Investments help insurers offset underwriting losses

NEW DELHI: Even as 2007 saw plunging premiums and underwriting losses for general insurance companies, it was more than offset by the returns on their investment incomes due to the booming stock market. Companies spread their risks thinner, buoyed by the Sensex which moved above the 20,000-mark.

As equity markets have had a good run, some insurance companies have sought to offset underwriting losses with capital gains, where accounting standards allow profits to be booked in the year of sale and there is no mark-to-market accounting.

“Insurance companies do offset risks by investment incomes. In any detariffed market, losses on account of underwriting is natural. It will take some time before the market settles down. The board of every insurance company sets a mandate spelling out the quality of growth,” said IRDA chairman CS Rao.

What happens to insurance companies when the Sensex may not generate as much returns? “In the event of an equity market correction, those companies, which have excessive reliance on capital gains — say more than 25% of the Profit Before Tax (PBT) — will have to increase prices to maintain profitability as a significant source of profits dries up. However, this correction cannot be immediately done as it would affect the stability in premium rates and cannot be linked to the swings in the equity market. By the time the insurer realises this mismatch, it would be too long to make any correction,” an industry expert said.

In January 2007, general insurers were given the freedom to price policies within prescribed limits. Premiums fell as high as 60% of the original tariffs as companies rushed to sell the cheapest policies to expand the market share. Further, the industry will be ushered into complete free-pricing in January 2008. In the new year customers will need to differentiate policies not on prices alone but on various product features as well.

Bajaj Allianz General Insurance CFO S Sreenivasan said: “The question is do insurers try to offset their underwriting losses by investment income? But what needs to be considered is the sustainability of this investment income. We feel that ultimately sustainable investment income will come from a growing stream of interest and dividend income, which is driven by cash-flow generation. Bajaj Allianz General Insurance, which focuses on retaining rather than reinsuring risk with a strong underwriting basis, will be able to generate sustainable cash flows and hence, growing stream of investment income. In the ultimate analysis, shareholder value will be driven more by free cash flows than book value.” In the financial year 2006-07, Bajaj Allianz was the only company to make underwriting profits, he added.

The underwriting performance of an insurance company is measured in its combined ratio. The combined ratio is the loss ratio and the expense ratio taken together. The loss ratio is calculated by dividing the amount of losses by the amount of earned premium. The expense ratio is calculated by dividing the amount of operational expenses by the amount of earned premium.

A combined ratio of less than 100% indicates underwriting profitability, while above 100 indicates an underwriting loss. A lower number indicates a better return on the amount of capital placed at risk by an insurer. “The combined ratio reflects the health of the general insurance business and captures the impact of claims ratio, expense ratio and commission ratio. ICICI Lombard’s combined ratio for fiscal 2007 was less than 100%,” Ritesh Kumar, head of retail, rural and reinsurance at ICICI Lombard.

“The board mandate fosters quality growth. Maintaining a healthy market share as well as the bottomline are key to ICICI Lombard’s growth strategy and for leveraging the opportunities thrown up by India’s robust economic expansion. Going forward, the industry will witness a re-pricing of risks in line with the risk profile of the category,” Mr Kumar said.


http://economictimes.indiatimes.com/Personal_Finance/Insurance/Analysis/Investments_help_insurers_offset_underwriting_losses/articleshow/2659860.cms

The Case for Insurance-Based Investments

"Buy term and invest the rest." That's the mantra among many experts who see term insurance as the only smart way to protect yourself and your family.

The unfortunate thing, however, is that insurance-based investments have a lot of untapped potential. Tax laws favor them, and if you need life insurance anyway, attaching investments to a policy can have some real benefits. But just as it took discount brokers like Charles Schwab (Nasdaq: SCHW) and TD Ameritrade (Nasdaq: AMTD) to take advantage of deregulation in the financial industry and challenge the expensive commission structures of big-ticket brokers like Morgan Stanley (NYSE: MS) and Citigroup's (NYSE: C) Smith Barney, it will take a new generation of "discount" insurance companies to wrest control of the profitable insurance market away from the big players, such as Prudential (NYSE: PRU) and MetLife (NYSE: MET).

The perfect insurance investment
Insurance policies enjoy benefits that many standard investments lack. Earnings within a policy grow tax-deferred, and death benefits paid to beneficiaries aren't subject to income tax at all. Some states provide limited protection from creditors' claims for insurance policies, meaning that they can be used for asset protection strategies. In addition, the federal student aid form excludes the value of life insurance policies from your assets when determining financial aid eligibility.

With these benefits in mind, we can create the perfect insurance investment. It would have the following characteristics:

* Life insurance coverage at the same cost as equivalent term policies;
* Access to low-cost investment options across the full range of asset classes and subclasses, with depth of choices similar to those offered by mutual funds;
* Loan options that give policyholders access to their money at no cost, since it's the policyholder's own money that's being used for the loan;
* Minimal administrative fees and associated costs; and
* Cash values that rise in proportion to the premiums you put in, without holdbacks for sales commissions or surrender charges.

In theory, there's nothing difficult about creating a life insurance investment vehicle like this. In reality, though, nothing currently available comes close to this ideal.

Falling short
Unfortunately, you just can't find insurance-based investments at a reasonable cost. The closest you'll get is in the variable annuity realm, where traditional discounters like Vanguard and Fidelity have offerings that cost around 0.25% more than comparable mutual funds. That's well below the average charge for mortality and expenses of about 1.2%.

Variable life insurance carries even more costs. One variable policy I looked at carried monthly administrative charges of $35 and mortality and expense charges of 0.9% for the first 10 years the policy is in force, and it charged an extra 2% for policy loans during those first 10 years. Another firm, in its 412-page prospectus, reveals monthly fees of $30 and up, 1% extra for policy loans, and 0.45% in mortality and expense charges. And in neither case do those numbers include the expenses charged by the respective investment subaccounts, which in one case ranged from 0.37% to 1.29% more.

Wait for the new model
Just as brokerage firms had to adapt to new conditions in the financial services industry, so too will life insurance companies eventually have to offer more competitive products. Although a patchwork of state regulations makes it difficult for insurance companies to evolve quickly, once customers realize how much of their money goes toward unnecessary sales and support costs, the ensuing revolt will leave insurers no choice but to create more beneficial products.

Of course, there's no guarantee that existing insurance companies will be the innovators in this arena. After all, you can still pay big commissions at some brokerage houses, so there will always be a place for high-commission life insurance. Until permanent insurance comes with a reasonable price tag, however, most people will be better served by sticking with term.



http://www.fool.com/personal-finance/insurance/2007/12/28/the-case-for-insurance-based-investments.aspx

Trading For A Living - Part 2

In part 1 of this article I started to look at the financial implications of giving up the day job to instead start trading full time for a living. There are more than just monetary considerations as we will see later, but for now, there are some more costs to ponder.

More Costs!

Let’s move on to equipment. Presumably you already have a PC and internet connection by virtue of the fact you are reading this on the internet. But are these both up to the job of trading full time? Again the specifications for both hardware and ISP will depend largely on your trading style, but if you’re relying on a 100Mhz Pentium II and a dial up service, you’re setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too – expect the unexpected.

Many traders make the mistake of saying “This will do me whilst I start out, and I’ll get something better when I make some real money”. This is quite simply false economy, you are unlikely to ever make real money with a substandard setup (and this applies equally to substandard software and data feeds). This is a cut-throat business and 95% fail, you must give yourself every advantage you can. You wouldn’t enter the Indy 500 in a go-kart with the intention of buying a better car when you’ve won a few races, and the same thing applies here.

Earnings

When you’ve added this all together, you have a pretty good picture of how much money you need to generate from your trading in order to live. Does your past performance suggest you will be able to meet this target? It’s tempting to say “When I go full time I’ll make much more”, but how do you know this is the case? Perhaps you can take a couple of weeks holiday and try it out – if you don’t make enough in that two weeks then you’re not ready. A few weeks really isn’t enough time to know if you’re going to succeed though. An ideal next step then is to cut your day job hours to part time and trade maybe two or three days a week. This way you know you have some money coming in, you get to trade for real, and if it all goes horribly wrong you are probably better placed to get back into full time employment than someone who quit the working world completely.

The option of part time work is a luxury many of us don’t have however. So does it have to be all or nothing – trade or work? Why not keep the day job and trade outside your working hours as well. If you are trading and end of day strategy, then this is easily achieved by doing your research in the evening and placing the appropriate combinations of Stop and Limit orders with your broker. For day traders, certainly practising is easier if your intended market is not your home market, for example if you want to trade the US and you live in the UK where you can come home and paper trade in the evening.

There are other try before you buy options open to the day traders who want to practise trading their home market outside of normal hours though. eSignal allows you to download tick data for any symbol and play it back in real time or speeded up so you could trade the whole day in an hour. Other vendors have similar offerings, and if you have an IB account you can use AutoTrader to record tick data during the day for playback into a demo version of SierraCharts or QuoteTracker for free.

The bottom line here is that before you take the plunge, you need to have done everything in your power to prepare yourself for what lies ahead. It will still be harder than you ever thought, but it will be nigh on impossible with no preparation whatsoever.

Other Considerations

There are a few non-financial aspects to consider before going full time with your trading. If you have a family, how will the change impact them? Do you have the space to work uninterrupted during the day? It’s important that the family don’t assume that because you are at home you are automatically available to take the kids to school, or walk the dog. Make sure from the start that everybody knows the ground rules and that you can separate your working time from your free time effectively.

Consider also the social impact of leaving your full time employer. Again, if you have a partner or family are you going to drive each other nuts being in the same house all day? Relationships can be tested to the limit! Or if you live alone, are you going to drive yourself nuts being on your own all day? Trading full time can give you enormous amounts of free time, but if you have nothing to fill that time with you can quickly lose the plot – I’ve seen it happen and it’s not pretty.

Is It Worth It?

Nobody can tell you if trading for a living is for you, it’s something you have to find out for yourself. I’ve seen traders go through highs and lows to challenge those of any stock chart, but for most it has proved to be a good move. The long list of benefits are all there for the taking, as with any change of career or indeed any major life change, as long as you go into it with your eyes open, and above all prepare, then there is no reason why it cannot work for you.

About The Author

Geoff Turnbull is a full time day trader, and a contributor to http://www.stock-trading-world.com

The Realities Of Market Timing

Market timing systems are based on patterns of activity in the past. Every system that you are likely to hear about works well when it is applied to historical data. If it didn’t work historically, you would never hear about it. But patterns change, and the future is always the great unknown.

A system developed for the market patterns of the 1970s, which included a major bear market that lasted two years, would have saved investors from a big decline. But that wasn’t what you needed in the 1980s, which were characterized by a long bull market. And a system developed to be ideal in the 1980s would not have done well if it was back-tested in the 1970s. So far in the 1990s, any defensive strategy at all has been more likely to hurt investors than help them.

If your emotional security depends on understanding what’s happening with your investments at any given time, market timing will be tough. The performance and direction of market timing will often defy your best efforts to understand them. And they’ll defy common sense. Without timing, the movements of the market may seem possible to understand. Every day, innumerable explanations of every blip are published and broadcast on television, radio, in magazines and newspapers and on the Internet. Economic and market trends often persist, and thus they seem at least slightly rational. But all that changes when you begin timing your investments.

Unless you developed your timing models yourself and you understand them intimately, or unless you are the one crunching the numbers every day, you won’t know how those systems actually work. You’ll be asking yourself to buy and sell on faith. And the cause of your short-term results may remain a mystery, because timing performance depends on how your models interact with the patterns of the market. Your results from year to year, quarter to quarter and month to month may seem random.

Most of us are in the habit of thinking that whatever has just happened will continue happening. But with market timing, that just isn’t so. Performance in the immediate future will not be influenced a bit by that of the immediate past. That means you will never know what to expect next. To put yourself through a *timing simulator* on this point, imagine you know all the monthly returns of a particular strategy over a 20-year period in which the strategy was successful.

Many of those monthly returns, of course, will be positive, and a significant number will represent losses. Now imagine that you write each return on a card, put all the cards in a hat and start drawing the cards at random. And imagine that you start with a pile of poker chips. Whenever you draw a positive return, you receive more chips. But when your return is negative, you have to give up some of your chips to *the bank* in this game. If the first half-dozen cards you draw are all positive, you’ll feel pretty confident. And you’ll expect the good times to continue. But if you suddenly draw a card representing a loss, your euphoria could vanish quickly.

And if the very first card you draw is a significant loss and you have to give up some of your chips, you’ll probably start wondering how much you really want to play this game. And even though your brain knows that the drawing is all random, if you draw two negative cards in a row and see your pile of chips disappearing, you may start to feel as if you’re on *a negative roll* and you may start to believe that the next quarter will be like the last one. Yet the next card you draw won’t be predictable at all. It’s easy to see all this when you’re just playing a game with poker chips. But it’s harder in real life.

For example, in the fourth quarter of 2002, our Nasdaq portfolio strategy, with an objective to outperform the Nasdaq 100 Index, produced a return of 5.9 percent, very satisfactory for a portfolio invested in technology funds only. But that was followed by a loss of 7.8 percent in the first quarter of 2003. Most investors in this strategy, at least those we know of, stuck with it. But they experienced significant anxiety at the loss and the shock of a sharp reversal in what they had thought was a positive trend. The same phenomenon happened, with more dramatic numbers, in our more aggressive strategies.

Some investors entered those portfolios in the winter of 2002, and then were shocked to experience big first-quarter losses so quickly after they had invested. Some, believing the losses were more likely to continue than to reverse, bailed out. Had they been willing to endure a little longer, they would have experienced double-digit gains during the remainder of 2003 that would have restored and exceeded all of their losses. But of course there was no way to know that in advance.

Most timers won’t tell you this, but all market timing systems are *optimized* to fit the past. That means they are based on data that is carefully selected to *work* at getting in and out of the market at the right times. Think of it through this analogy. Imagine we were trying to put together an enhanced version of the Standard & Poor’s 500 Index, based on the past 30 years. Based on hindsight, we could probably significantly improve the performance of the index with only a few simple changes.

For instance, we could conveniently *remove* the worst-performing industry of stocks from the index along with any companies that went bankrupt in the past 30 years. That would remove a good chunk of the *garbage* that dragged down performance in the past. And to add a dose of positive return, we could triple the weightings in the new index of a few selected stocks; say Microsoft, Intel and Dell. We’d get a new *index* that in the past would have produced significantly better returns than the real S&P 500. We might believe we have discovered something valuable. But it doesn’t take a rocket scientist to figure out that this strategy has little chance of producing superior performance over the next 30 years.

This simple example makes it easy to see how you can tinker with past data to produce a *system* that looks good on paper. This practice, called *data-mining,* involves using the benefit of hindsight to study historical data and extract bits and pieces of information that conveniently fit into some philosophy or some notion of reality. Academic researchers would be quick to tell you that any conclusions you draw from data-mining are invalid and unreliable guides to the future. But every market timing system is based on some form of data-mining, or to use another term, some level of *optimization.* The only way you can devise a timing model is to figure out what would have worked in some past period, then apply your findings to other periods.

Necessarily, every market timing model is based on optimization. The problem is that some systems, like the enhanced S&P 500 example, are over-optimized to the point that they toss out the *garbage of the past* in a way that is unlikely to be reliable in the future. For instance, we recently looked at a system that had a few *rules* for when to issue a buy signal, and then added a filter saying such a buy could be issued only during four specific months each year. That system looks wonderful on paper because it throws out the unproductive buys in the past from the other eight calendar months. There’s no ironclad rule for determining which systems are robust, or appropriately optimized, and which are over-optimized. But in general terms, look for simpler systems instead of more complex ones.

A simpler system is less likely than a very complex one to produce extraordinary hypothetical returns. But the simpler system is more likely to behave as you would expect.

To be a successful investor, you need a long-term perspective and the ability to ignore short-term movements as essentially *noise.* This may be relatively easy for buy-and-hold investors. But market timing will draw you into the process and require you to focus on the short term. You’ll not only have to track short-term movements, you’ll have to act on them. And then you’ll have to immediately ignore them. Sometimes that’s not easy, believe me. In real life, smart people often take a final *gut check* of their feelings before they make any major move. But when you’re following a mechanical strategy, you have to eliminate this common-sense step and simply take action. This can be tough to do.

You will have long periods when you will underperform the market or outperform it. You’ll need to widen your concept of normal, expected activity to include being in the market when it’s going down and out of the market when it’s going up. Sometimes you’ll earn less than money-market-fund rates. And if you use timing to take short positions, sometimes you will lose money when other people are making it. Can you accept that as part of the normal course of events in your investing life? If not, don’t invest in such a strategy.

Even a great timing system may give you bad results. This should be obvious, but market timing adds a layer of complication to investing, another opportunity to be right or wrong. Your timing model may make all the proper calls about the market, but if you apply that timing to a fund that does something other than the market, your results will be better or worse than what you might expect. This is a reason to use funds that correlate well you’re your system.

The bottom line for me is that timing is very challenging. I believe that for most investors, the best route to success is to have somebody else make the actual timing moves for you. You can have it done by a professional. Or you can have a colleague, friend or family member actually make the trades for you. That way your emotions won’t stop you from following the discipline. You’ll be able to go on vacation knowing your system will be followed. Most important, you’ll be one step removed from the emotional hurdles of getting in and out of the market.

About The Author

Robert van Delden has been managing the FundSpectrum Group since 1998, whose objective it is to help individual investors to increase their investment returns using low risk Market Timing strategies.. More details can be found on our membership web site: http://www.fundspectrum.com

Is Starting A Business For Me? What To Consider Before Starting A Business

Do you have the right temperament?

Starting a small business is one of the most serious decisions that a person can take in life. Positively, it often results in higher income levels than one could achieve as an employee together with the unique buzz of being your own boss but conversely it also can be stressful, will demand longer working hours and will probably reduce your ability to take long holidays.

Do you have a definite business idea?

The desire to be your own boss is not enough to succeed. Empirical evidence clearly shows that those who do best normally have previous work experience in their chosen business field or have conducted thorough research.

Research, Research, Research!

Before committing to setting up a new business carry out as much research as possible, perhaps contacting any representative and professional bodies for their input and advice. In addition, it is important to note local market conditions as, unless you have a unique selling point, it is very difficult to succeed where a local market is saturated with established competitors. In addition, it is always wise buy a few pertinent general business books as most will encapsulate the basics of creating a successful business - The formula being remarkably consistent from sector to sector.

Hope for the best but expect the worst!

By definition most entrepreneurs are positive but ironically such optimism can often be their worst enemy, so always leave a sufficient financial safety blanket.

Keep non-essential costs to a minimum.

Many new business people overspend on hardware, expensive computers, printing etc. If your business does not require people physically coming to a shop or office do not waste money on office rental or even employing a secretary. In many cases, a serviced or virtual office will create the right impression at a fraction of the cost of having your own office.

Get Expert Advice

Today many government bodies and banks offer free business start up advice. In general such advice may not be all encompassing and may have certain vested interests but by seeking such advice from a number of different suppliers you should end up with a fair understanding of how to develop your new business.

Consider a Franchise.

The risks of establishing your own business are considerably reduced by buying a well known and established franchise. In many cases, the franchisor can often help with finance, computer software and business methodology. The downside is that if you really are aiming for the heavens then becoming a franchisee is unlikely to result in untold riches!

About The Author

Austen Osborne

www.startingmybusiness.biz is dedicated to helping small businesses that are starting up or are looking to grow. They offer everything from company formation to accountancy, via business books and virtual offices.

Call now on 0845 1300 060 to get started.

Overbought/Oversold

Has your broker ever told you that a stock is “overbought” or “oversold”? He probably went on the explain that the stock you own (I hope you didn’t) had gone down so far that it now was oversold and due for a rally. He might also have encouraged you to buy an equal amount to “dollar cost average” your position so that when (“if”- he didn’t say that, I did)) it did go back up you could “get out even”. He might even say you “could make a fortune”.

Waiting to get out even is the great trap that is preached by all the big Maul Street brokerage houses. What is even worse is most brokers and financial planners believe it. What happened to all those beautiful company reports sent to you telling how wonderful this stock was before you bought it. Maybe you better read those back to him. Brokerage companies do not want you to sell.

When any stock is going either up or down for any extended period of time it does seem logical that it can become overbought or oversold, but let’s examine what that means to your ownership.

The reason a stock started up is because the underlying profit projection is going to produce substantial profits that will make the stock more valuable. At some point it is going to reach a true valuation and should stop advancing. What usually happens is it goes beyond true valuation to what could be called overbought (over valued) and then starts down. You may be encouraged to buy when a particular stock becomes “hot” and everyone is buying it. When all the sheep are buying you want to be a seller or you will also be sheared.

Suppose all this was in anticipation of future profits that did not materialize? Then the rise would turn over and head down. This would be more likely for a smaller company than one of the giants, but giants have been toppled. If any fraud was involved the company might even go bankrupt.

Think back to WorldCom that went to the moon and was finally flushed down the sewer. Did it EVER while it was tanking become oversold for a rally? Not hardly because there was no value. Unless you truly understand how to trade overbought and oversold situations the best thing to do is keep your hands in your pockets.

Beauty is in the eye of the beholder. Overbought and oversold is in the mind of the buyer/seller.

About The Author

Copyright 2004 All rights reserved.

Albert W. Thomas Former 17 year exchange member, floor trader and brokerage company owner. F*R*E*E investment letter www.mutualfundmagic.com. Author of best seller "IF IT DOESN'T GO UP, DON'T BUY IT!"

al@mutualfundmagic.com

Super Rules, OK?

Do you rule your superannuation or does it rule you?

It’s easy to fall for some myths about your super unless you do some clear thinking about who is in charge. Virtually all Australian employees now have a superannuation account, many have several, even more than they know about. We all hope to use this money to fund our retirement, but unless you look after your super then you are in danger of losing some of your money along the way.

Myth number 1.

Someone else can look after my super. Only partly right. It is possible go through your working life letting your super run on autopilot, but you may be in for an unpleasant surprise if you don’t keep an eye on your super. Make sure your employer is paying the correct amount, and that if your employer goes broke your super is still available.

If you change jobs you need to decide if you wish to ‘roll over’ the money into another fund. This is especially important if you change jobs frequently. You can find that you have relatively small amounts scattered over several funds, and in each you will be paying a management fee before you earn any distribution or interest. In the long term inflation will eat away at the value of your principle, even though the dollar amount stays the same. Many super companies provide a free service to consolidate small accounts for you. Use them.

Myth number 2.

It’s not my money until I retire. Dead wrong. It’s your money, just like the rest of the money in your pay packet. Super funds are providing a service of managing your money until you can legally access it when you retire. You have control of it. After July 2005 you will have even more say about your money. If you are not happy with the service you should tell the service provider. If they can’t fix your problem, then you can sack them and put your money elsewhere.

Myth number 3.

I don’t need to worry about it until I am at least fifty-something. Not really. Australians are enjoying longer lives and better health. You will need more money if you want to have more options in retirement. You will probably need to top up your super to achieve financial independence in your golden years. The sooner you start the better.

The Australian Government is generously giving away our money to help lower and middle income earners top up their super. It’s called the superannuation co-contribution scheme. If you, or your spouse, are eligible you should make sure you get your share.

Fact number 1.Our superannuation is our money. To look after your super you need to learn about your rights and options. It’s a long term task. You need to get information and advice. Don’t rush, but start soon.

About The Author

Darby Higgs is a Melbourne-based web writer. Read about how he retired at http://www.vinodiversity.com

Protecting the Tax Advantage of Your Deferred Compensation

The American Jobs Creation Act of 2004 imposed strict new rules on non-qualified deferred compensation plans. Beginning in 2005, deferred compensation programs that are not in compliance with the new rules may be taxed as wages, slapped with a 20% excise tax, plus charged an interest penalty.

Given the potentially huge tax consequences for non-compliance with the rules, you should consult with your organization’s benefit specialist and your tax professionals to figure how your compensation might be affected by these new rules.

Deferred compensation plans are often used to provide for the deferral of salary, incentive compensation (i.e., commissions or bonuses), or supplemental compensation for top executives, independent corporate directors, and individual board members. The new rules apply to nonqualified deferred compensation plans at taxable and tax-exempt organizations.

An option for independent corporate directors and individual board members who receive 1099 income for their services may consider is to freeze their nonqualified plan and adopt a qualified plan such as the “one person defined benefit plan”, called the Solo-DB Plan. Qualified retirement plans are exempt from the requirements of the American Jobs Creation Act.

The Solo-DB plan allows the highest deductible contributions possible in a qualified retirement plan. For example in 2005 one can contribute up to $170,000 of compensation into a tax-deferred Solo-DB plan.

Defined benefits plans have been around for a long time. But, recent pension legislation has raised the contribution and deductibility limits as well as simplified plan fund requirements. Thus, defined benefit plans like Solo-DB have become much more attractive to upper-income individuals with self-employment income. The Solo-DB plan will allow you to aggressively fund your retirement while cutting your taxes significantly.

Individuals who qualify for the Solo-DB plan include sole proprietors, independent contractors, and small business owners age 45 or older who can contribute more than $41,000 annually to the plan for at least three years.

For more about Solo DB plans visit Lamaute Capital at: http://www.InvestSafe.com.

About The Author

Daniel Lamaute, CEO of Lamaute Capital, Inc. (www.InvestSafe.com) specializes in setting up retirement plans. You may visit http://www.investsafe.com to access a free calculator that will help you estimate what your maximum contribution might be under different plans.

What My Horse Had For Breakfast

Let’s see, he had some oats, fresh alfalfa and his vitamins. I know from the mixture that is great food and he will win the seventh race this afternoon. He can’t lose because of his diet and a great jockey will be riding him.

Kinda reminds me of what my broker (horse trainer) told me to do when I was selecting a mutual fund to buy. He said to check out what was in the fund (the mixture of stocks, like my horse’s breakfast) and to see if there was a good fund manager (the jockey). I did what he said and carefully read the annual report and the prospectus too. Sounds great so I bought it.

What I can’t understand is I did all the things the horse trainer said I should and "Rocket", my horse’s name, still came in 6th in an 8-horse race. All I wanted him to do is come in first and I can’t say I’m crazy about that mutual fund either.

That fund has a 5-star rating, is managed by one of the great names on Wall Street and has 60 of the best known company stocks I can think of and yet it is going down. I am doing everything that conventional wisdom says I should, but I continue to lose. Is there and answer?

I am not so sure about the horse, but I know the conventional wisdom of Wall Street is mostly smoke and mirrors. I read the Annual Report, but I forgot that "annual" means that much of the information is over a year old. How much help can that be? And I forgot that the prospectus was not written to enlighten me, but for the bean counters in Washington. It is supposed to make available to me all the financial information I need to make a decision to buy. All of this research is nonsense, as it will not tell me the one most important thing I need to know - will the price increase so I can make a profit? Unfortunately, my broker is not going to be much help here either as he has been trained by the Wall Street method which has nothing to do with making money or protecting my capital.

Anyone can look up all kinds of information, but when it comes down to it ask this question: Will knowing all that stuff make me any money? I always figure that if I can find it out it isn’t worth knowing any more because that information is already reflected in the price of the stock or mutual fund. So why bother?

Wall Street brokerage companies want you to do all that "research" because if what you buy doesn’t go up they can say you knew everything about it before you bought it. It wasn’t their fault you did not understand it.

I think I’ll sell that horse. And quit listening to my broker.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Trading Baskets Part I

Q. What is a basket?

A basket is a group of up to 50 stocks that you can trade, manage and track as one entity.

In another article, I wrote about a rather conservative method of being in the stock market. See: "A Triple Dipper: How to Make 3 Profits on 1 Stock" at http://www.traderaide.com/Selected_Articles/Tripple_Dipper.html.

This time let’s talk a little about trading "baskets". The definition above maybe needs to be expanded just a bit. You can trade baskets using longer term buy and hold strategies, a shorter-term swing trading approach or as a day trader. A basket of stocks is nothing more then any group of stocks that someone has grouped together for any of a number of reasons. They may be of the same sector, or they may be made up of a number of stocks in different sectors.

An example of a few baskets could look like what is sited below. To save time and space I’ll use the stock symbols only. You can look them up later if you are interested. Let’s say you see stem cell research as the thing of the future and wanted to be invested in it. If you don’t know which stock is going to fair the best, you may want buy a basket of stocks that is made up of ASTM GERN and STEM. This would be a basket of stem cell stocks. Now let’s say you think the Internet stocks look good and, again, you are not sure which ones will do the best. In your Internet basket you may want to pick up some shares of EBAY, YHOO and AMZN. Obviously your basket can contain any number of stocks you want. Many online brokers will actually allow you to set up baskets in your account, and you can put in a sell order all at once on the entire basket or pick and chose which ones you want to sell. I’m not recommending these stocks in any way, shape or form, but merely using them as examples.

Okay, that’s pretty basic, but I’m sure you get the picture. The examples above would more or less be the type of baskets you would probably be thinking of holding for some time and not day trading.

Most day traders have an entirely different kind of basket of stocks. A day trader may have any number of stocks in his trading basket that he or she has been become very familiar with. They have studied them and even charted them for intraday movement (I hope) for some time and have learned the trading habits of the individual stocks. They have a fairly good idea of how the stock moves on a daily basis with or without news. They have knowledge of how it reacts to earnings, analyst upgrades, analyst downgrades and other events that may be reoccurring. They have also probably learned how they trade when hit by surprise events as well. They know which market makers to watch the closest. They also know who the main market maker in the stock is, often referred to as the axe.

A day trader’s basket may be any number of stocks. A good average could be somewhere between 25-50 stocks. But it may also be larger or smaller. I have known traders that traded one stock all day long and nothing else. I have known others that were able to watch 300 stocks. Personally, I think that is way too many.

When I was trading I had a basket of about 75 stocks. Some I knew were only going to be in play on news or when reporting earnings. Others were fairly reliable moves on a daily basis. And still others were extremely sensitive to any sort of news or event.

Today, if I was going to put together a basket of stocks, I would be looking at the following symbols: GOOG, TASR, TZOO, AIRT, QLGC, SYMC, PLMO, KMRT, EBAY, SINA, RIMM, RMBS, PCLN, and DCLK as well as other NASDAQ stocks. I would not over look New York Stock Exchange stocks, although many do. I would be looking at: MO, PFE, CAT, GE, GM, TYC, MRK, MOT, and others as well. Keep in mind, I am not recommending any of these stocks specifically for you to buy or trade. I am merely trying to give you an example of what a basket may look like. You have to decide yourself what stocks you would add to you your basket based on your own knowledge gained through experience and research on each stock.

I think every trader should have a basket of stocks he or she follows and trades. Day trading without your own basket raises the risk level and puts you in a position where you are always looking for something to trade. On slow days where the market is just not offering up much in the way of trading opportunities, you may have a tendency to jump on stocks, that under different circumstances, you would have passed on. Having your own basket of stocks will lower your exposure to risk. They may not move any better under slow market conditions, but at least you will have some knowledge of how they move. In Part II I will tell you about a special trading basket technique I used during the early boom days of day trading. It may still be a valid concept today.

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. We do request that we be informed of where it is posted so reciprocal links can be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late1990's both as a trader and as the moderator of one of the Internet's largest real time trading rooms. He is the owner of http://www.TraderAide.com , Strictly Business Magazine at http://www.sbmag.org http://www.FrameHouseGallery.com and http://www.EducationResourcesNetwork.com

Larry, Moe and Curley, Investment Brokers

Larry, Moe and Curley were sitting in their favorite restaurant just off Wall Street having their usual 3 martini lunch and were discussing the day’s events and their client portfolios.

Larry:”I had 12 calls this morning from customers wanting to know why the market was going down”.

Moe: What did you tell them?”

Curley: “Yeah, what”, taking another gulp of his libation.

Larry: “You know, the usual. This is a normal correction and not to worry. I am watching your account. The market always comes back.”

Moe: ”That’s the same BS I tell them.”

Curley: “ I have more than 300 accounts and I can’t watch them except my 5 big traders. Who cares about the others anyway? My company won’t let me tell them to sell when their stock starts down and they believe the old saw about ‘hang in there for the long haul’. I blew out of all my stocks last week. Thank goodness. The market has dropped 300 points since then.

Moe: “It would be better for the customers if our company would let us tell them to use stop loss orders."

Larry and Moe, shouting in a single voice: “Don’t say that or we’ll get fired”. They both bonk him on the head spilling his drink. “Nyuk. Nyuk.”

Yes, it may sound funny, but there is more truth than fiction in that imaginary conversation.

Why don’t brokerage companies tell their customers to sell when the market is declining?

There are two reasons. First any large brokerage does not want to get on the bad side of a company. That company might have a public offering later on and they will definitely not be asked to sell any of the stock or bonds. This is where the big money is on Wall Street. The second reason is they don’t want the customer to have cash in his account. He might take it out. Brokers make money even if you do not trade. It is not much, but it does keep the pilot light lit.

Brokers also discourage customer stop loss orders because it is more paper work for them and then they do have to watch your account. Unless your account is high 6-figure or 7-figure you are not on the radar screen. Mr. Broker (an appropriate name for what he does with your money) has an average of 300 accounts and many have 600 or 700. As new guys come into their office they give them the little accounts.

When a broker passes his securities license he is given two manuals. One is SEC regulations that must be followed and the second is how to open accounts. There is no third manual on how to protect customers’ money or trade. Brokerage companies want their salesmen to follow the company line and push certain products. There is no thought of customer protection.

If your broker is Larry, Moe or Curley it is time to find a new one.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Moving Average Convergence Divergence ( MACD ) Charts

The Moving Average Convergence Divergence charts, or MACD charts for short, are a technical indicator that is derived from the more simple moving average.

The MACD charts are oscillating indicators, meaning that they move above and below a centerline or zero point. As with other oscillating and momentum indicators, a very high value indicates that the stock is overbought and will likely drop soon. Conversely, a consistently low value indicates that the stock is oversold and is likely to climb.

THE 12-DAY AND 26-DAY EMAS

The MACD charts are based on 3 exponential moving averages, or EMA. These averages can be of any period, though the most common combination, and the one we will focus on, are the 12-26-9 MACD charts.

There are 2 parts to the MACD. We will focus first on the first part, which is based on the stock's 12-Day and 26-Day EMA. The 12-Day EMA is the faster EMA while the 26-Day is slower.

The logic behind using a faster and slower EMA is that this can be used to gauge momentum. When the faster (in this case 12-Day) EMA is above the slower 26-Day EMA, the stock is in an uptrend, and vice versa. If the 12-Day EMA is increasing much faster than the 26-Day EMA, the uptrend is becoming stronger and more pronounced. Conversely, when the 12-Day EMA starts slowing down, and the 26-Day begins to near it, the stock movement's momentum is beginning to fade, indicating the end of the uptrend.

THE MACD LINE

The MACD charts use these 2 EMA by taking the difference between them and plotting a new line. Very often, this new line is depicted as a thick black line in the middle chart.

When the 12-Day and 26-Day EMA are at the same value, the MACD line is at zero. When the 12-Day EMA is higher than the 26-Day EMA, the MACD line will be in positive territory. The further the 12-Day EMA is from the 26-Day EMA, the further the MACD line is from its centerline or zero value.

THE 9-DAY EMA

This line on its own doesn't tell much more than a moving average. It becomes more useful when we take into account its 9-Day EMA. This is the third value when we talk of 12-26-9 MACD charts. Note that the 9-Day EMA is an EMA of the MACD line, not of the stock price. This EMA (the thin blue line alongside the MACD line) acts like a normal EMA and smoothes the MACD line.

The 9-Day EMA acts as a signal line or trigger line for the MACD. When the MACD line crosses above the 9-Day EMA from below, it indicates that the downtrend is over and a new uptrend is forming. Time to consider bullish strategies. Conversely, when the MACD line drops below its 9-Day EMA, a new downtrend is forming and its time to implement bearish strategies.

THE MACD HISTOGRAM

So far, we have covered the most simple form of interpreting the MACD charts. We now look at the MACD histogram. Just as the MACD line is the difference between the 12-Day and 26-Day EMA, the MACD histogram is basically the difference between the MACD line and its 9-Day EMA.

So when the MACD line crosses above its 9-Day EMA, the MACD histogram will cross above zero. In order words, a bullish signal is obtained when the MACD histogram crosses above zero, and a bearish signal is obtained when it crosses below zero.

POSITIVE AND NEGATIVE DIVERGENCE

The MACD histogram forms valleys and peaks. Sometimes, multiple peaks are formed, with each subsequent peak becoming lower and lower. These progressively lower peaks constitue what is known as a negative divergence. A negative divergence on the MACD histogram is an indication that the current uptrend might reverse in the near future. This could happen even though the actual stock price seems to be making higher peaks in the chart. Basically, the MACD histogram negative divergence is a warning that the stock might turn down soon.

Similarly, the positive divergence on the MACD histogram predicts the subsequent uptrend. However, sometimes these divergences can create false alarms. If we follow these signals, we could have bought into a downtrend.

As such, I would like to remind you that individual indicators such as the Moving Average Convergence Divergence (MACD) charts should not be used on their own, but rather with one or two additional indicators of different types, in order to confirm any signals and prevent false alarms.

Steven is the webmaster of http://www.option-trading-guide.com If you would like to learn more about Option Trading or Technical Analysis, do visit for various strategies and resources to help your stock market investments.

High Volatility Investments

Penny stocks and options are high volatility investments that attract both the trader and the long term investor because of the small amount of capital required to make substantial gains as compared with less volatile higher priced stocks. The long term investor buys a stock believing that a company’s value will increase over time and the stock price along with it. When he buys an option it is usually to reduce the risk in owning the underlying stock. The short term trader looks at things a little differently. Typically a trader looks for large percentage price movement over a short period of time. Large percentage, short term price movements can be found both in options and certain penny stocks.

Penny Stocks are often defined as stocks priced below $5. It is often implied, but not necessarily the case, that penny stocks are also micro caps with capitalizations of less than about $250 million. Penny stocks can be found across the full range of capitalizations from micro caps to large cap stocks. For example, Sun Microsystems (NASDAQ: SUNW) met the definition of a penny stock for much of 2004, trading between $4 and $5. In late 2004, trading between $5 and $6 per share, its capitalization was over $18 billion. The price of a large cap $18 billion stock would rarely be expected to move by a large amount over a short period of time. The largest percentage daily price gainers, of say 50% or more are typically stocks that started from $5 or less. But they are typically micro caps.

As a group, micro cap penny stocks are avoided by large funds because prices are too easily affected by sizeable buy and sell orders and capitalizations are too small to affect a large fund’s bottom line. Buying more than 10% of a publicly held company carries with it certain insider responsibilities. Large funds must wait until stock prices rise typically above about $20 before they can become seriously involved without moving the price and still have price movement impact their financial results. The small investor has a distinct advantage over large fund managers when he takes an early position in a good micro cap penny stock.

Short term options are best suited when the underlying stock has a higher price, say above $50. While it is more likely that a micro cap penny stock will gain 50% in a single day than it is for a higher priced stock, the typical 5 or 10 to one leverage that options provide makes it only necessary for a higher priced stock to move 5% to see a 50% gain in the corresponding option price. There are several additional considerations involved in choosing an option. Not the least of these is the market environment. When chosen properly, options for higher priced stocks provide the same large daily price movements of penny stocks. Lower priced stocks need to move by a larger percentage in order to see a similar percentage move in the corresponding option. They are only likely to do so if they are micro cap penny stocks.

James Andrews publishes the Wiser Trader Stocks and Options Newsletter. One can read about choosing penny stocks and options at http://www.wisertrader.com

© 2004 Permission is granted to reproduce this article, as long as, this paragraph is included intact.

Selecting Rules for Investing and Trading

There are three important differences between investing and trading. Overlooking them can lead to confusion. A beginning trader, for example, may use the terms interchangeably and misapply their rules with mixed and unrepeatable results. Investing and trading become more effective when their differences are clearly recognized. An investor’s goal is to take long term ownership of an instrument with a high level of confidence that it will continually increase in value. A trader buys and sells to capitalize on short term relative changes in value with a somewhat lower level of confidence. Goals, time frame and levels of confidence can be used to outline two completely different sets of rules. This will not be an exhaustive discussion of those rules but is intended to highlight some important practical implications of their differences. Long term investing is discussed first followed by short term trading.

My mentor, Dr. Stephen Cooper, defines long term investing as buying and holding an instrument for 5 years or more. The reason for this seemingly narrow definition is that when one invests long term, the idea is to “buy and hold” or “buy and forget”. In order to do this, it is necessary to take the emotions of greed and fear out of the equation. Mutual funds are favored because of they are professionally managed and they naturally diversify your investment over dozens or even hundreds of stocks. This does not mean just any mutual fund and it does not mean that one has to stay with the same mutual fund for the entire time. But it does imply that one stays within the investment class.

First, the fund in question should have at least a 5 or 10 year track record of proven annual gains. You should feel confident that the investment is reasonably safe. You are not continually watching the markets to take advantage of or to avoid short term ups and downs. You have a plan.

Second, performance of the instrument in question should be measured in terms of a well defined benchmark. One such benchmark is the S&P 500 Index that is an average of the performance of 500 of the largest and best performing stocks in the US markets. Looking back as far as the 1930’s, over any 5 year period the S&P 500 Index has gained in price about 96% of the time. This is quite remarkable. If one widens the window to 10 years, he finds that over any 10 year period the Index has gained in price 100% of the time. The S&P500 Index has gained an average of 10.9% a year for the past 10 years. So the S&P500 Index is the benchmark.

If one just invests in the S&P500 index, he can expect to earn, on average, about 10.9% a year. There are many ways to enter this kind of investment. One way is to buy the trading symbol SPY, which is an Exchange Traded Fund that tracks the S&P500 and trades just like a stock. Or, one can buy a mutual fund that tracks the S&P500, such as the Vanguard S&P 500 Index Fund with a trading symbol VFINX. There are others, as well. Yahoo.com has a mutual fund screener that lists scores of mutual funds having annualized returns in excess of 20% over the past 5 years. However, one should try to find a screener that gives performance for the past 10 years or more, if possible. To put this into perspective, 90% of the 10,000 or so mutual funds that exist do not perform as well as the S&P500 each year.

The fact that 10.9% is average market performance for the past 10 years is all the more remarkable when one considers that the average bank deposit yield is less than 2%, 10 year Treasury yields are about 4.2% and 30 year Treasury yields are only 4.8%. Corporate bond yields approximate those of the S&P500. There is a reason for this disparity, though. Treasuries are considered the safest of all paper investments, being backed by the United States Government. FDIC regulated savings accounts are probably the next safest while stocks and corporate bonds are considered a bit more risky. Savings accounts are possibly the most liquid, followed by stocks and bonds.

To help you calibrate the safety and liquidity question, the long bond holders are comparing bond yields they now receive with next year’s anticipated stock yields. Consider that next year’s anticipated S&P500 yield is around 4.7% based on the reciprocal of its average price to earnings ratio (P/E) of 21.2. Yet the 10 year annualized return of the index has been 10.9%. Bond holders are prepared to accept half the historical yield of stocks for added safety and stability. In any given year, stocks may go either up or down. Bond yields are not expected to fluctuate widely from one year to the next, although they have been know to do so. It is as if bond holders want to be free to invest short term, as well as, long term. Many bond holders are thereby traders and not investors and accept a lower yield for this flexibility. But if one has decided once and for all that an investment is for the long term, high yield stock mutual funds or the S&P500 Index, itself, seem the best way to go. Using the simple compound interest formula, $10,000 invested in the S&P500 index at 10.9% a year becomes $132,827.70 after25 years. At 21%, the amount after 25 years is more than $1 million. If in addition to averaging 21%, one adds just $100 a month, the total amount after 25 years exceeds $1.8 million. Dr. C. rightly believes that 90% of one’s capital should be allocated over a several such investments.

Now that you’ve allocated 90% of your funds to long term investing, that leaves you about 10% for trading. Short to intermediate term trading is an area that most of us are more familiar with, probably due to its popularity. Yet it is significantly more complex and only about 12% of traders are successful. The time frame for trading is less than 5 years and is more typically from a couple of minutes to a couple of years. The typical probability of being right on the direction of a trade approaches an average high of about 70% when an appropriate trading system is used to less than about 30% without a trading system.

Even at the low end of the spectrum, you can avoid getting wiped out by managing the size of your trades to less than about 4% of your trading portfolio and limiting each loss to no more than 25% of any given trade while letting your winners run until they decrease by no more than 25% from their peak. These percentages can be increased after there is evidence that the probability of choosing the correct direction of a trade has improved.

Intermediate term trading is based more on fundamental analysis which attempts to assign a value to a company’s stock based on its history of earnings, assets, cash flow, sales and any number of objective measures in relation to its current stock price. It may also include projections of future earnings based on news of business agreements and changing market conditions. Some refer to this as value investing. In any case, the objective is to buy a company’s stock at bargain prices and wait for the market to realize its value and bid up the price before selling. When the stock is fairly priced, the instrument is sold unless one sees continuing growth in the value of the stock, in which case he moves it over into the investment category.

Since trading depends on the changing perceived value of a stock, your trading time frame should be chosen based on how well you are able detach yourself from the emotions of greed and fear. The better one can remove emotions from trading, the shorter the time frame he can successfully trade. On the other hand, when you feel surges of emotion before, during or immediately after a trade, it’s time to step back and consider choosing your trades more carefully and trading less frequently. One’s ability to remove emotions from trading takes a great deal of practice.

This is not just a moral statement. An entire universe of what’s called technical analysis is based on the aggregate emotional behavior of traders and forms the basis of short term trading. Technical analysis is a study of price and volume patterns of a stock over time. Pure technicians, as they are called, claim that all pertinent news and valuations are imbedded into a stock’s technical behavior. A long list of technical indicators has evolved to describe the emotional behavior of the stock market. Most technical indicators are based on moving averages over a predefined time period. Indicator time periods should be adjusted to fit the trading time frame. The subject is far too large to do it justice in less than several volumes of print. The lower level of confidence involved in trading is the reason for the large number of indicators used.

While long term investors may use only a single long term moving average with confidence to track steadily increasing value, traders use multiple indicators to deal with shorter time frames of oscillating value and higher risk. To improve your results and make them more repeatable, consider your expectations of changing value, your time frame and your level of confidence in predicting the outcome. Then you will know which set of rules to apply.

James Andrews publishes the Wiser Trader Stocks and Options Newsletter. Information on selected stock market trading systems, including those of Dr Stephen Cooper, can be found at http://www.wisertrader.com.

© 2004 Permission is granted to reproduce this article, as long as, this paragraph is included intact.

Trading Systems

A trading system consists of a set of rules for viewing markets and making trades. The advantages of trading systems can be hidden when they become associated with trading platforms involving trade order submission and processing. A clarification of their roles can help explain the benefits of using a trading system. This can be done without identifying a particular platform or system. Once the platform infrastructure is isolated, a brief look can be taken at why a trader can benefit from a trading system.

An online trading platform consists of the infrastructure for viewing market prices and making trades. While platforms make use of user provided hardware and the internet itself, platforms consist of software linked to a database while displaying price quotes, enabling order entry and routing orders to an exchange. A platform of software and order routing services is provided by many brokers. It often includes programmable charting software that allows a user to select from an array of formats for price, volume and technical indicators. Links to real time databases are used by day traders while free delayed quotes are quite adequate for position traders who analyze data after the markets close to minimize the emotional stress of changing prices. Platform software saves time and reduces errors by automating repetitive tasks.

Some platform tools have become quite sophisticated, allowing a user to add his personal rules for making trades. Rules tell the software which set of indicators and prices to monitor and the levels at which traded instruments are to be bought and sold. Automated systems trading software are preprogrammed with trading rules enabling them to make trades with minimal user input. These software modules, designed by third party vendors to operate under existing platforms, are based on algorithms that identify price trends and market turning points. Since their accuracy is limited by the presumed market volatility, an algorithm is needed to recognize when market volatility falls outside the envelope for which the software rules were designed. The quality of a set of rules can be estimated from historical back testing on past market prices stored in a database. It is often pointed out that back testing lacks the realism of real time emotional stress and that past performance is not an indicator of future performance. While the latter is valid in all cases, the nature of trading system rules reduces emotional stress to the degree that the rules are consistently followed.

In any case, it is the rules themselves that comprise the trading system. In their purest form, trading systems take the form of a compact set of rules written on paper.

The ability to consistently make error free decisions amid changing prices in an environment of fear and greed is unlikely without the discipline that rules provide. It does little good to have all the price monitoring, charting, order submission and routing infrastructure if one does not have a consistent set of rules for making trades. Most of us find this out the hard way, judging from the statistic that only about 12% of stock traders are successful. For futures traders the number is closer to 5%. It is not just a coincidence that the percentage of traders that rely on a proven trading system is near these same levels. The consistent use of a proven trading system can be most beneficial to traders with all levels of experience.

Seeing the difference between trading systems and platform infrastructure makes the characteristics of a good trading system more obvious. A good trading system explains when trading should not be attempted, thereby, avoiding forced trading under inopportune conditions. It should specify how to independently generate a strong watch list of candidate trades to eliminate the need to chase after the latest hot tip from an advisor. For obvious reasons, a trading system should be easy to use, totally objective, take little of a trader’s time and make consistent profits. It should also avoid large draw downs and give clear trading signals.

A trading system is best learned from a master trader who remains actively engaged in teaching. The master can help the student tailor the system to his personality, financial means, risk tolerance and skill level. The next best approach is to simply read what has been written and adopt it to one’s personal situation. But under no circumstances should one try to wing it without the support of a set of trading rules. The advantage of rule based trading systems lies in their objectivity and consistency. When followed consistently, emotional trading and its associated errors are removed from the equation. As an investment, trading systems more than pay for themselves, not only in profits gained, but also in the amount of capital preserved. This is true not only for advanced automated trading systems but also for a compact set of rules on paper.

James Andrews publishes a newsletter at http://www.wisertrader.com where one can read about compact trading templates and advanced automatic trading systems. © 2005 Permission is granted to reproduce this article, as long as, this paragraph is included intact.

Just Say 'NO' to Your Stock Broker

We have all heard that slogan that started back when Nancy Reagan was in Washington. It was all about drugs. Now I want to remind you this can be your slogan when you get one of those telephone solicitations from a strange broker or even your own stockbroker who is acting a little strange. By that I mean he wants you to buy something.

Currently we are in an advancing stock market and we all hope it is going to go higher and higher. None of us, definitely including me, knows for sure where it will end up this year. Barron’s, the weekly financial publication, has declared on their front page that “THE BULL IS BACK”. They are also guessing. But it makes you feel good.

It makes me wonder when I study the fundamentals of the economy how they have come to this conclusion. Unemployment just had an uptick, most companies have yet to declare a dividend, the American dollar is losing value against many foreign currencies, manufacturing capacity utilization is still low and shows no signs of increasing, balance of trade is way out of whack and on and on.

Yes, there is some good news. Many companies are “beating the estimates”. That means they are showing greater sales and profits than the brokers on Wall Street thought they would have. This is good press and usually has the effect of pushing stock prices higher. Many of these better profits are at the cost saving of laying off hundreds if not thousands of workers. And worst of all we don’t know if these profits are true. Many are profoma meaning management is guessing.

If you are one of those people who hopes the market will go back up so you can get out “even” you are going to find that hope is the most expensive word in the dictionary. But what can you do about it? You are now being given the opportunity to save what is left of your retirement account. On any stock or mutual funds you have it would be a guess to say this is the place to sell. The smart thing is to listen to the market and do what it tells you.

When any equity is advancing you want to set up a trailing stop-loss order and move it up each week as your stock advances. Suppose you bought a stock at $100/share and watched it drop to $15. Pretty disheartening! It has now risen back up to $30 and your broker has assured you it will continue to rise. Maybe. But what if it doesn’t?

Tell your broker to put in a stop-loss order about 10% below its current price. He will say you don’t need to. This is where you just say ‘NO’. Brokers don’t watch any but their biggest and most active accounts. He must do as you ask according to regulations.

Put in a stop-loss order today. Protect your retirement account with a simple ‘NO’.

INVESTMENT LETTER 3 months free at http://www.mutualfundmagic.com Copyright Albert W. Thomas All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” Former 17-year exchange member, floor trader and brokerage company owner. Copyright 2002

Short Selling for Investors

Shorts. Let’s see. If there are shorts there must be longs. Which is best? Longs or shorts?

If you are trading in the stock the stock market experts like longs better than shorts. If you are “long” that means you own stock and that is “good”. If you are short you have sold stock and that is “bad”. At least that is what Wall Street preaches. And why do they want to make you believe this and is it true? Let’s examine the facts.

Today I hear stories on the financial news and there are articles in the paper that people who are “short” driving the market down. They have sold more stock than they own and this is causing the market to collapse. I even hear that Congress is trying to pass a law that will not allow people to sell short. They are blaming hedge funds who are allowed to sell short. The basic flaw in this concept is when a short sale is initiated it must be done on an up tick. That means the stock must be going up in order to make a “short” sale. No short sale may be made to pressure the market down. That is a fatal pin in the balloon of that lie.

There are reasons people will make the sale of a stock. If you own it you may just need the money now or if it is going down you may not want to lose money should the downward trend continue. There is on old saying in the market – “the trend is your friend”. If you see a stock that is declining you may want to sell it first and when it declines further you will buy it back at a lower price later on. This actually puts a floor under that stock because some time in the futures you MUST buy it. Whoever is doing the shorting does not matter whether it is an individual or a hedge fund. They are actually doing two things that are both good for the market. They are providing a future buy to support the price at a lower level that keeps it from going lower and they are providing liquidity to the market.

When you buy long you want it to go up so you can sell it later at a profit. When you sell short you sell it now with the idea of buying it back after it declines. Both are driven by the profit motive. How can one be good and the other bad? It is like saying there is good electricity and bad electricity.

If company CEOs don’t want people to short their stock I suggest they look in the mirror to find out who is at fault. The CEO is not running his company properly and that is why the stock is declining. No outside person or group can drive a stock lower that is making a good profit. There is a good reason for the price decline.

Buying short does not put the market down. The ultimate outcome of a short sale (covering the short) is very positive for the market.

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http://www.mutualfundmagic.com Copyright Albert W. Thomas All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” Former 17-year exchange member, floor trader and brokerage company owner.

Maniac Investment

Let’s first understand what maniac means. According to Webster a maniac is “mad; raging with madness; raging with disordered intellect”. You don’t know anyone like that, do you?

There is a book that is still in print today that was originally published in 1841 with the title Extraordinary and Popular Delusions of Crowds by Charles Mackay. He explains in rather horrific detail how people were caught up in the madness of buying property in the South Seas in 1720, the numismatic coin craze of 1980 and the tulip bulb trading in 1637. You wonder how people could have been so gullible to have bought a single tulip bulb or land they would never see for huge amounts of money. Could anything like this ever happen again?

I was floor trader on the commodity exchange in 1973 when the Hunt brothers drove silver from $2.00 per ounce to $54. That mania lasted a few months and quickly tanked to $6.00. I took part in that mania. I was one of the maniacs.

When it was taking place it seemed like the thing to do and very few questioned the sanity of those participating. In fact, if you weren’t part of the crowd there was something wrong with you. When there is a stampede it is best to run with the herd or be trampled to death. However, there were a few who were not mesmerized.

Today we are participating in one of those manias only now it is called a bubble and still is not being taken too seriously. Yes, it is the stock market mania. Many are still trapped in the madness of the crowd of the 1990’s who believe the “market always comes back”. They are clutching their tulip bulbs, sorry, stock certificates, and refuse to let go of them because they know their value will grow back to what it was 3 years ago. Stock owners have become mad with what – greed? fear? denial?

When something, almost anything, drops 50% in price it will take a 100% increase in value to get back to “even”. With today’s economic and world conditions that could be a long time and maybe not in our lifetime.

Years ago I heard a story about how they used to catch monkeys. A small hole just big enough for the monkey to slip his empty hand inside would be drilled in a coconut and candy and fruit would be put in it. The coconut was tied to a stake in the ground. When the monkey grabbed a fistful of goodies he would not let go even when the hunter came for him. Greed holds him in an invisible grip.

Many investors today are like those monkeys. They refuse to sell what is remaining of the stocks and mutual funds they own even though they can clearly see the major trend continues down. They became mad with greed and now fear of loss entraps them.

Until this madness is recognized investors will continue to see their portfolios become smaller and smaller. They must learn to let go.

Written 3/10/03 but still applies today.

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Copyright Albert W. Thomas All right reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” Former 17-year exchange member, floor trader and brokerage company owner.

A Secret Revealed: Why Most (Day) Traders Fail

The following perspective on (day) trading comes from my many years of experience of active day trading or being the moderator of one of the largest day trading chat rooms on the Internet.

One of the biggest problems I see with new traders (and even some old ones) has nothing to do with the software or the broker they are using. Nor is the problem a result of buying too high or selling to low; or not having enough money. The problem isn't any of those things.

It has to do with not having a trading plan. A good trading plan will go a long way towards solving the problems mentioned above.

Ted Williams was once asked how he hit the baseball so much better then everyone else. He said he had no idea and that he just went up to the plate and swung at the ball. There has only been one Ted Williams and as great as he was at hitting a baseball, I don't think he would have made a great day trader with that approach. Most great hitters have an idea what they are going to do every time they step up to the plate. Traders need to know exactly what they expect every time they enter a trade.

Everyone should start out with a basic trading plan and use it. As the old saying goes, "Plan your work and work your plan". However, you also have to be ready to be flexible. That has to be part of your planning. As Clint Eastwood said as his character in "Heartbreak Ridge", "You got to adjust, you got to learn to improvise. And if all else fails, you to learn to survive!" Traders that are not able to make adjustments, improvise and survive will experience their own Heartbreak Ridge.

Your trading plan can't be one where you simply figure you are just going to follow someone else. That may be one way to get a start and a bit of experience, and it can be a part of a much bigger overall plan. But it cannot start and end there. You have to learn to trade on your own so you don't accidentally follow someone off a cliff. You have to know who to follow and who not to follow.

When I was trading I made a lot of good trades knowing who to follow and who not to follow. Yet, in the long run, I do not believe you can make a living doing that. The biggest problem in following other traders is being too far behind the trade because you are "following" and not leading. I think each and every trader has to become the very best trader he can possibly be, on his own. He needs to get there as fast as he can. Following more experienced traders can be a means to this end and can help get you started, but it cannot be the end. This takes planning.

A basic trading plan will take in your long-term goals and objectives as a trader. You'll have to decide if you want to try to make a career out of trading, or just be a part time trader. Once you have decided this you can make other decisions such as how much money you would like to make at either full time or part time trading. Your money goals have to be realistic. They can't just be, "I want to make as much money as I can". These basic decisions will determine the time and money you will have to commit.

Your trading plan should be on going, constantly evolving and eventually contain things like how many days, weeks, and hours you will need to trade to meet your goals. If it is as detailed as I think it should be, you would know how many trades per day and how much profit per trade you will have to average. Of course, these things will have to be developed over time and added to your plan as you go and as you gain more knowledge.

There are many excellent books on learning to day trade. My favorites are found at http://www.TraderAide.com/books

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and included. We do request that we be informed of where it is posted and reciprocal links will be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept nation back in late 1990's both as a trader and later as the moderator of one of the Internet's largest real time trading rooms.

Floyd is also the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org, FrameHouseGallery.com and EducationResourcesNetwork.com

Copy Cat or How to Use a Successful Trading System

How many books have you read about successful traders? How they did this or that and made a fortune and are still doing it. You say to yourself, “I’m going to follow his method and get rich”.

So you subscribe to his newsletter (they all have one, $250) and buy his course on CD Rom ($495)and next time he is anywhere near you attend his seminar with a $500 discount for only $2495. You do understand you must do exactly as he does and you try your best to follow the directions, but for some reason you still are not making money. At least you are not losing as much as you did before (I hope).

Go look in the mirror. You are not Richard Russell, Richard Wyckoff, Bill O’Neil or any one of the great gurus of the market place. Each one of them has devoted every minute of his life to understanding the market. Each one is very successful and each one has a completely different way of approaching trading. Can you copy any one of them? It is very doubtful.

These great teachers can help you, but you have to develop your own method and style of investment. Whether it is long term or short term it must be something with which you resonate. When I was a floor trader there were a thousand guys trading and I know there were a thousand different guide lines. No one had the same buy or sell signal. If they all followed a pat program they would all be buying and selling at the same time so it could not work.

I have stood in the pit and watched the same person offer to buy and when there was no seller he would then offer to sell usually at the same price. Yes, he was scalping for one or 2 ticks, but he knew what he was doing even if it looked strange. A friend of mine could arbitrage by standing in the middle of the gold pit and hit buys and sells that were off by one or two ticks because they could not hear each other due to the noise of other traders who were shouting their offers.

You can look at the basic trading style of one of the “greats”, but you must adapt it to your method. I have not seen anyone able to successfully copy a trading program exactly. You will improvise and find a slightly new approach that becomes “yours”. It then becomes part of your cellular being. It works for you and probably won’t work for anyone else.

If the programs the hype masters are selling work so well why aren’t there more rich traders? And if the programs are so darn good why are they telling you?

To be a successful trader you can’t copy cat an existing program, but you can take a basic trading vehicle and modify it your own plan. Turn that cat into your own tiger.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Building The Foundation For Wealth

You wouldn’t build your home on anything less than a solid foundation. Similarly, you can’t build wealth and financial independence without first having sound foundational principles to build upon.

I have found that many people are working on wealth building strategies such as maximizing their 401K returns, aggressive stock trading, and real estate investing without such a foundation.

Most of my clients are coming from a “one step forward, two steps back” cycle of wealth building that gets them nowhere in the long run.

There are steps you can take to make sure that you are maximizing and protecting your gains at the same time. Without these steps, you are destined to experience the gain-loss cycle which, in the end, is like spinning your wheels in the mud.

Discover how your employment circumstances affect your wealth building strategy and have more of the things you want by identifying your biggest expense and managing it without having to make more money.

Most people take gains in their cash flow to mean they can spend more on things they don’t need. It is human to want to surround yourself with the things you want to match how you feel about your new income from investments or a raise at work.

But what happens here is that you lose future earning power and you rip out pieces of your wealth building foundation because you are not putting new income to work by investing in your debt.

People talk a lot about returns on investments. Think of the return on a 13% credit debt that you pay off in 5 months aggressive debt investment. It’s NOT just 13% you are saving by investing in your debt!

Once that debt is paid off you can turn the payments you were making toward a larger debt, sometimes doubling the rate at which you are able to pay off that bigger debt. Combined, the return on your investment here is massive compared to regular stock investing!

Wealth building, in the beginning, is actually started with debt reduction and strict management. A change in attitude about your debt, from “liability” to investment, is the first step in true wealth building.

Today you should sit down and find the monthly expenses that truly don’t mean as much to you as building wealth does. See how you can eliminate some of your spending to invest in your debt in order to maximize your cash flow faster, giving yourself a raise!

Take most of what you now have available per month and turn it toward the next debt – raising the regular monthly payment by as much as you can while rewarding yourself with a little thing to note your accomplishment.

Before you take on another investment, think about the wealth you can build with the money that currently goes to debt. Once you have mastered your debt, all that money can go toward investments, savings, and living expenses that far outstretch what you are able to experience now.

The only aggressive investment strategy that has absolutely zero risk is debt investment. You cannot lose and the gains are always tremendous compared to any other form of investing.

Live your retirement years free of financial stress, relaxed and enjoying life due to automatic income streams you create through the powerful investments you can afford AFTER investing in your debt.

C.C. Collins is a respected financial strategist and investing expert. His NetWorthPublishing family of sites offers information and help with stocks, mutual funds, retirement planning and wealth building.

Day Traders and Swing Traders and Options? Maybe!

Typical day traders and swing traders look for stocks with quick, short term movements, and are not in the business of holding positions overnight let alone a week or two. So the use of options has not usually been a component of their trading strategies.

Now however, some new opportunities for profit are available since many day trading firms are allowing their traders to trade options. Unfortunately, many option strategies do not apply to the quick in and out nature of day trading. Neither day traders nor swing traders are typically in a single stock long enough for the strategy of selling options for premium collection to be viable.

Since these traders often look for break-outs, and sometimes go bottom fishing to find opportunities for profit, a premium paying option might work well for them. Why? Because the trader would be buying protection from catastrophic losses. Bottom fishing and breakouts are associated with volatility, which means uncertainty and risk. However, there is a strategy that will provide the necessary protection for these traders to carry positions through overnight risk, while remaining fully protected. This would still allow also them to take advantage of the large potential upswing that was the original goal of identifying the bottom and the break-out. This strategy is called the protective put.

THE PROTECTIVE PUT

The Protective Put Strategy involves the purchase of put options in combination with the purchase of stock and works well in situations where a stock is prone to rapid, volatile movements.

A put option gives an owner the right, but not the obligation, to sell a certain stock, at a certain price, by a specified date. For this right, the owner pays a premium. The buyer, who receives the premium, is obligated to take delivery of the stock should the owner wish to sell at the strike price by the specified date. A strategically used put option offers protection against substantial loss.

The protective put strategy is a strategy that is ideal for a trader who wants full hedging coverage. This strategy is very effective in stocks that normally trade under high volatility, or in stocks that normally do not trade under such high volatility but may be involved in an event driven, highly volatile situation.

When an investor purchases a stock, they can buy the put (protective put) to provide a proper hedge. The construction of this position is actually quite simple. You buy the stock and you buy the put in a one to one ratio meaning one put for every one hundred shares. Remember, one option contract is worth 100 shares. So, if you buy 400 shares of IBM then you need to purchase exactly four puts.

From a premium standpoint, you must keep in mind that by purchasing an option, you are paying out money as opposed to collecting money. This means that your position must “outperform” the amount of money that you paid for the put. If you were to pay $1.00 for a put and you owned stock against it, the stock would have to increase in price $1.00 just to break even. The protective put strategy has time premium working against it, thus the stock needs to move to a greater degree, and more quickly, to offset the cost of the put.

When we buy a stock, three potential outcomes exist. The stock can go up, go down or it can remain stagnant. If we were to analyze the three scenarios, we would find that only one scenario, the up scenario, can produce a positive return and that’s only when the stock increases more than the amount you paid for the puts. The other scenarios produce losses. If the stock is stagnant, you lose the amount you paid for the put. If the stock goes down, you lose again- but the loss is limited. It is the limiting of loss in highly volatile situations that makes the protective put an attractive and useful strategy.

This is how it works! Imagine you buy stock for $31.00 and buy the 30 strike put for $1.00. If the stock goes down, the position will produce a loss. For example, if the stock is down to $30.00 (down $1.00) at expiration of the option, you have a $1.00 capital loss. With the stock at $30.00, the 30 strike puts will be worthless, thus you incur a $1.00 loss because that is what you paid for the put. Your total loss will be $2.00. Using the protective put strategy set a cap on your losses. The put strategy's attractiveness is that it will allow you to set loss limits!

Let’s see how that works. We’ll set the stock price down to $28.00. Since you purchased the stock at $31.00, there will be a capital loss of $3.00. The puts, however, are now in the money with the stock below $30.00. With the stock at $28.00, the 30 strike puts are worth $2.00. You paid $1.00 for them so you have a $1.00 profit in the puts. Combine the put profit ($1.00) with the capital loss ($3.00) and you have an overall loss of $2.00. The $2.00 loss is the maximum you can lose no matter how low the stock goes because the buyer of your put must take the stock at the strike price. This is the protection the put provides.

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Part II of Day Traders and Swing Traders and Options? Maybe!

Before every protective put trade it is possible to calculate
your anticipated maximum loss. Use the formula: (stock price
minus strike price) plus option price. For example, suppose you
will pay $30.00 for your stock, and you want no more than a $3.50
loss on the position. Then you would choose the $27.50 strike
put which costs $1.00. Following the formula, you take your
stock price ($30.00) and subtract the put’s strike price (27.50)
which leaves you $2.50. To this $2.50 loss, you then add the
amount you spent on the option ($1.00), which gives you a
combined, maximum loss of $3.50 for this position. You can set
your loss limit by the strike price of the put you buy and the
cost of the put. This formula will work every time. Remember,
stock loss, (stock price paid - strike price), plus option cost
(option price) equals maximum potential position loss.

The protective put strategy, when used correctly, will allow
investors to take advantage of the same opportunities that could
provide large potential gains, but without being exposed to the
extreme risks the position could potentially present. In these
scenarios, the protective put strategy deserves consideration.

For example, a stock in the process of a steep decline would be a
good opportunity to implement a protective put, when trying to
pick a bottom. Quite often, stocks experience bad news or break
down through a technical support level and trade down to seek a
new, lower trading range.

Everyone wants to find the bottom to buy and go long, catching
the technical rebound, or to start accumulating the stock at
lower levels for the longer term.

There is a potential for a very big reward if you pick the
“right” bottom. However, with the big potential gain comes the
big potential loss that is common in these types of risk/reward
scenarios. Here is a perfect opportunity to employ the protective
put strategy! It will provide protection against substantial
loss, while allowing room for potential gains if the stock should
bounce.

Remember, the protective put allows for a large potential upside
with a limited, fixed downside risk. If you feel that the stock
has bottomed out and is starting to consolidate, you purchase the
stock and then purchase the put at the same time as insurance
against further decline in the stock.

If you are right, and the stock runs back up, the stock profit
will well exceed the price paid for the put. Once the stock
trades back up, consolidates, and develops its new trading range,
the need for the protective put is over. At this time, if you
still like the stock and want to hold on to the long position,
you could always start selling calls against it.

Use the formula for maximum loss discussed earlier. Calculate the
loss in the stock and the amount you paid for the put and add
them together for your maximum loss in this position. The
protective put has limited your loss.

Maximum Loss = (Stock Price – Strike Price) + Option Price

This protection will save you enough money when you pick a false
(wrong) bottom that you may, if you like, try to pick the bottom
again at a lower point. The exhaustion scenario, as described
here, is a perfect opportunity to apply the protective put
strategy.

As seen with the exhaustion example, the protective put strategy
is best used in situations where the stock has a potential for an
aggressive upside move and the chance of a big downside move.

Another potential opportunity for using the protective put is in
combination with Technical Analysis. Technical Analysis is the
study of charts, indicators oscillators, etc. Charting has
proven to be reasonably accurate in forecasting future stock
movements.

Stocks travel in cycles that can and do form repetitious
patterns. These patterns are predictable and detectable by the
use of any number of charts, indicators and oscillators.

Although there are many, many forms and styles of technical
analysis, they all have several similarities. The one we want to
focus on is the technical “break-out.” A break-out is described
as a movement of the stock where its price trades quickly through
and beyond an obvious “technical resistance” or resistance point.

For a bullish breakout, this level is at the very top of its
present trading range. Once through that level, the stock is
considered to have “broken out” of its trading range and will now
often trade higher, and establish a new higher trading range.

The “break-out” is normally a rapid, large upward movement that
usually offers an outstanding potential return if identified
properly and acted upon in a timely fashion. However, if the
break-out fails, the stock could trade back down to the bottom of
the previous trading range.

If this were to happen, you would have incurred a large loss
because you would have bought at the upper end of the previous
trading range. As you can see the “break-out” scenario is an
opportunity that has large potential rewards but can on occasion,
have a large downside risk.

However, if you were to apply a protective put strategy with the
stock purchase, you can drastically limit your downside exposure.
For instance, say you were to buy the 65 strike put for $2.00.
If the stock trades up to $75.00, you would make $9.00 if done
naked but only make $7.00 if done with the protective put.

This difference is the cost of the put. This $2.00 investment is
more than worth it should the stock go down. If the break-out
turns out to be a “false” break-out and the stock reverses and
trades down, your 65 put will allow you to sell your stock out at
$65.00 minus the $2.00 you paid for the put. This limits your
loss to $3.00 instead of a potential $8.00 loss. This is a much
better risk/reward scenario.

Most professional traders, including day traders and swing
traders can reap huge rewards for the protective put strategy.
The reason is in how most traders attain profits and losses.
Normally, successful traders make a little money on a consistent
basis. They make a little bit day in and day out. But when it
comes to losses, they lose in large chunks. They spend a month
building up profits only to lose that money in one day usually in
one stock. If a trader could figure out how to avoid even a
handful of these large losses, his or her profitability would
soar. My answer is to start using the protective put when buying
on breakouts and when bottom fishing.

_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
Amazing Options Trading Strategies For Safer Investing
and Explosive Profits. Discover how to protect your
investments with the leveraged power of options. Step
by step video tutorials show you how. Click here now:
http://www.options-university.com
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