I can honestly say that 30 years ago I learned how to trade the markets in the pits of Chicago.
It was there, in one of those sweaty, tumultuous, in your face trading pits, that I learned one of the most valuable trading secrets in the world.
This one trading secret opened my eyes to why things happen in the markets.
This trading secret, which is over 800 years old, is one of the most monumental mathematical discoveries of all time.
The publication in 1202 of the "The Book of Calculation" was never meant to be a road map to success in the markets. However, it turned out to be an extraordinary blueprint for how modern day markets work.
The number sequences contained in this amazing 800 year old book, is like having a virtual DNA for every stock, futures and foreign exchange market.
No one knows for sure why these number sequences work. Some traders believe them to be mystical, others, like myself prefer to call them one of life's little mysteries.
I have been using this sequence of numbers to trade the markets for over 30 years. I have to say that after all this time, I am still amazed that these numbers still work!
My new 8 minute educational trading video that remains true to core principals of the "The Book of Calculation." Show you step by step, exactly how you can benefit from using this trading secret.
I have a question for you, when did you last gas up your car?
If you experienced the pain at the pump, plus sticker shock, you're not alone.
The pain at the pump is real, it's painful, and it's also affecting the daily pocketbook of millions of Americans who rely on the pump to get them to work. Now the bad news, there's no magic wand that any politician can wave to make all of this go away.
Here's the bottom line, the world runs on crude oil, and demand is likely to remain high in the foreseeable future.
It's not any one event that's causing oil prices to rise, it's a combination of several things. You only have to look at the value of the ever shrinking dollar, plus world wide demand for raw commodities, to understand why prices are moving higher.
Forget the pain at the pump, here's a way for you to profit from the pump.
Take a look at the latest video to come out of the MarketClub digital studios, to see how you can benefit. This6 minute video focuses on Crude Oil. See if it makes sense to you. I know this approach makes sense, because everyday we get calls and emails from traders like Milt in Virginia who tells us our approach works.
"When I started using the MarketClub, I checked out your signals versus the signals I generate for a few weeks. I used mine to verify yours… now I use yours to verify mine and the profits have been astounding!"
Milt Fall
Virginia ==============
Remember, we are not brokers, so we are not going to be asking you to open an account with us. We are trading educators, that's what we do best right after trading.
Now more than ever you need a plan to survive financially in what is turning out to be a very tough year for housing and the stock market.
Now more than ever you need a market proven, risk adverse formula for the future.
Now more than ever you need to be diligent, disciplined and follow a proven financial strategy.
"The past is the teacher of the future" Old Hungarian Proverb
There is nothing new in the markets as financial history always repeats itself. The subject of todays blog posting is something you need more than ever in these volatile markets and that is money management.
In my previous blog postings we discussed diversification and stops. These two disciplines are all part of your money management suite of tools. But there are two other elements that make up a successful money management strategy in my opinion.
The two missing elements I am talking about are and the importance of usingFOCUS and DISCIPLINE.. You must have these two elements in your money management toolbox if you are going to succeed and make the kind of money that allows you to enjoy the good life.
Just imagine not having to worry about Fed actions, or stressing out about if some companies earnings is going to miss expectations.
Well, all that is possible with good money management. The tools we have discussed in our previous posts stops and diversification allow you the luxury of not worrying and stressing out over things you cannot control.
THE NUMBER ONE SECRET TO MONEY MANAGEMENT
All credit goes to the Oracle of Omaha, Warren Buffett for this secret. Mr Buffett who at 77 is a legend in the investment world. Here are Mr. Buffett two most important rules to investing.
Rule Number One: Never lose money.
Rule Number Two: Never forget Rule Number One.
If you follow this advice you will be very successful, perhaps like Mr. Buffett?
We were lucky enough to recently share some TV time with Mr. Buffett. You can watch it here.
Let's go back to our two topics today … FOCUS andDISCIPLINE.
Here's an example of FOCUS.
Say you are bullish on a certain stock or futures market. You need to FOCUS on three key components. 1. Entry price. 2. Trade risk. 3. Profit potential.
Here's an example of DISCIPLINE.
This is what I believe is the difference between winners and losers in the market.
It can be all summed up in one word DISCIPLINE!!!
Without DISCIPLINE the odds of being successful in the market are against you.
Here's a simple recap of the four basic components that make up your money management game plan.
The DOW dropped 370 points (2.9%) after a report from the Institute for Supply Management's (ISM) index of the service business sector announced a fall from 54.4 to 41.9. This is the first decline in the retail, travel, banking, construction, and restaurant industries in about 5 years. A reading below 50 indicates contraction; it was the first service-sector contraction in more than four and a half years. Economists had been expecting another month of growth for the service sector that accounts for 2/3's of the economy. The overall indication in January is that non-manufacturing has come to the end of a long-term period of growth," said Anthony Nieves, chairman of the Institute for Supply Management's non-manufacturing business survey committee.
This disappointing news coupled with a report highlighting the first decline in employment since August of 2003 has rocked the market this week. However Microsoft's (NASDAQ: MSFT) bid for Yahoo (NASDAQ: YHOO) took the spotlight leaving the unemployment report in the shadows. The report indicated the loss of 17,000 jobs in January, the greatest decline since 2003, despite an expected growth of 70,000 jobs.
How will the wake of these two reports affect the market in the year to come? Will the decrease in employed American citizens have a dramatic impact on US consumer spending? Will the fear of the “R-word” fuel a tailspin? For me, there is more questions than there are answers.
Will we see strength in the economy anytime soon? Will the FED come to the rescue? Cary Leahy, and economist at Decision Economics says, "We do have considerable stimulus from both the Federal Reserve and from a major cut in taxes in the middle of the year so the economy could experience a decent second half.”
As more reports are released and regardless of major moves we must remember to follow basic trading rules to curb our losses and protect our portfolio:
Did you ever have your grandmother tell you not to put all of your eggs in one basket?
Well it turns out grandma was right. Grandma, knew a great deal about the power of diversification and how it reduces risk both in business and in trading.
IN BUSINESS …
What if McDonalds only sold hamburgers, do you think they would still be competitive when the world is turning to healthier lifestyles. Now don't get me wrong every once in a while I like to chow down on a nice juicy hamburger. But I also like to eat healthy and so do a great many other people. McDonalds moved with the times and diversified into chicken wraps, salads and a whole host of other healthier food groups. In other words they diversified.
IN TRADING …
It just doesn't make sense to trade just one market, there's just too much risk and too little opportunity in one market. A trader needs to stay flexible and at the same time be diversified.
Before we get into the meat and potatoes of market diversification let's take a look and see how the dictionary defines "diversification"
di·ver·si·fi·ca·tion
1. the act or process of diversifying; state of being diversified.
2. the act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous.
That's the official version of diversification. Now let's apply that to the markets. First off, we have to accept that the market can do only three things, it can go up, it can go down and it can go sideways.
Your portfolio on the other hand, can only move two ways. It can go up, or it can go down.
We all know the direction our portfolio should go, and we want to see it go in that direction with the least amount of risk. That's where diversification comes in. NUMBER ONE SECRET TO DIVERSIFICATION
Here is the number one secret to market diversification, spread the risk and trade in non correlating assets.
Here's an example of a non diversified portfolio.
Say you are bullish on Crude Oil and you buy a futures contract in crude, but what if the rest of your portfolio was full of energy stocks?
What you have created is one basket of eggs. In this case a basket of energy eggs. Your portfolio is dependent on one sector and that is energy. This is just too risky for the average investor. No matter how many stories you hear from the various experts saying that energy is going through the roof you don't bet the farm on one market … ever.
You need to have as many non correlating asset classes as you can follow. This short video illustrates diversification perfectly.
The other key to diversification is cash. You don't have to be in all the markets everyday. Cash is a way of diversify … Swiss Francs, Canadian Dollars, Euros, etc etc.
Here's an example of how a well diversified portfolio.
Stocks, bonds, futures and cash.
Out of those four asset classes, you have a multitude of choices. Stocks allow you to cover a broad spectrum of different domestic and international sectors. Bonds do the same thing, and the futures markets cover everything from raw commodities to financial instruments.
You can divide your portfolio into different percentages and allocate then to various asset classes. The more you divide into non correlated asset the less your risk will be.
Here's what I am suggesting. I call it the Will Rogers approach. Here Will Rogers was known for his famous quips.
"I'm more concerned about the return of my money than with the return on my money".
I guess Merrill Lynch should have remembered that when it had to write off 8.4 billion dollars and cause the firm to have it's first loss in 93 years. Diversification would have smoothed that disaster for Merrill, what got in their way was plain old fashioned greed.
The American humorist Will Rogers (1879 - 1935) had a special way of making a point. Here's another one of his insights about trading and investing.
"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it". — Will Rogers
Will was right!
Only buy sectors when they are going up. When they turn down, get out and move into cash. Then look for another non correlating market sector for your portfolio that's moving up. For sophisticated traders you can even short different asset classes which is a way to turbo charge your returns.
Yes, it takes time to analyze the markets and find winners, but the time of a buy and hold strategy is gone forever.
We are living in extraordinary times, never before have we had so many people living on the planet. Never before have we had so many major countries competing for an ever shrinking supply of raw commodities. Never before have we seen times like this that present both great opportunity and great risk.
Diversify … spread your risk, don't be a Merrill. You can do well and thrive in the future with a well balanced and diversified portfolio.
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It was there, in one of those sweaty, tumultuous, in your face trading pits, that I learned one of the most valuable trading secrets in the world.
My new 8 minute educational trading video that remains true to core principals of the "The Book of Calculation." Show you step by step, exactly how you can benefit from using this trading secret.
Did you ever have your grandmother tell you not to put all of your eggs in one basket?
the rest of your portfolio was full of energy stocks?
