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Category: Trading Rules

Internal control is one of the major determinants of the long-term trading success. The following article is based on the book “Trade Your Way to Financial Freedom” by Van Tharp...Internal control is one of the major determinants of the long-term trading success. The following article is based on the book “Trade Your Way to Financial Freedom” by Van Tharp.

 

The Importance of Internal Control

According to Van Tharp, internal control is about psychology, money management, and system development:

  • Psychology {60% weight)
  • Position sizing {30% weight)
  • System development {10% weight)

In many ways, trading success becomes the product of internal control. However, most traders don’t realize the importance of having it.

  • Internal control is necessary for achieving general portfolio risk control
  • Traders who dedicate themselves to developing internal control are the ones who will ultimately succeed
  • Most successful speculators have low success rates (35-50%), however, they manage to be profitable as the size of their profitable trades far exceeds the size of their losses. This requires tremendous internal control
  • Most successful fundamental investors are contrarians and wait patiently for the right opportunity before taking a market position. This also requires internal control

Internal Control and the Processing of Vast Amounts of Information

One major obstacle that traders face every day is the vast amount of information they are exposed to. According to research, human beings can only receive 1-2% of the visual information available at any one time. Consequently, humans are forced to develop several shortcuts. Traders lacking internal control are unable to control these shortcuts, and consequently, they lose key information and can hardly make any money at all.

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Category: Trading Rules

Martin Zweig (1942-2013) was a famous American stock market analyst, adviser, and investor...Martin Zweig (1942-2013) was a famous American stock market analyst, adviser, and investor. His investing methodology was based on a system that combines macroeconomics, fundamental analysis, and market timing. Apart from his popular newsletter (The Zweig Forecast), he has published two books.

  • “Winning on Wall Street” in 1986
  • “Winning With New IRAs” in 1987

The following advice is included in his first book.

 

General Advice from Martin Zweig

 

  • The major direction of the market is dominated by monetary considerations, primarily FED policy, and the movement of interest rates
  • Once established, the trend typically lasts from one to three years.
  • Combining to produce a monetary "climate" is loan demand in the economy, liquidity in the banking system, inflation or deflation, and, of course, policy decisions by the Federal Reserve
  • To succeed in the market you must have discipline, flexibility, add patience. You have to wait for the tape to give its message before you buy or sell.

 

Follow the Trend

 

  • To appreciate the role of momentum, think about a rocket ship being launched to the moon. If it takes off with a lot of thrust, it has a chance of making it out of the earth's atmosphere. If it doesn't, it will turn around and flop back.
  • I find that buying on strength gives you an edge. You must pay a premium, but you increase the probability of being right.
  • After years of testing various market averages, advance/decline ratios, volume figures, and other indicators, I have found that strength does indeed tend to lead to greater strength. Every single bull market that I've seen has started with a tremendous rally. The rally doesn't necessarily come the first day after the bear market ends.

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Category: Trade Resources

 

A currency exchange rate incorporates interest rate policies and macroeconomic data such as economic growth, inflation, and unemployment.

 

Basic Fundamental Conditions in the Foreign Exchange Market

 

Majorly, an exchange rate reflects a combination of the following fundamental conditions:

(i) growth, inflation, and unemployment

(ii) monetary policies, and especially the interest rate policy of the central bank

(iii) fiscal policies & government spending

(iv) political stability (political risk)

(v) legislation regarding capital taxation & the openness of the domestic economy

 

New macroeconomic conditions can create trading opportunities in the Foreign Exchange market

The Foreign Exchange market is so efficient that the impact of news is instantly incorporated into all exchange rates. However, when there is a major shift in the general macro circle, there can be tremendous opportunities for Forex traders. A macroeconomic shift is behind all key Forex trend reversals.

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The Forex market operates as a decentralized network where the world's major currencies can be traded one against another in a 24-hour basis, from Monday to Friday...

Introduction to the Foreign Exchange Market

With daily volumes of 4 trillion USD, the Foreign Exchange or Forex is the largest financial Market in the world. The Forex market operates as a decentralized network where the world's major currencies can be traded one against another, in a 24-hour basis, from Monday to Friday.

 

The Short History of the Modern Currency Market

 

After the end of World War II, the Bretton Woods Agreement (1944) became the basis of a new global monetary system. According to that agreement, the exchange value of a country’s currency was fixed and equal to a particular quantity of gold. Since the Bretton Woods Agreement ended, during the 70s, the current Floating Currency System has arisen. According to the modern Floating System, the value of every currency rises or falls according to the dynamics of demand and supply.

  • In 1971, the CME (Chicago Mercantile Exchange) was the first exchange to offer currency trading within the International Monetary Market (IMM)
  • After 1990, the revolution in Informational Technology provided the framework for a new fully-computerized Forex Market, the Online Forex Market

 

Today there are many hundreds of Online Brokers offering access to the Foreign Exchange market. These brokerage firms are divided into three main categories:

(1) ECN Brokers (Non-Dealing-Desk)

(2) STP Brokers (Non-Dealing-Desk)

(3) Market Makers (Dealing-Desk)

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Category: Trading Rules

Born in 1960, Nassim Nicholas Taleb is a Lebanese-American mathematical statistician, author, risk analyst, and options trader. His work focuses on problems of uncertainty, randomness, and probability. He created the risk-hedging technique 'Tail risk hedging' or 'Black swan protection' that aggregates portfolio exposure in order to hedge against extreme market volatility. According to the Sunday Times, his 2007 book 'The Black Swan' is one of the twelve most influential books since World War II.

 

NASSIM NICHOLAS TALEB TRADING TIPS

 

■ Knowledge is in dealing with what we do not know

Knowledge and discovery are not so much in dealing with what we know, as in dealing with what we do not know.

  • We are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see

 

■ What characterizes real speculators like Soros from the rest

What characterizes real speculators like Soros from the rest is that their activities are devoid of path dependence. They are totally free from their past actions. Every day is a clean slate.

  • My lesson from Soros is to start every meeting at my trading boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone but happen to be endowed with the rare privilege of knowing it.
  • George Soros, when making a financial bet, keeps looking for instances that would prove his initial theory wrong.

 

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Linda Bradford RaschkeBorn 1959, Linda Bradford Raschke is an American trader, operating mostly as a futures trader. Linda started her trading career in 1981 making markets in options. Later, she became a registered CTA (Commodity Trading Advisor) and founded LBR Asset Management.

 

LINDA BRADFORD RASCHKE TRADING TIPS

 

■ The ability to perceive patterns in the market

I believe my most important skill is the ability to perceive patterns in the market. I think this aptitude for pattern recognition is probably related to my heavy involvement with music.

 

■ Be contrarian to the panic

Some of the best trades come when everyone gets very panicky. The crowd can often act very stupidly in the markets. You can picture price fluctuations around an equilibrium level as a rubber band being stretched... if it gets pulled too far, eventually it will snap back. As a short-term trader, I try to wait until the rubber band is stretched to its extreme point.

 

■ The accuracy of a prediction drops off dramatically, the more distant the forecast time

I believe that only short-term price swings can be predicted with any precision. The accuracy of a prediction drops off dramatically, the more distant the forecast time. I'm a strong believer in chaos theory.