Month: January 2013

By MoneyMorning.com.au

You’ve probably worked out by now that we’re bullish on this market.

We’ve had this view for over a year. Things didn’t look too good at first when we put our neck on the line.

But we stuck with it. We know it’s tough to time the market, but unlike the mainstream dinosaurs, we believe it’s crucial to be an active investor.

And because we believe it’s crucial to be active, we also believe you should look at ‘insuring’ your share portfolio after a strong rally.

With the main Aussie stock index up 15.5% since last August, it now makes sense to look at ‘stock insurance‘…

Before we go on, we’ll make one thing clear: we’re still banking on stocks going higher. And if you think talk is cheap, we’ll point out that we have more stocks on our recommended buy list than we’ve had in more than two years.

So as we say, we’re putting our neck and reputation on the line by going all-in with this stock market.

However, we’ve been in this game a long time. We’re not dumb enough to think that stocks will keep going up in a straight line. That never happens. Yesterday you saw the S&P/ASX 200 fall 18 points.

And when we see stories like this in the Age…

‘Economic spending levels are reaching similar proportions to those typically seen before major financial crises, prompting warnings that over-investment could lead to a significant correction.

‘And Australia, as a major commodities exporter, could be one of the most at risk, according to a new report from credit rating agency Standard & Poor’s.

‘S&P singled out China as the biggest risk factor…’

…we’ll admit we get a bit edgy.

That’s why when we see stocks rally hard and fast, we start looking around for ideas for you to protect the gains you’ve built in recent months.

We Do This and So Should You

The good news is you’ve got a few options. The first option is the obvious – sell your stocks.

Now, this could be famous last words, but we don’t advise that option. And it’s not a strategy we’re personally using.

Your second option is something we’ve banged on about for nearly two years. That is to allocate your wealth across different asset classes. For instance, a few dividend-paying shares, gold, silver, cash, term deposits, fixed interest, and small-cap growth stocks.

That’s our personal strategy, we’re more than happy with it, and we actively suggest you put a similar plan in place if you haven’t already done so.

The way it works for us is that once we buy an asset we rarely sell it. Rather than selling, what we tend to do is use current cash flow to change the weighting of assets in our investment portfolio. E.g. in recent months we haven’t added to our cash exposure; as the cash flows in it is quickly invested in stocks and gold.

There’s a third option. It’s to use what we call ‘stock insurance’. There are a few ways you can do this. One way is to use exchange traded options.

We won’t go into this in too much detail because once we start going into ‘calls’ and ‘puts’ we could be here all day. It’s complicated to learn, but once you get the hang of it, it can be an effective way to protect your wealth, grow your investments, and even provide a reliable income.

But we’ll leave options there for now.

How to Short Sell the Market Without Short Selling the Market

Another option with ‘stock insurance’ is to short sell stocks. That is, if you think the stock market is overpriced, you can short sell a stock (or the index), which means betting on prices falling. If you’re right and the share price falls, you stand to profit.

Like options, short selling has its own set of risks. And it’s not for everyone. But if you’re a serious investor and you want the chance to make money in any market condition, then you should at least look at adding short selling to your repertoire.

But there is one more option. It has the best elements of short selling (profiting from falling shares) without the need to short sell.

We’re talking about the Betashares Australian Equities Bear Hedge Fund [ASX: BEAR]. It’s an exchange traded fund (ETF) that trades on the Australian Securities Exchange. It allows you to buy and sell the ETF just as you would any other share.

The difference with this ETF is that it performs inversely to the broader market. If the stock market goes up the BEAR ETF goes down, and vice versa.

We can best show you by using this chart:

The BEAR ETF is the blue line. The S&P/ASX 200 is the pink line. You can see that as the stock market has taken off in recent months the BEAR ETF has fallen.

So if you want a way to protect some of your investment portfolio, the BEAR ETF is a pretty good way to hedge your portfolio, even if it’s just for a short time.

It means you don’t have to sell any of your share portfolio, which could trigger capital gains tax or cause you to miss out on dividends.

Of course, the BEAR ETF may not be a perfect hedge for you. For instance, if your shares fall more than the BEAR ETF rises. But even so, it’s something to think about.

Australian stocks are at a two-year high, and the index is only a couple of hundred points from a four-year high. So while we’re banking on stocks continuing to rise this year, it makes complete sense to start thinking about ways you can insure your share portfolio if the worst happens and the market hits another rough patch.

Cheers,
Kris

PS. If you want to keep track of the latest things we’re reading and brief commentary on events that happen through the day, check out our Google+ page here. Whenever we come across a story we think could interest you we post a link and a brief comment. Check it out, we think you’ll find it useful.

From the Port Phillip Publishing Library

Special Report: The Big Money Secret of Ironstone Mountain

Daily Reckoning: Economic News Just In: Ben Bernanke Linked to Global Warming

Money Morning: Here’s Why We’re Still Buying This Stock Market

Pursuit of Happiness: The Bad Joke That Saved Your Freedom of Speech

By MoneyMorning.com.au

Nobel Prize-winning economist and New York Times columnist Dr. Paul Krugman is at it again.

A favorite of the Keynesian crowd, he claimed earlier this week that fixing the [US] deficit is important but added that ‘doing it now would be disastrous’. He also observed that the 10-year U.S. debt situation isn’t really all that bad.

At least he’s consistent. I’ll give him that.

For five years now Dr. Krugman has argued that increasing U.S. government spending is vital to the US economy’s recovery. And for five years he’s been dead wrong.

Since this crisis began, the United States has spent trillions…more money than any nation in history. In the process, it’s gone from being the world’s biggest creditor to the biggest debtor of all time.

In fact, our national debt is now so high that people literally can’t count the zeros. So most have thrown up their hands in exasperation and given up trying.

Now, to be perfectly clear, I don’t believe Dr. Krugman is stupid. Far from it – you don’t win Nobel Prizes for being an idiot.

However, I do believe that he’s trapped in the past-an acolyte of sorts to failed economic policies and doctrine that dates to the 1930s.

Some people, like University of Chicago Finance Professor John H. Cochrane, are more pointed, noting that if Krugman were a scientist, he’d be akin to a ‘flat-earther’, an ‘AIDS-HIV disbeliever’ or somebody who believes the continents don’t actually move.

This makes him very dangerous in the scheme of things because Dr. Krugman’s solution is that ‘we’ just haven’t spent enough money…yet.

I don’t know how he can make that argument with a straight face.

Where Krugman Gets It Wrong

Here’s the thing. If Dr. Krugman’s ideas and his understanding of modern finance were accurate, the US economy would be screaming along at 6%-8% a year, and the debt we’ve accumulated already would have led to some sort of government-spending utopia.

That obviously hasn’t happened. Our nation hasn’t had a balanced budget for years, and doesn’t look set to come up with one any time soon.

Unemployment remains chronically high and we haven’t created a fraction of the jobs actually lost since this crisis began. Various studies suggest there are 15 million-20 million people who are underemployed.

Manufacturing has cratered and confidence is slipping. Our financial markets are still appallingly overleveraged and the risks associated with them are more concentrated than ever.

It’s no wonder, under the circumstances, that the economy recently slipped back a notch and that GDP contracted by 1% for the first time since Q2 2009, according to the government’s latest data.

Krugman has got to understand this, so there’s something else driving the man. But what?

I think what Krugman’s really hammering on is the implied belief that the government should take charge of all capital markets because private business is incapable of effectively investing for society’s good.

In other words, he’s dismissing the science of empirical economic data and proof for the fallacy of imperfect information and social engineering. At the same time, he’s completely ignoring the dangers of easy money.

In as much as he subscribes to Keynesian economics and its 1930s roots, he’s either forgetting or deliberately dismissing another view from the pages of history, that of NY Senator Elihu Root, who warned against the dangers of easy money in 1913, the year the Fed was created.

Root correctly observed 100 years ago that the ‘expansive’ policies of his time would ‘enlarge business with easy money’ but ultimately lead to a crash when ‘credit exceeds the legitimate demands of the country.’

And he pointed to the panics of 1837, 1857, 1873, 1893 and 1907 as examples. I can only imagine what he’d say today.

So Why Can’t Krugman Make the Same Jump?

I don’t know, but I find it absolutely galling that he cites treasury markets, low interest rates and Japan as evidence that he’s correct in his thinking.

Apparently he’s willing to overlook the fact that the only reason our treasury markets haven’t gone crazy is that Team Bernanke has them on life support with no plans to pull the proverbial plug. If anything, spending more money as Dr. Krugman advocates would accelerate the madness.

Bloomberg reports the latest round of bond buying will top $1.14 trillion by the end of 2014. There’s a reason why the global derivatives industry is now valued at as much as $1.5 quadrillion.

It’s because no amount of spending can compensate for the cumulative failure of decades of bad fiscal policy. The markets know this even if, evidently, policy makers don’t.

They also know that stimulus spending never works on anything other than a short-term basis. No nation in recorded history has ever bailed itself out by doing what our leaders are doing today.

Spending even more money now would be like giving an addict more drugs on the assumption that it will help him kick the habit later. The private markets have always been and will always be more effective ‘investors’ than central government planners.

As for low interest rates, bear out the presumption that more spending is okay, that notion too is badly flawed.

Stimulative spending depends on the government’s ability to convince people to involuntarily reallocate their capital from one bubble to another.

By keeping rates artificially low, the Fed is forcing money from bonds and cash into stocks which is why the markets have rallied. Don’t get me wrong, I like rallies just as much as everybody else does. It’s what happens ‘next’ that I have a problem with.

Spending more money perpetuates the illusion of wealth by fueling borrowing. Borrowing, particularly at the government level, in turn strips capital from private markets and further bloats the public sector.

Krugman has noted this isn’t bad for the dollar. No, it isn’t, but it’s not exactly great, either. The reality of the situation isn’t so much that Dr. Krugman’s policies are working, but rather our leaders don’t have the political willpower to make the right decisions.

Being wrong in consensus is easier than being right. That’s why it’s easier to put off difficult decisions even when doing so means higher consequences in the future.

But, back to the issue at hand. The dollar has survived the most inflationary assault in modern financial history relatively unscathed to date because there is no alternative currency on the planet.

The Euro is a great big question mark. The Swiss Franc isn’t liquid enough, and the Yen is an unmitigated disaster.

So far the Chinese haven’t let the Yuan take on the burden, knowing full well that they don’t want to play this game which, I think, is the ultimate irony considering how capitalist the world’s biggest communists have become.

As for his insistence that Japan is an example of why policies like his and yet more spending is the answer, I can’t imagine that Dr. Krugman truly believes that.

The Nikkei has fallen 71.5% from its peak, its domestic economy is in tatters and China recently brought that nation to its knees in a buyer’s strike that crippled already fragile exports without even trying.

Japan’s combined public, private and corporate debt is approaching 500% of GDP. To my way of thinking, Japan’s ‘success’ is hardly worth emulating.

Here’s How to Really Fix the Problems with the US Economy

Instead of spending more money on the assumption we’ll deal with the problems for having done so later, as Dr. Krugman advocates, what we need to do is cut spending radically.

Our government needs to get out of the way and free up the true capital needed for growth. We need to let dead financial institutions die, including, if necessary, parts of our nanny state itself.

At the same time, we need desperately to return to a strong, fixed-value dollar. From 1790 to 1970 we had one, and the U.S. economy grew at an average annual rate of 3.94% according to Louis Woodhill, who noted as much in Forbes last August.

That stands in stark contrast to the 2.81% average annual growth rate for the “fiat” period of 1970 to the present, when our dollar has been allowed to float freely against other currencies and the Fed has been able to print money at will.

Krugman, like other classic Keynesians, has argued for a weak dollar on the assumption that it helps exports and thereby strengthens the economy.

Here, too, the data suggests otherwise. Woodhill noted that dating back to 1950 when the Bureau of Economic Analysis began tracking such things, presidential terms that coincide with strong rising dollar periods reflect average real GDP growth of 3.21% a year.

Presidential terms when the dollar is stable produced average real GDP growth of 3.58% a year, while presidential terms when the dollar was falling chalked up a much lower 2.23% average real GDP growth.

And finally, Krugman has argued that the rising inequality of wealth and the irrationality of the markets are primary causal factors behind the mess we’re in. So, logically, he wants to spend more money as a means of equalizing both.

He should know better. Higher capital risks equal higher capital returns.

If the government seizes capital, which is effectively what it is doing by printing and diverting expenditures, it lowers both the return on investment and, not coincidentally, the incentive to invest in the first place.

This is why businesses are not spending money and the government cannot kick-start lending at the consumer level, no matter how hard it tries. People have been so badly scarred by the financial crisis that they don’t want more debt – even if it’s free.

The other flaw in Dr. Krugman’s argument is that cheap capital and government spending does not constitute effective investment. In fact, it creates ‘malinvestment’.

This is a term from the Austrian school of economics that refers to pricing distortions caused by unstable money that actually causes businesses to invest in the wrong assets at the wrong time.

The housing bubble is perhaps the best example in modern times of what I am talking about in this instance.

Fueled by an orgy of debt, unregulated derivatives and congressional leaders who determined that housing was a right not a privilege, billions in capital was diverted. For lack of a better term, it was ‘malinvested’ and the results should not have been surprising in the least.

Imagine what would have happened if that money had been appropriately invested in real manufacturing, with real products and real jobs?

The truth of the matter is that more spending would be tremendously counterproductive and our deficits are already a problem. The 10-year picture is not okay…it’s terrible. We crossed the point of marginal gain a long time ago.

Then again, there’s always the little green men.

As Dr. Krugman noted on CNN August 8, 2011, defense against space aliens via ditch digging and bulwark building would create a viable economic build-up that would end ‘this slump [in] 18 months’. If they never arrive, he posited, we’d still be better off economically for having prepared.

I’m not so sure.

Keith Fitz-Gerald
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

Why the News Could Get Worse for Apple Shareholders
25-01-2013 – Kris Sayce

How to Play the EU Referendum for Profit
24-01-2013 – Kris Sayce

Here’s Why I’m Proudly Bullish About China’s Economy
23-01-2013 – Dr. Alex Cowie

How to Find Stocks for Troubled Times: Keep Scalable Businesses in Mind
22-01-2013 – Nick Hubble

Why It’s Still Not time to Buy the Japanese Stock Market
21-01-2013 – Murray Dawes

GBPUSD’s rise from 1.5674 extends to as high as 1.5875. The pair is now facing 1.5900 key resistance, a break above this level will indicate that the downtrend from 1.6339 has completed, then another rise towards 1.6500 could be seen. However, as long as 1.5900 resistance holds, the rise from 1.5674 would possibly be consolidation of the downtrend, and another fall to 1.5500 to complete the downward movement is still possible.

Forex Signals

By www.CentralBankNews.info Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

By www.CentralBankNews.info
    Albania’s central bank cut its benchmark refinancing rate by 25 basis points to a historic low of 3.75 percent, saying the rate reduction should help ensure that inflation meet the bank’s target as inflationary pressures are low and have been declining in recent months.

    The Bank of Albania, which cut rates by 75 basis points in 2012, said economic activity this year is positive and similar to 2012 but growth is expected to remain below potential and demand-side inflationary pressures are expected to remain low.

    The central bank forecasts annual inflation this year between 0.8 and 3.8 percent compared with 2012’s average inflation rate of 2.0 percent, following December’s 2.4 percent inflation rate.

    The central bank targets inflation of 3 percent, plus/minus 1 percentage point. 

    Albania’s central bank governor, Ardian Fullani, said foreign demand had been the main driver of economic growth this year and data show this trend continuing in the fourth quarter. In the third quarter, 

Albania’s Gross Domestic Product rose by 2.4 percent from the second quarter for annual growth of 2.7 percent, up from 2.1 percent in the second quarter and the first quarter’s contraction of 0.2 percent.

    “On the other hand, domestic demand remains sluggish, due to the lack of fiscal stimulus and the performance of slow consumption and private investment,” Fullani said in a speech after the central bank’s council approved the semi-annual statement on January 30.

    www.CentralBankNews.info  

These 3 charts help you understand how moving averages work

By Elliott Wave International

Moving averages are a popular tool for technical traders because they can “smooth” price fluctuations in any chart. EWI Senior Analyst Jeffrey Kennedy gives a clear definition:

“A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down… one way to think of a moving average is that it’s an automated trend line.”

Moving averages are both easy to create and extraordinarily dynamic. You can choose which time frame to study as well as which data points to use (open, high, low, close or midpoint of a trading range).

Jeffrey Kennedy shares 3 of the most popular moving averages in this excerpt is from his 10-page eBook: How to Trade the Highest Probability Opportunities: Moving Averages. Learn how you can download the entire eBook here >>

Let’s begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.

For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).

The 13-period SMA is a widely used simple moving average that works equally well in commodities, currencies, and stocks. In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled:

Another popular moving average setting that many people work with is the 13- and the 26-period moving averages in tandem. The figure below shows a crossover system, using a 13-week and a 26-week simple moving average of the close on a 2004 stock chart of Johnson & Johnson. Obviously, the number 26 is two times 13:

During this four-year period, the range in this stock was a little over $20.00, which is not much price appreciation. This dual moving average system worked well in a relatively bad market by identifying a number of buyside and sellside trading opportunities.

 

How to Trade the Highest Probability Opportunities: Moving Averages Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free 10-page eBook. Learn step-by-step how moving averages can help you find high-probability trading opportunities. Improve your trading and investing with Moving Averages! Download Your Free eBook Now >>

By Warren Seah

Back testing and demo-ing are a key component for evaluating effective trading system. The theory is any strategy that work well in the past is likely to work well in the future. Conversely, any strategy that performed poorly is most unlikely to perform good results in the future.

Advantages for Performing Demo and Back-testing Evaluation

1. History repeats itself. Repeated patterns can be identified from the back-test.

2. Investors can be educated with key ratios like max draw-down so that they know what to expect when using the systems.

3. Increases investors’ confidence to rely on the systems during the draw-down period. Thus, investors know when to stick to the trading rules and when to discard the trading system.

4. Provides an estimate of the probability and magnitude of the potential trade profits and losses because the performance statistics can be reproduced by back-testing.

Limitations of Demo Testing and Back-testing

1. Spreads

Liquidity conditions during certain news hour may narrow the spreads. GMT day spread and night spread may differ due to liquidity conditions. All of this widening and narrowing of spreads may not be accurately accounted for in the bid and ask price.

Strategy that requires certain max spread conditions would not have perform as well in live trading compared to a back-test.

2. GMT OffSet

The server time may change at certain time of the year in UK and US due to summer and winter daylight saving hour. The price and history feeds may not correspond to the specified chart timing. This will mean that certain strategies that only trade at certain hours may get prices mismatch figures.

3. Brokers’ Manipulation

Certain brokers’ will offer close to ideal trading conditions in the back-test and demo test. This ideal conditions certainly do not happen when trading live. The idea doing this is to attract as many potential traders to use their services. You can find out more information on some of the popular forex forums online.

4. Trade Entry Method

Systems that use market order for entries may face difficulty in getting in at the right price you want in the live conditions. The fact is during live conditions, the market price will be very volatile and getting in at the right price manually will be a problem. There will be a difference in the entry prices between back-test or demo with live conditions.

Summary

Having to recognise the limitations of backtests and demo test, it will help us in understanding more about how the trading systems work and how to evaluate and analyse a system better. It does not mean that backtest results do not work, the fact is, it still works.

About the Author

Warren Seah

Warren examines commercial trading systems and has since started researching and analysing systems to uncover good systems which bring in consistent profits.

Click Here To Read More On Forex Robot EA

http://www.FxEAReview.com

By Danielle Franklin

Back-testing via your forex demo account is the way to check whether your trading strategy is successful or not. The general idea behind back-testing is to find an effective strategy that worked well in the past and is most likely to produce the same winning results now.

Back-Testing Advantages

1. Recognition of the patterns that tend to repeat itself within a certain course of time.

2. Deeper understanding of the trading system and more precise decision making during the draw-down period.

3. Estimation of the potential profits and losses based on historical performance data.

Back-Testing Drawbacks

1. Some strategies require a specific spread conditions, meaning that those strategies might not be as effective during live trading compared to demo.

2. Summer and winter time changes may cause the confusion and mismatch price and history figures for specific charts.

3. Trading live means dealing with volatile market prices. Strategies based on order for entries may not work very well in live trading, since the entry prices between demo and live account might differ.

How to Back-Test?

1. Download MetaTrader 4 platform and Expert Advisor from your forex broker.

2. Open MetaTrader 4 platform and click on VIEW.

3. Click on Stategy Tester – a new window will pop up.

4. Choose the Expert Advisor you wish to test.

5. Select the currency pairs (EUR/USD, USD/JPY etc).

6. The field “Model” is the accuracy options. Using every tick is advisable.

7. Check the date box and choose the period of testing – the beginning and the end date.

8. Visual mode will show a chart with the actual trades. The disadvantage of the visual mode option is the significant delay in the back-testing process, therefore you might consider giving it up.

9. Period drop down menu shows the time frame of the chart.

10. At Expert Properties you can choose the initial deposit.

11. At Expert Properties choose the Inputs options. You might want to start with default settings for now and change in needed with time.

12. You are all done – click on start button and see your back- testing in action.

About the Author

Danielle Franklin writes for ForexExplore where you can find more information on: Forex Brokers – Forex brokers reviews and rating, comprehensive forex tutorials and articles, latest forex news and forex blog.

By Warren Seah

Forex traders make use of partial close ea in the scaling out of their trade positions based on profit levels that had been fixed prior to the start of trading. This is how the ea work: Once the market trading price gets to a stipulated take profit level, the trader would collect his initial profit by exiting a proportion of the total contract. The trader can then proceed to move the stop loss to the entry price in order to ensure that no matter what happens to the market trend, a loss will not be incurred.

Partial close ea is very easy to manage since they are only concerned with taking out part of a contract while letting the remaining positions to ride the trend till it dies out. The ea ensures that the worst case scenario that could result is a no win and no loss situation whenever there is trend exhaustion and the stop loss level is hit at the breakeven level. This is termed Pip protection Mechanism.

Partial close ea is particularly good for day trading or short term trading. It is very easy to take up several contracts in such a setting; part of which could be taken off the market once profit has been realized as determined by the short term market behavior and market structure.

Longer term market behavior also makes for a balance. A trader can trade on the short term and also benefit from longer term trend riding as well as its accompanying profit. But there is also the danger of a trader exposing himself to too much risk by trading several contracts. Caution is advised in terms of practicing money management by not risking more than 2% per trade and not more than 5% per day or month. The efforts that professional traders put in the management of their equity is what keeps them going on in forex trading; without the management of equity, most of them would have retired from the market long time ago.

More advanced exit strategies will have partial close method incorporates with trailing stop strategies for the management of trades, and it also spells out the price level at which portions of a contract can be exited. In short, partial-close strategies serve as guide to a trader on how best to approach his trade for him to be successful.

It would be so much easier to have more winning trades, and to make more profit when the partial close method is used in exiting a trade. Partial close ea is also capable of helping traders leverage from the behavior of the market in the short term and the longer term. Prior specification of trade exit strategies helps to eliminate emotional indecisions that could ruin a trade. The proper use of the ea helps a trader in his quest to be successful in trading.

About the Author

Warren Seah

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