We have been lucky over the past few weeks to be able to tell you about our good trade nights, well today we will tell you about a bad one. Personally I was stopped out of both of my trades last night for a 80 pip loss.

While it is not pleasant, it’s a fact of trading, you are going to have losing trades, you would be foolish to believe you will only have good trades and never lose.

In discussing last night between ourselves we realized that several of our traders whom trade reversal patterns were all over Cable last night, and we have to look no further than the newsletter I wrote last night to see how they did it.

Personally I rely heavily on various support and resistance levels for my trading style, and in doing so, it is easy to over look, what many believe it the strongest indicator available, Candlestick patterns. Lets look at what I wrote last night;

For those of you who are fans of the candlestick patterns, we had a perfect double bottom form on both the 4 hour and the 1 hour charts yesterday, right before the spike up, I hope you saw it and were able to get in a long position. Anywhere from 100 to 150 pips could have been had on the move. The double bottom formed in the first couple of hour of the London market, those of you who actively trade the London market were the beneficiary’s of a classic pattern that worked to perfection. I on the other hand missed this as I was studying the backs of my eyelids and not the charts at 3:00 AM EST.

How silly was it of me to dismiss the reversal for poultry 100 pip move. The pattern we have been in since February has been a trading range between 1.7600 and 1.7230. That initial move left us at 1.7400, a full 200 pips short of the established top of our range, which by the way it exactly where we are now.

Tonight we are trading around 1.7595 our first region of resistance is in the 1,7600 range, and a second region around 1.7660. For support we look to around 1.7540.

While it is obvious after the last two days that we are in a short term up trend, we have the super resistance of 1.7600 to break. Since February we have only broken above it once to 1.7624, and that was a quick spike that came immediately back down. Cable has tested 1.7600 at least a half a dozen times and held, so being a support and resistance guy I feel we are staying with the established trading range.

As all of you know only time will tell, but having a good forex trading education will make a lot easier for you to predict future movement and make successful trades.

Learn about any of Eddie’s amazing trading tools: Forex Seminar | Forex Trading Course | Forex Trading Education

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There are many good penny stock investments available, which could turn a small amount of capital into a small fortune very quickly. However, to discover these you need to know what to look for and what to avoid. When searching for that one big payoff, steer clear of the following examples.

The Phone Salesman - Anyone who is attempting to sell you investments over the phone should be considered an enemy. They have high-pressure sales tactics, and effective, believable arguments. However, they are not doing you any favors, no matter how good they make an investment sound.
They are operating in their best interest to dump over-the-counter stock on you, and the money you pay in will go into their own pockets, or the pockets of their company.
There has never been a need for good companies that are going places to resort to these type of tactics, but there has always been a need for poor, sinking, or shady companies to do so. If you choose to ignore this advice you deserve what happens to your investment.
You may also run into difficulty trying to find a buyer for your shares once you decide it is time to sell.

Very Low Volume Stocks - Without much trading activity it becomes increasingly difficult to buy or sell for the prices you want. As well, it becomes nearly impossible to get an understanding of where the stock price is heading, or to calculate fair valuations for the company’s stock price.
Not only that, but companies subject to low trading volume generally do not have a lot of positive interest.

The Hot Tip Stock - There are actually professional promoters who make a very good living generating and nurturing rumors about some penny stock that’s guaranteed to go through the roof. The entire concept hinges on the rumor being spread from person to person, at the office, over the phone, or at social venues.
The promotional ploys can be very costly for investors who get involved without special knowledge about the company or the actions of the promoter. In most cases if a stock really is going through the roof you won’t hear a word about it, because a select few individuals will be very intent on keeping the information to themselves.

Guaranteed Performance - If a stock is guaranteed to go up, it will almost always go down. Nothing is ever certain, especially on the stock market. When someone guarantees certain performance out of a stock, they may be a promoter, naive investor, self-serving broker, or have heard the guarantee from another source. In any case, don’t believe them. Instead check into the company yourself and if you feel it is a good investment, you may want to proceed.

Sinking Ships - When a stock has dropped a lot you may think that, “it can’t go any lower,” or that it is “a good bargain.” Especially with penny stocks, you need to avoid this type of thinking because many sinking ships don’t ever rebound, and they can go lower, and they aren’t good bargains just because they cost less than before.

Commission Free - If you are interested in getting stock commission free you may think you are saving money, but it generally means that you are buying over the counter stock directly from a promoter or the company.
Either way, they take their own invisible ‘commission’ from you, either by selling to you for an arbitrary amount which is unfairly high, or selling to you for the asking price rather than the bid price based on their own current valuations.

International Penny Stock - We’re not talking about living in the U.S. and steering clear of Canadian stock, or vice versa. We are talking about penny stock issues from Africa, Australia, European, Russian, or South American penny stock markets. First of all, you won’t be too impressed with the level of investor protection and exchange honesty in some of these regions, and you most certainly won’t be too impressed with the broker fees you incur when trying to purchase internationally.
Besides, if you can’t find good penny stock investments in North America, you won’t be able to find them anywhere else either.

Warrants and Rights - These are not technically stocks, but instead are derivative investments based on an underlying company’s shares. However, they often appear like penny stocks because they sometimes get listed in the stock pages, and often trade for pennies.
It is unlikely that you will accidentally purchase derivatives, but make sure you know what you are trying to buy by understanding the listing criteria of the paper you are reading, or verifying your purchase with your broker.

To get free information about investing in penny stocks visit http://www.pennystocks.com. They offer information on the definition of penny stocks, getting started, benefits, risks and how to find a good penny stock.

Peter Leeds, one of North America’s leading Investment Coaches, is a self-made millionaire who has created his fortunes on the stock markets. He has also empowered thousands of individuals to do the same. His personal success and incredible ability to consistently pick money-making stocks has earned him a loyal following of successful investors and has generated significant attention from the financial world.

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Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing. Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem - when you can just blame it on trading psychology instead?

Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding. The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills? Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed.

Trading Scenario

Consider the a trading plan which has the following three setup types: (1) initial which your intended trade entry (2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade (3) second continuation which is intended as a trade addon setup, but is also one ‘last’ chance to enter a trade.

You get an initial sell setup that triggers, but you do not take the trade = trade1. The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done. This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2. Why wasn’t the trade taken? You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far. Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.

Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade. Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3. AND AGAIN - you don’t take the trade. After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3.

Like trade1 and trade2, trade3 is a profitable trade. This swing has really turned into a great directional move, with each break holding on weak retests - a textbook example of the strengths of your trading method, but YOU have never entered a trade. You are going nuts! You are getting into this damn swing - you just can’t take it any more. Another retrace holds as a lower high. You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high. Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.

Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy. Bad just got worse, you also don’t exit when the swing goes into buy. After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down - right? TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction. A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.

TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy. This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted - this was a losing trade that they should not enter.

Is this a trading method or trading psychology issue? What ‘message’ is TraderB going to take from what has just happened. Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology? Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners. Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.

Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response. Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions. Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow. Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.

Barry Lutz has been trading, as well as teaching others to trade since 1997, through his firm Tactical Trading, LLC., http://www.tactrade.com. He also writes a daily trading teaching lesson called the Trade Journal, which can be found, along with other resources on trading psychology and trading method at The Tactical Trader, http://www.tactrading.com.

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The debate rages all over Eastern and Central Europe, in countries in transition as well as in Western Europe. It raged in Britain during the 80s: Is privatization really the robbery in disguise of state assets by a select few, cronies of the political regime? Margaret Thatcher was accuse of it - and so was the Agency of Transformation in the Republic of Macedonia. At what price should the companies owned by the State have been sold? This question is not as simple and straight forward as it sounds.

There is a gigantic stock pricing mechanism known as the Stock Exchange. Willing buyers and willing sellers meet there to freely negotiate deals of stock purchases and sale. Every day new information, macro-economic and micro-economic, determines the value of companies.

Greenspan testifies, the economic figures are too good to be true and the rumour mill starts working: interest rates might go up. The stock market reacts with a frenzy - it crashes. Why?

A top executive is asked how profitable will his firm be this quarter. He winks, he grins - this is interpreted by Wall Street to mean that they WILL go up. The share goes up frantically: no one wants to sell it, everyone want to buy it. The result: a sharp rise in the price. Why?

Moreover: the price of the stock prices of companies A with an identical size, similar financial ratios (and in the same industry) barely budges. Why didn’t it display the same behaviour?

We say that the stocks of the two companies have different elasticity (their prices move up and down differently), probably the result of different sensitivities to changes in interest rates and in earnings estimates. But this is just to rename the problem. The question remains: why? Why do the shares of similar companies react differently?

Economy is a branch of psychology and wherever and whenever humans are involved, answers don’t come easy. A few models have been developed and are in wide use but it is difficult to say that any of them has real predictive or even explanatory value. Some of these models are “technical” in nature: they ignore the fundamentals of the company. Such models assume that all the relevant information is already incorporated in the price of the stock and that changes in expectations, hopes, fears and attitudes will be reflected in the prices immediately. Others are fundamental: these models rely on the company’s performance and assets. The former models are applicable mostly to companies whose shares are traded publicly, in stock exchanges. They are not very useful in trying to attach a value to the stock of a private firm. The latter type (fundamental) models can be applied more broadly.

The value of a stock (a bond, a firm, real estate, or any asset) is the sum of the income (cash flow) that a reasonable investor would expect to get in the future, discounted at the appropriate discount (usually, interest) rates. The discounting reflects the fact that money received in the future has lower (discounted) purchasing power than money received now. Moreover, we can invest money received now and get interest on it (which should normally equal the discount). Put differently: the discount reflects the loss in purchasing power of money not received at present or the interest that we lose by not being able to invest the money currently (because we will receive it only in the future). This is the time value of money. Another problem is the uncertainty of future payments, or the risk that we will not receive them. The longer the period, the higher the risk, of course. A model exists which links the time, the value of the stock, the cash flows expected in the future and the discount (interest) rates.

We said that the rate that we use to discount future cash flows is the prevailing interest rate and this is partly true in stable, predictable and certain economies. But the discount rate depends on the inflation rate in the country where the firm is (or in all the countries where it operates in case it is a multinational), on the projected supply of the shares and demand for it and on the aforementioned risk of non-payment. In certain places, additional factors must be taken into consideration (for example: country risk or foreign exchange risks).

The supply of a stock and, to a lesser extent, the demand for it determine its distribution (how many shareowners are there) and, as a result, its liquidity. Liquidity means how freely can one buy and sell it and at which quantities sought or sold do prices become rigid. Example: if a lot of shares is sold that gives the buyer the control of a company - the buyer will normally pay a “control premium”. Another example: in thin markets it is easier to manipulate the price of a stock by artificially increasing the demand or decreasing the supply (”cornering” the market).

In a liquid market (no problems to buy and to sell), the discount rate is made up of two elements: one is the risk-free rate (normally, the interest payable on government bonds), the other being the risk related rate (the rate which reflects the risk related to the specific stock).

But: what is this risk rate?

The most widely used model to evaluate specific risks is the Capital Asset Pricing Model (CAPM).

According to it, the discount rate is the risk-free rate plus a coefficient (called beta) multiplied by a risk premium general to all stocks (in the USA it was calculated to be 5.5%). Beta is a measure of the volatility of the return of the stock relative to that of the return of the market. A stock’s Beta can be obtained by calculating the coefficient of the regression line between the weekly returns of the stock and those of the stock market during a selected period of time.

Unfortunately, different betas can be calculated by selecting different parameters (for instance, the length of the period on which the calculation is performed). Another problem is that betas change with every new datum. Professionals resort to sensitivity tests which neutralize the changes that betas undergo with time.

Still, with all its shortcomings and disputed assumptions, the CAPM should be used to determine the discount rate. But to use the discount rate we must have what to discount, future cash flows.

The only relatively certain cash flows are the dividends paid to the shareholders. So, Dividend Discount Models (DDM) were developed.

Other models relate to the projected growth of the company (which is supposed to increase the payable dividends and to cause the stock to appreciate in value).

Still, DDM require, as input, the ultimate value of the stock and growth models are only suitable for mature firms with a stable and not too high dividend growth. Two-stage models are more powerful because they combine both emphases: on dividends and on growth. This is because of the life-cycle of firms: at first, they tend to have a high and unstable dividend growth rate (the DDM tackles this adequately). As the firm matures, it is expected to have a lower and stable growth rate, suitable for the treatment of Growth Models.

But how many years of future income (from dividends) should we use in a our calculations? If a firm is profitable now, is there any guarantee that it will continue to be so in the next year, the next decade? If it does continue to be profitable - who can guarantee that its dividend policy will not change and that the same rate of dividends will continue to be distributed?

The number of periods (normally, years) selected for the calculation is called the “price to earnings (P/E) multiple”. The multiple denotes by how much we multiply the (after tax) earnings of the firm to obtain its value. It depends on the industry (growth or dying), the country (stable or geopolitically perilous), on the ownership structure (family or public), on the management in place (committed or mobile), on the product (new or old technology) and a myriad of other factors. It is almost impossible to objectively quantify or formulate this process of analysis and decision making. In telecommunications, the range of numbers used for valuing stocks oa private firm is between 7 and 10, for instance. If the company is in the public domain, the number can shoot up to 20 times the net earnings.

While some companies pay dividends (some even borrow to do so), others just do not pay. So in stock valuation, dividends are not the only future incomes you expect to get. Capital gains (profits which are the result of the appreciation in the value of the stock) also count. This is the result of expectations regarding the firm’s free cash flow, in particular the free cash flow that goes to the shareholders.

There is no agreement as to what constitutes free cash flow. In general, it is the cash which a firm has after sufficiently investing in its development, research and (predetermined) growth. Cash Flow Statements have become a standard accounting requirement in the 80s (starting with the USA). Because “free” cash flow can be easily extracted from these reports, stock valuation based on free cash flow became increasingly popular and feasible. It is considered independent of the idiosyncratic parameters of different international environments and therefore applicable to multinationals or to national firms which export.

The free cash flow of a firm that is debt-financed solely by its shareholders belongs solely to them. Free cash flow to equity (FCFE) is:

FCFE = Operating Cash Flow MINUS Cash needed for meeting growth targets

Where

Operating Cash Flow = Net Income (NI) PLUS Depreciation and Amortization

Cash needed for meeting growth targets = Capital Expenditures + Change in Working Capital

Working Capital = Total Current Assets - Total Current Liabilities

Change in Working Capital = One Year’s Working Capital MINUS Previous Year’s Working Capital

The complete formula is:

FCFE = Net Income PLUS

Depreciation and Amortization MINUS

Capital Expenditures PLUS

Change in Working Capital.

A leveraged firm that borrowed money from other sources (could also be preferred stockholders) has a different free cash flow to equity. Its CFCE must be adjusted to reflect the preferred dividends and principal repayments of debt (MINUS sign) and the proceeds from new debt and preferred stocks (PLUS sign). If its borrowings are sufficient to pay the dividends to the holders of preference shares and to service its debt - its debt to capital ratio is sound.

The FCFE of a leveraged firm is:

FCFE = Net Income PLUS

Depreciation and Amortization MINUS

Principal Repayment of Debt MINUS

Preferred Dividends PLUS

Proceeds from New Debt and Preferred MINUS

Capital Expenditures MINUS

Changes in Working Capital.

A sound debt ratio means:

FCFE = Net Income MINUS

(1 - Debt Ratio)*(Capital Expenditures MINUS

Depreciation and Amortization PLUS

Change in Working Capital).

About The Author

Sam Vaknin is the author of “Malignant Self Love - Narcissism Revisited” and “After the Rain - How the West Lost the East”. He is a columnist in “Central Europe Review”, United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia.

His web site: http://samvak.tripod.com

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A beginner usually feels very attracted to the stock market while for example discovering a stock that’s being reported in CNBC or the news program and watching it rise fast and make new highs from $10 to $35 in just 2 months.

While learning about this successful news story he’s saying to himself “Oh boy if I was one of those lucky guys who bought that stock back when it was priced at $10 I easily would have tripled my money by now… That means my 20 grand would transformed in to a whooping 70 K! hassle free … I would have been able to grab one of those big HUMMERs on the spot and probably pick up a nice Rolex by the way!”

The stock market news constantly reports of hot stocks that are breaking out and making tremendous gains on the same day or doubling in price in just a few hours. Back in the bull market of the late 90’s you could easily see a good number of hot stocks sprouting out every week.

Those years surely made it look like every body could easily take LONG SHOTS and make a shiny pile of gold every day in the stock market. But today’s market is a different story. A totally different animal.

Some say that the stock market has gotten more realistic. Fantasy land is over and GAMBLING YOUR WAY TO RICHES is not an option anymore. You might get lucky a few times, but your
constant loses can wipe you out sooner or later.

The fact that the bull market period has ended for now doesn’t mean that you can’t make a great deal of money in today’s market. A lot folks from many walks of life keep making excellent profits on a daily basis, pocketing hundreds & thousands of dollars by trading stocks online.

Success in day trading starts by applying a wiser and REALISTIC methodology for choosing hot stocks as well as for getting in and out of them with profits in mind.

You need to look at the stock market more realistically. You got to learn that you can benefit when stocks go up and also when they FALL down. You got to WORK SMARTER and get more selective about the hot stock trading opportunities that you choose. You need to embrace the nature of day trading and be fully prepared to take advantage of stocks that are poised for a BIG RISE on the same day.

The bottom line is you have to PREPARE YOUR SELF to be successful, just like you would do it in other areas of your life in order to achieve success

Momentum Stock Trading helps new day traders and investors trade in the stock market every day in a practical way at http://www.MomentumStockTrading.com

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