Not Taking Profits

546

It’s an emotion every trader is familiar with: greed. Who doesn’t want to get rich, and who doesn’t want to do it in one trade? But thinking that way is one of the main reasons most traders lose money. There’s a much better method to making your fortune.

The Complete Guide to Daytrading, day trading coach

If you know the pitfalls of trad¬ing, you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly?mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.

Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.

Greed is an obvious but dangerous mistake. By their very nature, of course, traders are greedy, since they start trading in order to make more money. Wanting more money isn’t dangerous; wanting it too quickly is. Every trader wants to get rich, and they want to do it in one trade. And that’s when they lose.

Trading success comes from consistency, not from a trading “grand slam.?There are a lot of newbie traders out there who believe that their fortune will be made in just one amazing trade, and then they’ll never have to work again for their entire life. This is a dream, a dangerous one. Successful traders will realize that right away. The best, and usually only, way to make a fortune in trading is consis¬tency. And this fortune will probably be made in small amounts. Unfor¬tunately, most traders go for the big wins, which result in big losses.

It makes sense that traders are more interested in larger profits per trade. What would you rather have ?a fifty dollar bill or a five dollar bill? The answer is obvious. But when it comes to trading, it’s not that simple. If you don’t take the five dollar bill, you may lose fifty dollars of your own money, or more. The main thing to keep in mind is this: even though you can’t take the fifty dollar bill right away, you can take ten five dollar bills over a longer period of time. And the end result is the same ?fifty dollars.

And that’s the main point here: small, steady profits add up. This is not to say you’ll never have a big winner. In options trading for example, it’s pretty common to have profits of 100%, 200%, or even 1,000% in just one trade. So, it’s not impossible to snag the big profits ?it’s just not something you should count on. If you expect numbers like this all the time and accept nothing less, you’re setting yourself up for guaranteed disappointment.

The key to trading success: small but consistent profits. Consistency is the key, because if your profits are consistent and predictable, then you can simply use leverage to trade size. Therefore, you must know when to exit with a profit. Resist the temp¬tation to stay in “just a little longer, for just a little more.?

Penny Stocks – Turn Your Pennies Into Dollars

1154

We’ve all heard about the investor how bragged about his 100% or 1000% return on a stock or about the guy who made it rich by investing in small caps, undiscovered stocks that made it big. Too easy to lose money unless you know what to look for.

penny stocks, trading, investing

Penny Stocks – Turn Your Pennies Into Dollars

We’ve all heard about the investor how bragged about his 100% or 1000% return on a stock or about the guy who made it rich by investing in small caps, undiscovered stocks that made it big. In theory, it seems to be too easy. Invest in a couple of penny stocks, then sell them when they move up. Unfortunately, it is too easy. Too easy to lose money unless you know what to look for.

First, lets have a look at what types of companies trade on the OTC BB or Pink Sheets.

Stocks that no longer trade over $1 on the Nasdaq
These include companies that fell from grace (Enron). While it is possible that they may see better days in the future, the odds are stacked against them. Its usually best to avoid trading these stocks. If you feel that the temptation is too much, wait until the stock begins to rebound. If you try catching a falling knife, you will get hurt.

New Start Ups
Every year there are hundreds if not thousands of companies who decided to go public. Whether they need the money to expand their business, or are looking to cash out their equity, its a natural progression for a company with a compelling story, and a great track record to go public. While many of these companies will file for an IPO, many others will start off trading on the OTC BB as a penny stock

Second, lets look at some tips to help the penny stock trader avoid making costly mistakes.

Due Diligence
Stocks listed on the Pink Sheets don’t have to file annual or quarterly statements. This makes starting your due diligence difficult. Often, the information is sketchy at best, and typically, its biased. You should expect a shareholder to say good things about the company. If the company didn’t have potential, they wouldn’t be holding it. Or, they might be hoping to unload their shares and hope to talk you into buying.

Stocks listed on the OTC BB file annual and quarterly statements. This provides some measure of financial success. You’ll find most penny stocks lose money, whether through managerial incompetence, or research and development. The key is to identify the companies whose management has a record of consistently making money, or at the very least, delivering on their business plan, and decreasing expenses.

Penny Stock Newsletters
Being a writer for The Leading Source (http://www.1source4stocks.com) puts me in a biased position when speaking to penny stock newsletters. Here’s what I can tell you: be careful! Check the disclaimer for the amount the newsletter is being paid to carry the profile. Are they being paid in cash or in shares? You’ll likely find a corelation between the number of shares they are being paid, and the rating on the hype meter. Does that mean that you should avoid any stock where the company is paying IR professionals in shares? No. Just keep in mind that they are selling a story, and if they sell the story to other shareholders, they will gain. This is not a problem if you get in early, but could be a problem if you aren’t able to jump in right away.

Take a look at the track record of the newsletter. Have they profiled winners? Do they state the facts, or state the hype? Do they also offer unpaid stock profiles? If they do, you’ll likely find that they do their own research in all companies, and are looking to ensure that they aren’t passing a weak stock your way just to pay the bills.

If a company is paying an IR professional money to profile a stock to its subscribers, should you avoid it? Of course not. Think of the payment as advertising. They are promoting the company, and trying to get exposure. Like any company, the only way to get exposure is through some method of advertising. So dont dismiss a paid profile as hype. Keep it in the back of your mind while you are reading the profile, but pay attention to the profile. You may find a diamond in the rough that no one has discovered.

Volume
If you want to make money, you have to be able to buy and sell enough shares to lock in your profit, or protect your capital. If ABC company’s daily volume is only 500 shares a day, it may take you several days to accumulate a position worth taking. If there is bad news, who is going to buy your shares? If the volume is low, stay away. Its not worth it. If you feel that strongly about owning the company, consider contacting the company directly and working out a deal.

Buy Results, Not the Story
If you buy the hype, odds are, you will end up being the last one to own the shares, while everyone else has sold off their position. Look at a company, take a look at what their business plan was, and confirm if they have followed through on that plan. Were they successful? Did they bring a product to market on time? Did the company follow through on its acquisition strategy in the manner they set out? The hype might get you a quick pop, however, unless you are watching your trading screen every second of the trading day, you will miss out.

Size matters
There are thousands upon thousands of penny stocks. The size of your position should not be anymore than $2000 – $3000. While this may not seem like much, keep in mind that its not unusual for a $0.10 company to drop to $0.05. That’s a 50% loss. If your position is $10 000, a 50% haircut leaves you with only $5000. Keep your losses to a minimum. If the company has done well, and you are up, either take your profits off the table, or add to your position, and be sure to reset your stop loss so as to protect your previous profits. Capital preservation is the key to successful trading.

Have a plan before you buy. What are your reasons for buying. What is your exit strategy? Where is your stop loss? At what point will you take your profit? Write down these answers before you place that buy order.

Penny stock investing can be profitable. Remember, you are taking larger risks than you would if you were purchasing shares in a bank stock. That risk can be rewarded with returns that you cant get with a bank stock, or, it will be met with a large loss and a bad taste in your mouth for investing in penny stocks.

Do your homework, don’t believe the hype, and protect your capital.

Note: The Leading Source provides its subscribers with both paid and unpaid profiles. Follow those tips and you will watch your pennies grow into dollars.

The Need for Diversification in the Stock Market

997

Diversify or Die

stocks, stock market, stock investing, stock quotes, share, new york stock exchange, investing, investing basics, investing stocks, share price, investing stock market, wall street, stock information, buy stock, stock research, stock exchange, buy st

Copyright 2006 Richard Stoyeck

Why is it that some people only buy one or two stocks? Others may have 15 stocks but have 50 percent of their investment assets in just one of those 15 stocks. In Wall Street we refer to this type of behavior as concentration. Some firms call it over-concentration. When this happens in a brokerage firm it is always considered dangerous. It is so dangerous, in fact, that if the brokerage firm is using a concentrated stock position as capital, then the market value of the security in question is given a haircut. This means that the full market value of the security is chopped by some fixed percentage in any capital computation. In other words, if you are over-concentrated, you don’t get full value. Some of you may have margin accounts. As you know, StocksAtBottom.com advocates cash ownership of stocks. If you own stocks on margin, it is our opinion that you will get sold out on margin. Normally in a margin account you put up 50 percent of the value of the stock you acquire in cash. If equity falls below 35 percent, you get a margin call. Now, brokerage firms love it when clients have 15 or 20 different stocks in a margin account. If there are some bonds in that account, guess what, they love it even more. Why? Because brokerage firms know that stocks represent risky investments. Something can always go wrong in any one situation. Maybe something can go wrong in any two situations. It’s tough to see something go wrong in 15 situations. That is the essence of diversification. SPREAD THE RISK AROUND. It makes a lot of sense. Some investors own 50 to 100 stocks. This is because they think they need that many to achieve the investment goals that they set out for themselves. In business school at a master’s degree level they teach you that to achieve true diversification you need to own something approaching 14 equity positions. It has been the experience of StocksAtBottom.com that 6 to 10 different equity positions is sufficient to achieve diversification. The one thing we know for sure is that it’s not one stock or two stocks. Own one or two and you get killed.

Putting all your eggs in one basket We advise all investors to own several stocks and to own more than one sector. Own more than one type of investment (that means equities, bonds, real estate, cash, you get the picture) or you will have problems. Sectors refer to stocks with broad themes. Examples are: * Energy * Semi-conductors * Housing * Auto * Consumer * Airlines * Personal Computers * Technology in general If you own 10 stocks, but they fall into only 2 sectors then you really have not achieved diversity in your portfolio. You see, when they come to get Ford Motor, usually General Motors is not that far behind. By the way, it’s great on the upside to own everything in one sector when that sector is going your way. There’s probably not a greater high in the world than when everything you own is going up. On the flip side, when you are overly concentrated in a sector that’s heading down, lower and lower every day, there is no worse emotional low. The depression can be almost unbelievable. There’s also the issue of owning more than one type of investment. There are equity investments, which are stocks. There are real estate investments, and bond investments. There are also venture capital investments, precious metals, and others such as oil and gas. To a large extent, you achieve diversity in your investment strategies by owning different types of investments, as well as investing in different sectors. Let’s go into a few real life examples. We at StocksAtBottom.com believe we have already made the equivalent of a lifetime of investing mistakes, so learn from a few of ours.

Arrow Electronics It was Christmas week in the early 1980’s. One of us was sitting at Bear Stearns as a limited partner at the time. We were doing very well as stockbrokers. It was the period of full commissions (no discounting), and clients were doing 10,000 share trades in $50 dollar stocks. Taking home an income of $500,000 to $1,000,000 in a year was no big deal at the time. We were loaded up on Arrow Electronics, a NYSE company in the semi-conductor sector. Business was fantastic, the future was bright, and things could not have been better. Since we were involved on the banking side as well, we had an open line of communication to the company. We knew we had a good thing going. The telephone rang on one of those beautiful days prior to Christmas when New York City is the place to be, Rockefeller Center all lit up with a 50 foot Christmas tree and all. “Hello.” A harried response, “There’s been a fire at the Tarrytown Hilton Executive Center, a lot of people are dead.” “Okay, that’s terrible, how does it affect me and by the way, what’s for lunch today?” “Buddy, you don’t understand,” the dead pan voice says. “What don’t I understand?” “The entire executive leadership of Arrow Electronics was in that fire.” All of them, every one of them had been killed by this monstrous tragedy. It was the worst Christmas imaginable for the wonderful families of this dedicated group of execs. The families never recovered, the company never recovered in terms of the people that were left, and the stock took years to recover. It plummeted from $32 per share to $4 per share in a matter of days. The recovery was slow and hard, it was agony all the way back on this particular stock. Arrow Electronics is an example of putting all your eggs in one basket. It is an example of owning just one stock. SAB does not care how much you know about a company, things can go wrong and do go wrong. You simply cannot own just one company because the risk on the downside is too great. YOU MUST DIVERSIFY IN ORDER TO SPREAD THE RISK.

The Perfect timing to sell your stocks

458

I will guide you through the best way and timing for selling your stocks at maximum cost with minimum risk.

stocks, stock market

While quite a bit of time and research goes into selecting stocks, it is often hard to know when to pull out ?especially for first time investors. The good news is that if you have chosen your stocks carefully, you won’t need to pull out for a very long time, such as when you are ready to retire. But there are specific instances when you will need to sell your stocks before you have reached your financial goals.

You may think that the time to sell is when the stock value is about to drop ?and you may even be advised by your broker to do this. But this isn’t necessarily the right course of action.

Stocks go up and down all the time, depending on the economy…and of course the economy depends on the stock market as well. This is why it is so hard to determine whether you should sell your stock or not. Stocks go down, but they also tend to go back up.

You have to do more research, and you have to keep up with the stability of the companies that you invest in. Changes in corporations have a profound impact on the value of the stock. For instance, a new CEO can affect the value of stock. A plummet in the industry can affect a stock. Many things ?all combined ?affect the value of stock. But there are really only three good reasons to sell a stock.

The first reason is having reached your financial goals. Once you’ve reached retirement, you may wish to sell your stocks and put your money in safer financial vehicles, such as a savings account.

This is a common practice for those who have invested for the purpose of financing their retirement. The second reason to sell a stock is if there are major changes in the business you are investing in that cause, or will cause, the value of the stock to drop, with little or no possibility of the value rising again. Ideally, you would sell your stock in this situation before the value starts to drop.

If the value of the stock spikes, this is the third reason you may want to sell. If your stock is valued at $100 per share today, but drastically rises to $200 per share next week, it is a great time to sell ?especially if the outlook is that the value will drop back down to $100 per share soon. You would sell when the stock was worth $200 per share.

As a beginner, you definitely want to consult with a broker or a financial advisor before buying or selling stocks. They will work with you to help you make the right decisions to reach your financial goals.

Struggling to Identify the Direction of the Market

470

: New trader? Experienced trader? Somewhere in the middle? Regardless of how long you’ve been trading, it’s very likely that you’ve struggled with identifying trends in the markets. Trends are crucial to successful trading, but they’re also one of the biggest problems for traders. So, how do you avoid wasting time and energy when it comes to predicting trends? The answer is simplicity itself.

The Complete Guide to Daytrading, day trading coach

If you know the pitfalls of trad¬ing, you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly?mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.

Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.

One of the first mistakes new traders make is sinking a lot of wasted time and effort into predicting legitimate trends. Traders can use very complicated formulas, indictors, and systems to identify possible trends. They’ll end up plotting so many indicators on a single screen that they can’t even see the prices anymore. The problem is that they lose sight of simple decisions about when to buy and when to sell.

The mistake here is trying to understand too much at once. Some people think that the more complicated their system is, the better it will be at “predicting?trends. This is almost always an illusion. Depending too much on complicated systems makes you completely lose sight of the basic principle of trading: buy when the market is going up and sell when it’s going down. Since you want to buy and sell early in a trend, the most important thing to discover is when a trend begins. Complicated indicators only obscure this information.

Remember to keep it simple: one of the easiest ways to identify a trend is to use trendlines. Trendlines are straightforward ways to let you know when you are seeing an uptrend (when prices make a series of higher highs and higher lows) and downtrends (when prices show lower highs and lower lows). Trendlines show you the lower limits of an uptrend or the upper limits of a downtrend and, most importantly, can help you see when a trend is starting to change.

Once you get comfortable plotting trendlines, you can use them to decide when to start taking action. Only after using these early indicators should you start using more specific strategies to determine your exact buy or sell point. Moving averages, turtle trading, and the Relative Strength Index (RSI) are some examples of more complex indicators and systems that are available. But only use them after you’ve determined if the market is trending or not.

Of Stocks, Stockholders And Stock Market

446

A copper mining enterprise Stora Kopparberg first introduced the system of stock in the 13th century. The financial backers and owners felt the need to raise money for investment in the new projects of the same company so they started the method of stock and shares. It was also required in order to ward off the threat to the ownership rights if the company was sold, which would mean complete loss of control.

The investors got the monetary support they were looking for and…

stock,stock trading,mutual funds,dividends,

A copper mining enterprise Stora Kopparberg first introduced the system of stock in the 13th century. The financial backers and owners felt the need to raise money for investment in the new projects of the same company so they started the method of stock and shares. It was also required in order to ward off the threat to the ownership rights if the company was sold, which would mean complete loss of control.

The investors got the monetary support they were looking for and at the same time solved ownership issues in case the company was sold by granting stocks to the people. Plus, they sold a part to people and still retained control over the company. Thus, the owner had some portion of the assets, some power to make decision conditionally. In return, they shared a part of the profit with the stockowner as dividend.

Financially, stock implies the ownership or share in a corporation. It gives the stockowner the right to claim a share in the assets and income of the corporation. The two types of stocks, preferred and common differ in many respects. The common stock owners can vote at the shareholders’ meetings whereas the preferred stockowners cannot vote. Common stockowners get dividends declared by the company, whereas preferred stock owners have higher claim in assets and income of the company. Preferred stock entitles the owner to have his dividends earlier than the common stock owner. Preferred stock owner gets the priority when the company goes bankrupt. Besides these two, the other types of stock are dual class shares and treasury stock.

A stockowner is not liable to losses in case the company closes and has loans to pay back. The loss of the stockholders is limited to the money that would have been made by converting the assets into cash since all the money would be used to repay the loans to the creditors.

A stock exchange is the place where trading of shares is carried out. Individuals and companies sell and purchase shares on a large scale. Generally, a particular company trades only in one specific market and is said to be on the list of that particular stock exchange. However, big multinational companies can be listed on many stock exchanges. This is called inter-listed shares.

There are various methods to buy or sell finance stocks, but the commonest among them is through the mediator called stockbroker, who actually transfers the shares from one owner to another. Stocks can be bought directly from the company also.

The stock market of a country is an indicator of its economy, which just goes to show the growth and power of the stock market.

Stock Indexes: The Inside Story

437

A stock index is simply an average price for a large group of stocks, formed from stocks with something in common. One huge function of indexes is that they can function as investment instruments — mutual funds based on an index duplicate the holdings of the underlying index.

stocks, stock trading

Most of us have heard of stock indexes, but have only a fuzzy idea of them at best. This article aims to clarify some of the basics of stock indexes — what they are and how they work.

What Is A Stock Index?

A stock index is simply an average price for a large group of stocks, either those on a particular stock exchange or stocks across an entire investing sector. Indexes are formed from stocks with something in common: they are on the same exchange, from the same industry, or have the same company size or location. Stock indexes give us an overall snapshot of the economic health of a particular industry or exchange.

Many stock indexes exist; in the United States the most well known are: the Dow Jones Industrial Average, the New York Stock Exchange Composite index, and the Standard & Poor 500 Composite Stock Price Index.

How Does It Work?

There are several ways to calculate an index. An index based solely on stock prices is called a “price weighted index.” This type of index ignores the importance of any particular stock or the company size.

A “market value weighted” index, on the other hand, takes into account the size of the companies involved. That way, price shifts of small companies have less influence than those of larger companies.

Another type of index is the “market share weighted” index. This type of index is based on the number of shares, rather than their total value.

Index As Investment Tool

Another huge function of indexes is that they can function as investment instruments in and of themselves. Mutual funds based on an index duplicate the holdings of the underlying index. Thus, if index A rises by 1%, the Index A Mutual Fund rises by 1%. This has the tremendous advantage of lower costs. Plus these index funds have been shown to generally outperform managed funds.

The Big Indexes

One of the best-known indexes in the world is the Dow Jones Industrial Average. It is a “price-weighted average” index composed of the stocks of 30 of the most influential companies in America. Some feel that 30 companies are not enough to form an accurate assessment for so influential a measurement, but it is reported around the globe daily nevertheless.

The Standard & Poor 500 Index is based on 500 United States corporations, carefully chosen to represent a broader picture of economic activity.

Beyond the United States, the most influential index is the FTSE 100 Index, based on 100 of the largest companies on the London Stock Exchange. It is 1 of the most important indexes in Europe. 2 other important indexes are France’s CAC 40 and Japan’s Nikkei 225.

The Friendly Trend – Technical vs. Fundamental Analysis

1521

Technical analysts have flourished and waned in line with the stock exchange bubble.

The authors of a paper published by NBER on March 2000 and titled “The Foundations of Technical Analysis” – Andrew Lo, Harry Mamaysky, and Jiang Wang – claim that:

“Technical analysis, also known as ‘charting’, has been part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis.

One of the main obstacles is the highly subjective nature of technical analysis – the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper we offer a systematic and automatic approach to technical pattern recognition … and apply the method to a large number of US stocks from 1962 to 1996…”

And the conclusion:

” … Over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value.”

These hopeful inferences are supported by the work of other scholars, such as Paul Weller of the Finance Department of the university of Iowa. While he admits the limitations of technical analysis – it is a-theoretic and data intensive, pattern over-fitting can be a problem, its rules are often difficult to interpret, and the statistical testing is cumbersome – he insists that “trading rules are picking up patterns in the data not accounted for by standard statistical models” and that the excess returns thus generated are not simply a risk premium.

Technical analysts have flourished and waned in line with the stock exchange bubble. They and their multi-colored charts regularly graced CNBC, the CNN and other market-driving channels. “The Economist” found that many successful fund managers have regularly resorted to technical analysis – including George Soros’ Quantum Hedge fund and Fidelity’s Magellan. Technical analysis may experience a revival now that corporate accounts – the fundament of fundamental analysis – have been rendered moot by seemingly inexhaustible scandals.

The field is the progeny of Charles Dow of Dow Jones fame and the founder of the “Wall Street Journal”. He devised a method to discern cyclical patterns in share prices. Other sages – such as Elliott – put forth complex “wave theories”. Technical analysts now regularly employ dozens of geometric configurations in their divinations.

Technical analysis is defined thus in “The Econometrics of Financial Markets“, a 1997 textbook authored by John Campbell, Andrew Lo, and Craig MacKinlay:

“An approach to investment management based on the belief that historical price series, trading volume, and other market statistics exhibit regularities – often … in the form of geometric patterns … that can be profitably exploited to extrapolate future price movements.”

A less fanciful definition may be the one offered by Edwards and Magee in “Technical Analysis of Stock Trends“:

“The science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in ‘the averages’ and then deducing from that pictured history the probable future trend.”

Fundamental analysis is about the study of key statistics from the financial statements of firms as well as background information about the company’s products, business plan, management, industry, the economy, and the marketplace.

Economists, since the 1960’s, sought to rebuff technical analysis. Markets, they say, are efficient and “walk” randomly. Prices reflect all the information known to market players – including all the information pertaining to the future. Technical analysis has often been compared to voodoo, alchemy, and astrology – for instance by Burton Malkiel in his seminal work, “A Random Walk Down Wall Street”.

The paradox is that technicians are more orthodox than the most devout academic. They adhere to the strong version of market efficiency. The market is so efficient, they say, that nothing can be gleaned from fundamental analysis. All fundamental insights, information, and analyses are already reflected in the price. This is why one can deduce future prices from past and present ones.

Jack Schwager, sums it up in his book “Schwager on Futures: Technical Analysis”, quoted by Stockcharts.com:

“One way of viewing it is that markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal of the chartist is to identify those periods (i.e. major trends).”

Not so, retort the fundamentalists. The fair value of a security or a market can be derived from available information using mathematical models – but is rarely reflected in prices. This is the weak version of the market efficiency hypothesis.

The mathematically convenient idealization of the efficient market, though, has been debunked in numerous studies. These are efficiently summarized in Craig McKinlay and Andrew Lo’s tome “A Non-random Walk Down Wall Street” published in 1999.

Not all markets are strongly efficient. Most of them sport weak or “semi-strong” efficiency. In some markets, a filter model – one that dictates the timing of sales and purchases – could prove useful. This is especially true when the equilibrium price of a share – or of the market as a whole – changes as a result of externalities.

Substantive news, change in management, an oil shock, a terrorist attack, an accounting scandal, an FDA approval, a major contract, or a natural, or man-made disaster – all cause share prices and market indices to break the boundaries of the price band that they have occupied. Technical analysts identify these boundaries and trace breakthroughs and their outcomes in terms of prices.

Technical analysis may be nothing more than a self-fulfilling prophecy, though. The more devotees it has, the stronger it affects the shares or markets it analyses. Investors move in herds and are inclined to seek patterns in the often bewildering marketplace. As opposed to the assumptions underlying the classic theory of portfolio analysis – investors do remember past prices. They hesitate before they cross certain numerical thresholds.

But this herd mentality is also the Achilles heel of technical analysis. If everyone were to follow its guidance – it would have been rendered useless. If everyone were to buy and sell at the same time – based on the same technical advice – price advantages would have been arbitraged away instantaneously. Technical analysis is about privileged information to the privileged few – though not too few, lest prices are not swayed.

Studies cited in Edwin Elton and Martin Gruber’s “Modern Portfolio Theory and Investment Analysis” and elsewhere show that a filter model – trading with technical analysis – is preferable to a “buy and hold” strategy but inferior to trading at random. Trading against recommendations issued by a technical analysis model and with them – yielded the same results. Fama-Blum discovered that the advantage proffered by such models is identical to transaction costs.

The proponents of technical analysis claim that rather than forming investor psychology – it reflects their risk aversion at different price levels. Moreover, the borders between the two forms of analysis – technical and fundamental – are less sharply demarcated nowadays. “Fundamentalists” insert past prices and volume data in their models – and “technicians” incorporate arcana such as the dividend stream and past earnings in theirs.

It is not clear why should fundamental analysis be considered superior to its technical alternative. If prices incorporate all the information known and reflect it – predicting future prices would be impossible regardless of the method employed. Conversely, if prices do not reflect all the information available, then surely investor psychology is as important a factor as the firm’s – now oft-discredited – financial statements?

Prices, after all, are the outcome of numerous interactions among market participants, their greed, fears, hopes, expectations, and risk aversion. Surely studying this emotional and cognitive landscape is as crucial as figuring the effects of cuts in interest rates or a change of CEO?

Still, even if we accept the rigorous version of market efficiency – i.e., as Aswath Damodaran of the Stern Business School at NYU puts it, that market prices are “unbiased estimates of the true value of investments” – prices do react to new information – and, more importantly, to anticipated information. It takes them time to do so. Their reaction constitutes a trend and identifying this trend at its inception can generate excess yields. On this both fundamental and technical analysis are agreed.

Moreover, markets often over-react: they undershoot or overshoot the “true and fair value”. Fundamental analysis calls this oversold and overbought markets. The correction back to equilibrium prices sometimes takes years. A savvy trader can profit from such market failures and excesses.

As quality information becomes ubiquitous and instantaneous, research issued by investment banks discredited, privileged access to information by analysts prohibited, derivatives proliferate, individual participation in the stock market increases, and transaction costs turn negligible – a major rethink of our antiquated financial models is called for.

The maverick Andrew Lo, a professor of finance at the Sloan School of Management at MIT, summed up the lure of technical analysis in lyric terms in an interview he gave to Traders.com’s “Technical Analysis of Stocks and Commodities”, quoted by Arthur Hill in Stockcharts.com:

“The more creativity you bring to the investment process, the more rewarding it will be. The only way to maintain ongoing success, however, is to constantly innovate. That’s much the same in all endeavors. The only way to continue making money, to continue growing and keeping your profit margins healthy, is to constantly come up with new ideas.”

New Mexico Joins the Nuclear Renaissance

1585

The Urenco enrichment facility could spark another New Mexico uranium boom. Another uranium boom may now be in progress. How is that possible?

New Mexico, Uranium, Mining, Uranium enrichment, nuclear power, energy

New Mexico hasn’t had a uranium boom since 1950. After Navajo shepherd Paddy Martinez woke up from his nap, beneath a limestone ledge with a handful of funny looking yellow rocks, only to be later told he had discovered New Mexico’s first uranium, the state was swarmed with thousands of prospectors hoping to cash in on the nuclear metal.

Another uranium boom may now be in progress. This time, the charge is led by the European consortium Urenco Ltd, general partner of Louisiana Energy Services (LES), which was issued a draft license, this past Friday, by the U.S. Nuclear Regulatory Commission to build and operate a $1.5 billion uranium enrichment plant in Lea County, New Mexico. Louisiana Energy Services is a Urenco-managed partnership, whose members include Exelon Corp, Entergy Corp and Duke Energy Corp. This is the first permit issued for a uranium enrichment facility in thirty years; the first ever to a private company.

Announcement of the uranium enrichment facility came nine days after International Uranium Corporation (IUC) announced it was reopening its uranium mines in the Four Corners region of the western United States. In a company news release, Ron Hochstein, president of IUC, announced, “We intend on utilizing our large capacity mill to its full advantage through toll milling contracts with other future miners in the area? The company’s White Mesa Mill, only one of two operational uranium mills in the United States, is across from the New Mexico border.

Uranium development companies have acquired uranium properties, abandoned by major oil companies during the uranium drought of the 1980s and 1990s, and could be well positioned to advance those properties through the permitting process. Over the past year, newer uranium companies have entered the state, optimistic the record-high spot uranium price may help finance their exploration and development costs in New Mexico.

With a uranium mill, just past the western border of New Mexico in neighboring Utah, and the soon-to-be-built uranium enrichment facility in southeastern New Mexico, when might the state again become a world-class production center? Only over the past few years has Canada’s Athabasca Basin, with its ultra-high grades of uranium ore, surpassed the cumulative production of New Mexico. The Grants Mineral Belt in northern New Mexico produced more than 340 million pounds of uranium oxide (U3O8, yellowcake) before the uranium depression of the 1980s and 1990s brought New Mexico mining to a standstill. The Grants Mineral Belt produced about 40 percent of all the mined uranium in the United States.

Who is Urenco?

Urenco is short for Uranium Enrichment Company. Three countries ?Germany, the Netherlands and the United Kingdom ?signed the Treaty of Alemlo (Netherlands) on March 4, 1970 as a way to collaborate in developing centrifuge technology for uranium enrichment. In 1971, three industrial partners ?British Nuclear Fuels plc (BNFL), Ultra-Centrifuge Nederland N.V. (UCN) and Uranit GmbH ?founded Urenco Ltd. The company has since spun off its Enrichment Technology Company. There are now three wholly owned subsidiaries, based in each of the respective countries.

The Louisiana Energy Services partnership plans on building the National Enrichment Facility (NEF) about five miles east of Eunice, New Mexico. The NEF plans on providing a sustainable domestic supply of slightly enriched uranium, also called ‘low enriched uranium?or LEU, using Urenco’s gas centrifuge technology. Currently, USEC is the other uranium enrichment facility, using the more expensive gaseous diffusion technology. USEC is a publicly traded company, created under the Clinton-Gore Administration for the purposes of the Russia-US ‘swords for plowshares?HEU deal. Under the HEU agreement, Russia’s counterpart supplied USEC with uranium from decommissioned Russian nuclear weapons. This uranium now supplies U.S. utilities with about 50 percent of the uranium used to power domestic nuclear power plants.

In 2001, the domestic uranium industry only produced 12 percent of its required supply of enriched uranium, while Russia exported 55 percent to the United States. Urenco supplied 16 percent of the U.S. demand. Urenco plans to increase its percentage of enriched uranium to about one-quarter of U.S. enrichment demand, once the plant is running at full capacity. This amounts to annual production of 3 million Separative Work Units (SWUs). A Separative Work Unit is the unit used to express the effort necessary to separate U-235 and U-238. The capacity of enrichment plants is measured in tons SW per year. For example, a large nuclear power station with a net electrical capacity of 1300 MW requires an annual amount of 25 tons SW (enriched uranium) to operate (with a concentration of 3.5 percent U-235).

The National Enrichment Facility will become Urenco’s North American debut of the company’s gas centrifuge technology, which the company boasts is the ‘world’s most advanced, energy-efficient and cost-effective uranium enrichment technology.?It has reportedly been used for more than thirty years.

What is Gas Centrifuge Technology?

Only 0.7 percent of the weight of natural uranium, the U-235 isotope found in nature’s uranium, is the isotope needed to power a nuclear reactor. The U-235 isotope is the one that splits inside the core. It is this isotope which releases energy in the fission process. Because natural uranium can not power a nuclear reactor, the concentration of U-235 must be slightly increased, also known as ‘low enrichment,?from 0.7 percent to between 3 and 5 percent. The enrichment occurs during the centrifuge process.

It is called the ‘gas centrifuge process?because gaseous uranium hexafluoride (UF6) is fed into a cylindrical, high-speed rotor. The gas is whirled around inside thousands of centrifuges in a nearly friction-free environment, separating the fissionable U-235 isotope from the heavier U-238 isotope. The centrifugal motion pushes the heavier U-238 gas away from the useful U-235 gas, which remains closer to the rotor axis. The process is repeated until the desired enrichment percentage is achieved.

Let’s back up the process a few steps. First, the uranium is mined and milled. The finished product, which is shipped off to the conversion facility, is called yellowcake.

The next step in creating nuclear fuel for a reactor is the conversion process. The yellowcake, or U3O8, is converted into uranium hexafluoride, or UF6. Yellowcake is dissolved in nitric acid to create a new solution, uranyl nitrate. Hydrogen is then used to reduce this to UO2. This is then converted to UF4 with hydrofluoric acid. The UF6 is obtained with the uranium is oxidized with fluorine. At ambient temperatures, UF6 forms solid grey crystals. Depending upon its temperature, uranium hexafluoride can be a solid, liquid or gas.

After the U3O8 has been converted to UF6, it is transported to the enrichment site in an internationally standard transport container. The solid UF6 is heated up in an air-tight pressure vessel until it returns to its gaseous state. It is then fed into the centrifuge. The Urenco ‘gas centrifuge?has two pipes, one which removes the enriched uranium and another which removes the heavier uranium, depleted of U-235.

Because a single centrifuge won’t enrich the uranium to the desired level, a number of centrifuges are connected together. The connected, parallel centrifuges are called a cascade. By passing through each of the centrifuges in the cascade, the U-235 is gradually enriched to the level required by the customer, a nuclear power plant.

After the desired enrichment level is achieved, the enriched UF6 gas is passed through a series of compressors and packaged into product containers. The UF6 gas is cooled until the vapors solidify onto the walls of the container. The finished product is shipped to the fuel fabrication plant where the solid, enriched uranium is manufactured into fuel pellets.

Uranium Enrichment Means Big Money

The key to expansion, after sufficient U3O8 has been mined, is ensuring the uranium is converted and enriched so that it can fuel nuclear power plants. Until now, U.S. utilities have relied upon Russian HEU to LEU supplies to fuel their nuclear reactors. Urenco’s NEF in New Mexico gives a boost to the nuclear energy sector, and provides U.S. utilities with an alternative to having uranium enriched at USEC’s Kentucky plant, or worse yet, shipping domestically produced uranium overseas for enrichment. For instance, Brazil was forced to have its uranium enriched in Europe, until recently.

Value-adding to the fuel supplying reactors can mean big money for LES, and especially for Urenco Ltd. But, the investment of $1.5 billion will also produce hundreds of new jobs for the border towns of both New Mexico and Texas. Estimates show about 800 construction jobs will be created as the facility is being built, and as many as 1200 during the peak of the construction. About 300 employees will be required to operate the facility. Nearby Andrews, Texas has been celebrating the National Enrichment Facility. The city manager expects the number of new homes under construction to jump by 10-fold this year. School enrollment has grown over the past year while newcomers have moved into the area, hoping for construction jobs.

Urenco’s National Enrichment Facility should begin construction later this summer, probably in August. Louisiana Energy Services (LES) hopes to start selling enriched uranium in 2009, probably to its U.S. utility partners, who hope to build new reactors. A statement issued by the Nuclear Energy Institute (NEI) on Friday, congratulating LES for the approval of its NRC license pointed ahead to the U.S. expansion of the nuclear energy sector. The NEI’s chief nuclear officer, Marvin Fertel, said, “This experience bodes well for the construction and operating license applications for new nuclear power plants that are expected to be submitted to the agency beginning in 2007.?

Learn Stock Trading From Playing Poker

641

Picking good stocks is only the first step to become a consistently profitable trader. Those of you that track the performances of stock picks I post on http://www.cisiova.com/analysis.asp know that it is impossible to determine if a stock is good without a good exiting strategy. And for most traders, exit strategy is the hardest part. Many people say that to trade profitably you need to develop the right mentality. Unfortunately, such winning mentality can only be developed …

stock, stocks, stock pick, stock trading, trading, poker, portfolio management

Picking good stocks is only the first step to become a consistently profitable trader. Those of you that track the performances of stock picks I post on http://www.cisiova.com/analysis.asp know that it is impossible to determine if a stock is good without a good exiting strategy. And for most traders, exit strategy is the hardest part. Many people say that to trade profitably you need to develop the right mentality. Unfortunately, such winning mentality can only be developed through experience. However, there is a short cut to get through the learning curve without throwing thousands of dollars in the process. This short cut is playing POKER.

Yes you heard me right. Apparently, playing poker has a lot of similarities with investing in stocks. First of all, they both deal with money, uncertainties, and a keen judgment of potential risk and reward. In this article I will explain the similarities and differences between stock trading and poker. But before proceeding, make sure you know the rules of Texas Holdem and fluent with the terminologies.

Think of stock picking as looking for good hands to play. In Texas Holdem, you can look at the two hole cards and decide whether you can play the hand or not. Similarly, you can analyze the stock before entering a position. Fortunately for you traders, no one will raise pre-flop, so you just pay the commission. Remember to exit the position you also need to pay the commission, which implies that the cost of entering a position is two times the commission. Good poker players only play good hands, so you should do thorough researches before entering a position. One good thing about trading is that you do not have to wait for good stocks like poker players wait for good hands, you can find good stocks on stock picking websites or using screeners to find them yourself.

Once you call the blinds in poker, you get to see the flops and two more cards. Think of these cards as the performance of your stock after you enter the position. In poker, the flop can make a good hand, a medium hand, or a bad hand (by helping your opponents). In trading, you can observe the potential of the stock as well, and you should objectively judge the downside and upside potential of the stock. In poker, there are times that you have a good hand, and your opponent have a better hand, and you know you are beat. These are the times where your mentality matters the most. An experienced poker player will fold his hand regardless of the amount of money he has put into the pot. As a trader, at times that you think the upside potential fails to actualize, you should sell the stock regardless of how much you have lost. On the other hand, when a good poker player knows he has the winning hand, despite the possibility of losing at the river, he would bet aggressively, without fearing the small losing possibility. In trading, this translates to if the stock goes up and manifests higher upside potential, you should not fear that you will lose your recent winnings. Therefore the winning mentality is to ride when the stock is going up, and sell when the stock is losing its heat. This discipline is easily said than done. So many times I have heard people lost all their money because they hold on to losing positions (due to hope) and sell winning positions too early (due to fear).

By playing poker, you would get the chance to master your emotions, learning not to hope when you are beat, and not to fear when you are favorable to win. You want to lose small and win big, not the opposite.

Now go practice. This mentality only develops with experience.