Planning Your Dive and Diving Your Plan - Trading!

A colleague of mine just returned from a scuba diving trip in Cozumel, which just happens to be one of my favorite places to dive. Anyway, she was telling me about an unexpected difficulty she encountered while swimming around the corral reef down about 85 feet. It wasn’t anything serious but her story reminded me of something my scuba instructor used to say over and over again. "Plan your dive, and dive your plan".

When you’re down about 90 or 100 feet the nitrogen acts on your body in a way that’s not too dissimilar to having one dry martini on an empty stomach. It’s called Nitrogen Narcosis, Rapture of the Depths, or Martini’s Law. So the thing to do is get your planning done while you have a clear head, (i.e. on the surface). And then when you’re deep into it, and you’re feeling a bit euphoric, or nervous, you don’t have to make any decisions about ‘what’ to do. You just follow your plan.

This holds true for trading as well. When you’re feeling the euphoria or nervousness set in, remember to follow your plan. And, uhm yeah,, also have a plan to follow. Clear heads will prevail.

Years ago I had the good fortune of talking with a trading guru for several hours. This individual is world renowned for his trading saavy and skill. What he elaborated in that conversation had a tremendous impact on me. HE said that when he learned how to trade that his family enforced only one rule that he had to follow. KNOW WHERE YOU ARE GOING TO GET OUT BEFORE YOU GET IN. He felt that the problem that most traders had was that they felt that this simplicity did not apply to them. I remember sitting and speaking with him and thinking about my own mistakes, primarily letting hope take over in my decision making.

Many traders think that crying "UNCLE" on a trade and taking a loss is unacceptable. Since that conversation I have taken numerous losses on trades but it’s funny how they don’t have the STING that they used to because I PLAN MY DIVE and DIVED MY PLAN.

Historical Briefing: Stocks, Finance and Money

The World Bank claims that some two billion of the world’s citizens live on $1 per day or less! That fact absolutely shocked me. With this statistic in mind it becomes important to focus on all of the things that have served as money over the history of civilization. Aztecs used Cocoa beans, Norwegians used Butter and dried cod, many Indian tribes used animal skins and some of the early colonists used grains. It’s worth thinking about this the next time you pick up your paycheck. The word "salary" is derived from the word SALT, which is what was the key currency of the North Africans for hundreds of years. SALT was a key commodity substance used for preserving food.

A butter and dried cod banking system? Reconciling your monthly bank statement must have been very messy!

I’ll take bear markets for $100 please Alec!

Anybody want to guess how we came to describe and define a BEAR market? Well, there is a debate on this one as most people feel that when a Bear makes a killing its claws move from up to down. However, bear markets are bone-chilling experiences. Markets always fall much faster than they rise! Anyway, the word "arctic" is derived from "arktos" which just so happens to be the Greek word for "BEAR!" And that is how it is believed that the word BEAR came to describe a declining market. Brrrrrrrrrrr..

Now you know!

Ok, why the heck do they call it Wall Street anyway?

It was the Dutch you see. They had just moved to Manhattan and had nowhere to build a dyke, so instead they built a wall. This was in 1653, and it wasn’t meant to keep water out, but was made to keep out the British and Indians. Easy enough for the Dutch, just a 12 foot high wood stockade that ran from river to river.

Then in 1685 they laid out Wall Street along the line of the stockade.

Now you know.

These days the average volume on the New York Stock Exchange is several hundred million shares. We have even seen numerous days when the volume exceeded over one billion shares. To give you an idea of how far we have come, the last date on record when the New York Stock Exchange traded less than one million shares was October 10, 1953. The very first day that the BIG BOARD traded over one million shares was December 15, 1886. On Black Tuesday, the BIG CRASH on 10/29/29 the market established Record volume of 16 million shares!

Trading Education: The Best of Both Worlds!

I made my very first investment in the stock market when I was ten years old. Ever since then I have been hooked! Now I check out hundreds of trades each year with the same excitement andenthusiasm, and each time try to find that one market at the right time that could dramatically create wealth.

If you would’ve been fortunate enough to invest $1,000 in Microsoft when it first came public, that initial investment would be worth close to $300,000 today. In the last 10 years America Online has been up 12,000% and it has come creashing lower as well! Although statistics like this are advocated regularly by journalists and brokers the majority of investors have a very difficult time staying in an investment for that long of a period of time even though they know they are in a good company The financial markets are a never ending source of temptation trying to lure you into a new position with each passing second. The belief that the grass is always greener in another market is a distraction that every investor eventually has to contend with. Even if you are a MUTUAL FUND investor the fact is that you are always looking for the BEST return available.

Years ago when I worked as a broker I was confronted with this dilemma. One of my clients told me that he knew the BIG MONEY was made in holding on for the LONG TERM but that he liked trading the short term swings. He asked my advice and I had to think long and hard for several days before I could respond.

Eventually, I presented him with the following strategy that literally combines the best of the TRADER and INVESTOR worlds. Traders are looking for the quick hit and run. Investors seek their advantage by looking at the long term. Long term investors quite often benefit from allowing dividends to be reinvested into purchasing more stock in the company and the very real possibility of the stock splitting in the future. If you combine both of these apparently opposite perspectives you end up with a very unique viewpoint that eliminates a lot of stress associated with decision making. This strategy will bring home the perspective that within every seed that you plant in the financial markets lies the promise of ten thousand forests. I refer to it as my FOREST STRATEGY! It is another way to make your short term efforts as a trader pay you dividends by also recognizing the importance and significance of long term investing.

Let’s say that your initial investing capital is $10,000. 1) Find a company, preferably in the Standard and Poors 500 Index that you understand and are familiar with. If you want to narrow down your group you can select companies that are in the Dow Jones Industrial Average which include only 30 stocks. These are established companies with long financial histories that can be researched to your hearts delight.

2) Study the companies Price Earnings Ratio. Where is the Price Earnings ratio now? What has been The highest and lowest points of the price earnings ratio over the last five years? Look to buy a company with a historically low price earnings ratio that is a leader in its industry. Use the Price Earnings Ratio as a guide. Don’t try to pick bottoms. 3) Look at a chart of prices to see what has happened recently and to determine where a good buy point is.

4) Place your trade with the intention of a 10% profit objective. Once you reach your profit objective, sell enough shares in the company to remove your initial $10,000 investment and only leave your $1,000 profit in that stock.

5) Repeat steps 1-3 as you search for another company to trade for a 10% profit and plant the Remainder for the long term.

6) Repeat, Repeat, Repeat.

The drawback on this type of trading is that when you are with a great company you do give up a lot of upside. However, if you look at the PROBABILITIES how many IBM’s, Aol’s, Yahoos! Or Microsofts are there out there in relation to the entire universe of stocks? What I personally like about this style of trading is that it eliminates the GREED factor that most investors have of trying to hold on for the top tick. Secondly it also allows you to build a nice diversified portfolio. Thirdly, trading becomes a very fun game with potentially lucrative long term implications. It is very possible to trade this way once a month planting a seed in a quality company that can easily become a Forest of Wealth for you.

Some trades might take the better part of a year to pan out. Some trades might achieve your profit objective in a matter of weeks or days if you are really fortunate.. Keep in mind that you still have to manage your risk on each and every trade. Let me be perfectly blunt, if you don’t manage your downside there will not be an UPSIDE… It is acceptable to use any of the RISK Management Techniques that I advocate by doing Partial Covered Calls and other Option Selling Techniques. When done correctly those techniques can dramatically accelerate your returns.

I must admit that I truly enjoy this type of trading. (My broker likes it as well as it generates many more commissions for him.) However, part of the reason that this method sits well with me is that I hardly pay any attention at all to my profits after I take them. It becomes very stress free to know that you have increased your wealth 10% and are just interested in planting seeds all over the financial landscape in companies that meet your criteria. I must however stress the point that you make sure that you are aware of the downside. This method is by no means RISK FREE….but for the individual who likes to trade and invest simultaneously it truly is ideal.

Guard your investment principal at all costs and let your profits run. Just one more way to look at the bigger picture. Kind of like a Johnny Appleseed meets the financial markets. Many extremely successful investors do this with Initial Public Offerings as well. Study away.and remember,let’s be careful out there.

Oil spike, jobs report pummel stock market

An unprecedented spike in crude oil prices followed the release of a dour unemployment report Friday, sending the stock market to its worst losses in months.

By the end of the day, hopes that the economy’s slowdown was nearly over had been left behind. And consumers who had seen a small break in gasoline prices again were facing the prospect of $4-a-gallon prices at the pump.

The jobs report for May from the Labor Department was filled with grim numbers, starting with a 5.5 percent unemployment rate, up from 5 percent. That was the biggest one-month rise since 1986 and put the unemployment rate at its highest since October 2004.

Employers also had eliminated 49,000 jobs in May, the fifth straight month of losses.

With multiple worries to choose from, Wall Street flinched principally because of oil’s surge. There was less concern about the jump in unemployment, though both reinforced worries about economic weakness.

“It appears to be oil-induced rather than that jobs number,” Ken Powell, chief equity strategist at Overland Park-based Mariner Wealth Advisors LLC, said of Friday’s drop.

The Dow Jones industrial average gave up 3.1 percent of its value, erasing more than the 214 points it had gained Thursday. Its loss of 394.64 points was the biggest in more than a year and left the blue-chip stock index at 12,209.81, the lowest since the end of March.

The oil price spike, sparked by comments that Iran might be attacked by Israel, pushed crude oil futures to a record close Friday of $138.54 a barrel, up $10.75.

The price was up more than $11 at one point during trading on the New York Mercantile Exchange. A barrel of oil cost less than $11 less than a decade ago, in late 1998.

Gasoline prices had retreated a few cents in recent days, with AAA noting that the national average retail price for gasoline dropped Thursday for the first time in a month.

But Friday’s big jump in oil prices, which followed a smaller rise the previous day, will put a stop to that. Wholesale gasoline prices, which had declined earlier in the week, jumped nationwide. In the Midwest, wholesale prices were up about 20 cents a gallon Friday.

“This is all we needed to put fuel on the fire,” said Mike Right, a spokesman for AAA in Missouri.

Oil prices were relentless Friday. They started early up about $5 for a barrel of West Texas Intermediate oil, the U.S. benchmark, and gathered strength through the day.

The move was triggered by stern talk from Israel officials that Iran’s nuclear program, which Israel and the West believe exists to build nuclear weapons, could not be allowed to continue.

Israel’s prime minister, Ehud Olmert, was quoted Friday saying that Israel would attack Iran if it did not abandon its nuclear program. He was in Washington this week and said his discussions with President Bush were dominated by Iran.

There is precedent for Israeli military action. In 1981, Israeli planes destroyed an unfinished Iraqi nuclear reactor. Iran has denied that its nuclear program is meant to produce weapons. Last year Israel bombed a suspected nuclear reactor in Syria.

A conflict that involved Iran would quickly be felt by the oil market. Iran is the second-largest producer in the Organization of the Petroleum Exporting Countries and the fourth-largest exporter of oil in the world, according to the Energy Information Administration.

Iran produces 3.8 million barrels per day of crude oil, and there is only enough surplus oil production in the world to replace just over half that amount. A disruption of Iran’s oil exports clearly would be serious, said market observers.