Tag archives for Stock Trading

Two enormous recessions. Unparalleled government bailouts. An entire lost decade of growth.

It’s been more than 10 years since the tech boom, and most of us have about the same net worth as we had in the first place — or possibly less. The result of this flat and oftentimes irrational stock market has been a media rush to call “an end” for the average buy-and-hold investor.

The rumor mill is circulating and in full effect: Get out of the stock market before it’s too late!

Is this the beginning of the end for the stock market, or will predictions of stocks’ demise turn out to be the worst myth of the 2010s?

Where exactly are you going?
From 1980 to 2000, scholars like Jeremy Siegel and others were touting the wisdom of long-term, buy-and-hold investing; individuals and academics alike were virtually all on the same page. In fact, one survey by a Securities Industry Association in 1999 showed that most investors expected to earn a rate of return equal to about 30% — confidence was at an all-time high!

Nonetheless, according to a recent article in The Atlantic, the modern diversified portfolio, the ease of which we use technology, and the growing popularity of mutual funds have possibly combined to erode our equity premiums. In fact, while most savvy investors used to expect an annual return of 8%-10%, there’s plenty of chatter about that number being much closer to 4%-5% for years to come. Smithers & Co., an asset allocation firm, has forecasted that the next 10 years in the stock market will deliver a paltry 1.8%. So where do you go from here?

Savings: While it would be nice to allocate a large portion of our nest-egg in savings, CDs, or Treasuries, it just isn’t possible anymore. Savings accounts offer near-zero interest rates, and even the 10-year Treasury yields barely more than 2.5%.
Bonds: Corporate bonds and bond funds have had a great run. However, even the global bond guru Bill Gross expects lower returns. According to Gross, because rates have nowhere to go but up, “bonds have seen their best days.” And this comes from a man who manages a $214 billion bond fund. Ouch.
Government: There may have been a time when you could save what was possible and expect your employer and the government to fill out the rest. With pensions long gone and 70% of workers not confident in Social Security, those days are simply over. For the first time ever, this year, payouts to retirees and the disabled will exceed what the government brings in from payroll taxes.
The bottom line is that regardless of what pundits will say about the stock market, it’s the only real option you have left. You need individual stocks to protect your portfolio — period.

Get back to basics already
Years ago, investing in dividend stocks was all the rage. But then the market took off, technology and globalization changed the way we invested, and dividends became boring or old-school. Investors expecting those 30% returns certainly weren’t going to find them in dividends — hence the flock to the fast-growers and the small-caps with unlimited potential.

Yet things have changed, and if you’re not investing in dividend stocks right now, you’re missing out on an amazing opportunity. Throughout history, academics have proven that dividend-paying stocks outperform their non-paying brethren. In addition, from 1871 to 2003, only 3% of the market’s return actually came from capital appreciation — that means that 97% came from reinvesting in dividends!

So in order to avoid the greatest myth of our decade — that stocks can’t provide above-average returns — you’ve got to start investing in dividends. In particular, you need to find stocks that pay great yields, that have sustainable payout ratios, and that have illustrated a knack for increasing their dividends over time. To help you in your quest, I’ve identified seven stocks that not only fit the criteria above, but that are trading for dirt-cheap valuations (to help ensure value).

All seven of these stocks fit the perfect dividend mold — they pay good, sustainable yields, they have plenty of room to grow, and they are trading for more-than-reasonable prices. In addition, I tried to choose stocks that would help create a diversified portfolio, so every sector is covered, from technology to finance to health care.

Don’t believe the hype
There will always be people — whether it be friends, colleagues, or professionals — that employ fearmongering as a way to express their philosophy. However, while I agree that our investing world has certainly changed, I disagree with the notion that returns will be dismal and that you must avoid stocks to ensure your financial safety. Investing in dividend stocks is still a prudent, reliable, and wealth-generating way to keep you on the fast track toward retirement. You may not get rich overnight, but you can certainly sleep well knowing that you didn’t get bullied in the wrong direction.

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Many traders and investors spend hours on end testing out lots of different technical indicators. However while many of them have their merits, there is a much easier way to generate winning trades and that’s to make full use of trend lines.

Trend lines are basically lines on a price chart that show you the current trend. These lines can be applied to your charts very easily. You simply connect the high points to form the upper trend line and connect the low points to form a lower trend line.

Once you have these trend lines in place you can then use them to time your entry and exit points. The first way you can put these lines to use is to use them to help determine areas of support and resistance. You will generally find that the price will reverse downwards when it approaches an upper trend line and reverse upwards when it approaches a lower trend line. This isn’t always the case of course, but it does tend to happen more often than not, particularly on the more popular shares.

Another way to use them is to wait until one of these long established trend lines is broken. For example if there is a clear upward trend and a solid lower trend line that has been sloping upwards for quite a while now, you may want to go short on the stock in question if the price closes firmly below this lower line at any point.

Finally if a stock has been trading sideways for several weeks or months, you should find that it’s possible to draw broadly horizontal lines connecting the high points and the low points during this period of consolidation. Then as soon as the price breaks above either of these lines, you can trade the prevailing trend which nearly always takes place after one of these breakouts. This is particularly true if the breakout is supported by above-average volume.

Whichever of these trading methods you decide to use, the point I want to make is that trend lines can provide you with better trading signals than any of the technical indicators that so many traders swear by. This is especially true on many of the most widely traded shares because so many other traders and investors are watching and trading the exact same trend lines. I personally like to trade those stocks where the long-term trend is finally broken after several months of a predictable trend, but all of these methods work extremely well.

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With many companies offering dividend yields of anything between 5% and 10% in many instances, it’s easy to see why so many investors are drawn to these high yielding stocks. However a common mistake that a lot of amateur investors make is that they think this is risk-free money. That’s sadly not the case, however.

The fact is that you cannot simply buy one of these high yielding stocks just before they go ex-dividend, and then sell them straight afterwards for a risk-free return. Unfortunately the share price takes this dividend into account, so on the ex-dividend date you can be sure that the price will inevitably fall by the same amount as the yield, ie 5% or whatever it may be.

You can still make money from these stocks, however. You can either forget about the short-term price movements and keep them as long-term investments, banking the generous dividend payouts every year, or you can look to profit from them on a short-term basis.

This is something that I like to do a lot. All you do is create a list of companies who have generous payouts in the next few months (preferably 4% or more), and then concentrate on finding bargains from within that list. The best way to do this is to use technical analysis. If you use oscillating indicators such as the CCI, RSI and stochastic indicators, for instance, it’s very easy to see which stocks are trading at bargain levels because each of them will be indicating an oversold position at the same time.

This is a low-risk trading strategy because there are two big reasons why one of these shares will rise in the near future. Firstly because they are obviously oversold on a technical basis, but secondly because there is a forthcoming dividend payout which nearly always brings in additional traders and investors and helps to drive the price higher.

So the point I want to get across is that its always worth drawing up a list of high-yielding stocks and paying particular attention to those that have big payouts coming up. It’s not a fool-proof strategy, just like any other trading method, but in most cases it will generate some excellent results.

Furthermore you will often find that you can bank your profits without hanging around for the dividend payout either. This is obviously beneficial because you can plough these profits back into the markets straight away without having to wait a few months for your dividend to be paid.

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The reason why Warren Buffett is able to consistently beat the market of average investors & money managers is because he holds very different beliefs and philosophies about how the markets work. Let’s compare the beliefs of Warren Buffett to the beliefs of the average investor or fund manager.

Broad Diversification Versus Focus

Fund managers and financial experts often advise clients to broadly diversify their money across many different financial instruments such as stocks, bonds, currencies & money market funds. The logic is that by spreading your money into different areas, you reduce your risk. Master Investors like Warren Buffett believe that although broad diversification reduces risk, it also reduces any potential of return. If you invest in 50 stocks, then for your portfolio to double in value, you must find 50 stocks that double in value. That is almost impossible! At the same time, by investing in so many companies and instruments, it is impossible for you to become an expert in anything. He believes that people diversify into everything to protect themselves against
their own ignorance! It’s like asking the great tenor Luciano Pavarotti to diversify into Heavy Metal, Country & Western, Techno, Hip Hop and R&B in order to reduce his risks in case he does not do well in Opera.

Instead, Warren Buffett believes in focusing all his money into a few, very well selected stocks that he knows will double in value. He believes that an investor must only invest into a few companies that he understands very well and can track very closely. He calls it investing within your circle of competence. Does this mean that you should bet your entire savings on one or two companies? Of course not! That is too dangerous. It is still important to spread your money across at least 8-10 stocks that you know inside out. However, once you buy more than that, it becomes harder to invest intelligently.

Following the Market Versus Going Against the Market

Fund managers & the investing public tend to be very short-term performance focused. They tend to buy a stock when there is lots of good news (i.e. economy is strong, company’s earnings beats forecast, launch of a new product etc) that pushes the stock price higher and higher. Consequently, they tend to jump out of a stock when bad news sends the stock price falling. Actually, there is nothing really wrong with this approach.

By doing so, you are investing along with the trend. This strategy is known as ‘momentum investing’. However, the danger with ‘momentum investing’ is that it is all about timing and the ability to read into investor psychology. The trouble is that most average investors who lack these skills jump in too late (after all the professional funds have entered), when the stock price has already risen near its peak! Sure enough, they find that the stock prices start falling the day after. Out of fear and panic, they sell the stock and end up with a loss. This is why the typical
investor always experiences their stock price falling soon after they have entered the market.

On the other hand, value investors like Warren Buffett take a Contrarian approach. They go against the market psychology and trend. They buy the stock of a good company when nobody else wants it. This is when the stock price is extremely low and attractive. They then wait patiently for the stock to come into favour again. When optimism returns and the crowd starts to push the shares of the company higher and higher, the value investor will then sell his shares at a nice profit.

High Risk, High Return Versus Low Risk, Low Return

While many financial experts preach the concept of having to take high risks in order to make high returns, master investors like Warren Buffett believe that it does not take high risks to make high returns. Instead, it takes a high level of financial and business competence to make high returns! In fact, he will only make an investment when there is a very low risk of loss and a very high probability of gain. He does this by only investing in companies that are selling way below their true value. In this way, he gives himself a wide margin of error. Which means even if his calculations are off, he will still be making money.

Invest Only when there Is a High Probability of Success

The trouble with professional managers of mutual funds is that they are pressured to invest 80% of their cash into the market, even when there is nothing attractive to buy. This happens after a prolonged bull-run when stock prices are so high that companies are way overvalued. On the other hand, Buffett would happily keep all his money in cash and only invest when there is a golden opportunity. This is exactly what happened in 1999-2000 (stock prices were insanely overvalued) when Buffett was criticized for not making a single investment and keeping all his money in cash. Buffett only moved in to buy after 2001, when stock prices had crashed and companies could be bought for a steal.

Before you can successfully model a person’s investment strategy, you must first model their beliefs. It is a person’s beliefs about investing that shape their decisions, their actions and their results. So, if you want to be able to consistently beat the market and make higher returns than anyone else, shouldn’t you begin by adopting the beliefs of the world’s greatest investor?

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Like a lot of investors in various asset markets, you may be taking a good trading risk management strategy for granted. This may be because of the common idea that handling market assets is all a game of odds. There may be some truth to this concept but it is not entirely correct to say that you are powerless.

Believing that nothing is within your sphere of control is the fastest route to considerable losses. It’s as if you are putting yourself at the mercy of the unforeseen forces of fate. If this is an accurate description of market investing, then you are just as likely to make profits on a gambling table.

The truth is that there are two things that you can control. These are your trading psychology and your market risk management rules. Both of these factors are part of a greater whole that comprises your trading plan. Managing risks however, often plays a more important part because it can influence your thoughts and feelings in such a way as to allow you to trade more logically and make profits possible.

The term isn’t too difficult to understand. It simply involves, setting the rules that will determine the kinds of losses that you are willing to sustain. This means, you are given the power to indicate your loss limits so you never have to endure too many falls or too big a loss.

Some people have a slightly incorrect notion of a risk management strategy. They may think that any approach that limits the number of losses is an ideal one. They forget however that the size of each loss can have a significant impact on how successful a specific tactic is.

Take for instance a single loss that can instantly cut down $1000 from your account. Compare this to five losses that amount to no more than a $100 each. In these scenarios, it is clear that your single loss can be more devastating than you string of small losses. A good method therefore considers more than just the number of failures that you sustain.

A comprehensive approach to investment risk management looks at several different factors. You need to look into how much you are willing to set aside as capital for trading. You also need to figure out the number of units you will purchase on each trade. Once these are set, you have to determine the maximum amount that you are willing to lose on any single trade and the predefined loss figures that will give you the sign to exit specific trades.

Proper control of your risks is not as straightforward as you would imagine. Creating a solid plan can take some time to think over and to establish. It is however, a step that you can’t afford to skip. Because it is one of the very few factors that you can completely get a grip on in trading, you should take full advantage of it. Start incorporating a risk management strategy into your trading plan. Doing so can only mean greater gains for you.

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You should take a successful trader’s word for it when he tells you that it pays to learn how to trade. It is true that this profession has its risks and can lead to losses just as much as it can lead to profits. Nevertheless, the results of unraveling the inner workings of market investing can be very rewarding.

Genuine Freedom

The first obvious advantage of becoming a professional trader is the potential financial profits that you can gain. As most people already know, buying and selling assets is one of the most lucrative businesses known to man. Although different assets have different leverage potentials, it is a fact that even those that are not leveraged can lead to significantly large gains. You should primarily learn about trading because of the opportunity to gain the kind of financial freedom that you and your children can enjoy for years to come.

On top of improving your finances, market investments can also change the way you live your life. They can give you freedom from the rigid structures of office work and politics. Never again will you have to deal with limiting work obligations and difficult co-workers.

A reputable course can also teach you to be more specific. On top of your general motivation to earn more, you will also be taught the importance of creating specific objectives that can push you close to success and how to make sure you achieve them.

Control of Your Path

Once you become convinced of the advantages of learning to trade, a good educational course can also give you the power to determine your path. It can be very convenient for you to simply entrust your money to an account manager or pay for the advice of a full service stock broker.

Experts can make up for your technical limitations. Managed account experts can fully take charge of investing your cash while full assistance brokers can give you advice if you prefer to trade on your own but don’t know how. Obviously though, expert help can sometimes leave you in the dark when it comes to determining exactly what should happen to your money. Add to this the disadvantage of having to listen to contradictory pieces of advice. Learn how to trade so you can call the shots yourself.

Logical Approach

There is a common misconception that putting your money on any of the different markets is similar to putting your fate on the hands of chance. This is not entirely correct. There are factors that you can manage successfully to make sure you have a better shot at making solid profits. A learning guide can teach you how to master your emotions and thoughts so you can approach trading more logically. Moreover, expert instruction can give you the right skills to identify your risk levels and rationally abide by the rules that you set to avoid losses that go beyond the risk criteria that you determine.

There is every reason to learn how to trade. This is the one key that can truly give you the life that you want and deserve. Fortunately, you can now educate yourself without having to enroll in a full school course. Expertly made short courses are all within reach of eager and interested investors.

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