forex fire

As we have seen the commodity markets fall, we have been forced to ask the question, “Is this the end of the commodity bull market or, one more decline in a multi-year trend?” The opposing forces of global inflation and waning demand have led to a considerable state of flux. Over the last couple of weeks, we have seen very wide ranges and declining open interest in several commodity sectors. We believe that it would be too easy for this run to come to an end in such an orderly fashion. Adding to the confusion, many of the markets continue to hold their weekly trend lines while others have penetrated their trends even within the same sectors.

Given the mass confusion, it may be easier to create a long position in a commodity based currency, rather than looking at each market individually. The Australian Dollar is our favorite of the commodity based currencies due to the broad base of commodities they provide to the world’s markets. Going back to last week’s idea, we have seen the Australian Dollar penetrate its weekly trend on declining open interest.

Over the last three weeks we have seen open interest decline by almost 25%. This indicates a market that is unsure of its future direction. If this were the initiation of a new downward trend, we would expect open interest to remain steady to higher, as each washed out long position would be replaced with new short position of equal or greater size.

Therefore, it may be time to act on last week’s idea. Place an order to buy the Australian Dollar at .9110 on a stop. This will force the market to begin to turn around and show some upward momentum before we get in. If the buy stop is filled, place a protective stop around .9048. Using the statistical analysis generated, we can expect the market to trade within boundary of .8929 and .9267 with a high probability over the coming two to three weeks. This is also provides option traders with the two essential factors for a successful trade - a price and time target. Please call for option details. 866-990-0777

Andy Waldock

http://www.commodityandderivativeadv.com

866-990-0777

An introduction to Forex trading must first start with the understanding that Forex is the world’s largest and most liquid trading market and often times considered as the best home business anyone can ever venture into even with the much talked about risks of Forex trading. But trading Forex without understanding what exactly Forex is all about is where majority of the risk falls into. It is no secret that on daily basis more and more investors are shifting from stocks and other financial vehicles such as bonds and commodities to the all-electronic world of Forex trading for income and profit because of its numerous benefits & advantages over traditional trading vehicles such as those mentioned above.

The foreign exchange which is often times referred to as Forex and it is not traded from a central exchange as is the case with stocks. The Forex market is traded over-the-counter (OTC), or the Interbank market. The interbank market is the network of banks which are linked electronically 24 hours and the trade of foreign currency is conducted through these banks.

As an investor in the Forex market what you are doing in essence is simultaneously exchanging on countries currency for another. A good illustration is as follows: GBP/USD -The first currency (in this example, the GBP) is referred to as the base currency and the second (USD) as the counter or quote currency. So if you buy the GBP you are simultaneously selling the USD as shown in the pair above.

Just as on any other market, Forex trading though with an exclusively high potential profitability is essentially risky as well. It is possible to make a living from trading the Forex market, but this must be follow after a certain training including a familiarization with the structure and kinds of currency pairs, the principles of currencies price formation, the factors affecting prices alterations and trading risks levels. Mastering techniques and strategies on how to use technical and fundamental analysis to make your trading decision is a road you definitely can not avoid.

After acquiring the basic knowledge of Forex trading, the next step would be to open a demo trading account and begin to put all you have learned into practice. Only when you have built a strategy that generates consistent profit should you move to a live account.

Karen Fairham regularly contributes informative articles to web sites on Forex trading and stock trading. To read more on forex trading strategies to help you maximise your profit visit: http://www.forexxtrader.blogspot.com

There were a lot of worried faces today when the Dow Jones Industrial Average dropped some 450 points mid day. Excited faces that were full of joy just a day ago now looked very worried, and fearful, and this was reflected in the jittery responses of 4x software traders.

As someone who had rode through several markets crashes including the Black Monday drop, and as a professional trader, what would be the best response when the stock market crashes?

Being in the stock market is not about being always right in the market. You could be wrong, and be caught , as I would expect many traders would be with this market crash, but it would be your response to the crash that could help you mitigate the losses and difficulties and 4x software you ride through the storm and even to rebound strongly, in many cases, with a profit several months down the road.

At the onset of a market crash, quickly assess your overall portfolio. If you are still in profits, consider liquidating.I am talking about your overall portfolio, not individual stocks. This response is taken especially if you treat trading stocks and shares as a business, and it is the bottom line that counts. A profit is a profit, and your mentality is to manage your business as a fund. By doing so, you are protecting your capital and your profits. If you have separate portofilios involving long term position stocks and the short term trading stocks, it is the short term trading portfolio that warrants your attention. You will move back into the market later when stock prices stabilise and you would have a good chance to buy them lower.

If you are not selling your stocks, do not average or buy more stocks at a lower price immediately, until there are confirmed signs that the market has stabilised. It is like catching a falling knife when the market is dropping, and especially if the market drops are due to external factors. What is low today can become lower especially if the falling momentum increases as the day passes.

When a market has crashed, the mood will have decidedly changed from bullishness to bearishness. The first few days after a crash, there is confusion. It is during these moments of confusion that having a clear direction and a trading plan for bearish periods, would put you into focus with a clear way how to trade or ride out these turbulent times.

It is during a market crash that there is a flight back to quality stocks, and also traders will be exploring new avenues for making a consistent replacement income. When things look bad in the stock market sector, there would be many traders who will want to look at trading other financial instruments, such as currencies and forex. The forex market is active 24 hours every day, and represents the biggest financial trading market in the world. For the trader, as long as the sun rises and the sun sets, the world of trading continues, irrespective of its outward form as stocks and shares, futures and commodities or currencies and forex.

Peter Lim is a Certified Financial Planner. To discover how you can make money from the forex trading during stock market crashes, and to earn a substitute or replacement income trading forex, visit the author’s blog at http://1forex-trading.blogspot.com

If you want to enjoy currency trading success, you need to catch and follow trends and spot turning points and this tool will help you - it’s an obvious tip in many respects but most traders simply don’t use it, so here it is.

It’s to look at other markets that impact on the currency you are trading and for the purposes of illustration let’s look at the US Dollar.

The dollar is a net importer of energy and high energy costs hurt it and the main one we are referring to here, is crude oil. In recent history when crude has hit high levels (and we have had recent tests of $100 a barrel) it has hurt the dollar and the retreat from this level has seen the dollar stabilize and rise.

Tops in the oil market recently have warned of dollar rallies.

Another major factor is interest rates.

Recently the dollar has been hurt by the perceived view that interest rates will be cut and you can get an idea of how much by looking at interest rate futures. When the interest rate futures rally too hard to fast and then fall, you can often see the dollar rally.

Why? Because traders get ahead of themselves - the recent rally in dollar euro was preceded by 100% consensus that interest rates will be cut by 50 bps (probably true) but gave 50 - 50 that rates would be cut by 75 bps (unlikely) the level of interest rate cuts factored into the market was overdone and prices in interest rate futures fell and the dollar rallied.

Tops in oil and interest rate futures can be used to warn of dollar rallies.

Another important variable is the stock market. Weak stocks hurt the dollar and strong stock markets support it - so watch it in fact if you want another tip:

If you are trading long term trends and only want to look at the prices of currencies once a day, do it just after the stock market closes. This closing price is always significant and while currencies trade 24 hours they are effectively thinly traded until Tokyo opens and the US stock market close sets the tone for the next day

Other currencies are also affected by outside influences:

The Canadian Dollar - Is a net exporter of oil and high prices of oil and other commodities are supportive of the currency

The Australian Dollar - Australia is a big producer of gold and when gold prices are high it supports the currency.

By looking at other markets that are important to a currency, you can often spot whether trends are going to continue or reverse. While it’s obvious that currencies don’t move in isolation, many traders do not bother to look at other markets for clues - if you do, you can get a trading edge.

A trading edge is what forex trading is all about and if you research this tip further, you will find it very useful as part of your forex trading strategy for bigger profits.

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The Federal Reserve is easily one of the most powerful–and misunderstood–of all American institutions. The Federal Reserve’s steady hand as America’s “central banker” has been especially critical to U.S. economic performance during the past 25 years. Why?

The management of fiscal policy (taxation and spending) during the majority of those years by various Administrations and Congresses was less than admirable. As a result, the enormous and irresponsible buildup of Federal debt remains, for now, our collective lasting legacy.

Today’s Federal Reserve–under the control of Chair Ben Bernanke–enjoys a very high level of credibility as an inflation fighter. In the world of central banks, there is no loftier objective…nor any greater success.

Inflation Control

The Federal Reserve’s number one responsibility is to maintain American price stability. It has been largely successful over the past 15 years in doing so, with consumer prices rising at an average annual rate of 2.7% since 1991. More comprehensive measures of inflation have risen at even lesser rates. In contrast, U.S. consumer prices rose an average of 6.2% annually during the ’70s and ’80s, with a painful bout of double-digit inflation in 1979 and 1980.

Today’s Fed is very concerned that higher energy prices now impacting the economy will contribute to a broad series of price increases for thousands of products and services across the economy. Such a pass-through of energy costs keeps Fed officials awake at night.

Add in volatile commodity and gold prices, the fear of further terrorism in the U.S. and abroad, enormous purchases of U.S. Treasury securities by foreign investors, and a handful of other topics, and one gets a feel for the life of a Fed official. It is not for the faint hearted.

In its efforts to maintain price stability, the Fed many times is called upon to…

1) “take the punch bowl away from the party” (to slow the economy) when it gets a bit too rowdy

2) administer preventive “medicine” to its patient (the U.S. economy) when necessary in order to minimize the chance of a more serious “inflation disease” later, which would require even more drastic action (more painful medicine)

Note: Most changes to monetary policy are enacted by the Fed adding reserves to or withdrawing reserves from the banking system through a process called open market operations. The result of such moves is to increase or decrease the Fed’s most critical interest rate, the federal funds rate. The federal funds rate is the rate at which commercial banks and certain other financial institutions invest excess funds with other commercial banks on an overnight unsecured basis.

The federal funds rate is easily the most important of ALL short-term interest rates. Changes in the federal funds rate immediately impact the level of all other short-term interest rates, including the prime lending rate and various short-term investment rates. The discount rate, the other rate controlled by the Fed, is now almost irrelevant in today’s conduct of monetary policy.

The “Dog” and the “Tail”

While many of the Federal Reserve’s official responsibilities remain unchanged from earlier years, the nature of the Federal Reserve’s monetary policy flexibility has changed markedly during the past 25 years. In my opinion, the Federal Reserve is no longer the primary determinant of when monetary policy changes are necessary–the U.S. bond market is.

Since the Federal Reserve’s creation in 1913 until perhaps the late 1970s, the Federal Reserve solely determined monetary policy. The nation’s bond market–much smaller during those times–then quietly fell in line. During that era, the Federal Reserve was the “dog,” while the bond market was the “tail.” This relationship has now reversed.

Today’s reality is that the Federal Reserve, to a large extent, provides the monetary policy mix that is demanded by a powerful and very inflation-sensitive bond market. The market is now the “dog,” while the Federal Reserve is the “tail.”

Today’s inflation-wary bond market provides the Federal Reserve with less monetary policy flexibility than at any time in its history. Any future Federal Reserve attempt to over-stimulate U.S. economic growth with “easy money” would be met with rising long-term interest rates (to protect lenders/investors from impending higher inflation) and cries of Federal Reserve irresponsibility.

Conducting Monetary Policy

How is proper monetary policy determined by the Federal Reserve? The Fed is clearly concerned about the inflation implications of today’s historically tight labor markets and the wage pressures that could result.

In addition (and figuratively speaking), today’s Federal Reserve conducts monetary policy using an old-style balancing scale with four trays.

In separate trays, the Fed balances:

1) Criticism from the “hawks,” who see inflation under every rock. The hawks are typically critical of the Fed, noting that the institution is not aggressive enough in diffusing inflationary expectations

2) Criticism from the “doves,” who constantly argue that monetary policy is too restrictive. The doves argue that the Fed has usually gone too far in monetary tightening or not eased policy enough, and that the Fed frequently threatens the economy with the “r” word…recession

3) Recent price performance of gold and various other commodities. Price movements in these commodities can serve as inflation red flags, as well as signs of monetary policy that is too restrictive

4) The current shape and slope of the U.S. Treasury yield curve, including the most recent direction of 10-year U.S. Treasury Note and 30-year U.S. Treasury Bond yields. Such information provides a clue as to the bond market’s collective view of inflation expectations

Only when all trays are in “relative balance” does the Fed consider monetary policy to be appropriate.

The Fed must also consider the inflation implications of U.S. dollar strength or weakness relative to other global currencies. The Fed must also consider the conduct of monetary policy by other major central banks including the European Central Bank, the Bank of England, and the Bank of Japan…

…not a task for the faint-hearted

Economic futurist Jeff Thredgold is President of Thredgold Economic Associates, a professional speaking and economic consulting company.

Since 1976 Jeff’s weekly economic and financial newsletter, Tea Leaf, has been helping people make sense of the tangled maze of the U.S. and global economy and financial markets in a light, approachable style. Sign up to receive the free Tea Leaf email newsletter and let Jeff Thredgold show you how to use this information to enhance your financial well-being for years to come.

Jeff is the author of econAmerica: Why the American Economy is Alive and Well…and What That Means to Your Wallet (Wiley, 2007), and On the One Hand…The Economist’s Joke Book.

His career includes 23 years with $96 billion banking giant KeyCorp, where he served as Senior VP and Chief Economist. He now serves as economic consultant to $50 billion Zions Bancorporation, which has banks in 10 states.

The carry trade is an investment strategy involving basic arbitrage between interest rates. Any Forex transaction comprises of simultaneously selling one currency and buying another. Object of the carry trade is to sell a currency with a low interest rate and purchase one with higher interest rate. Trader pays interest on the sold part of the trade and collects it on the currency that was purchased, capturing the rate differential.

This easy strategy has been a buzzword in Forex circles for many years. There are always differences in interest rates to be exploited and sometimes they are quite substantial. To make it more appealing, these imbalances can last for a long time, years even, making the carry trade a darling among the “easy money” crowd. Such was the case for JPY which had been heavily borrowed for years in order to buy NZD, AUD and GBP, until last summer. That’s when the now famous “unwind of the carry trade” took place, sinking a lot of over leveraged traders.

Since then financial press has been relatively quiet on the subject. Recently, though, new variants of the method have started to pop out. On of them involves USD being sold against a basket of other currencies. It is based on the premise that FED will continue to cut rates and the dollar will continue its weakness unabated. Since the outcome for rates of other major economies is also very uncertain, hence the basket of currencies. This makes it for a rather complicated strategy, requiring careful allocation within the basket. This particular a approach makes the carry trade a little more complicated than it needs to be.

Another option gaining attention of late is the use of emerging markets currencies, also known as exotics. Some of the relatively high yielding ones are, as of this writing, Brazilian Real, Mexican Peso, Turkish Lira and South African Rand. While they are not available on all platforms, more and more brokers are adding at least some of them to their offerings. As of late, Rand (ZAR) and Lira (TRY) seem to be leading the pack.

South African Rand has been actively traded for many years now, has accumulated a wealth of historical data and is probably most suitable for individual trader. South African Reserve Bank’s overnight rate stands 11%. Rates have been cut four times last year and this trend is expected to continue. This country has benefited enormously from the commodities boom, especially the metals. It’s not without serious problems though, very high unemployment rate, political instability, and failing infrastructure (electricity shortages) are sure to have effect on the Rand. This currency is available on most of the leading broker’s platforms.

Turkish Lira currently offers the highest interest rates in the industrial world. The benchmark overnight rate was standing at 15,25% lately. In 2001 the country started reforms, backed by International Monetary Fund, which greatly improved economic stability. This led to Turkey being one of the fasting growing economies in the world, for a few years running. Prospective European Union membership also increased the flow of foreign investment. However, country has to overcome very high level of deficit and external debt. Political instability is always possible, as well as the ever present threat of a military conflict with its Kurdish minority.

These exotics certainly offer interesting and tempting opportunities for carry trade enthusiasts. Combined with daily interest payouts and massive leverage availability, they are sure to draw attention of speculators. Let’s not forget, however, that the potential for loss is also high. During adverse times, exotic currencies will tend to move much faster than others. While worthy a second look, this carry trade is probably best suited for the most adventures traders, no matter how much hype surrounds it.

Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on http://www.spectrumforex.com Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at kulej@spectrumforex.com

The launch of the US Oil Fund (ticker: USO) gave investors an easy way to invest in the hottest commodity of the day: oil. Still reeling from the post-Katrina boom that has kept gas prices over $2.00 a gallon, investors bought over five million shares in the ETF’s first day.

The concept is an easy sell: it’s a fund that invests in oil contracts with the purpose of mirroring the value of West Texas Intermediate (WTI) light, sweet crude oil at a ratio of one barrel contract per share. One share, one barrel.

Easy, right?

Riiiiiiiight…

The Well-Known Risks of Commodities

Everyone knows about the risks of investing in commodities, but it is worth repeating the main points.

Commodities prices fluctuate quickly and widely. An announcement from any OPEC country could send oil prices up or down 10% within minutes. With every word spoken by the prime minister of Iran oil pushes upward.

Oil investments are also subject to operational risks: environmental hazards such as oil spills, leaks, fires and discharges of toxic chemicals.

This is not rational long-term investing. This is short-term, profit-taking trading, and it should be treated as such.

Commodities have long been considered a hedge against market fluctuations, not a primary holding. Now they are suddenly an investment strategy. Any commodity — oil, gold, pork bellies — should be considered a hedge against a bond or equity market downturn.

Like gold and other commodities, oil futures have enjoyed a long bull market in the post 9-11 world, but commodities and hard assets tend toward modest gains over the long term. And they are all subject to sudden, harsh corrections.

Specific Risks of the Oil ETF (USOF)

Though any commodity investment involves certain general risks, the US OIL Fund (USOF) ETF has specific risks that make it particularly unstable.

1. Price Risk - This is the risk that the NAV of the fund will not equal the price of WTI light, sweet crude, as the fund intends. The fund’s prospectus outlines three reasons why this could happen:
2. Market Risk - The trading price per share of the ETF may not correlate with the value of the NAV, which is calculated by dividing the total value of the fund’s assets by the number of shares. The ETF, then, could trade at a premium (more than the underlying assets are worth) or a discount (less than the value of the underlying assets).
3. Management Risk - The NAV may not match the value of the benchmark oil contract. The underlying assets of the fund, then, could stray from the value of the contracts the fund trades.
4. Futures Arbitrage Risk - The price of the benchmark does not closely correlate with the price of WTI light, sweet crude. In this case, futures contracts may differ in price from the underlying asset (barrels).Any one of these risks would be enough to make USOF a questionable investment, but there’s more…
5. Strategy Risk - Rather than profit from speculative short-term futures trading, the USOF tries to track the price of the underlying assets (oil), using futures contracts. This is all to be carried out by the General Partner (manager), Victoria Bay Asset Management, described in the prospectus as “lean staffed,” which “relies heavily on key personnel to manage trading.” As the prospectus notes, “there is no assurance that the General Partner will successfully implement this investment strategy.” Like stocks, futures contracts can be over- or undervalued with respect to their underlying assets. Further, the fund can be manipulated by short-term trading tactics (i.e. short selling). This fund’s reliance on a “lean-staffed” manager which does not actively manage the fund’s assets, but rather attempts to track an index price, does not bode well for the fund.

Legal Risks

Aside from the organizational risks, the USOF has two outstanding legal claims to contend with.

1. NYMEX - The New York Mercantile Exchange (NYMEX) is the exchange through which WTI light, sweet crude is traded. As the publisher of the price of that asset, NYMEX is challenging USOF’s use of the price as a benchmark. NYMEX is seeking a licensing agreement with the fund, or threatening legal action to prevent the fund from using it as a benchmark. According to the prospectus, “USOF is unable to determine what the outcome from this matter will be…This may adversely affect USOF’s ability to achieve its investment objective.”
2. Goldman Sachs - One of the world’s largest investment banks, Goldman Sachs, has two patents pending which may be infringed upon by the fund’s methodology. Both patents define a means for creating a pooled fund that trades futures contracts and issues the equity interest of the fund to investors through publicly traded shares. Should the patents be granted, USOF may be held liable for patent infringement, if it were to “operate as currently contemplated after the patents were issued.” If either of these patants is granted, the fund may be liable for royalties, which would come from the fund’s assets.

These are complicated matters for attorneys in the specialized areas of Intellectual Property and Finance, and this author is unqualified to make a determination as to the merits of the claims made. As investors, however, we are all qualified to say, “nope, too much risk for me.” Pure oil contracts are less risky than this fund. Should USOF be held liable for either of these claims, any damages or royalties will be taken directly from the fund’s investors, which could negatively affect performance by 4-5 basis points (0.4%-0.5% annually, which can negate any positive performance or exacerbate the losses of a hedging investment).

Conflicts of Interest

The fund makes no bones about it: a whole section of its prospectus is entitled, “The General Partner Has Conflicts of Interest.” The management of this fund has other investment interests that may be of more importance (to them) than this fund. “For example,” it states, “a conflict may arise because the General Partner and its principal and affiliates may trade for themselves.”

Essentially, this is an open invitation for the management to prioritize their own holdings (and holdings they have a vested interest in) over the USOF holdings.

Better Options Abound

Usually there are better options around, no matter what you’re looking at. But when it comes to USOF, there are few worse options.

The management has not proven itself as a consistent performer. The underlying commodity is near an all-time high. The strategy is subject to pending legal decisions.

There are better options in mutual funds that specialize in commodities producers. And even these funds should not comprise more than 5% of an individual’s portfolio.

If you still feel the need to invest in the “pure oil play” that’s getting all the press these days, please read The Prospectus before investing.

B. Patrick Regan is a freelance writer and a staff writer at StocksAndMutualFunds.com. He had no vested interest in any securities discussed in this article at the time of publication.

Observing the movement of stock prices in Japanese Candlestick format and in real-time depiction is somewhat akin to watching the printout of an electrocardiogram in motion. One is seeing at first hand the story of an unfolding investor psychology. The first practitioner of Candlestick price representation, so many centuries ago in Japan, was no doubt seeking to develop a strategy or a system of tactics which would deliver to him a trading advantage which would assist him in planning his next moves. The technique of price recordation which he developed was based on the principle of expanding the “line,” or “bar,” on a chart representing the range of prices for a given time period so as to create a fattened-out line, or cylinder, in which the opening price and the closing price for that time period would be the upper and lower limits of the cylinder. If the closing price of the day were higher than the opening price, then the cylinder would not be filled in, or would be left “white;” whereas if the closing price of the day were lower than the opening price, then the cylinder would be filled in, or made “black.”

This style of price display presented a visual picture which was instantly recognized by the eye. It was easy to discern the mood of the rice traders which was in effect during that session; and, depending on the relationship of that particular Candle bar’s relationship to adjacent and nearby bars, the operator had a basis for making a prediction of the direction of prices for the next day.

Furthermore, when interpreted properly in the light of human judgment, the shape of a bar, especially when considered in conjunction with adjacent or nearby bars, was found to possess an ability to forecast a reversal of major trend.

After long and expensive historical research and translation of old records into English, the Candlestick approach to price charting was brought to the Occidental world about 25 years ago. In the early years, the Candles developed a following only very slowly. More recently, however, professional traders and investors, as well as those who do not trade or invest for a living, have begun to appreciate the advantages of the Candlesticks, to the point at which it seems reasonable to predict that they will be the standard within the foreseeable future.

What is so unusual about the Candles? In short, they form patterns which have meaning in terms of revealing traders’ theretofore-hidden investment rationale, and also in terms of allowing forecasts to be made regarding the future course of price action. Some of these visual formations or images are useful in foretelling the end of a trend and a possible topping out and rollover to the downside (if the major trend has been one of increasing prices) or of bottoming out and rolling to the upside (if the major trend has been one of declining prices).

At the top of an extended rising market, one of the more dependable reversal patterns is the “Evening Star,” a three-bar pattern in which the first bar is a tall white bar; the middle bar is a small “Star” which usually sits higher than the first bar; and the third bar is a tall black candle which usually sits lower than the Star. This formation is bearish in its implications; and the implication is strengthened if the Star is a “Shooting Star,” which looks like its namesake. At the end of an extended declining market, the inverse pattern can also appear; and, perhaps not unexpectedly, its name is the “Morning Star.”

The opposite of the Shooting Star is the “Hammer,” which appears only at the end of an extend downtrend. The Hammer is considered to be one of the more reliable predictors of a possible change of trend to the upside, especially when the next day’s closing price is higher than the closing price of the Hammer.

A “Doji” is a price bar in which the opening price and the closing price are the same. It is considered to be an indicator of a reining-up - of indecision - and of a possible change of trend, when it appears at the end of an extended move in either direction. A Star whose opening price and closing price are the same is called a “Doji Star.” A “Bearish Engulfing” pattern occurs at the top of an uptrend, and is marked by the “real body” (i.e., the cylinder in the price bar) engulfing the real bodies of one or more previous bars. The “Bearish Engulfing” formation is, quite naturally, bearish. Its converse is the Bullish Engulfing pattern, which occurs at the bottom of a downtrend; and, obviously, carries a bullish signal.

In Candlestick parlance, gaps (”windows”) are celebrated as being generators of support and resistance. Often, a comparison of price action before and following a gap clearly reveals the power of a gap to repel prices which venture within it.

The Candles are useful in any time frame, including day trading. Although they are valuable in foretelling reversals, they do not predict the extent of a move. They are perfectly compatible with all “Western” Indicators, and the synergy which often results from the Candles and the Western Indicators used together can be remarkable. Furthermore, the Candles are equally adaptable to use in every financial market, including stocks, indexes, commodities, and Forex.

Technical analysis of Japanese Candlestick price imaging is founded on the hypothesis that price action in the financial markets is not random or mechanical; rather, that it is patterned (if the practitioner is following Elliott Wave theory), and that it is the result of human emotion in action.

There are many practitioners of Candlestick analytics who make their services available to the investing public. Some of them publish investment advisory newsletters (alternatively called “investment newsletters” or “market letters” or permutations thereof); some offer instructional and training seminars, forums, and chat rooms; some publish books; and some of them offer multiple services and products. Their observation of the Candlestick world sometimes leads to a critique of the common wisdom as propounded by the media, and to explicit review of, and commentary on, the state of the markets. Expostulation of the Candlestick analytical technique is not commonly a part of financial news programs, either in the popular printed media or on television; nor are the particulars of Candle theory often the subject of study, research, investigation, or illustration for the benefit of the investing public.

This is unfortunate, because the information which flows from these concepts could often open up new possibilities for investors and be of value to them in their decision making process.

http://www.candlewave.com

Trading is the buying and selling of stocks or other financial instruments over short periods with a view to making a profit between the opening and closing of a position. By contrast, investing is the accumulation of assets over the long term. Although investors adjust their portfolios, this is part of a longer strategy rather than creaming-off short-term profits.

Investments consistently grow over the long term, investing is rational. But trading is closer to an afternoon at the races.

Wall St traders rank among the highest paid members of society, out-earning doctors, engineers, teachers and countless other seemingly more useful occupations. Trading is perceived as lucrative and glamorous.

Trading has become available to the little guy since the onset of the Internet.

There’s no shortage of cut-price brokers clamoring to execute your trades, computerized platforms offering to put your system on auto-pilot, and courses promising untold wealth for just a few hours a day in front of the screen. There’s all kinds of strategies - swing trading, day trading, momentum trading, scalping… in all kinds of markets - stocks, forex, options, future, commodities…

It all sounds too good to be true. But is it?

Markets are supposed to be efficient. That means that the price of any stock, currency etc is the right price taking account of everything that’s publicly known about it. If that’s so, how come the big boys can make big bucks? Maybe it’s because they know just a little more than you or me, or maybe because they can take advantage of any new facts that little bit quicker.

Trading is basically a zero-sum game. The act of trading doesn’t generate value in itself. Every dollar gained by someone is a dollar lost by someone else. Although historically cheap, commissions still take a chunk out of every trade. These can soon mount up if you’re making many trades a day, and remember every trade carries a commission going in and another coming out.

All this doesn’t mean trading isn’t for the small player, but it does mean s/he should proceed with extreme caution. There are individuals out there doing very well from trading, but there’s a good many that have lost their shirts.

If you’re still interested, accumulate knowledge, read widely, get involved in Internet forums… Decide what you’re going to trade and adopt, adapt or create a system.

Then open one or more practice accounts. Get to know the platform. Test your system. Tweak it until you’re confident you can make a consistent profit. Then, and only then, consider doing it for real. If you take the plunge, remember the psychology differs when you’re playing with real money - your money. Stay disciplined.

Johnny Finnis is editor of personalmoneymanagement101.com, a simple and unbiased introduction to finance and investment for ordinary people to make the most of their money. Have your say on our blog

To the average investor, “correlation” once seemed to be one of those “little known, less cared about” ideas. But in today’s increasingly connected global financial system, correlation takes on a whole new importance. Witness how our entire credit and financial system teetered on the brink of collapse when one market, the sub-prime credit market, started tumbling out of control.

Bear with me for just one short academic moment.

In the world of finance, correlation is a statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are uncorrelated.

In real life, perfectly correlated or uncorrelated assets are rare; rather you will find securities with some degree of correlation. For investors trying to build diversified portfolios that improve returns while reducing risk, correlation is not a good thing. In fact, it is a very bad thing. High correlation amongst investments means that as one goes up (or more recently) down, all the others move right along with it.

Unfortunately, the interconnectedness of global markets has led to a very high level of correlation between assets, not only among equities, but across most asset classes that, on the surface, don’t seem like they should be all that correlated. According to The Economist, March 9, 2007, “Perhaps it should not be too surprising that, according to Merrill Lynch, over the past five years the Russell 2000 index of small American companies has a 94% correlation with the S&P 500, the main Wall Street index. More alarmingly, international stock markets have not offered any diversification either: they have shown a 95% correlation. Yet more startling are the figures showing that hedge funds have recorded a 94% link with shares. Even property has been following Wall Street 81% of the time.”

Why should investors be concerned about this? For a very large segment of the population, our jobs/incomes (and any defined benefit pensions) are tied to the state of our employers/companies, which are tied to the state of the economy, which is tied to the state of the financial markets. Defined contribution pensions, 401k’s, and IRA’s are most commonly invested in equities (through mutual funds or self-directed accounts) and are therefore tied to the same set of risk variables in the economy (interest rates, energy prices, geopolitical instability, natural disasters, currency fluctuations, commodity prices, illiquidity of credit markets, etc.) When the entire house of financial cards starts tumbling, only uncorrelated assets have the ability to be a lifeline to investors’ net worth.

Enter life settlements as investments. Life settlements are discounted cash settlements paid by investors to life insurance policyholders. In exchange, investors later receive the full amount of the life insurance policy upon the passing of the insured; a win-win transaction. Policyholders, who choose to sell their policy, receive cash now to enhance the quality of their remaining days. Investors receive an excellent return on investment, historically a double-digit return.

How does that solve the correlation dilemma facing investors today? The July 30, 2007 cover story of Business Week, Profiting From Mortality, states “Moreover, [life settlements are] ‘uncorrelated assets,’ meaning their performance isn’t tied to what’s happening in other markets. After all, death rates don’t rise or fall based on what’s happening to commodities, say. Uncorrelated assets like these are highly prized in an increasingly connected global financial system.” Life settlements bring a true measure of diversification to investment portfolios at a time when most other investment asset categories are increasingly operating in parallel.

“Investors are attracted to life settlements because insurance is seen as a noncorrelated alternative asset. Life settlements provide noncorrelated diversification because insurance policies are independent of the factors contributing to economic downturns, such as interest rate fluctuations and increasing fuel cost. As a result, life settlements are one way to reduce a portfolio’s exposure to sudden downturns in the stock and bond markets,” according to Conning Research & Consulting, Inc.’s 2007 study “Life Settlement Market: Increasing Capital and Investor Demand”.

Wall street firms have known this for years. Firms like Berkshire Hathaway and AIG have poured hundreds of millions of dollars into life settlement portfolios, to mitigate risk in all their other “correlated” assets. Institutional investors are using life settlements to shore up collateral for development projects. After all, unlike real estate, life insurance policies (logically) don’t decline in value over time. Each day, a life insurance policy is one day closer to reaching full value.

Options for individual investors to participate in life settlement assets had been few, but the investment picture is improving. Funds are on the horizon, although not yet here, and fractional ownership arrangements already exist, that provide the diversification necessary to achieve a predictable rate of return for an individual life settlement investment portfolio.

Financial advisors have preached diversification for years. What they were really trying to say and most of them didn’t realize it, was that investors need to uncorrelate their investments. Unfortunately for many of us, diversifying with a bunch of highly correlated assets achieved nothing, didn’t diversify, only “deworsified”. Life settlements, on the other hand, are one truly uncorrelated investment asset.

Dave Yelken is a life settlement expert and the owner of Accelerating Wealth, LLC, a financial services agency specializing in life settlement strategies, based in Bedford, Texas. To contact Dave, or to add yourself to his mailing list, please visit http://acceleratingwealth.com/