venture

The TSX Venture Exchange is a Canadian-based junior listings market that houses many micro-cap and small-cap firms. This exchange provides start-up firms the opportunity to raise equity capital and is owned by the TMX Group, a conglomerate financial services firm that primary deals in trading and clearing. The TMX Group acts as either a parent company or holding company for the Toronto Stock Exchange (TSX), TSX Select, the Equicom Group Inc. and Shorcan Brokers Inc., among other subsidiaries and companies that TMX Group has taken an ownership interest in. Out of these, the Toronto Stock Exchange is most notable; the exchange was founded in 1861 and is the foremost exchange in all of Canada, as well as being worldwide leader in the mining and energy sectors.

Until September 2012, the TMX Group itself traded on the Toronto Stock Exchange; however, it was acquired by TMX Group Limited (previously known as the "Maple Group Acquisition Corporation") on Sept. 14, 2012, and its shares were taken off the market. Today, you can trade shares of TMX Group Limited on the Toronto Stock Exchange under ticker symbol "X." The TMX Group is a highly successful company with reported operating revenue of $167.5 million in the second quarter of 2012, up from Q1 operating earnings of $162.3 million.

An Attractive Offering Indeed

As noted above, the TSX Venture Exchange is a subsidiary of TMX Group. The exchange benefits from this arrangement by being viewed favorably in the marketplace, based off the sterling reputation of the parent company. Thus, many qualifying companies were interested in applying for a listing. Other exchanges such as the OTC Markets Group Inc., known as the "Pink Sheet stocks," suffer from poor reputations of defrauding and misinforming their clients.

 The different types of fraud on the penny stock market are varied and insidious. One such scheme is the "pump and dump" operation, where either the issuing company or a third party will do all it can to artificially prop up the price of its equity on the market. Then, when the stocks are sufficiently "pumped" up, the outside party will quickly liquidate its position and "dump" its entire holding back onto the market. Penny stock companies have even been known to pay celebrities to promote their equity offerings; most famously, 50 Cent's endorsement of a small penny stock firm on Twitter allowed him to cash out some millions richer when his Twitter followers took the bait.

Relative to other listings, the TSX Venture Exchange provides a high level of transparency for investors. Similar to the Toronto Stock Exchange, the TSX Venture Exchange is well regulated by the Alberta Securities Commission as well as other provincial securities regulators. Companies that are listed on the exchange must report their quarterly financial statements and interim MD&A, annual financial statements and MD&A, an annual report, etc. All in all, the TSX Venture is a better-regulated and comprehensive source of information for investors seeking to trade penny stocks. The exchange's high standards keep the good guys in and the bad guys out.

 

Not for Everyone

Despite the appeal of the TSX Venture offering, an investment in penny stocks is not for every investor. Although the TSX Venture Exchange may be a better penny stock exchange than most, it is better to have previous knowledge of the industries that you are investing in. Information provided by the issuing company may not be satisfactory to make sound investment decisions upon.

In addition, penny stocks are not for those who can't afford to lose big. The risks inherent to a penny stock are massive. As an inherently speculative investment, capital allocation to an investment vehicle classified as a penny stock is only for investors with the proper time horizons, liquidity needs and time preferences.

 

The Bottom Line

In the words of Burton Malkiel, there are not very many $100 bills lying around to be picked up. Most of the time, something that sounds like too good to be true probably is. Investors should be wary of the associated risks of penny stocks as well as the many dangers of fraud. That being said, the TSX Venture Exchange is a very legitimate enterprise - on par with the Nasdaq Smallcap Market and the American Stock Exchange (AMEX) in the U.S. Penny stock investments should only be made, by properly informed investors, with an exchange that has the standards of the TSX Venture

Can Regular Investors Beat The Market?

Can Regular Investors Beat The Market?

Topic Covers:

 Day Trading, ETFs, Investing Basics, Investment, Portfolio Management, Stocks

 We all invest with the hopes that one day we will have enough money to live off our investments. The question remains, can a regular investor like us really beat the market? Do we have what it takes to win over the middlemen and institutions that have millions or even billions invested in the market? According to Terrance Odean, a finance professor at the University of California, Berkley's Haas School of Business, "Many of the mistakes investors make come from a lack of any understanding of the innate disadvantages they face."

David and Goliath

The answer to this question is not an easy one, and the answers will vary depending on who you ask. By "beating the market" we're talking about everyday working Americans who try to obtain greater capital gains and income return than the S&P 500.
David E. Y. Sarna author of "History Of Greed," explains it this way, "We all have some larceny in us. We buy securities because we think we know someone or something others don't. I don't think anyone can consistently outperform the S&P 500 without assuming greater than market risk."

 Some of us might have the tools (and connections) required to make knowledgeable decisions that will lead us to a portfolio with higher returns, but others like stockbrokers, bankers and big corporations most likely have an advantage, right? While many people in the financial industry have insider information which they cannot legally trade on, they also possess the necessary financial statement analysis skills to develop a greater insight about a given company. Robert Laura, author of "Naked Retirement: A Stimulating Guide To A More Meaningful Retirement" and President of SYNERGOS Financial Group says, "The reality is there will always be a lure to try and beat the market, especially since those who have beat it consistently are revered so highly (Bill Miller, Peter Lynch) and/or are compensated well (hedge fund managers). I think the market can be beaten, but even a broken clock is right twice a day. Best way to describe it: It's possible but not probable."

According to Laura, the sad reality is, the average individual investor has little chance of beating the market. He says the common investor uses mutual funds, are stuck in 401(k) plans which essentially track the broader index, and pay higher fees as compared to stock, index funds or ETFs. Also many mutual fund type investments don't use stop loss order to protect gains and thus do not always provide the type of protection individualized portfolios can perform. As he puts it, "investors are set-up to fail from the get-go."

Investing in 401(k)s is no better. "Most 401(k)s aren't benchmarked and most companies don't have a good investment policy for selecting funds within the program. You can't even get some asset classes in many and most advisors are sales people, not fiduciaries and just taught how to sell funds," he adds.

The good thing is many more investors are taking responsibility and interest in their investments. They are taking the initiative to learn how their investments work and are less intimidated. Laura says investors are learning that individual stocks aren't as scary as everyone suggests and there is valuable information available to everyone if they know where to find it and how to apply it.

 He adds, "The advent of ETFs and Index investing allow people to mimic the market, instead of trying to beat it, which is a better, less expensive perspective to have."
A Lost Cause?

Founder of FinancialMentor.com, Todd R. Tresidder, said in 2010 "All the evidence supports the disappointing fact that regular investors as a whole underperform the market. As long as they try to 'beat the market' they actually underperform."
The best way for regular investors to achieve better risk-adjusted returns is by focusing not on out performance, says Tresidder, but instead by losing less. In other words, regular investors have one competitive advantage - liquidity. "Big investors are the market but the little guy is nimble and can buy or sell without affecting the market - something the big guy can't do. Systematic risk management can work to provide regular investors with similar or slightly improved investment performance relative to the market at substantially less risk," he says.
Helping the Odds

What can an investor do to increase their chances of "beating" the market? Laura says there are several things:

Use low cost funds and/or a low cost platform for trades. The best way to make money is to save money.

Establish and follow a discipline which translates into just doing what you said you are going to do.

Give every investment in your portfolio a buy price, hold price and sell price along with one or two reasons to buy, hold or sell at that value. This gives you specific criteria to act and provides your portfolio with purpose and specific direction.
Watch for headline risk. Set up email alerts for your investments so as new information comes out about them, you are aware of it in the early stages to consider changes. Mark your calendar for things to watch like earning dates, intellectual property timelines and industry reports like Federal Reserve meetings, unemployment numbers, new housing starts and other information that will affect the specific sector or security.
 Sarna suggests investing in what you know and understand, such as solid, profitable small-caps and even microcaps in niches you can monitor and understand. These can appreciate much more rapidly than equivalently-priced large-caps.

 The only way to get above market returns is to develop a competitive advantage says Tresidder. "It is either developed through knowledge and information flow, or it is developed through extensive research resulting in an investment strategy that exploits irregular market behavior."

According to Tresidder, the only way to outperform the markets is to develop a competitive advantage that exceeds transaction costs and passive market return.

The Bottom Line

The debate of whether an individual investor can beat the market is as old as the stock market itself. Those who have found fortune investing will often preach that they possess superior analytical skills which allowed them to predict the market. Those investors who suffer losses will tell a much different tale.
 

Invest Like A Pro

Invest Like A Pro 

Topic Covers: 

 Active Trading, Asset Allocation, Bear Market, Day Trading, Financial Theory, Hedge Funds, Investing Basics, Personal Finance, Portfolio Management, Retirement, Risk Tolerance, Stocks, Warren Buffett

 For those investors who have been lucky enough to have survived one or more major market downturns, some lessons have been learned. For example, there always seem to be some firms that not only survive those downturns, but profit handsomely from them. So why do certain investment companies do better than others and survive market waves? They have a long-term investment philosophy that they stick to; they have a strong investment strategy that they formalize within their products and understand that while taking some risk is part of the game, a steady, disciplined approach ensures long-term success. Once the key tools of successful investment firms are understood, they can easily be adopted by individual investors to become successful. By adopting some of their strategies, you can invest like the pros

Strength in Strategy

A strong investment philosophy should be outlined before any investment strategies are considered. An investment philosophy is the basis for investment policies and procedures and, ultimately, long-term plans. In a nutshell, an investment philosophy is a set of core beliefs from which all investment strategies are developed. In order for an investment philosophy to be sound, it must be based on reasonable expectations and assumptions of how historical information can serve as a tool for proper investment guidance.

 For example, the investment philosophy, "to beat the market every year," while a positive expectation, is too vague and does not incorporate sound principles. It's also important for a sound investment philosophy to define investment time horizons, asset classes in which to invest and guidance on how to respond to market volatility while adhering to your investment principles. A sound long-term investment philosophy also keeps successful firms on track with those guidelines, rather than chasing trends and temptations. Since each investment philosophy is developed to suit the investment firm, or perhaps the individual investor, there are no standard plans to write one.
If you are developing an investment philosophy for the first time, and you want to invest like a pro, it's important that you consider covering the following topics to make sure the philosophy is robust:

Define Your Core Beliefs

The most basic and fundamental beliefs are outlined regarding the reason and purpose of investment decisions.
Time Horizons
While investors should always plan on long-term horizons, a good philosophy should outline your unique time frame to set expectations.

Risk

Clearly define how you accept and measure risk. Contrary to investing in a savings account, the fundamental rule of investing is the risk/reward concept by increasing your expected returns with increased risk.

Asset Allocation and Diversification

Clearly define your core beliefs on asset allocation and diversification, whether they are active or passive, tactical or strategic, tightly focused or broadly diversified. This portion of your philosophy will be the driving force in developing your investment strategies and build a foundation to which to return when your strategies need redefining or tweaking.

The Secret of Success

Successful firms also implement product funds that reflect their investment philosophies and strategies. Since the philosophy drives the development of the strategies, core style investment strategies, for example, are usually the most common in most successful product lines and should also be part of an individual plan. Core holdings or strategies have multiple interpretations, but generally, core equity and bond strategies tend to be large cap, blue chip and investment grade types of funds that reflect the overall market.

 Successful firms also limit their abilities to take large sector bets in their core products. While this can limit the potential upside when making the right sector bet, directional bets, practiced by hedge funds, add significant volatility to a fund that is judged by not only its performance but its relative and absolute volatility.
When defining an investment strategy, it is very important to follow a strict discipline. For example, when defining a core strategy, restricting the temptation to follow or chase trends keeps the strategy grounded. This is not to say that one can't have additional momentum strategies with different goals, as these can be incorporated into the overall investment plan.

Outlining a Strategy

When outlining a sound investment strategy, the following issues, which are similar to those of creating a philosophy, should be considered:

Time Horizon

A common mistake for most individual investors is that their time horizon ends when they retire. In reality, it can go well beyond retirement, and even life, if you have been saving for the next generation. Investment strategies must focus on the long-term horizon of your investment career, as well as the time for specific investments.

Asset Allocation

This is when you clearly define what your target allocation will be. If this is a tactical strategy, ranges of allocations should be defined, if strategic in nature. On the other hand, hard lines need to be drawn with specific plans to rebalance when markets have moved in either direction. Successful investment firms follow strict guidelines when rebalancing, especially in strategic plans. Individuals, on the other hand, often make the mistake of straying from their strategies when markets move in sharp directions.

Risk Vs. Return

At this point you should clearly define your risk tolerance. This is one of the most important aspects of an investment strategy, since risk and return have a close relationship over long periods of time. Whether you measure it relative to a benchmark or a absolute portfolio standard deviation, just remember to stick to your predetermined limits.

Putting the Pieces Together

It's important to remember that investment strategies define specific pieces of an overall plan. Successful investors cannot beat the market 100% of the time, but they can evaluate their investment decisions based on their fit to the original investment strategy.

After you have survived a few market cycles, you can potentially start to see patterns of hot or popular investment companies gathering unprecedented gains. This was a phenomenon during the Internet technology investing boom. Shares of technology companies rose to rock star levels, and investors - institutional and personal - lined up at their gates to pile on funds. Unfortunately for some of those companies, success was short-lived, since these extraordinary gains were unjustified. Many investors deviated from their initial investment strategies in the hopes of chasing greater returns. Individuals can model themselves after successful investment companies by not trying to hit home runs, instead focusing on base hits.

That means trying to beat the market by long shots is not only difficult to do consistently, it leads to a level of volatility that does not sit well with investors over the long term. Individual investors often make mistakes such as shooting for the stars and using too much leverage when markets are moving up, and tend to shy away from markets as they are falling. Removing the human biases by sticking to a set approach and focusing on short-term victories is a great way to fashion your investment strategy like the pros.

The Bottom Line

Taking cues from successful professional investors is the easiest way to avoid common errors and keep on a focused track. Outlining a sound investment philosophy sets the stage for professional and individual investors, just like a strong foundation in a home. Building up from that foundation to form investment strategies creates strong directions, setting the paths to follow. Investing like the pros also means avoiding the temptation to drift from your investment philosophy and strategies, and trying to outperform by large margins. While this can be done occasionally, and some firms have done it in the past, it is nearly impossible to beat the markets by large margins consistently. If you can fashion your investment plans and goals like those successful investment companies, you too can invest like the pros.
 

Triple Screen Trading System - Part 3

TST System - Part 3

Topic Covers: 

Active Trading, Technical Analysis, Technical Indicators

A trader's chart is the foremost technical tool for making trading decisions with the triple screen trading system. For example, traders commonly use weekly moving average convergence divergence (MACD) histograms to ascertain their longer-term trend of interest. Deciding which stocks to trade on a daily basis, the trader looks for a single uptick or a downtick occurring on the weekly chart to identify a long-term change of trend. When an uptick occurs and the indicator turns up from below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.
By using the ocean metaphors that Robert Rhea developed (see Triple Screen Trading System - Part 2), we would label the daily market activity as a wave that goes against the longer-term weekly tide. When the weekly trend is up (uptick on the weekly chart), daily declines present buying opportunities. When the weekly trend is down (downtick on the weekly chart), daily rallies indicate shorting opportunities.

 

Second Screen – Market Wave

Daily deviations from the longer-term weekly trend are indicated not by trend-following indicators (such as the MACD histogram), but by oscillators. By their nature, oscillators issue buy signals when the markets are in decline and sell signals when the markets are rising. The beauty of the triple screen trading system is that it allows traders to concentrate only on those daily signals that point in the direction of the weekly trend.

 For further reading, see Getting To Know Oscillators - Part 1, Part 2 and Part 3.
For example, when the weekly trend is up, the triple screen trading system considers only buy signals from daily oscillators and eliminates sell signals from the oscillators. When the weekly trend is down, triple screen ignores any buy signals from oscillators and displays only shorting signals. Four possible oscillators that can easily be incorporated into this system are force index, Elder-Ray index, stochastic and Williams %R.

Force Index

A two-day exponential moving average (EMA) of force index can be used in conjunction with the weekly MACD histogram. Indeed, the sensitivity of the two-day EMA of force index makes it most appropriate to combine with other indicators such as the MACD histogram. Specifically, when the two-day EMA of force index swings above its center line, it shows that bulls are stronger than bears. When the two-day EMA of force index falls below its center line, this indicator shows that the bears are stronger.

More specifically, traders should buy when a two-day EMA of force index turns negative during an uptrend. When the weekly MACD histogram indicates an upward trend, the best time to buy is during a momentary pullback, indicated by a negative turn of the two-day EMA of force index.

When a two-day EMA of force index turns negative during a weekly uptrend (as indicated on the weekly MACD histogram), you should place a buy order above the high price of that particular day. If the uptrend is confirmed and prices rally, you will receive a stop order on the long side. If prices decline instead, your order will not be executed; however, you can then lower your buy order so it is within one tick of the high of the latest bar. Once the short-term trend reverses and your buy stop is triggered, you can further protect yourself with another stop below the low of the trade day or of the previous day, whichever low is lower. In a strong uptrend, your protective provision will not be triggered, but your trade will be exited early if the trend proves to be weak.

 

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 The same principles apply in reverse during a weekly downtrend. Traders should sell short when a two-day EMA of force index turns positive during the weekly downtrend. You may then place your order to sell short below the low of the latest price bar.
Similar in nature to the long position described above, the short position allows you to employ protective stops to guard your profits and avoid unnecessary losses. If the two-day EMA of force index continues to rally subsequent to the placement of your sell order, you can raise your sell order daily so it is within a single tick of the latest bar's low. When your short position is finally established by falling prices, you can then place a protective stop just above the high of the latest price bar or the previous bar if higher.

If your long or short positions have yet to be closed out, you can use a two-day EMA of force index to add to your positions. In a weekly uptrend, continue adding to longs whenever the force index turns negative; continually add to shorts in downtrends whenever the force index turns positive.

Further, the two-day EMA of force index will indicate the best time at which to close out a position. When trading on the basis of a longer-term weekly trend (as indicated by the weekly MACD histogram), the trader should exit a position only when the weekly trend changes or if there is a divergence between the two-day EMA of force index and the trend. When the divergence between two-day EMA of force index and price is bullish, a strong buy signal is issued. On this basis, a bullish divergence occurs when prices hit a new low but the force index makes a shallower bottom.

Sell signals are given by bearish divergences between two-day EMA of force index and price. A bearish divergence is realized when prices rally to a new high while the force index hits a lower secondary top.

The market wave is the second screen in the triple screen trading system, and the second screen is nicely illustrated by force index; however, others such as Elder-Ray, Stochastic, and Williams %R can also be employed as oscillators for the market wave screen.

 To continue learning about the second screen in this system, go to Triple Screen Trading System - Part 4. For further reference, you can also revisit Part 1 and Part 2.

Triple Screen Trading System - Part 2

TST System - Part II

 Topic Covers:  

Active Trading, Day Trading, Technical Analysis, Technical Indicators, Trading Software
Market Trends

The stock market is generally thought to follow three trends, which market analysts have identified throughout history and can assume will continue in the future. These trends are as follows: the long-term trend lasting several years, the intermediate trend of several months and the minor trend that is generally thought to be anything less than several months.

Robert Rhea, one of the market's first technical analysts, labeled these trends as tides (long-term trends), waves (intermediate-term trends) and ripples (short-term trends). Trading in the direction of the market tide is generally the best strategy. Waves offer opportunities to get in or out of trades, and ripples should usually be ignored. While the trading environment has become more complicated since these simplified concepts were articulated in the first half of the 20th century, their fundamental basis remains true. Traders can continue to trade on the basis of tides, waves and ripples, but the time frames to which these illustrations apply should be refined.

 Under the triple screen trading system, the time frame the trader wishes to target is labeled the intermediate time frame. The long-term time frame is one order of magnitude longer while the trader's short-term time frame is one order of magnitude shorter. If your comfort zone, or your intermediate time frame, calls for holding a position for several days or weeks, then you will concern yourself with the daily charts. Your long-term time frame will be one order of magnitude longer, and you will employ the weekly charts to begin your analysis. Your short-term time frame will be defined by the hourly charts.

If you are a day trader who holds a position for a matter of minutes or hours, you can employ the same principles. The intermediate time frame may be a ten-minute chart; an hourly chart corresponds to the long-term time frame, and a two-minute chart is the short-term time frame.

 

First Screen of the Triple Screen Trading System: Market Tide

The triple screen trading system identifies the long-term chart, or the market tide, as the basis for making trading decision. Traders must begin by analyzing their long-term chart, which is one order of magnitude greater than the time frame that the trader plans to trade. If you would normally start by analyzing the daily charts, try to adapt your thinking to a time frame magnified by five, and embark on your trading analysis by examining the weekly charts instead.

Using trend-following indicators, you can then identify long-term trends. The long-term trend (market tide) is indicated by the slope of the weekly moving average convergence divergence (MACD) histogram, or the relationship between the two latest bars on the chart. When the slope of the MACD histogram is up, the bulls are in control, and the best trading decision is to enter into a long position. When the slope is down, the bears are in control, and you should be thinking about shorting.
Any trend-following indicator that the trader prefers can realistically be used as the first screen of the triple screen trading system. Traders have often used the directional system as the first screen; or even a less complex indicator such as the slope of a 13-week exponential moving average can be employed. Regardless of the trend-following indicator that you opt to start with, the principles are the same: ensure that you analyze the trend using the weekly charts first and then look for ticks in the daily charts that move in the same direction as the weekly trend.

 

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 Of crucial importance in employing the market tide is developing your ability to identify the changing of a trend. A single uptick or a downtick of the chart (as in the example above, a single uptick or a downtick of the weekly MACD histogram) would be your means of identifying a long-term trend change. When the indicator turns up below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.

The model of seasons for illustrating market pricesfollows a concept developed by Martin Pring. Pring's model hails from a time when economic activity was based on agriculture: seeds were sown in spring, the harvest took place in summer and the fall was used to prepare for the cold spell in winter. In Pring’s model, traders use these parallels by preparing to buy in spring, sell in summer, short stocks in the fall and cover short positions in the winter.

Pring's model is applicable in the use of technical indicators. Indicator "seasons" allow you to determine exactly where you are in the market cycle and to buy when prices are low and short when they go higher. The exact season for any indicator is defined by its slope and its position above or below the center line. When the MACD histogram rises from below its center line, it is spring. When it rises above its center line, it is summer. When it falls from above its center line, it is autumn. When it falls below its center line, it is winter. Spring is the season for trading long, and fall is the best season for selling short.

Whether you prefer to illustrate your first screen of the triple screen trading system by using the ocean metaphor or the analogy of the changing of the seasons, the underlying principles remain the same.


To learn about the second screen in the triple screen system, read Triple Screen Trading System - Part 3. For an introduction to this system, go back to Triple Screen Trading System - Part 1.