Investment Stratigies (Cont. 2)

Historically the market has increased after congress changed hands with such strength on a midterm election.

Allocation to different investment instruments:

Currencies: 5-10%
Commodities: 5-10%

How to handle investing with a small pot <5K

Use a mixture of Bull Call spreads to profit from an advancing market.
In addition Use either credit calender spreads OR credit Bull Put spreads.
Remember to design your trades to utilize the overall market direction.

Here's a look at how the Dow made a leap of more than 23 percent six times the past 25 years:

-- 1985. A third straight year of strong economic growth -- GDP grew 4.1 percent -- after a deep recession had ended in November 1982 fueled a 28 percent gain in the Dow. The inflation rate remained stable a fourth straight year, convincing many investors that the inflation monster of the late 1970s had been slain.

-- 1989. Mergers and acquisitions, including takeovers by corporate raiders, helped push the Dow up 27 percent. Kohlberg Kravis Roberts & Co.'s purchase of RJR Nabisco was the largest corporate deal the country had seen. In August, the Dow regained the level it had reached in August 1987, two months before that year's "Black Monday" crash.

-- 1995. The Dow jumped 33 percent as what would become the longest economic expansion in U.S. history powered through its fifth year. And more Americans were putting money into stocks through 401(k) accounts. The number of households owning stocks jumped to 41 percent, up from 37 percent in 1992 and 32 percent in 1989, according to the Federal Reserve.

-- 1996. The Dow rose another 26 percent as the economy continued strong. Stocks gained so much that Federal Reserve Chairman Alan Greenspan asked in a speech in December whether "irrational exuberance has unduly escalated asset values."

-- 1999. Strong corporate profits and excitement about the Internet pushed the Dow up 25 percent. Earnings per share for the companies in the S&P 500 index jumped 28 percent, the strongest growth since 1994.

-- 2003. The Dow rose 25 percent as the economy enjoyed its second year of recovery after the 2001 recession. The Federal Reserve cut short-term interest rates as low as 1 percent to encourage growth.

The two years the Dow rose 22.6 percent were 1986 and 1997. Each followed one of the strong years above as strong economic conditions continued.

Many analysts expect corporate profits will keep rising -- and stock prices with them -- but not at a rate that would send the Dow past 14,000 next year. Bank of America Merrill Lynch, for example, expects earnings per share for the big companies in the Standard & Poor's 500 index to rise 9 percent in 2011 and 6 percent in 2012. It sees the S&P rising 13 percent in 2011 from Friday's close.

"Nothing's impossible, but it's not real probable," says Bob Millen, a portfolio manager of the Jensen Portfolio mutual fund.

Even Huntington's Bateman, who says the Dow could reach a record in 2011, warns stocks may not stay that high for long. Larger government deficits, he says, could drive stock prices lower in 2012 or 2013.





Ultra Aggressive Allocation: 100% Stocks
If your goal is to achieve returns of 9% or more, you will allocate 100% of your portfolio to stocks. You must expect that at some point you will experience a single calendar quarter where your portfolio is down as much as -20%, and perhaps even an entire calendar year where your portfolio is down as much as -60%. That means for every $10,000 invested, the value would drop to $4,000. Over the course of many, many years, the down years (which occur about 28% of the time) will be offset by the positive years (which occur about 72% of the time).

Moderately Aggressive Allocation: 80% Stocks, 20% Bonds
If you want to target a long-term rate of return of 8% or more, you will allocate 80% of your portfolio to stocks and 20% to cash and bonds. You must expect that at some point you will experience a single calendar quarter where your portfolio is down as much as -20%, and perhaps even an entire calendar year where your portfolio is down as much as -40%. That means for every $10,000 invested, the value would drop to $6,000. You must rebalance this type of allocation about once a year.

Moderate Growth Allocation: 60% Stocks, 40% Bonds
If you want to target a long-term rate of return of 7% or more, you will allocate 60% of your portfolio to stocks and 40% to cash and bonds. You must expect that at some point you will experience a single calendar quarter and an entire calendar year where your portfolio is down as much as -20% in value. That means for every $10,000 invested, the value would drop to $8,000. You must rebalance this type of allocation about once a year.

Conservative Allocations: Less Than 50% in Stocks
If you are more concerned with capital preservation than achieving higher returns, then invest no more than 50% of your portfolio in stocks. Investors who want to avoid risk need to stick with safe investments.
[By Dana Anspach, About.com Guide]








Investors Waltz On, Eye Exits
by Mark Gongloff
Tuesday, February 22, 2011
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Fed Helps Markets, Economy Return to Precrisis Levels; End of Stimulus Feared

One by one, economic and market indicators have returned to levels that prevailed before the Lehman Brothers meltdown in 2008, effectively turning back the clock on some of the worst effects of the financial crisis.

The stock market has doubled from its crisis low. Economic growth and Wall Street pay are at record levels. The yield gap between junk bonds and Treasury debt is at its smallest since 2007. Merger activity is the busiest since 2008, including the recent proposed union of NYSE Euronext (NYSE: NYX - News) and Deutsche Börse AG (NYSE: DB1.DE - News). Hype over Internet companies is reaching fever pitch, with Facebook Inc. recently valued at $50 billion.

The return of these and other gauges to precrisis levels suggests that the economy, companies and financial markets are strong and ready to stand on their own.

Even as they remain heavily invested in the market, many investors are wary about what happens next. The recovery in the economy and stocks has been fueled to a large degree by unusually aggressive government support. As a result, investors are worried about the ultimate cost of ending the crisis, including what will happen when government support begins to wane in a few months.

[More from WSJ.com: G-20 Measures Lack of Progress]

"The recovery is real; there are very real reasons why there is growth," says Steven Romick, manager of FPA Crescent Fund for First Pacific Advisors, a Los Angeles asset-management firm. "There will also be very real ramifications for the manner in which that growth was achieved."

Much of the gains for the economy and financial markets have come courtesy of government stimulus, in particular the Federal Reserve's two quantitative-easing programs. The second of those programs, a $600 billion plan to buy U.S. government debt, ends in June.

It seems increasingly likely that the Fed will end the buying program as scheduled, but it isn't clear yet how financial markets will respond. For now, the Fed seems intent on completing the program, and investors may feel the need to make as much money as possible before it ends.

"Everybody understands that one day the game will end, and they all believe they can be the first one out the door," says Howard Simons, a strategist at Bianco Research in Chicago. "The day the Fed says OK, game over, everybody out of the pool, that'll be an ugly day."

Left in the wake of the crisis are high unemployment, a badly damaged housing market and fragile government finances. The Obama administration last week said it expected a fiscal 2011 budget deficit of $1.65 trillion, or nearly 11% of gross domestic product, the highest since World War II. Publicly held federal debt has swelled to 61% of GDP, the highest since 1952.

[More from WSJ.com: Morgan Stanley Hedge Risks Trimming Profit]

Some worry the Fed may wait too long to tighten policy, letting inflation get out of hand. Its balance sheet, after two rounds of extraordinary support for the economy, has swollen to about $2.5 trillion. That cash could feed broader inflation, beyond already surging commodity prices, if it enters the economy through more aggressive bank lending.

"Real activity is recovering, and people's willingness to take risk seems to have increased," says Raghuram Rajan, a finance professor at the University of Chicago Booth School of Business. "Does that mean we have come back to normalcy? Are things hunky-dory? The answer is no."

Many investors, both professional and individual, are staying in the market, continuing to ride the stock gains, even if they remain skeptical of the rally's longevity.

"The crisis is over for now, and I don't think it will come back in the next year or two," says Mary Chandler, 54 years old, a medical writer and individual investor in Bellevue, Wash. "But it will come back. There will be another 2008."

Ms. Chandler says she has been active in the market since the dark days of December 2008 and has no immediate plans to pare back her exposure, despite her sense of anxiety about the longer term.

[More from WSJ.com: Europe's Debt Crisis Rumbles On]




Francesca Levy, AP Business Writer, On Sunday March 27, 2011, 4:12 pm EDT

Catastrophic events can move stock prices dramatically: at one point during the week after Japan's devastating earthquake and tsunami, the Dow gave up all its gains for the year. Within six trading days it had returned to where it was before the disaster.

That may seem quick, but it's not. Brian Gendreau, strategist for the Financial Network, an advisory firm, studied the effect on the Dow of six major disasters. In all but one case the index declined at first, but returned to its pre-disaster level in an average of fewer than four days. In the fifth case, last year's oil spill in the Gulf of Mexico, it didn't decline at all.

The Dow fell as much as 4.6 percent after each of the five other calamities Gendreau looked at: the 1979 nuclear accident at Pennsylvania's Three Mile Island; the 1986 Chernobyl nuclear accident; the 6.9-magnitude earthquake that struck Kobe, Japan, in 1995; the 2004 Indian Ocean Tsunami; and Hurricane Katrina in 2005. The longest it took the Dow to recover was 15 days, after the Kobe earthquake. In the case of Chernobyl, the Dow recovered in a day. In that context, last week's stock recovery took slightly longer than average.

There's another clue that the rebound is for real, in spite of the recent dips and leaps in the market. It can be found in the 50-day moving average of the S&P 500, which measures the average value of the index over the most recent 50 days.

Comparing an index level to its moving average shows what general direction the market is taking, without the interference of short-term spikes and plunges. Analysts fretted when the S&P 500 fell below its 50-day moving average on March 10. On Thursday, it climbed back above the average.

But the moving average can also signal longer-term trends. Before March 10, the S&P 500 had stayed above its 50-day moving average for more than 100 days. That has only happened five other times since 1980, says Ryan Detrick, strategist for Schaeffer's Investment Research. After each of those blocks ended, the index rose by an average of 6 percent in the following three months. Four out of those five times, it rose an average of 3.3 percent after just a month.

Then there's the macroeconomic view. Barry Knapp, chief economist for Barclay's Capital, says stocks are probably safe from a steep drop for the next six months. He expects the economy to follow the patterns of the last three recessions.

In the last three economic downturns, the Federal Reserve started to unwind the interventions it had made to keep markets afloat well after the economic picture started to improve. Knapp calls the six-month periods leading up to each of those turning points in Fed policy a "sweet spot," and says the economy is in one now.

The Fed raised interest rates in May 1983, six months after the economy began to recover from the 1981-1982 recession. The Fed waited nearly three years to raise rates after the recession that lasted from July 1990 to March 1991. And in January 2004, three years after an eight-month recession, the Fed reversed what Knapp calls its "unconventional policy" of pledging to keep interest rates low, although it didn't raise rates until June.

Knapp expects the Fed to end its purchases of Treasurys, allow its balance sheet to shrink, and eventually raise interest rates between September and November. In past sweet spots, the S&P 500 didn't fall more than 7 percent. That's less than the 10 percent drop market analysts call a "correction," or a temporary downturn within a bull market.

"If you're really getting into the middle of a business cycle, even if you're getting shocks to growth, you shouldn't be seeing a 10 percent correction," says Knapp.

Even though the impact of major disasters on the market has typically been short-lived, it's important to remember that Japan's nuclear crisis isn't resolved yet and the long-term economic effects of the disaster are uncertain.

In a worst-case scenario, a cloud of radioactive steam could reach Tokyo, crippling the world's third-largest economy. For the quake and its nuclear aftermath to dent global growth, there would have to be "some sort of extended shutdown in the Japanese economy and a major shutdown in the supply chain" of weeks or months, says Jeffrey Cleveland, senior economist at money manager Peyton & Rygel. That possibility is small, and the market seems to have taken that into account, Cleveland said.

From a distance, the market can seem prone to unpredictable swings. Yet even as a long list of international threats rattle investors, stocks are still moving more or less by the numbers.


Some interesting Trading Links:
http://stockedu.info/education/strategies.pdf (PDF File)

Commentary: Market's valuation currently well above average


More from MarketWatch.com:

• Looking Forward to Tax Day

• Investors Should Choose Stocks Now

• Bailouts for Banks, Free Markets for Us





History Bodes Ill for Stock Market
by Mark Hulbert
Tuesday, April 12, 2011

Here's a sobering thought as earnings season begins in earnest:

There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines.

This modified P/E was made famous in the late 1990s by Yale University professor Robert Shiller, particularly in his book "Irrational Exuberance." In this modified P/E, the denominator is not current earnings per share but average inflation-adjusted earnings over the trailing 10 years. This modified ratio — sometimes called P/E10, or CAPE (for Cyclically Adjusted Price Earnings ratio) — has a markedly better forecasting record than the simple P/E.

According to Shiller's website, the CAPE currently is 23.5, or some 43% higher than the CAPE's long-term historical average. The four previous occasions over the last 100 years that saw the CAPE as high as they are now: • The late 1920s, right before the 1929 stock market crash

• The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms

• The late 1990s, just prior to the popping of the internet bubble

• The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch

To be sure, a conclusion based on a sample containing just four events cannot be conclusive from a statistical point of view. Still, it will be hard to argue that the current stock market is undervalued or even fairly valued.

Is there any way of wriggling out from underneath the force of this conclusion? I'm not so sure.

One popular attempt to sidestep the conclusion is to argue that today's rock-bottom interest rates justify much-higher-than-average stock valuations. But there is precious little historical evidence to support this argument.

In fact, according to econometric tests conducted by Clifford S. Asness, managing and founding principal at AQR Capital Management, a Greenwich, Conn.-based quantitative research firm, the P/E ratio's explanatory power goes down, not up, when the ratio is adjusted according to prevailing interest rates. (Click here for a copy of Asness' study. )

Perhaps the bulls' best argument, in the face of the current high CAPE level, is to point out that valuations can remain high for some time before they come back down to earth. The CAPE at the height of the Internet bubble in early 2000 was above 40, for example. And it was above 30 right prior to the 1929 stock market crash. Compared to those two lofty levels, the current CAPE might suggest that the bull market still has room to run.

Nevertheless, one can't help but notice that the bulls are on shaky ground if their best argument requires drawing analogies to the two occasions in the past when stocks were more overvalued than they ever were, either before or since.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

Our 2.5 Percent Trading System is the consequence of many years of trading. This system has been created and published here in an effort to help guide new, as well as experienced, traders in taking profits at practical levels. We feel taking profits on a regular procedure is a very logical and straight forward method for being profitable in the markets when day trading.

For anyone that has traded the markets for any length of time, it doesn’t take too much self-assessment on your trading activity to notice that, more often than not, after you purchase a stock you will see it spend quite some time bouncing back and forth between positive and negative territory. Often times you will witness a stock move into the money, then pull back to either break even or a loss of some kind on paper. In most cases, at some point, this process will reverse itself and the stock will magnetize buyers and return to break even and/or a profit again (depending on your entry point and the quality of the stock itself).

So it translates soon to a question: what is the best way to handle this situation to guarantee that the least amount of time is wasted with stocks bouncing up and down, while at the same time working to produce the most realistically attainable profits.

With our 2.5% Trading System, we present that one of the most logical solutions to this situation is to discover at what level “most” of your trades become profitable. Once launched, this level become your “profit taking point” where you either close the position out, or at least become alert to the fact that the stock is at a level where you may wish to sell it or install a trailing stop loss.

Before deciding at what level profits should be taken, let’s imagine all of the trades we attempt on a line that travels from left to right. Each vertical “segment” of the line represents a specific trade and the up and down action of the vertical segment represents the action of the stock itself. We’ll call the “zero line” the price at which you purchase the stock. From this point, some trades will go up (imagine a bar graph with the bar moving upward) while some trades will move down (picture the zero line (your purchase price) with a bar graph moving down).

Understand that the stock may go up and down within this vertical line for as long as you hold the trade. Baring any major down turns or up turns, you will have something that looks like the representation below:

[]
[] <--- zero line
[]This “segment” represents a stock moving up or down past the zero “gain” line after it is acquired. The top of the segment would represent the high during the time in which you held the stock, while the bottom would represent the low.

Once you sold the stock, you’d close out this segment and move along to the right on the line which symbolizes all of your trades. In the graph below, the next bar or “segment” of the graph would symbolize the next trade and so on. Assuming relatively normal up and down movement of stocks, a chart of this nature, over time, would typically appear like the following:

TYPICAL TRADES OVER TIME: Gain/loss
----------------------------------> ---------

[] <-- 10%
[] []
[] [] []
[] [] [] [] [] <-- 5%
[] [] [] [] [] [] [] [] []
[] [] [] [] [] [] [] [] [] [][]
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][] <-- 2.5%
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][]
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][]
------------------------------------------------------------ ZERO line
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][]
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][]
[] [][][][][][][][][][][][][][][][][][][][][][][][][][][] <-- (2.5%)
[] [] [] [][][] [] [] [] [] [] [][]
[] [] [] [] [] [] [] []
[] [] [] [] <-- (5%)
[]
[]
[] <-- (10%)As seen above, you have a group of trades going up and down with each segment symbolizing the high and low for any given trade. Some trades reaching higher levels, some trades reaching lower levels, but all basically lingering around the zero “break even” line for the most part - at least until such time as you close out the trade. This is actually very similar to real life. You buy a stock, it goes up a couple percent, then down a couple percent. At some point it’s sold and you move to the next trade.

When participating in trades, many times traders make one of two basic mistakes. Either they fail to have an exit point secured prior to buying the stock (this leaves them floating long for who knows how long) or they do secure an exit point, however, the exit point is often too high to be readily realistic for quick profit taking.

In the latter case, you tend to spend a great deal of time “waiting” for your trade to hit some nearly mythical (and often rather greedy) price. This price will often times be based on a percentage such as 10%, 20% or even higher; which often is too far out of attain.

In some cases, there is inherently nothing wrong with this situation, except for the minor problem that it does not generate profits as often as one would like! Not only that, but the higher the exit point, the more time your trading capital is exposed to the risks of the market. Both negative situations you may fall in.

In any event, you have to ask yourself honestly, how often do you really hit a 10% or 20% gainer when day trading? It’s certainly not impossible, but it does take time to reach and with this time comes exposure and risk. For the most part, gains of this size are rather difficult to achieve on a consistent and short-term basis. Keep in mind that even Warren Buffett only looks for around 26% PER YEAR. So if we let his success be any guide at all, then I think it’s only fair to say that hoping for nothing but 10 to 20 percent gains from each of your trades is rather unrealistic at best.

Again, we are not suggesting that it is impossible, but for most, it’s exposing yourself up for failure in the markets.

So what is the solution then?

In our experience, with a normal market, what does happen most often is represented in the bar chart shown above. Typically you get a move of a few points (or sometimes even just a few fractions) to the up or down side and then it repeats. If you honestly analyze how most stocks move and do not let greed take control of your emotions, then you will see that most stocks (baring major, and often unexpected, news) move only a few percent to the up or down side on any given market day. If you then examine “typical stock movement” in and effort to isolate a realistic level for profit taking, we feel you’ll see that some place around 2 to 3 percent is “generally” the range in which your average stock will trade up or down.

Of course, this may not be true of every stock in the market, but generally speaking, your typical stock will bounce around in this range. Some will be higher, some will be lower. We feel 2.5 percent is very obtainable and, as such, have chosen it as our level for taking profits.

In fact, see how often we get 2 to 4 percent on our stock picks in the short term model portfolio. True, sometimes the stocks move to higher levels, or exceed even our longer term price targets, but most often we go for taking profits around 2.5 to 3 percent. This is not only very obtainable, but adds up quickly while also reducing our market exposure.

I’m sure some members say, “Look at them selling with ‘only’ 3% profits”. But ask yourself (by looking at the chart above), “What would be the best way to make consistent money on these types of trades?”

We suggest that the best way is to take 2.5% profits AS SOON AS you have them. This happens enough to permit you to move in and out of stocks rapidly. And because it does happen (a lot more than waiting for the big home runs) you’ll find that a lot of singles (and small gains) add up pretty fast! This is the key to being profitable in the markets, as well as having cash on hand to take advantage of those “unexpected” dips in the market. After all, you can’t trade the market if you are stuck in it.

Similarly, if you find yourself below the zero line (into a loss from your acquisition), doesn’t it make more sense to hold longer and give your trade the opportunity to rebound? Just like large gains, large losses tend to not happen any more frequently than large gains do (of course to some degree this depends on the specific stock and overall market).

Some people always cut their losses at 5% or 8%, but if you always cut your losses at say 5 percent, then you are going to hit that much more of often. It is true that your losses may not be as large, but by racking them up much more consistently, your losses do add up. Certainly, it’s a calculated risk, but then so is the market.

We are inclined to speculate that if you sell at 2.5 percent profits (and get that consistently - thus returning profits) and are willing to hold until 10-15% percent on the down side (not as likely), then wouldn’t you tend to sell at a profit much more often than you did at a loss? Remember, good stocks tend to bounce back from those oversold levels (the lower they go, the more of a deal they become). Again, some of this has to do with trading good quality stocks when the market is in your favor; but that’s all part of the game (i.e. deciding the right stocks to trade).

If done properly, the results of this system should be fairly good, consistent, profits. In other words, trading. Of course, you would have to adjust these percents for different types of stocks, but I say it’s better to find stocks that do work well with the 2.5 percent system than trying to find stocks which fit a different model. Read on to see why…

Keep in mind, as soon as you say to yourself, “well I’ll just do this with stocks that return 5%, or 7%”… that’s greed. And greed is bad. Greed will get you into shaky situations in the market nearly every time and with our 2.5% Trading System, one of the things we are trying to do is avoid becoming overly greedy. Ask yourself how many times (over and over again) you have had profits and let them slip into losses?

GREED (n.) - An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.

Need we define greed to show that it translates to more than you need to be successful at trading? It doesn’t really take much to make a nice (very nice) living in the stock market. Let us learn from the old saying, pigs get fat, hogs get slaughtered.

Okay, now let’s have a look at our 2.5% compounded profit chart below (using margin). This chart shows a person starting with $20,000 and (using margin) buying $40,000 worth of stock(s) that move 2 to 3 percent - finally being sold at 2.5 percent.

By returning 2.5% on $40,000 worth of stock, you should produce $1,000 on your initial trade - not bad. Many individuals work all week for that. Then next time around you’d be using $21,000 in cash and buying $42,000 worth of stock (again, assuming margin). Remember, if you reduce your risk by not using margin, your returns will be less.

The chart below was produced using a little compounding program that simulates a series of profitable trades. Keep in mind, however, that this example does not include commissions, nor does it take into account trades that may be stopped out at 10% or more. It’s simply to give you an idea of the power of compounding and routine profit taking.

Enter real cash available in account : 20000
Enter margin use (1 equals 100%) : 1
Enter number of times : 30
Enter projected return (.10 equals 10%) : .025

Real$ Principal Yield Balance Times
----- --------- ----- ------- -----
20000 40000 1000 41000 1
21000 42000 1050 43050 2
22050 44100 1102.5 45202.5 3
23152.5 46305 1157.625 47462.63 4
24310.13 48620.25 1215.506 49835.76 5
25525.63 51051.26 1276.282 52327.55 6
26801.91 53603.83 1340.096 54943.92 7
28142.01 56284.02 1407.1 57691.12 8
29549.11 59098.22 1477.455 60575.67 9
31026.56 62053.13 1551.328 63604.46 10
32577.89 65155.78 1628.895 66784.68 11
34206.79 68413.57 1710.339 70123.91 12
35917.13 71834.25 1795.856 73630.11 13
37712.98 75425.96 1885.649 77311.61 14
39598.63 79197.26 1979.932 81177.19 15
41578.56 83157.12 2078.928 85236.05 16
43657.49 87314.98 2182.875 89497.85 17
45840.37 91680.72 2292.018 93972.74 18
48132.39 96264.77 2406.619 98671.38 19
50539 101078 2526.95 103605 20
53065.95 106131.9 2653.297 108785.2 21
55719.25 111438.5 2785.963 114224.5 22
58505.21 117010.4 2925.26 119935.7 23
61430.47 122860.9 3071.524 125932.5 24
64501.99 129004 3225.1 132229.1 25
67727.1 135454.2 3386.355 138840.6 26
71113.45 142226.9 3555.672 145782.6 27
74669.12 149338.2 3733.456 153071.7 28
78402.57 156805.1 3920.129 160725.3 29
82322.7 164645.4 4116.135 168761.5 30

Total account balance : 86438.83The above presentation shows that using $20,000 in cash and making 30 successful trades that yield just 2.5% you can turn $20,000 into $80,000 using margin and compounding your profits. This could be done over several months, or even a full year and the results would still be outstanding. Again, this is only an example and does not take into account the very real possibility of losses, but you get the idea. Even if you only strived for 2.5% per week, you’d still be able to generate very respectable gains by the end of the year. Actually, many of our members have written to us and expressed that after a year or so of using this system they see the true power of it.

Okay, now let’s glance at how much a stock must move to generate 2.5 percent based on the price of the stock. Of course one easy example is a $10 stock going up 1/4 point (2.5 percent). The chart below is very handy and shows most of the major prices and how much of a gain is required for a return of 2.5 percent:

2.5 percent of stock price
-------------------------------

5 x 2.5% = .125 1/8
10 x 2.5% = .25 1/4
15 x 2.5% = .375
20 x 2.5% = .5 1/2
25 x 2.5% = .625
30 x 2.5% = .75
35 x 2.5% = .875
40 x 2.5% = 1 1 point
45 x 2.5% = 1.125
50 x 2.5% = 1.25
55 x 2.5% = 1.375
60 x 2.5% = 1.5
65 x 2.5% = 1.625
70 x 2.5% = 1.75
75 x 2.5% = 1.875
80 x 2.5% = 2
85 x 2.5% = 2.125
90 x 2.5% = 2.25
95 x 2.5% = 2.375
100 x 2.5% = 2.5The chart above shows stock prices of $5 graduations, but you get the picture. The hot spots that should be fairly easy to get are 1/2 point on a $20 stock and a dollar on a $40 stock. I would think on something like CSCO you could just about get this once a day if you are quick!

Meaning in a month or two you’d be rolling along. Let’s say you do turn $20,000 in to $80,000 (not counting commissions which wouldn’t be much if you are using a discount broker). Now examine the same setup if you begin with the $80,000 that you’d get from the example above and continue on doing just as well. (And you would continue doing just as well, because if you can get to this point, then you have mastered our system of trading).

Enter real cash available in account : 80000
Enter margin use (1 equals 100%) : 1
Enter number of times : 30
Enter projected return (.10 equals 10%) : .025

Real$ Principal Yield Balance Times
----- --------- ----- ------- -----
80000 160000 4000 164000 1
84000 168000 4200 172200 2
88200 176400 4410 180810 3
92610 185220 4630.5 189850.5 4
97240.5 194481 4862.025 199343 5
102102.5 204205.1 5105.126 209310.2 6
107207.7 214415.3 5360.383 219775.7 7
112568 225136.1 5628.402 230764.5 8
118196.4 236392.9 5909.822 242302.7 9
124106.3 248212.5 6205.313 254417.8 10
130311.6 260623.1 6515.578 267138.7 11
136827.1 273654.3 6841.357 280495.6 12
143668.5 287337 7183.425 294520.5 13
150851.9 301703.9 7542.596 309246.5 14
158394.5 316789 7919.726 324708.8 15
166314.2 332628.5 8315.712 340944.2 16
174630 349259.9 8731.498 357991.4 17
183361.5 366722.9 9168.072 375891 18
192529.5 385059.1 9626.477 394685.5 19
202156 404312 10107.8 414419.8 20
212263.8 424527.6 10613.19 435140.8 21
222877 445754 11143.85 456897.8 22
234020.8 468041.7 11701.04 479742.7 23
245721.9 491443.8 12286.09 503729.9 24
258008 516016 12900.4 528916.3 25
270908.4 541816.8 13545.42 555362.2 26
284453.8 568907.6 14222.69 583130.3 27
298676.5 597353 14933.82 612286.8 28
313610.3 627220.6 15680.52 642901.1 29
329290.8 658581.6 16464.54 675046.1 30

Total account balance : 345755.3It is a clear scenario now: if you do this over time and even if you only looked for 2.5% a week (not hard for an active trader) then in a little over a year of consistent trading you’d have turned $20,000 into over $300,000 with careful trading. Impossible? Not impossible, but you’d be surprised how hard it can be; especially when you take into account emotions involved and the occasional loss. But leave that to us because that’s where we come in. DayTraders.com tries to help keep you on the road to profits by showing you this basic system day-in and day-out in our morning stock market report.

While it’s not easy, we feel if you have the will, desire and dedication, then it can be done over time. If nothing else, this system will get you into the habit of taking profits. And at the very least, it will help you see that in order to make money from trading, you don’t necessarily have to hit a home run on each trade to be successful.

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To that extent, we try to follow this system in our newsletter in an effort to (if nothing else) educate and help guide members in taking profits. Certainly, when to sell is up to each member individually; our goal here is simply to provide a reference to what we feel is the road to profits.





5 types of Markets and Possible Techniques:

Trend Trading, when the market is predictably oscillating within a range. Use Mid-Term sizzler trades (Miniature bull call or bear put spreads) Utilize Multiple trades<1 Month

Time Erosion trading, when the market is either stagnant or beginning a bull cycle.
Use At-money Calendar Spreads alone or with the underlying
Use Bull put spreads ONLY with the underlying in place.
Butterfly spreads (Multiple trades) <1 Month

High volatility trading when the market is in turmoil:
Can use Straddles and Strangles.

Bear market trading when the market is within a LT downtrend:
Use Bear Put Spreads
Use at-money Call Calendar Spreads
Out-money put Calendar Spreads.
Have buy-back limit orders in place for above stratigies.
OR
In-money put calender spreads for 2 directional profits. (Stable and UP)
Covered calls w/ stock ownership for less risk with increased leverage.
Use index, SECTOR fund short or own puts as hedge. .
.

Bull market trading when market is in a strong rally
Use at-money Put Calender spreads .
Out-money call Calendar spreads
Have buy-back limit orders in place for above stratigies.
OR
In-money call calender spreads for 2 directional profits. (Stable and UP)
Covered calls w/ stock ownership for less risk with increased leverage.
Use Bull put spreads ONLY with the underlying in place.
Use Bull call spreads in multiples to capture speculative profits.
Can use ST<1wk sizzler trades.
Use index, SECTOR fund or own Out-money puts as hedge. .
.

For each sector represented choose from the following:
2 Stocks (Options) directional or Strangle
1 Stock TV (Options) Use Stop Loss
3% Risk Allocation per stock
Reallocate between Sectors & Trade Types for market conditions.
Wait 3 months to gauge success
20-25% allocation for Index Funds
Vertical funding (Amt per trade) and Horizontal funding (Number of trades).
1-Your Age = Amt in higher risk investments.
25%-50% of it kept Margin
50%-75% Allocated to positions
25% Total Net Risk

Using Insurance Puts: < 1 month on Calender spreads if high volatility or earnings month. (a bit in the money)
Leaps (Ratio back spreads) >1 yr w/ calls or puts
Calls for agressive plays 6 months out (a bit out of money)

When hedging calendar spreads, bull or put credit spreads:
If your using stocks hedge with sector options, if using sectors then hedge with index options.

When working with ETF Sector funds.
Start out your portfolio with The maximium funding allowed.
Balance out with an index hedge
You can lighten you hedge position in a strong market but keep buy orders in place.
Take your profits using stops with winning positions.
Keep doing this until positions are wittled down then refund as you see fit You can replace sold out positions with another sector ETF, with another ETF subsector within that sector or embellish other winning sectors to keep the balance on.

When working with a group of 5-10 stock option positions set up in a similiar mannor but replace winning positions with other stocks from similiar sectors.Also bring into play option stratigies for trend trading OR volatility trading if necessary.



Another possible strategy -(100-(Your age)) This is the percentage of your total funds for option trading
Keep 50% of that in a money fund for margin (if your put to or called out)
Allocate the remaining 50% for trading.
25% total net risk. (Can use beta’s of stocks to balance out)

Utilize 9 Sectors
Allocate 2 Stocks directional or Strangle/Stradle (Depends on market conditions) and 1 stock TV (Time Value)
3% Risk allocation per stock
Reallocate as necessary between types (Depends on Market conditions)
In addition you can also utilize ST sizzler trades (as described earlier) and or LT >1year trades.
Wait 3 months to judge success before making major stock changes.

/i Generally Speaking (all other things remaining equall)
If little to no profit is made after 3 months in a positin then remove and replace
If losses in a particular position exceed your predetermined amount then remove and replace.
If a particular type of trade (i.e.calender , LT, volitality) does not work well with current market conditions then remove that type in all sectors.
If you find that your overallocated to anyone type then balance out your other positions
If one or two sectors shine out way above the rest than you can overallocate to those sectors but only with a hedge. /i
You can use ST puts to protect your positions during volitile times.

Never overallocate to volitility positions (i.e.strangles, straddles)
Always apply idle monies to 401K, ETF or sector index positions if needed.
You can sometimes use puts <1 month out for protecting your positions. ,


Long term trades (excluding ETF index trades) do not need to be morphed (>1 year), nor do you need to worry about triggers since these trades should be put on only in a balanced fashion with hedges. Time Erosion trades, when designed properly either alone (Using multiple positions) or within other trades, should not normally need triggers, morphing or reallocating (barring Bull put or Bear call if you so desire)- nor should sizzlers. When working with funds in your 401K like large cap growth, mid cap growth and international remember that they are tied more to the S&P then the DOW.

As we said earlier -If The other types of positions go upside down use automatic trade triggers to stop losses . In situations where the positions do well consider reallocating monies to those trades. Re-Evaluate your strategy every 3 months if your not making good profit. Use all of your knowledge to design and manage the proper trade for the conditions. Each situation can be different.

When initially getting into a group of positions do the following:
FIrst determine the market direction, then pick good sectors and or stocks within the market, then wait for a 10% pull back on each of the positions before entering. Followup by purchasing more in smaller and smaller blocks.
To decide when to start a trade I use the following methods: For steady predictable range trading I like to reference the 2, 5 and 10 day graphs (7-14 day swings). For trend trading I like to use the 3, 6 and 12 month graphs. Within these graphs I like to reference the 10, 30, 50 and 200 day moving averages as to when they cross each other. When positions go upside-down try to preserve your gains only by morphing the position (don't try to profit on minor trend or range corrections), then when it reverts back to the original overall direction cash out the positive options thus leaving the position with an enhanced positive bias as it was initially. Utilize limit orders and/or trade triggers to get in and out in all but in the most extreme situtations, (let the market make the final decision - not you). This is especially true if you have either a lot of intrinsic profit in the position or if you have more than 18% of the position at stake in a mutual fund, ETF or index trade or 5% of a position at stake in an individual stock/option trade. Start your stock/option trades with only 1-2% of account and work your way up as the position progresses.

Exceptions to the above rules are LT plays where the market is definitively trending in one direction. Although a given stock can move wildly index's or index tracking stocks are oftn more predictable. Credit spreads can be used like calender spreads (to make regular monthly income.)

If (during that month) and/or when all of your trades become liquidated do not begin trading again until the next month.




When considering when to take profits do the following
Take into account the initial length of the trade and the quickness of the profit, if you obtain 20% in a very short time it's best to take it, you can afford to wait for profits if you have more than 6 months left on a trade. If its an index trade with a confirmed direction you can keep it on until a major top or bottom is reached, if it's a butterfly or TE trade then you simply let them all expire and keep the profits, if it's a straddle/strangle recommendation then wait until the target profit is reached. In general, for directional trades it is best to wait for a particular (minimum profit) then set stop-losses after that point, don't try to make money on the ebb and flow. I.E. Let your profits run but if you Reach 10% or more (profit) during the month you might want to consider tightening your stop losses and liquidating some positions to reduce your loss exposure (maybe to 2-4% of the entire portfolio). Some other techniques can also be used like taking ¼ of your profits when the Standard deviation (based on 10 period closings) is breached then taking the remaining profits in quarter increments if and when the technical’s are breached.

. If you looking for L.T. investment then simply put on Ratio Back Spreads and keep them until the technical’s are violated. In all other cases follow your own rules for getting in and out of trades based on technical indicators.

You can also morph the position to gain greater advantage of market changes. Do not, however, do any of these practices unless a position is expiring ( <1.5 months) or you find another position that is rallying.