Making Profits From Stock, Forex and Bond Market Trading Cycles
Stock-Markets / Cycles Analysis May 11, 2009 - 07:27 AM GMTBy: Uncommon_Wisdom
Larry Edelson writes: These days, it seems like many investors have forgotten that it’s ok to try and make some money. Almost everyone I know is playing it ultra safe instead. But with interest rates so low, you’re making less than 1 percent a year on your savings!
Don’t get me wrong. Even if I made nothing on my savings, I’d still save. Spending within your means and saving for a rainy day is an essential part of any financial plan, even if your savings isn’t making you a dime.
But if you have some speculative capital to put to work, today’s markets are ripe with some of the best trading opportunities I’ve seen in my 31 years of speculating in the markets.
So how about making some money?
Yes, the moves in the markets are wild. But they are BIG. They are frequent. And they are coming fast and furious, giving you many excellent opportunities and markets to profit from.
Case in point: Less than two months ago, in my March 16 column, I told you that “Major market moves are about to unfold” and that “There’s oodles of money to be made over the next few months.”
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| In the past two months, the Dow has seen the most powerful rally in 76 years! |
For the Dow Jones Industrial Average, which was trading around 7,200 at the time, I forecast “a powerful, multi-month rally that could eventually see the Dow rise to over 10,000, a gain of almost 50 percent from current levels.”
Similar gains, I said, were in store for the S&P 500 … the Nasdaq … Hong Kong’s Hang Seng Index … the Shanghai Composite … Japan’s Nikkei Index … and for Europe’s and Britain’s markets.
I suggested ways to take advantage of what I saw coming. Namely, the Dow Jones Diamonds (DIA) … the iShares FTSE/Xinhua China 25 (FXI) … and the Energy Select Sector SPDR (XLE).
Since then, we’ve seen the biggest, most powerful rally in the Dow in 76 years — since its Great Depression low in 1933. Any readers who acted on my suggestions are now sitting on …
Gains of up to 17 percent on the Dow Jones Diamonds (DIA)
29 percent on the iShares FTSE/Xinhua China 25 (FXI)
20 percent on the Energy Select Sector SPDR (XLE)
Not bad for just under two months!
What’s more, during that same time period, for VIP subscribers to one of my premium trading publications, I recommended positions that went on to bag them gains of 61.9 percent … 143.4 percent … 191.6 percent … and 268.8 percent — in less than one month!
You’re probably asking yourself, “How did Larry time those moves and nail such big profits?” And, “What profits does he see coming next?”
I’ll get to what I see ahead in a few minutes. First, I want to give you some “uncommon” rules you should follow any time you invest or trade in the markets …
What I call …
My Five Cardinal Trading Rules
Rule#1. Maintain a flexible mind and outlook. Understand this: The markets have a mind of their own, so if you want to fully understand them, it’s up to yourself to be flexible!
That means not having any preconceived notions about what the markets can or can’t do, and further, recognizing that in the short- and even intermediate-term, news has almost nothing to do with market trends.
That’s why I never — I repeat, NEVER — listen to the news when I’m trading. Nor does any successful trader I know.
It’s also why I am able to stay flexible in my trading, even if it means going long in the midst of the worst bear market in decades, or, short in the biggest of bull moves.
Rule #2. Be willing to be wrong. This is a critically important rule. Because if your focus is on being right, not only will you waste a lot of energy, it will subconsciously make you inflexible bringing about the very outcome that you were worried about to begin with — being wrong!
Being right or wrong has nothing to do with short-term trading and everything to do with your ego.
But ego has no place in the markets. Stick your ego in the markets, and they will devour it faster than you can blink.
So if being right has very little to do with making money in the markets, then what does?
Rule #3. Risk small amounts of money and always control your risk. For instance, suppose you have $100,000 in a trading account. And let’s say you decide to risk 20 percent on each trade. If you’re wrong five times in a row, you’re out of capital.
Even if you’re wrong just three times in a row, you’ll wipe out 60 percent of your account on just three trades. By then, you’ll be so psychologically wounded that you’re bound to make a multitude of mistakes with the remaining 40 percent.
But if you risk, say, just 2 percent per trade, you would have to be wrong 50 consecutive times to get wiped out.
See the difference? See how the odds shift in your favor when you strictly control risk?
You’re going to be wrong — a lot. Period. But if you limit your risk to very small amounts, while letting the profits run when you are right — you can make a lot of money even when you are wrong more often than you are right.
Consider the following example: You have 10 losing trades in a row, where you lose 2 percent of your original capital on each trade. So you’ve lost 20 percent. You’re down $20,000 big ones.
Then on the 11th trade, you make 30 percent, or $24,000. And on the 12th trade, you make another $24,000.
You’re $48,000 in gains puts you ahead $28,000. You’re now up 28 percent based on your original capital, yet you’ve only been right on two out of 12 trades!
Another related and key element …
Rule #4. Focus on the present, not the past or the future. Great athletes know this. Basketball players don’t worry about the next basket that needs to be made, tennis players, the next serve or the next point.
They do, of course, prepare and train. But when they are playing their games — they focus on the present, refusing to let the past or the future cause them anxiety. Why? Because anxiety causes one to lose focus.
Last, but not least …
Rule #5. Have your favorite tools at your disposal. For an athlete, it’s his or her favorite shoes, tennis racket, set of golf clubs.
For a trader, it’s his or her favorite analyst, technical trading system or indicators.
We all have our set of necessary and favorite tools to do our jobs, no matter what we do. For investing and trading, it’s no different. You must find the tools that work for you. You must also keep your tools in good working order — updating and refurbishing them as necessary.
I spend a lot of time on my tool bag, which ranges from standard technical indicators like moving averages, oscillators, charting and the like, to most importantly, my detailed historical studies on short-term and long-term investment and trading cycles.
Which brings me to the next question …
“What profits do I see coming next?”
I see lots more profits! Let’s start with the stock markets. Despite the still sinking economy, stocks should head higher, with the Dow on track to reach the 9,500 to 10,000 level.
You can see it via my cycle chart of the S&P 500 Index.
Notice how the cycles point to a continued rally into June 26, then a pullback, followed by another run higher into August 28.
Mind you, this chart does not give you the price levels. Only the rhythms — or cycling action — between buying and selling pressures in the market.
But along with the other tools I use, especially the proprietary reversal system that I developed in the early 1980s, I’m confident we’re going to see higher prices in the Dow and S&P 500.
Next, my cycle chart on the dollar: Notice how the dollar points lower into May 29, followed by a rally.
But don’t expect that rally to be anything more than a bounce. Reason: The dollar’s long-term cycle picture (not shown) is trending sharply lower into August 2011!
Next, the bond market — U.S. long-term Treasury notes and bonds.
Recall all my warnings about steering clear of them? Notice how the selling pressure points down hard into August 21, followed by a small relief rally, and then down again into early December and early February of next year.
That’s an ugly outlook for the bond market. No surprise. Between now and September, the U.S. Treasury is set to borrow an estimated $876 billion.
How can you take advantage of these moves?
First, there are the previously recommended plays: The Dow Jones Diamonds (DIA) … the iShares FTSE/Xinhua China 25 (FXI), to take advantage of a related rally in China … and the Energy Select Sector SPDR (XLE), betting on a rebound in energy prices that should accompany a stock market rally.
For a play on the declining dollar, I would consider the PowerShares DB U.S. Dollar Bearish Fund (UDN), an exchange-traded fund that rises in value when the dollar declines.
And for the bond market, consider the ProSharesUltraShort 20+ Year Treasury (TBT), an exchange-traded fund that rises in value as the prices of bonds fall.
Best wishes,
Larry
P.S. For more of my insights and analysis, all of my recommendations, and flash alerts consider a subscription to Real Wealth Report. At just $99 a year, it’s the best investment you’ll make. I guarantee it.
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