The Three Essential Rules For Profitably Trading On The Stock Market

Profiting from trading stocks is not a matter of luck. Successful traders develop a set of trading rules and diligently stick to those rules, no matter what. Here are the three essential rules that should be part of every trader's strategy.

Rule number one is that you do not know what the market is going to do.

No matter how skilled and how experienced you become, you do not know, with any certainty, what the market is going to do. All you ever have is an estimate, or educated guess, as to the path that the market is following.

Some of the greatest mathematical geniuses of all time have spent many years trying to write a system to accurately predict the ups and downs of the market and they have all failed. The reason why they failed is that there is no system. The market is a mass of individual psychology. It is impossible to predict all the various things that are going to influence that psychology let alone predict what that influence will be.

One of the great temptations for traders, who are experiencing a run of successful estimates, is to believe that they now understand the market. My advice to you, if you are experiencing this delusion, is to take a holiday in a nice, relaxing environment and then come back to trading only when sense has returned to your brain.

Rule number two is to decide, before entering a trade, what your strategy will be if your market estimate is wrong.

The biggest losses in trading occur when the traders have neglected to predetermine their loss cutting strategy or when a trader fails to follow their predetermined loss cutting strategy. Once the emotions of potential loss come into play our sound decision making ability takes a sudden and profound decrease. We start to kid ourselves that we know that the market will turn around and that we won't need to take a loss. If that ever happens to you then it is a good time for you to read rule one again.

If you were in the retail sales business then you would have to spend money buying your stock from the wholesaler in order to have the stock to sell at a retail profit. That is the nature of retailing. I see the inevitable losses in stock market trading as being equivalent to those wholesale purchases and the profitable trades as equivalent to the retail sales revenue. As long as the profits outweigh the losses then you have a sound business.

Of course in retailing you try to minimize the cost of acquisition of your stock. By the same logic, in trading you have a system to minimize the size of each loss and that is what rule two is all about.

Rule number three is to decide, before entering a trade, what your strategy will be if your market estimate is right.

The stock market is a volatile entity. You may be in profit today but if you don't collect that profit then it could turn into a loss tomorrow. For this reason you need a strategy for collecting your profit.

In discussing rule two I spoke about the psychological pressures and influences that you experience when you are in loss. Well the psychological issues are just as prevalent when you are in profit. I have seen so many new traders who fall victims to greed and hold their profit for so long that it turns into a loss before they collect a single cent.

Remember rule one; you don't know what the market is going to do. So make sure that you have a predetermined profit collecting strategy and that you have the strength of character to stick to it when the time comes.

The three rules above should be the first three rules in your personal trading system. If you can't accept and abide by these rules then I suggest that you stay away from trading.

If You Are Still Getting Ready To Start Then You Are Probably Going To Fail

One of the biggest differences between winners and losers in life is that winners start immediately whether they are ready to or not, but losers want to learn everything they think they need to know before they get started. There is a very good reason why the second method is a recipe for disaster.

Before you experience something it is almost impossible to know what is going to be important knowledge and what is not. It is only by experiencing a thing they we gain some understanding of what is involved.

The person who prepares, prepares, prepares and then prepares some more usually discovers when they finally do start (if they ever do) that what they have been preparing all this time is actual the wrong thing.

People who become successful take a completely different approach. The get an idea and then they immediately start working toward that idea. They often have no notion of what is the right thing to do to succeed or of what knowledge they will need to acquire. However by following their gut instinct and starting to do something, they soon discover what works and what doesn't and they discover from practical necessity what knowledge they need to seek out.

Once, after I had finished giving a two hour talk on residential property investing, a man came up to me and announced proudly that he had been studying property investing for 18 years and that he had read over one hundred and fifty books on the topic and that he agreed with almost everything I said in my talk.

I thanked him for the compliment and asked how many properties he had. He told me that he was in the process of negotiating his first one. The truth is that if he had read absolutely nothing and just bought virtually any house in any major city on day one, then it would have been worth at least four times what he paid for it at the time he was talking to me.

You have to be in the game to have any chance of winning the game!

The other reason why the successful people are the one's who jump in and learn of the go is that the psychological side of winning can only be developed by doing.

Take the stock market as an example. Many people study the stock market and then paper trade in order to learn the principles. If you are not familiar with the term "paper trade" it means that you do everything you would do in trading, except actually buying the stock.

These people often get good at analysis and at making the right decisions. They get good at knowing when to enter into a trade and when to exit that trade. Then they start investing for real and totally mess it up. They discover that when their hard earned cash is on the line the psychological pressure suddenly becomes the major factor in decision making.

They would have been far better off to have started real trading on day one, using very small amounts of money and then gradually increase the size of their trades over time. Nothing can prepare you psychologically for the game like actually being in the game.

Whatever you have been thinking about doing start it today and then be mindful of what is happening. By all means read and study everything you can but do it while you are playing the game, your results will prove the wisdom of what I am saying.

Safe Market: Jobs Thrown At Wall Street

First week of the year at the Wall Street stock market closed with hefty losses. The only sector which registered significant rises is the one of .

While Dow Jones industrial average registered an 82 points lowering with the value of 12, 398, the Nasdaq fell 19 points and the S&P went down with 8 points, the figures from the jobs market were the only ones to go high.

The Labour Department showed that payrolls went up at 167,000 in the last month of 2006 even though predictions were that they will go down at 100,000 from the November value of 132,000.

One of the companies which felt the direct effect of the stock market is the electronic retail chains "Best Buy" which reported like for like sales growth for the last December caused to the demand of flat screen TVs. "Circuit City Stores" is also sharing the same financial period as "Best Buy".

Other lucky case is the one of "Wendy's International" which registered a growth in sales of 3.1 percent for the same store at company owned restaurants, in the fourth quarter of 2006. On the other side of the hill, there stands Motorola with a fell that came right after it reduced its profit and sales forecast for the same fourth quarter of the year as the other companies.

Therefore, on a general view of financial lowering levels in all sectors, are really on the thrown of the Wall Street stock market.

The 10 Step Investment Process

This is the system that I use in my investing and it is also the system that I have taught to many other professional investors.

1. Desired Outcome

Always start the assessment of any potential investment by having a clear picture of what you want to achieve through this investment and why you want that particular outcome.

It is important that your desired outcome is compatible with the larger picture of your major goals and purposes

2. Select a Strategy

Decide what investment strategy is appropriate to meet your desired outcome. You may modify this as you go through the other steps in this process.

Of course the greater your knowledge of investment strategies the better equipped you will be to choose an appropriate strategy to meet both your goals and your current circumstances.

3. Identify Risks

It is crucial to identify the likely risks and then design a practical, sensible, effective risk management plan. Also note that you go through the risk identification before the profit analysis. This is to ensure that you don't get swept away with enthusiasm for a potential profit and forget to manage the risks.

Make sure that your risk analysis is realistic rather than optimistic. There is a place for optimism in wealth creation but it is certainly not in the risk management phase.

4. Identify Profit Potential

Profit potential needs to be thoroughly analysed and you also need a profit management plan to ensure that you actually collect on profits at an appropriate time.

So often, particularly in the stock market, would-be investors have paper profits but, because they have no strategy for when or how to collect, they hang in until the profits have evaporated.

Also it is important to decide the form of your profit. Will it be in cash or in assets, for example?

5. Compared to What & Cost versus Benefits Analysis

This is where you consider alternate investments and/or strategies and do a cost benefits analysis on each to help you decide the most appropriate investment for your desired outcome.

6. Identify and Overcome Obstacles

Almost all investments have potential obstacles that you will have to overcome in order to maximize your returns and minimize your risk. It helps to have identified them in advance and to have formulated a strategy to overcome or avoid them.

7. Design Your Exit Strategy

You should never enter an investment, or business, without having a clear strategy for exiting in the event that things go badly wrong or in the event that you have made a large profit and wish to move on.

8. Make a Decision

Once you weigh up all your research it is time to decide whether you will proceed or whether you will look for a different investment.

9. Take Action

A decision has no power until it is acted upon. If you have decided to proceed then take the necessary action step to put your investment into reality. If you have decided not to proceed then start taking action to find a better investment opportunity.

10 Review Your Outcome

Every action produces an outcome of some kind. If your outcomes are favourable then keep on with your plan, if they are unfavourable then review your plan as required, if they are disastrous then action your exit strategy.

The Bulls And Bears Game: Risks And Survival Strategies In Investments

The stock market is never constant, but one thing that is constant in the bulls and bears game is this question in people's minds as to how to make money with investments. Price movements keep changing the character of the stock market and the bulls (buyers) and bears (sellers) oscillate from financial highs to lows.

A bull market time in the stock market is when prices are steadily rising, outdoing past averages, accelerating optimism among investors and thereby raising their confidence. A bear market is the opposite, a state of pessimism when prices are falling by 20% or more in a key stock market index from a recent high over a minimum of two months. Evidently, investors indulge in some amount of risk as they invest. Nevertheless, the stock market never wanes in economic importance because it is a significant money-making arrangement for the big business houses.

Risks

You may have numerous investment opportunities to choose from. But it is always advisable to keep a watchful eye while choosing which company to invest on and how. A little less careful and you may walk into one of those fraudulent investment networks across the world. First and foremost, be wary of too many attractive offers like �huge profits in no time' or �zero risk involved' etc. Some opportunities even flaunt lofty claims of IRA approvals, tax-free offshore investments and more. Chances of these being authentic are close to nil. Other investment opportunities will assure you of a perfect offer that will reap good returns. Yet some others may pressurize you to act promptly, saying that the market is moving. In either case, do your homework. Get detailed information of the company, the fees involved and never share your bank information or personal financial details with anyone unless you are completely sure.

Strategies

Once you are clear on mind about the potential risks in the bulls and bears trade, it is time to plan strategically. There are two rudimentary approaches to investing money and being successful with that. These are: the fundamental analysis and the technical analysis. The former focuses on the analyses of the financial statements of companies, available in SEC Filings, market trends and more. Technical analysis involves market studies of the price actions, with the help of stock market charts and other quantitative methods to forecast future trends.

Besides these two base strategies, there is the index method strategy, in which one has a weighted or non weighted portfolio of the whole stock market or a part of it. This strategy helps to maximize diversification and minimize taxes on very regular trading, apart from ensuring a position in the general stock market trend.

Yet another, often unethical, survival strategy for investment is the insider trading method. In this, the investor has to rely on inside information.

Marketing Strategies For Real Estate Investors

People are increasingly investing in real estate after the uncertainties of the stock market. Many real estate investors are new to this market and often make mistakes leading to losses. They need to plan strategies for investing in real estate. People invest in real estate for selling at a later stage for a handsome profit. For this they need to have a marketing strategy in place.

Buy At Bargain Prices; Many real estate investors have entered the business because they saw someone else do the same, and make oodles of money. This is a big mistake, as it may not always work for you. As you will be selling your property later, you need to make bargain purchases, where you pay only around 80% of the current market value. Not easy, but possible.

Buy foreclosure properties; buy properties that are off the beaten path; properties that people avoid due to some adverse aspect they have � such as a massive roof leak condemned by the board of health.

Foreclosed properties are always bargain buys, and you may even get them cheaper than 80% of the current market value.

Upgrade The Properties; By upgrading the properties, you add market value to them. A property condemned by the board of health due to a massive roof leak, with a market value of $300,000 could be bought for, say, $200,000.
You can upgrade the property by effecting roof repairs, which could cost about $40,000. You can make a neat little profit, just by effecting little repairs, and easily selling for about $280,000, which is below the current market value.

Upgrading does not mean cosmetic changes. Cosmetic changes will not fetch you a high price, though you may have spent a bundle on it.

Flipping This is a very common strategy, but is risky at times. Some real estate investors, as a form of marketing strategy, buy and hold real estate properties for a short period and sell it at a profit. This is based on the assumption that the real estate prices will rise.

Flipping is not an easy way to make money, and you need to have enough cash flow, if you are not able to sell your property fast, and may have to hold on to it because of adverse real estate prices. Real estate investors, who are real flippers, combine the strategies of bargain buying and upgrading the properties to make decent profits.

Real estate investors must develop a marketing strategy for their properties. Depending alone on the tenet that all property prices always go up and never come down, may not be safe, as there are times of slump in the markets. Real estate prices do come down occasionally, and real estate investors should not believe in blind faith.

Alexander Gordon is a writer for www.smallbusinessconsulting.com - The Small Business Consulting Community. Sign-up for the free success steps newsletter and get our booklet valued at $24.95 for free as a special bonus. The newsletter provides daily strategies on starting and significantly growing a business.

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Saving for Retirement - How much will you need?

How much do you need to save to fund your retirement?

If you've ever looked what kind of nest-egg you are going to need to retire, you've undoubtedly come across the standard rule of thumb only allows withdrawing 4% a year if you want to have your savings last at least 30 years.

So if you wanted to start withdrawing $80k a year, you would need to have $2 million dollars in savings. Now that is a mighty sum, and many may consider it out of reach, especially if you are starting late in the game.

But, why only 4%? If the stock market averages 11% a year, why shouldn't your nest-egg last forever if you were taking out anything less than 11%. Let's take a quick look at the original study that forms the basis of this recommendation to understand its underlying assumptions. With that information we will see if we can shape our investment strategies to give us more from our savings.

The original work that many of these projections are based on was a paper by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz. As you read through this work, you'll find a few basic assumptions:

1) The goal of the analysis is to maximize the likelihood that your nest-egg will last for the desired period of time (in the study it is varied from 15 to 30 years). This is quite different from maximizing the most likely size of the portfolio.

2) The analysis is done by running a simulation using the historical data from 1926 to simulate the probable rates of return on your portfolio.

3) It also assumes the CPI (Consumer Price Index) predicts the inflation rate that you would need to match in your withdrawals (e.g. if you took $10k out the first year, and the CPI in the simulation went up 5%, in the 2nd year you would withdraw $10.5K)

4) The rate of withdrawal is never modified based on the portfolio performance. (Basically you would never reduce your spending as a function of your remaining funds.)

5) No tax or transaction costs were taken into account.


The working assumption was that the portfolio would need to last 30 years. This matches the most common retirement scenario (retire at 65, median life expectancy would be around 20 years, but a 50% chance of greater than 20 years life expectancy).

Finally, the only investment options were those with historical returns tabulated in the Ibbotson report, basically the S&P 500 as the stock market, and a family of differing maturity bonds for a bond portfolio.

With those constraints, then it turns out that you would not pursue a strategy of maximum returns on your portfolio (which is the case with a portfolio of 100% stocks), but more one that gives the best risk/ reward performance. The portfolio that gave the highest probability of lasting 30 years was found to be a 75%/25% mix of stocks and bonds, even though a 100% stock portfolio yielded about 1% more a year, the risk (as measured by the standard deviation of the annual returns) was reduced by about 20% with the diversified portfolio. For a 4% withdrawal rate, there was a 98% probability that it would last 30 years.

So, what are the factors that would allow us to increase the amount we could withdraw each year (or in effect reduce the amount we need to save)?

1) Reduce the number of years you want to ensure income. The only practical way to do this is to retire later. Helpful, but not the solution most of us want to count on. Also, to give some idea of how effective this is, if the target lifetime of your nest-egg is reduced from 30 to 25 years, the withdrawal rate can't even be increased from 4% to 5% and still keep a greater than 90% probability that it will last the target lifetime. You have to reduce the target time period to 20 years just to increase the withdrawal rate from 4% to 5%.

2) Accept a lower inflation rate. If you think your costs will be fixed, or expect that your rate of spending as you hit the 80's and 90's will go down, it may be appropriate to target a higher rate of withdrawal. Of course this has it's own set of risks, but the reality is that most 95 year olds are not traveling, eating out as much, keeping a vacation home, etc. as most 65 year olds. The flip side of that is the medical and extended care costs, which aren't captured by the CPI anyhow.

If you assumed no inflation at all in the analysis above, you could increase your withdrawal rate to 6% and still have a 98% chance the portfolio would last 30 years. That may not seem like much, but it's a 50% increase in income.

3) Increase the returns on your investments. This is the holy grail that most folks look for when evaluating their investment performance. While that can be helpful, keep in mind that the best result above was achieved with a lower yielding, lower risk portfolio than the 100% stock portfolio.

4) Reduce the risk of your portfolio. This is actually the key to success, especially when coupled with an increased return. To give some idea of the leverage of risk, if you can cut the risk (in this case the standard deviation or the amount of variation of the annual returns) in half without increasing the yield at all, you could increase the amount withdrawn each year by more than 50%.

Few investors understand the impact of improving the risk reward ratio of their portfolio. Not only will that help stay the course on following our investment plans, but in the long run it can actually reduce the target amount needed to sustain the a retirment income stream.