Why I'm Still Investing in Stocks

Most reasonable minds agree that we are currently in the midst of the biggest economic decline of our generation (and perhaps the one before, depending on how old you are at the moment). Things are bleak. Unemployment is high and going up. You can't open a paper these days without being met by an article about a company that's cutting jobs. Not just mom and pop companies, the big ones too: IBM, GE, Microsoft, pick a bank. Good jobs are getting scarce. The Dow is playing with 8000 and may drop by another 25% (seriously, it could happen). Foreclosures are at record highs and not just the sub-primes, prime jumbo mortgages are running at about a 7% default rate (according to Tuesday's WSJ).

What can be done? Who knows? Politicians will spend our money, people will get unemployment and go on welfare, we will scrimp and save and then, slowly, when no one is watching things will begin to turn around, little by little, and life will, over the course of a year or two, return to normal. We will all forget the bad times and people (who, as a rule, are stupid), will begin to act in the same ways they did before, over extending themselves, using too much credit, buying houses they can't afford. To put it simply, we will return to being Americans.

But, in the mean time, I'm investing in stocks . . . a lot. Prices are low. They may go lower, but right now they are low. I see one of two things happening in our country. One possibility is that history will repeat itself, and after a period of decline, we will pull out of the darkness and our economy will boom. This recovery is usually led by the markets. Stocks begin to rise before we all acknowledge that the worst is over. This is how it has happened in the past. The other alternative is that the markets go to zero and all meaningful productivity stops. We lose everything. We become Haiti. Everyone is broke and the country is irreparably broken. If this happens, so savings plan (whether in your bank or under your mattress) will help you. The dollar will be worthless because there will be no country to back it up. This second option, while possible, is very unlikely (in my opinion) and something that, unless you are going to build a compound and be able to raise your own food, is not worth preparing for. So, I'm buying stocks of good companies that are being drug down by the market in recession, and preparing for the turn around that will come and make me much, much, much better off.

What am I buying? Another post perhaps.

Happy Trading!

Trade Result CHF/JPY +41

This trade broke below the channel on the 1900 EST bar yesterday and I entered at 77.73. It wandered for some time then dropped hitting 77.05 during the 0300 EST bar and I moved my stop loss to break even. It came back up and dropped again, then rose and dropped and rose. I was getting seasick watching the movement so when it hit +20 pips during the 0500 EST bar I put a 20 pip trailer on it and just let it go. It fell pretty good during the 0600 and 0700 EST bars then popped back up. I got stopped out at 77.32 for a +41 pip trade. Can't be too sad about that! (the extra pip was because the price moved while I was setting my trailing stop so my break even was actually +1). That wraps up January. Not a bad month +588. Let's see if February is as profitable.

Happy Trading!

Trade Result EUR/JPY

This trade opened not long after I posted the trade idea. It opened at 118.21 at the end of the 2100 EST bar on 1/28. It did pretty well overnight gaining about 90 pips at one point. At +50 I moved to break even then saved 20 pips when it moved lower. I got stopped out just after 0700 when the price moved up sharply. So this one, which had a lot more potential, made us +20 pips. The CHF/JPY flirted with opening, but did not so I'm still watching that one.

Happy Trading!

Trade Ideas - CHF/JPY and EUR/JPY

Greetings Traders! the Swiss/Yen pair has been trading in a defined range of a bit less than 100 pips for the last couple of days and I look for it to break out soon. If it closes above 78.75 on the hour chart it is a buy for me. If it closes below 77.78, it is a sell. I'll put my stop on the other side of the channel and move to break even if I get 50 pips. I may put a trailer on if it starts looking dodgy in order to lock in some profit. If it breaks up I'm looking at 80.50. If it breaks down, I'm looking at 75.50.

Another one of the Yen pairs I like is the EUR/JPY. Looking at the hour chart I've got a trend line looking pretty strong that has been moving steadily upward since last week. If it breaks below the trend line on the hour chart, probably at about 118 or a bit higher, its a sell for me. Stop would go at about 119.80. I have as a profit target 113.00, but you know how I am about locking in some profit. We'll see how it goes.

Happy Trading!

USD/CHF Trade Result

Greetings All! I am back from vacation (last night very late) and just wanted to update the USD/CHF trade I had open when I left. If you'll refer to the last post (Jan. 16) you'll see that the trade was not looking good when I departed for vacation. It did turn around however (I told you that hope springs eternal!), and it moved up to 1.1344 on the morning of the 19th and my stop moved to break even. I was not able to watch the market while away, so I set my profit target at 1.350 (where I saw some resistance) and took off. It hit that target for a profit of +79 pips. If I had been here I would likely have put a 50 pip trailer on it and let it go and that would have take me out at 1.1421 for a +150 pip gain (71 pips better than my take profit target). As it was, the pair ran all the way up to break 1.1700. Quite a run, even for a pair that was ready to break out. I'll be satisfied with my +79 and be looking for more this coming week.

Happy Trading!

Trade Update EUR/JPY and USD/CHF

This trade opened at the end of the1400 EST bar at 118.02. It moved up pretty well and we moved to break even when the pair hit 118.52 a bit after 1900 EST. It was moving pretty well so I put a 50 pip trailing stop on to see what it would do thinking that if I got up today and it was still open, I might tighten it up. It continued to move up and, while I was asleep, the stop moved up to 119.02. The pair got has high as 119.90, but just after the open of the European session it moved down to take me out at 119.02. Still, a net +100 pips. Can't be too sad about that.

On the USD/CHF trade, however, is not going as well. The trade opened not long after I put the post up at 1.1271. It moved up a bit but fell after the ECB rate cut and is flirting with my stop at 1.1099. Hope springs eternal, but this one is not looking good. I'll update it later.

I'll be on vacation until with week of January 25 so it is unlikely there will be any new posts until after that. Happy Trading!

Trade Ideas EUR/JPY and USD/CHF

This pair just broke through the bottom of a long converging triangle on the daily chart that started back on October 25. It has been trading in a fairly tight range (for this pair) on the hour chart since about 0800 EST yesterday (24 bars). The pair has not traded this low for several years (late 2002) and it could go lower, but it could get pulled up toward its 800 day moving average as well so we need to be ready to move either way. I'll sell if it closes below 116.43 on the 60 minute chart, and buy if it closes above 117.93. My stop will be the other side of the channel for each trade. I'll move to break even if it gets to +50 pips and start saving pips thereafter (I'm thinking of a 10 pip trailer after I get to +50, but if it starts to look wonky, I could tighten it). I'll keep you posted.

Also, the USD/CHF has been in a channel for a couple of days. I'll buy if it closes above 1.1257 on the 60 minute chart and sell if it closes below 1.1100. Same stops and profit plan as with the EUR/JPY.

Happy Trading!

EUR/GBP Trade Result

Not much happened after the last post. The pair went sideways for a bit then fell to my stop. Net was +40.

The Finding Nemo Head Fake - Update on EUR/GBP Trade

If you have kids (or were a kid when it came out), I'm sure you've seen the Pixar classic "Finding Nemo". In that film, Marlin, Nemo's father, is teaching Nemo how you leave the anemone in which they live. First you go out and look, then you come back in, then out, then in, then out, then in, and if you want to do it a fourth time that's ok too (apologies to to Pixar for my paraphrasing). The currency markets often do the same thing and the current EUR/GBP trade is a perfect example (another example is the AUD/USD trade last week). When a pair is about to break out and make a move, it often practices a few times before it gets it right. Sometimes it even gives you a head fake in the wrong direction. If you want to trade break outs successfully, you've got to be prepared to get misled a time or two in order to get the benefit of the big move. For example, in the EUR/GBP trade I am currently in (see yesterday's Trade Idea), the pair gave us a head fake lower before busting out higher. Now I did enter on the lower break out and as a consequence lost 33 pips on that trade. However, when it broke north I got in again (when it broke the upper channel boundary) and that trade is currently up about 75 pips and is still going (I've locked in 40 pips so I'm going to be at least net positive for this idea). The point is you've got to be flexible when trading the Forex and be ready to admit that you were juked so you can get on board when the pair moves. In this case (and the last one) that flexibility turned what would have been a losing trade into a winner.

Happy Trading!

Trade Idea EUR/GBP

There are several currency pairs trading in a tight range at the moment. My favorite at the moment is the EUR/GBP. If it breaks and closes above 0.9033 on the 15 minute chart, that's a buy for me. On the buy side, I'll set my stop a bit below the bottom of the channel 0.9005 and look to move to break even if it gets to 0.9062 (where I see the first bit of resistance setting up). After that I look for 0.9170 for my first profit target. I'll probably start saving pips if it gets +50 though.

On the sell side, I'll sell if it breaks and closes below 0.9009 on the 15 minute chart. My stop will be 0.9040 (a bit above the upper channel line) and look to move to break even if it gets to 0.8975. My first profit target is 0.8955, where I'll start saving some pips. The pair could bread down as far as 0.8870. As you know from previous posts, I'm a strong advocate of putting pips in the bank, so I'll start doing some serious locking up if it moves strongly down.

Happy Trading!

How to Get Rich on 5 Pips a Week

While I grant you that the title to this post seems a bit on the "sell you the Brooklyn Bridge" side of things, as I'm not selling it (and don't plan to), it is really more a think piece, a mental exercise, if you will. I'm not going to give you a specific strategy, what I'm going to to is show you, through a simple mathematical exercise, how you can easily get rich trading the Forex if you refuse to succumb to greed. Ok, here it is.

The power of the Forex is leverage. It can kill you or make you rich. The beauty of it is that you are completely in charge of which one of those it will be. If you've ever traded the Forex, you know what I mean. You've seen the advertisements touting 400-1 leverage (actually 100-1 is much more common). 100-1 leverage means that if you have an account balance of $10,000 you can trade up to 100 times the value of that account (or $1 million, or 10 standard lots). If you are using 10-1 leverage you would trade no more than 1 standard lot.

Ok, here it is. Do this math: If you made five (yes 5) pips per week, what is your return using 10-1 leverage? If you've ever traded the Forex, you know that 5 pips a week is not an intimidating number. Almost every trade I take, at one point or another, is up 5 pips (even those which eventually lose). I'm sure you are thinking 5 pips, is he kidding? That's not going to get me anywhere. Remember, I'm not talking about 5 pips a day, or a trade. 5 pips per week is my number. The math says that if you have a $10,000 account and are trading 1 standard lot, 5 pips a week will equal $50/week. If you trade 50 weeks a year that means you'll make $2,500 over the course of the year. That's a 25% annual return on your account. In the investing world, a 25% return over the long haul would make you a star (how many famous investors have averaged 25% over the long term? None). That level of return on a $10,000 account would turn the account into $1 million in 6-7 years. You can expand the math to 10 pips a week,(50% return), and you can see that the money gets ridiculous in very short order. If you trade Mini lots you can take the leverage even further. If you trade 1 mini lot for each $1,000 in your account (10 mini lots equals 1 standard lot), and your compounding is even quicker (because you are increasing the amount of currency traded every time you increase your account by $1,000 instead of adding to your trade only when you've earned enough to add another standard lot).

Why don't people trade like this? Well, some do. Traders who are looking to make money and not for the high that trading gives you, trade like this. Many traders set pip goals and when they reach them, they stop trading. However, most go for the 100 pip home run trades each time. Those folks almost always blow up their account. The way to get rich trading the Forex, is by taking reasonable advantage of leverage and by taking small bites. When you are trading 10 or 20 standard lots, and the money begins rolling in, the wisdom of this kind of trading becomes apparent.

AUD/USD Trade Result

Wow! That was a strange trade. Here's what happened. The pair broke up out of the triangle on the 0800 EST bar. It went way up, then started falling back but at the end of the hour, it was still above the line so I was in. It continued its fall through the next bar and ultimately stopped me out with a 22 pip loss (the bottom of the triangle. The pair continued to fall through the bottom of the triangle and I was in again at 0.7193 (1000 EST). The pair fell down to 0.7143, +50 pips where I moved my stop to break even and waited for it to hit my first profit target of 0.7100. It did not. It retraced to my break even point and I was stopped out. The pair went back inside the triangle and then fell again. At 1200 EST I was back in at 0.7183. It again fell steadily past the +50 pip mark and about 1500 EST hit my first profit target of 0.7100. I moved my stop to protect 50 pips, set my limit for 0.7000 and left it to run. I went to bed last night with the pair trading about 0.7060 and when I got up this morning, found that it had hit the 0.7000 at 0245 EST or so. What a wild and crazy trade.

To recap, the first trade was a loss of -22 pips, the second was 0 pips, and the third was +183 pips. The lesson here is that when you trust your trading method you don't walk away from it just because it fails you once. Trading from descending triangles is a powerful method. The continued restricting of price is like a tiger crouching to pounce. You just don't know which way it is going to go. Don't give up if it goes against you once and don't be afraid to get back in if it starts moving again.

Happy Trading!

AUD/USD Trade Idea

It looks like the Aussie Dollar pair is trading in an ever tightening triangle. I've drawn support lines at the top and bottom of the triangle and will trade a breakout close either way. If it breaks down I look for first profit target of 0.7100 with an ultimate profit target of about 0.7000. If it breaks up, it is a bit more difficult. There is no real resistance until it gets to around 0.7800 so I'll probably move my stop to break even at +50 pips and then put a trailing stop on. If we get lucky she'll go all the way up to 0.7800, if not we don't have too much exposure. For the stops I'm using the opposite side of the triangle (but no less than 30 pips). I'll keep you posted.

Happy Trading!

End Of Year Commodities Summary

As I've said before, I trade a commodities futures account using a breakout system modeled on the Turtle Traders of 80's and 90's fame. Trading a break out system is very much an up and down existence. If you've not read Curtis Faith's or Michael Covel's books on the Turtle Traders, you should. They are fascinating reads (see the Amazon Carousel to the left). Anyway, my breakout system is fairly simple. I buy or sell on if one of the futures I follow hits a new high or low (over the last x number of days) and I exit the trade when the price of that issue hits a new low (over the last x-y days). The point is that I buy when prices show they are trending up, and I try to exit when prices indicate that the trend may be over. As a result, I do very well when prices trend either up or down and I really suck when prices move within a range. There are years when I've had 75% draw downs and year when my account has increased 5 fold. The thing about trading a breakout system is that you've got to be willing to endure the possibility of big draw downs if you want to make the big money when the markets are trending.

This year was no exception. The year started out with a bang and in the first quarter my account was up almost 400%. Then, for the next two quarters it was up and down (mostly down) and at the end of the third quarter I was down about 20%. Then the fourth quarter took off and I ended the year up 416%. This roller coaster, while a bit more extreme than in most years, is not atypical of a breakout system. Not everyone can stomach it. It took me years before I could live with it easily (ok, not easily, but live with it anyway) and in the end I had to create a, more or less, artificial mechanism in order to be able to psychologically survive the ups and downs. As I've said here before, I treat my commodities trading account as a stand alone trading account unconnected to any of my other investment. I view it more as an experiment and that helps me take the emotion out of my trading decisions. If I'm up a lot it is interesting to me from a statistical perspective. If I'm down, it is the same. I'm interested to see where I stand after 30 years or so of trading this way (I've got about 20 years left on that timeline). I trade a $100,000 account and bring it back to that level each year. If I'm up, like this year, I put my profit into a money market account. If I'm down, I take from that account what I need to bring the balance up to $100,000. Over the last 10 years, after taxes, I've put about a million dollars into the money market account. I don't use that money for anything other than this experiment. When I retire, I'll consider using whatever is left in that account, if anything, for something, fun but until then, the money does not exist other than for trading this system.

That is my method for keeping some psychological distance between me and the market. Everyone has their own way of surviving. This is mine. I hope it helps you to see how someone else does it.

Happy Trading!

USD/CAD Trade Closed

After my last post at 1800 EST, the pair moved down past 1.1885 (the point where I moved my stop to save 100 pips, then went north and clipped me out. So this ended +100 pips. After it moved up almost to the break even line again, it fell and is moving toward my 1.1820 goal (not that it matters to me, I'm out - but its still nice to be right!).

I'll take 100 pips on this one and see what comes next.

Happy Trading!

USD/CAD Trade Update

The trade opened at 1.2035. It fell like a stone to 1.1867 in the next hour. At +50 pips I moved the stop to break-even. I have since saved 50 pips so my stop is now at 1.1985 and I'm looking for the pair to get to 1.1820. If the pair reaches 1.1885 sometime after this post (1800 EST) I will save an additional 50 pips and move the stop to 1.1935 then hope for the best. When the worst thing that can happen is that you win 100 pips, life is not too bad.

More in the morning I'm sure.

Happy Trading!

New Trade Idea - USD/CAD

The Dollar Canadian pair is a volatile one. It tends to flow with the price of energy and metals (Canada's greatest source of wealth - other than its national pride and hockey prowess!). The pair has been trading in a slightly downward channel for the last few weeks and I expect it will break out at some point in the near future. I've drawn my "sell line" between 1.2075 (the low of the 1200 EST 1 hour bar on 12/24/08) and 1.2043 (the low of the 1500 EST 1 hour bar on 01/04/09). If the price closes below that bar on the 1 hour time frame I will sell. My profit target is 1.1820, but as is my way, I will move to break even at +50 pips and will lock some profit in if it keeps moving toward my target. On the long side, I've drawn my "buy line" between 1.2400 (the high of the 0400 EST 1 hour bar on 12/19/08) and 1.2342 (the high of the 1000 EST 1 hour bar on 12/31/08). Same basic idea, I'll buy if the 1 hour bar closes above this line. On the long side I have two profit targets. I'll sell half my position if the price gets to 1.2500 and the second half if it gets to 1.2600. As in the short side, I'll move to break even if I get to +50 pips and start locking in profit sometime thereafter. As for stop loss, I will get out if the price moves back and closes below the entry line at least 30 pips. I'll let you know how this works out.

Happy Trading!

USD/JPY Trade Closed

Wow, what a move. We got stopped out at 91.98 for an 80 pip gain, but after the pair fell 20 pips or so below my stop loss it rocketed up for another 140 pips and appears to still be moving up! Sometimes I think to myself "If I had only moved my stop to break even instead of locking in x amount of profit, or if I'd only locked in 50 pips not 100, I'd have been there for the big gain". But the truth of the matter is that that sort of thing works against you as often as it works in your favor. You may feel that a wider stop serves your trading style and, if your account can handle it, feel free to trade your personal style. Mine is a bit more conservative. I'd rather lock in gains or take profit on half of my trade and let the other half see what it can do. That works for me. To each his own, I guess.

Happy Trading!

Update on USD/JPY Trade

Ok. I give up. I should stop saying that I think a currency pair is going to break in a certain direction and just trade the breakouts as they come. As those of you who have been watching already know, the USD/JPY pair that I forecasted would fall, rose spectacularly toward the end of trading yesterday. It broke my buy line and I entered at 91.16. It closed above the 1.272 Fibonacci extension at the end of trading at 92.28. I'm going to leave a 30 pip trailing stop in and lock in 82 pips right now. I'll update when the trade closes.

Happy Trading!

ps. I still think the pair will fall, and I'll be ready (stop saying that - who are you talking to?)

Trade Result EUR/GBP

On the 19th of December I suggested a EUR/GBP long trade to take advantage of a deviation from the trend. I thought it might move back up and recapture some of what it had given back in profit taking from its big run up. I went long at 0.9305. I set the trade up to take profit on half my position at 0.9425 and the other half at 0.9600. The first half hit my profit target on Monday morning and the second target almost a week later. Total profit for the trade was +208 (I traded one half my normal position size on each leg so I added the two profits and divided by two). The pair continued to move up past my target and hit a high of 0.9805 (another 200 pips!). Perhaps I should have just moved my stop loss up and let it run. But, as one of my favorite traders, Rob Booker, often says, you should never feel bad about taking a profit.

On the USD/JPY idea I wrote about the other day, the pair is trading in a 100 pip range and I'll buy on the breakout either way. But I think it will fall (I've been wrong many times forecasting where prices will go, which is why I'm ready to jump either way). I've set my trade up to sell if the price closes below 0.8998 or buy if it closes above 0.9104 (both on the hour charts). In the last run up and retracement, the price has been respecting the .236 fib retracement level (at least 4 times). If it closes on the hour bar below that level (which is my entry point) I look for it to fall to the .382 and maybe the .500. I'll move my stop to breakeven or better if it hits the .382 and look for it to go to the .500. I'll keep you posted.

Happy New Year and Happy Trading!