Thursday, June 24, 2010
Wednesday, June 9, 2010
To keep the two activities separate you need to master a few simple concepts.
1. Speculating is a business not a hobby. You must treat it the same as running a business. That means you need to know at all times your working capital, cash flow and percentage return. If you are not prepared to do this go collect coins, it will be more pleasuring for you.
2. Prior to taking a position you have prepared and evaluated all possible outcomes. You will not be relying on a gut feeling or crutches. You will stick with you plan no matter what happens.
3. Hindsight is bullshit. Everything works on paper. Let me rephrase this — everything can be justified on paper. Reality is a much harder judge. Don’t be swayed by second guessing your methods.
4. Whatever you do avoid focusing on how much money you could have made if only…. This is a lot harder to do than it sounds, don’t kid yourself. Conversely don’t focus on how you could have avoided the loss if only…..What’s done is done and each trade is a new trade and does not have the memory of your last trade. Neither should you.
5. Avoid bragging about how much money you made. The market has a way of making all of us foolish. Such behavior forces us to lie when we are losing money to save face. It’s really no one’s business except yours.
Excerpt Taken From
In order to become a successful speculator you must learn the art of speculation. This begins with discipline. It starts with the basics. Basics are boring but essential. If you do not master the basics you will not master the art of speculation.
Just like any other artist spends endless hours practicing and perfecting the basics you must do likewise. Before we go into some of the basics let me re-iterate the one essential ingredient – Discipline all others are secondary.
Let us begin with the basics. Treat Forex Trading and Currency Speculation as a business. That means you need a dedicated space to practice your art un-interrupted. Every day you need a place to go and work on being a successful speculator. Set regular hours of work for each day and keep them consistent. If you choose 8 – 12 or 7 -3, it’s not as important as it is sticking with the schedule. Five days per week whether you feel like it or not, go to your work area and stick with the schedule.
Avoid distractions. Pretend that you are working for someone else and at the end of the day you will have to report to him. This means that during your schedule you don’t decide to go shopping, do groceries, and mow the lawn or hundreds of other things that come up during the day. All non-business related phone calls are to be avoided including surfing the Internet and chatting.
You are working! You are becoming a successful speculator not a professional jack of all trades.
Yes, I realize that I spent a lot of time on one point. However if you can not commit to this one point than stop reading now and save yourself the time required to finish the remainder of the book. Do something productive with your time like gardening. Half hearted efforts will not make you a successful speculator any more than driving a car turns you into a competent mechanic.
By this point you should be able to answer the question: Do I have the desire to dedicate a portion of my time to the discipline of learning the art of successful speculation? Remember all you need is a minimum of 2 hours per day to get started, of course the more hours you dedicate the quicker progress you will make, but 2 hours per day is enough to get started.
You took the first step by purchasing this book. So get your money’s worth from it, let’s continue.
When you really think about, currency speculation is like no other job. You have a pleasant working environment, get to choose your own work hours and are surrounded by constant excitement. It’s not much of a sacrifice is it? And the potential rewards, let’s not lose sight of the rewards. Yes, money isn’t everything but it sure is a nice thing to have.
Another reason why it is important to emphasize the basics is daunting statistics. It is generally accepted that only 5% to 10% of all speculators make money, this statistic has held over several decades and there is no reason to believe that it will suddenly improve. Out of 100 people who are reading this book if they do not follow it 90 to 95 of them will lose some or all of their capital. That should be enough to motivate you—be disciplined and learn the basics.
Recently, I had an opportunity to watch and listen as my son learned to play guitar. He would spend hours learning the chords and notes, playing the same song, or parts of a song to be more accurate, over and over again. Barely recognizable, but this did not deter him. Then one day as I was reading I heard music, yes a song that I recognized played almost flawlessly as far as I was concerned. My son became an artist. He learned the art of playing music on the guitar.
Speculating is much like that, fortunately for us it’s easier to learn but still requires daily discipline. Artists aren’t born they are made, same with speculators. You aren’t born a speculator you have to become a speculator.
Another point that needs to be addressed is that speculation is a lot like gambling. In fact it could very easily turn into gambling which would explain why so many lose. In order to be a successful speculator you cannot afford yourself the luxury to depend on luck. You need to know all potential outcomes before you place and order and stick with it. If you don’t you will fall into gambling and in the long run lose your capital.
Not only have we seen this over and over again we have done it to ourselves. The strange thing about it, you don’t realize or admit to what you’re doing. It’s obvious to others and obvious to you when others are doing it but oblivious to you.
Then a strange phenomena occurs. You develop a form of selective amnesia. You can remember everything except how much money you lost. I haven’t heard a speculator yet admit to losing money. Miraculously they always manage to be even. This is quite startling when you consider the statistics. Either decades of data are wrong or our speculators turned gamblers are lying.
You probably have guessed the answer-most speculators are liars. They quickly recall all their profits while totally ignoring or acknowledging the overwhelming losses. Talking about not being able to see the forest from the trees. At all costs avoid this trap. “Don’t be a lying speculator, especially to yourself”. If you’re losing money it’s better to tell someone it’s not any of their business that it is to tell them you are even. They will know you’re lying and you now know that you’re lying.
Excerpt Taken From
If you were to examine Forex trading from a distance and time perspective a few obvious observations will quickly surface.
1. In any trade there are 3 possible outcomes. You will either be up, down or even. That’s it! Simple
2. If you can be profitable 55% of the time you will be successful.
3. The market doesn’t know you, doesn’t know what position you took and it’s not out to get you. The quicker you can dispense with this distraction the more time you will have to focus on what matters.
4. This is similar to Point 3 with some stark differences. When you are on a run and everything is going your way keep in mind this does not make you a genius nor lucky. It’s how markets function and a skilled trader is able to operate rationally in periods of organized chaos.
5. You will have losses. It’s part of the trading experience. You must be prepared to accept them and more importantly learn from them.
Admittedly there are more points than these and you should take opportunities to learn them. However these are sufficient.
Excerpt Taken From
Yes! That’s the short answer. They are basically either momentum or trend variations. There is a great deal of pseudo science and complicated algorithms that go into justifying a particular method as a rule of thumb. The more complicated and harder to understand a method is the less likely is the probability that it will work.
I can use up a lot of writing space with complicated arithmetic and what seems to be undoubting equations. As said earlier it will not work. By the time you figure out that it doesn’t work I will have several other variations to further confuse you.
Does this mean that all those systems are useless? Of course not! Consider them as tools to be used. In skillful hands they can be very useful and profitable. Once again the onus shifts to the trader and not the method. A disciplined and skilled trader is able to use any method or system to his advantage. That’s what we were talking about before using systems that you are comfortable with and understand to gain an advantage.
Excerpt Taken From
One of the most compelling reasons for trading Forex is leverage. Leverage gives you the ability to control large assets with little of your own cash.
Typically in Forex the leverage is 100 to 1. What that means is that with as little as $1,000 you have control of $100,000. A 1 % move will produce a 100% profit. As you can see by the tables provided a 1% is typically the average move per day. Yes that’s per day.
When you combine leverage with the magic of compounding - the results are astonishing. A $10,000 account that produces a mere 3% profit per day will be worth over $7 million in a year.
This is the allure of Forex: Leverage & Compounding. However, to make it work requires discipline, persistence and a plan. Profits such as these are not produced by treating Forex trading as a hobby. Actually quite opposite is true. Half hearted efforts will leave you disappointed and most likely without capital. Leverage is a double edged sword, it cuts both ways. It can work in your favor or against you. When it goes against you it usually is quick final.
The key is to master the use of this double edged sword and use it with skill. Fortunately this can be taught just like any other skill. It requires discipline and commitment, both of your time and money. However the end result is worth the exercise.
Excerpt Taken From
Sounds like it should be a title for a movie, doesn’t it? With all seriousness though you can and should be using this strategy especially in a nasty bear market. Lets face it, who really knows when we are at the bottom? Stocks that look like a bargain today can have their values halved in a short period of time. Does that mean you sit on the sidelines and wait for a recovery? The answer is yes, but that is a lot easier said than done. Very few people will invest at the bottom of the market. In fact most people wait till it’s too late to get into the market. With this simple plan you wont have to wait, and you wont have to worry about whether you purchased the stock too early or should have waited. If you follow the strategy as outlined you will be able to purchase a stock at a discount to the current market price and if not still make a return that is above average expectations. Did I get your attention?
A short while ago I wrote Bottom Fishing With the Bears outline a procedure of investing in bad markets. Now I would like to show you another strategy to use for bear market investing, in fact it will work in all kinds of markets as long as you are an investor with realistic return expectations. At this point I would like to urge you to read Bottom Fishing With the Bears, both strategies can be used simultaneously and have the potential to become an important part of your investment planning. Don’t kid yourself serious investing requires planning! Anyone can buy shares in a company but overlook the second and most important part of investing—proper money management.
Bottom Fishing With the Bears used a fictional company trading on the NYSE (New York Stock Exchange) under the symbol DOG. This illustration will use an ETF (Exchange Traded Fund) which is composed of the largest DOG companies in the United States and trades under the symbol (you guessed it) DOGS. Keep in mind that although the stock is fictitious the actual illustration is based on an actual ETF comprised of DOGS and it does trade on a major U.S. stock exchange. We want to keep the strategy as real as possible without giving any specific investment advice. It’s the plan that I would like to focus on and leave the investment decisions and selection in your capable hands. Yes I know I’m stroking you a bit, but since you took the time to read this far you demonstrated that you are open to new ideas and do have enough common sense to decide for yourself.
Back to the Simple Plan: Buying shares at a discount to the current market price. How is it done? Though the concept is simple, take sometime to reread the strategy since some of the instruments used can be complicated and require full understanding. Don’t rely on anyone else, learn it yourself before you begin implementation. There are three things you will require immediately before you begin. They are money, cash brokerage account and an options account. While the first two are obvious having an options account may be unfamiliar. However, you will need all three.
Having everything in place and your account funded with $10,000 in cash, I would not recommend that you should use this strategy with less. We are buying quality investments not speculating. Anything less and your return will be diminished by commission costs. At the $10,000 level the commission costs are almost insignificant, depending which financial institution you have your account. Now that you are ready to go, lets see how and what you would do to buy shares at a discount in the ETF of DOGS.
As of this writing DOGS ETF closed at $8.24 per share. Remember though it’s for demonstration purposes only it is based on an actual trading ETF. Since DOGS is composed of some of the largest U.S. institutions beaten down by the current market conditions, this may be a good time to jump in and invest. Since the market is bad you are not sure whether the shares will go even lower or whether they bottomed out at this level. Your obvious choice is to go out and purchase 1,000 shares of DOGS at $8.24 for a total investment of $8,240 before commission. The rest of the illustration will be based on costs before commission. That’s one way and most of us are familiar with this method. Nothing new here. However, let’s look a little deeper and see what we uncover.
At the time the shares of DOGS closed at $8.24, its 6 month $8 PUTS were trading at $2.34 per PUT. What is a PUT? Good question, I’m glad you asked. A PUT is an option giving the owner the RIGHT to SELL 100 shares of an underlying instrument at a specified price by a specified period of time. In our example for instance the owner of a PUT with a strike price of $8 has the RIGHT (not an obligation) to sell 100 shares of DOGS to the seller of the PUT (also called the writer) at $8 per share at anytime during the 6 month period regardless of the price of the stock. On the other hand the seller or writer of the PUT has an OBLIGATION to purchase 100 shares of DOGS at $8 per share during this 6 month period regardless of the price of the shares. Got all that? If not read it over again before I show you how you can benefit.
Rather than outright purchasing 1,000 shares of DOGS at $8.24 you place your funds into a high yield money market instrument. Then sell (or write) 10 six month $8 PUTS on DOGS for $2.34. Since each PUT represents 100 shares and you sold 10 PUTS you are now OBLIGATED to purchase 1,000 shares of DOGS at $8 per share. For this OBLIGATION you will receive $2,340 ($2.34 x 100x 10). These funds are yours to keep. During the next six months three possible scenarios can occur with DOGS. The price of the stock can go up, down or stay the same. Correct? Well let’s see what happens with each scenario.
The shares of DOGS go up in six months. In this case your upside potential is limited. You are limited to the price you would through ordinary method purchased the stock plus the premium on the PUTS you received ($8.24 + $2.34=$10.58). Anything above $10.58 is your cap. However should this happen your return by using the simple plan is 28.3 percent in six months. This does not include the interest earned on your original capital of $10,000. All in all a pretty good return, a 57 percent annualized rate of return. Should the shares of DOGS remain at $8 or any amount above your return will be exactly the same as above.
On the other hand should the price of the stock drop below $8 per share during this 6 month time period the owner of the PUTS will sell you 1,000 shares of DOGS at $8 per share and you will be OBLIGATED to purchase the stock at $8 per share or $8,000. However since you received a premium for selling (writing) the PUTS your actual cost for 1,000 shares of DOGS is $5,660 ($8.00-$2.34 x 1,000= $5.66). As long as the stock is $5.66 or higher you haven’t lost anything. Had you purchased the shares outright at $8.24 and the stock is trading now at $5.66 your loss would be $2.58 per share or 31.3 percent as opposed to zero. Also, keep in mind that you now have 1,000 shares of DOGS at a cost of $5.66 per share. Any increase from this point is a profit in your pocket.
Think of this strategy as an alternative to outright stock buying. It’s a great way to bottom fish. As I have mentioned before, very few people know when we are at the bottom. Some of us get lucky and buy at the bottom, but this is an exception and not the rule. Investing requires careful planning, luck happens but should not be relied upon. I am reminded of a saying that a broken clock is right at least twice a day. However, I prefer having once that runs. What about you? Apply this Simple Plan to your investment ideas and workout the possible returns. It’s worth the effort.
Ivan Cavric is the president and managing director of PrimeQuest Capital Corp. Ivan Cavric is also managing consultant of Associated Financial Corp. For over 20 years Ivan Cavric has been involved with venture capital and start up companies. During this period Ivan Cavric has been on advisory boards of several public, private and start up companies providing management services and personnel.
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- Ivan Cavric
- Ivan Cavric I was born in 1959 in Croatia. I hold a degree in Religious Studies and I am an ordained minister in the Universal Life Church. During the early part of my life I worked at various jobs while continuing my education and later on became a fully registered Investment Advisor with the OSC (Ontario Securities Commission). I have successfully completed all the necessary requirements to be an Investment Advisor, as well as an Options, Commodities and Future Specialist. In 1995, I formed PrimeQuest Capital Corp. (formerly known as PrimeQuest Financial Group Inc.), which was structured as a virtual venture capital corporation with the capability of acting as an incubator for new ideas and start up ventures. Using the PrimeQuest model, I assisted in funding and developing several start-up ventures and acting as director and advisor to management. Some of these companies include Biosource Solutions Inc., Merritt House Media Inc., and Wolsley Finch Inc. Since then, I have been instrumental in providing venture capital and management assistance to over 70 companies, both private and public.