Investing Daily

The crash of 2008 wiped out trillions of dollars of wealth. By any chance, did you get caught up in some of that?

Basically, there’s only one way to lose big money--big money being a relative term, so let me rephrase. There’s only one path to losing a major percentage of your net worth, and that’s to risk it. Too many of us peg ourselves as “investors” because this is the easier road to take.

Investors generally have trouble selling (it doesn’t matter whether it’s for a profit or a loss)--as if for some reason selling is a chore. The truth is selling is just as easy as buying. Many markets today aren’t meant for holding. With certain exceptions (i.e., core holdings), markets today don’t favor long-term buy-and-holders. They favor aggressive traders.

It’s a mistake to be complacent. Today it’s critical that you be on top of your investments because the market environment changes very quickly. It’s hard to believe that this past summer oil was trading at $147 a barrel (the work of the evil speculators). Last week oil, was trading below $34 (with no evil speculators I know of being publicly thanked).

The Trend

Source: Commodity.com

I never would have imagined a move of this magnitude could occur in only six months. The trend can go longer and further than you can imagine.

This all dovetails nicely into our trading rules segment.

Rule No.1: The trend is your friend, so don’t fight it. Just one look at the chart above underscores this point. I don’t care if you have the net worth of a T. Boone Pickens; when trading is upside down, there’s nobody on Earth with enough money to fight the will of the market and come out on top.

Rule No. 2: Look for breakouts above previous highs (resistance) to be a buyer and breakouts below previous lows (support) to be a seller. The current chart of the Dollar Index illustrates both varieties here. You don’t need to risk much after the breakout, if it’s any good, your trade will work quickly.

Remember, timid traders don’t like to buy at new highs or short at new lows because a market doesn’t look cheap (or expensive) when trading at the breakout levels. Be bold because going with the breakouts places the odds in your favor. Just remember to use good money management.

Dollar Index

Source: Commodity.com

Rule No. 3: Identify and trade proven chart patterns. Without getting into the time-worn argument of technical versus fundamental, a legitimate question is why should chart patterns work at all? I believe it’s because markets are made by human beings making human decisions about when to buy and sell based on fundamental and technical inputs.

Because human nature doesn’t change, buying and selling patterns are replicated over time. Certain patterns emerge that I’ve found to be reliable indicators of either:  one, a continuation of the major trend; or, two, the trend is set to reverse.

Like anything else in the marketplace, nothing is foolproof, so you need to use stop-loss orders and reasonable money management. There are three major patterns I use in my own trading.

In 2009 I vow to identify and trade more flag patterns. I didn’t trade them often enough in 2008, but in 2009 I’ll do so more often because they’re very reliable.

What’s a flag-like pattern? It’s a pattern that looks like a flag blowing in the wind. It sets up opposite the major trend but points toward a continuation of the major trend. A picture is worth a thousand words, and the chart below illustrates multiple flags during the major oil downtrend of 2009--every one of ‘em pointing lower yet.

The time to go short is when the market breaks below the flag’s bottom. The time to buy is when the market breaks above a flag’s top.

Crude Oil Flags

Source: Commodity.com

My two other favorite patterns are the head-and-shoulders and breakouts from consolidation. I recently did an interview with Tom Aspray for MoneyShow.com during which I discussed how to identify the breakout pattern. In the interview I present my Six Rules for Trading Breakouts. Here’s the link to the video.

For my subscription based trading service Futures Market Forecaster I’m moving in the direction of recommending more shorter-term momentum plays. My FMF trade recommendations are very specific, delivered via e-mail to subscribers in real time and executable in the marketplace. My trades aren’t disseminated with the benefit of hindsight, but in real time during active markets.

And while we’re on the subject of timeless wisdom, let me conclude with some words of advice for the Chairman of the Federal Reserve and the Secretary of the Treasury:

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed. People must again learn to work instead of living on public assistance, lest Rome become bankrupt. -- Cicero, 55 BC

Happy Holidays.

Risk Disclaimer
Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.