Economic Cycles

The Economic Cycles

The Study of Cycles and Economic Business cycles may seem  to raise an eyebrows to many when hearing  it  the first time. Yes, you heard it right  ;CYCLES almost every human activity through out in  history almost and most often revolve in an intelligent discernible patterns which we called cyles; this idea is often far fetched and most likely to be misunderstood and  anyone who are known knowledgeable in the study  of cycles , such as yours truly; are often criticized and often ridiculed.  But ancient civilizations such as the Mayans, and Egyptians and Babylonians are very much aware of this knowledge where they (Mayans) where able to device the mayan calendar for timing the precession of the equinox to dates and seasons of time when it is time to plant and harvest crops.  Same is true with the Egyptians where they follow the Egyptian calendar of cycles to know when is the time to harvest and plant crops as well as to know when is Nile river flooding might next to occur.

History of Cycles 

Modern contributors in the study of cycles that was first noted in 1800's till  present.:

Sir Willam Herschel , 1802-(Scientist/Astronomer)-. He also said that that there is a correlation between the price of wheat and the sunspot cycle.Also discovered that mars and Jupiter rotated on their axis and  that they have  double stars so their gravity extends outside the solar system

Clement Jaglar ,1860 -discovered that there is a cycle of 9 -11 years of interest rates and stock prices and that cycle was named after him.

William Stanley Jevons,1870 - discovered that there is an economic cycle clearly correlated with the 11-year sunspot cyle.

Rothschild Family, 1890- is  believed to have discovered the 40-months cycle of consort prices and the commodity cyles for metals which helped them to amass tremendous amount of wealth that made them the richest family in europe.


Rockerfeller family 1900,- is beleived to have done the same as the Rotschild's but they in  turn discovered the 18 year  property cycle. 


 W.D Gann (1900-1930)- Legendary Trader- discovered that there are a lot of economic cycles; and that this cycles are harmonically related to each other.


Joseph Kitchen ( 1920)- publicly published the 40 mos cycle of interest rates and  consort prices, this cycle was named after him.


Nikolai Kondreif (1925) -Russian Economist -devised and clearly define the major economic cycles of History in his writings. Later named this wave cycle as the Kondreif wave theory.


Alexander Chihevsky (1918-1942) - Russian Biophysicist ,cosmobiologist, and father of heliobilogy, Nobel piece price winner.  Quotes that :" Life is a phenomenon, its production is due to the inner firms of the dynamics of the cosmos and their subjects which is due to the dynamics of each oscillation of organic pulsation which is coordinated with the cosmic heart and the grandiose hold of nebulous hold of the stars and the planets." Hence , that the Cosmos is the cause innacting to the Sun that results in the changes in the affairs of men and those things around him".


R.N Elliotte,1930 (  Accountant/Annalyst)-  studied the behaviors of Markets, That markets behaves in waves nested in another waves(fractals), this is the a  5 wave patterns in cycles and named that pattern  after him.


Joseph Schumpeter, 1940 - as an Australian-American Economist- discovered that the prior studies on cycles presented by Kondreif's (54 yrs),Kuznets's 18 years ,Juglar's 9 years and Kitchen's 4 yrs are all Hamonically related to each other and can form a composite wave form .
http://en.wikipedia.org/wiki/Joseph_Schumpeter
Simon Kuznets,1940 -published the18 year property cycle in the US. this Cycle was later named after him.He later received thenobel price on economics in 1971. 


Edward R. Dewey, 1942(Columnist)- Founding Father of modern cycles research and founded the Institutte of Cycle research FSI  which holds  other sub institutional research.

The Foundation for the Study of Cycles (FSC) is an international non-profit research organization for the study of cycles of events. It was incorporated in the state of Conneticut by Edward R Dewey in 1941. It has published "Cycles" magazine and recorded the work of Dewey and many other cycles researchers through the years. The FSC also holds conferences and publishes its proceedings. It publishes two journals aimed at investors, Business and Investment Cycles and Cycles Projections.

The Foundation consists of four interrelated groups:

• Interdisciplinary Cycles Research Institute (CRI)
• Market Research Institute (MRI)
• Institute for the Study of the Business Cycle (ISBC)
• Edward R. Dewey Institute for Cycle Research (ERDI)

J.M Hurst ( 1970 ) , - introducedthe computers analysis in the study of cycles and  formulated the HURST cycle.

From the Author:

There's a lot of cycle discoveries in the past and many of them coming from different fields  had gained prestigious recognitions , but yet even though many of this studies done from the past  which many finds today  as irrelevant and some say unfashionable or  unscientiific; yet we cannot deny it exist and happens in our everyday lives , Only then by learning to appreciate this natural cycles in our lives by carefully studying the past and look for patterns in the stock market and other charts;  that we can benefit  enormously  along the path to wealth creation and not walking blindly against it.

Stock and Commodity Cycles

Looking at the DOW jones historical data since the stock market began : Stocks and commodities have historically moved in opposite directions. Each asset class typically has a 16-18 year bull market followed by an equally long bear market. 

Being aware of these cycle patterns and understanding where in the cycle you are will give you great insight. Long term investors attempt to buy into these long bull market cycles early and ride them out until the end.

You don’t have to be a genius to make money in a bull market. Simply buying an index can give you great return in bull market cycle. The bull and bear stock market, commodity cycle shows remarkable consistency with a bull market in stocks and commodities taking turns every 16-18 years on average.

Each cycle during the 20th century has displayed similar characteristics.

1906 – 1923.
The commodity bull market began just before the stock market crash of 1907. This Crash was known as the “Bankers Crash” or the “Panic of 1907” and the New York Stcok Exchange fell 50%. The commodity bull market lasted until after WWI.  Characteristics to note are a stock market crash followed by a commodity bull market.

1929 – 1949.
In 1929 the stock market crashed. The Great Crash as it is known sent the Dow Jones Industrial Average from 380 in 1929 to 40 in 1932. Between 1929 and 1932 the Dow fell 90%.  During this time commodities were in a bull market and stocks were in a bear market. The bull market in commodities intensified during World War II.

1950 – 1965. 
In 1950 the 2nd world war was over and the Great Depression had ended. A bull market in stocks lasted for the next 15 years.  Commodities were plentiful as production was still at very high levels.

1966 – 1982. 
This bear market was notable for the market trading sideways for 16 years. The market fell 22% during this period and in comparison to past bear markets it doesn’t seem much but the real problem was inflation. The CPI in the U.S. increased by over 200% and interest rates reached double digits. Commodities boomed. There were a few stock market bear market rallies over this time but by 1982 no-one wanted to touch stocks, yet they were historically cheap.

1982 – 2000. 
The cycle repeated again with an attack on inflation as central banks around the world raised interest rates.  The 1980’s recessions in the U.S. and Japan were short but deep and both countries exited the recession early, although Japan experienced a deep recession in the early 1990’s. The U.S. had to deal with the Savings and Loan crisis during the early 80’s as well. In 1982 growth in stock prices and the economy took off for the next 18 years.  This bull market ended with a .com mania, the “Tech Wreck’ and a crash in 2000. A bull market in commodities followed.

2000 – present. 
The new commodity bull market started in 2000 with a sharp rebound in demand from emerging markets and particularly China. We don’t know when this commodities bull market will end but we estimate around 2016-2018. By the end of the commodity bull market commodities will no longer be in shortage as higher prices stimulate production of both prime commodities and alternatives.

Bull markets in stocks generally end with a crash followed by a commodities boom. The cycle is loosely around 18 years from boom to bust.

The current commodity super-cycle can be dated back to 1999. The major commodity indexes all hit their 20 year lows that year or in late 1998. Without doubt China and emerging market demand have been the drivers of the great commodity boom. Very low interest rates, thanks to the world’s central banks have made it attractive to own commodities in anticipation of inflation down the track.

Riding the commodity dragon with cheap money has been the name of the game.

China’s latest number are sobering, there has been a mark down in growth and trade partly caused by domestic policy changes but also because of weakness in Europe. Recent comments from BHP and Rio Tinto confirm a slowing of forward orders.

If China is slowing, and we expect it is, the question is one of term, or how long for? We don’t know, and neither does anyone else, we have to watch the numbers as they are released.

If commodity demand is softening what about the other factor, that of interest rates.

Federal Reserve Chairman Ben Bernanke is famous for having said that the Fed expects that abnormally low interest rates should start rising in late 2014. But fed funds futures indicate rates will rise sooner than that, perhaps as early as first quarter or till to mid 2013.

As we have listed above, there have been three periods in the past 80 years where periods of ultra-loose US monetary policy have coincided with upswings in the commodity-price cycle. These were the 1930s to the 1940s, the late 1960s to the 1970s, and the current period beginning in 1999.

As we noted earlier commodity cycles, tend to coincide with equity bear markets and last between 15 and 25 years. The current commodity cycle could run out of steam as early as 2014, bearing in mind that cycles are not an exact science, the future always changes; and these cycles compete with each other (e.a multidimensional reality) and its up to us : cycles analyst to identify which active cycles we are currently in.
.

And one thing we have seen in recent months  is that commodity prices will have turned down well before official recognition of changes in underlying supply and demand for raw materials.

Other Notable Cycles :    

25 year Generational:
       The 25-28 year Generational cycle is probably a sub-set (harmonic) of the longer 75-84 year cycle.  The four most recent manifestations of this cycle were in 1907, 1929-37, 1956-57, 1980-1982, and 2007 , 2016?.  somc postulates that the longer astronomic cycles are related to this 25-28 year cycle, and will do further research to consider those probabilites statistically.   Every third cycle seems to carry increased importance: after the 1789 inauguration of US President Washington, the 1860's civil war, the 1930's Depression, and Now, probable depression.
       This cycle, at its best, tends to produce long and grinding Bear markets (falling stock prices).  At its worst, it correlates with financial calamities.

10 year Numeric:Or the 10 year cycle for stocks:

      This 10-year negative economic cycle usually appears during the 6th and/or 7th year of every decade.  It just happens frequently--no one knows "why".   But i beleive that it is linked to the 20 year Jupiter/Saturn cycle, that, in a Financial Astrologers perspective, has a variable negative intensity every 10 years.  It is correlated with significant, and sometimes rapid, drops in stock prices and other assets.  High to low, the periods had declines in assets/stocks averaging 20% (substantial corrections being more likely).  The most recent noted 10 year cycles occurred in 1906-7, 1916, 1926, 1937, 1946, 1956-7, 1966, 1976, 1987, 1996, and 2006.

8-year cycles
  Also, the "8" years tend to be among the most profitable, with 2008 being a notable exception.  I think the profitability of the "8" years is a rebound effect of the preceding "6" and "7" years.  This time, 2006-7 had some sharp drops, but on the whole had rising stock prices, and thus the rebound effect in the "8" year, this time, was negative.

8 year US Presidential Cycle:

8-year  US Presidential cycle:

      Starting with 1907, the 8-year US Presidential cycle has been one of the most reliable indicators of market variability.  The negative periods tend to occur around the 6th year of two term Presidents, followed by significant rallies into the next election.  The declines averaged, high to low, about 20%; and the subsequent rallies similar in magnitude.  The years include 1907, 1917 (premature related to WWI), 1926, 1937-8, 1946 (would have been Roosevelt's second #2 term), 1957, 1966, 1974, 1987, 1998, and 2006.  2006 was a failure of this cycle.  2006-07 had several short, sharp (about 5-10%) declines, followed rapidly by higher highs.  2008 was The Failure, with the beginning of a Depressionary decline.

From the Author :

But for second half of 2012 will be part of a culmination of this US Presidential cycle; which in my  forecast will have another leg up starting on the 3rd week of Sept until  Middle of October in the US economy.And may start to pick up again by November.   In a fundamental note : this is due to  the FED's move to give another Quantitative Easing (QE with a different name) to prop up the economy. Because they all know, that a weak economy  in an election year will not be good to his re election.Caveat! on the second week of January 2013,  as many US treasury long term bonds may be maturing next year as well as the US fiscal deficit problem , expiring tax holiday, pension funds of baby boomer , obamacare's implementation and the current debt ceiling will  all be rolling out  next year  and  may all be  again in focus .


by PinoyGrader
CaveaT






Reposted  the PSE 


PSEi current 2012 model compared to its historic data. The top 3 positive correlation are 2004,2005 and 2007.For the month of July: It is an historical important month of the year where the market decides which trend it might want to go. ( important pivotal point of the year); but before it has to change its course ; historicaly it is a has a behavior to dip down first before a new trend to commence. one of the three years (shown below) will be the conclusion of the next trend.

The Black lines are current data
The Red are historic data

PSEi index comparison 2012 VS 2004

Timelag : 8.48 yrs

model correlation - 81 %

PSEi index comparison 2012 VS 2005
Timelag : 7.44 yrs
model correlation - 73.9 %

PSEi index comparison 2012 VS 2007

Timelag : 5.19 yrs

model correlation - 78 %

12 RULES FOR SUCCESSFUL TRADING

12  RULES FOR SUCCESSFUL TRADING

“If you can not follow a rule, do not begin speculating or

investing, as you are  sure to lose.” This is the common sayings I heard from Professional Traders and Investors in Wallstreet , : “Its all about  following  rules”;  One  must Learn to adhere strictly to a rule or do not follow it at all. To be successful in Trading  and the financial Markets  one really requires sheer determination, discipline , patience and the right knowledge and tools.

On my own experience – “I do not made this rules but I have been following this rules in my years  in trading, and I found  it very effective”.- if I  loose a trade, I am sure  I have broken  one of this rules.

The following rules should be carefully studied and applied

in your trading and I would  recommend this following rules of thumb:

1ST: CAPITAL REQUIRED

You would not try to run an automobile and start out

to travel several hundred miles unless you knew how much

gasoline it required to run a given number of miles. Yet,

you go into speculation without knowing one of the most

important things, -- the amount of capital required to succeed

and make speculation a business.

Do not try to get rich in a few months or a year. A man

certainly should be satisfied if he can acquire a competent

fortune over a period of ten to twenty years. Often we have

one year when a man with nerve and knowledge and a small

amount of capital can make a fortune. I have been able to

pile up enormous profits in a short time by pyramiding, but

this can not be done continuously and I do not claim to be

able to do it. What I am trying to teach you is a safe, sure

way, which will yield more profits than any other business

on earth if you will only be conservative and not make speculation

a wild gamble.

A man may go into business and lose all of his money

and then years pass before he has another opportunity to

make a large amount of money in that or any other business.

Yet, in the speculative markets opportunities return every

year, provided a man has studied enough to see them when

they appear. The chances for gain are so unusual and so

many great opportunities do come in Wall Street that the

average man gets greedy, gambles and does not wait between

times for the real opportunity.

People expect more profits in speculation than in any

other business. A man who would be satisfied with a return

of 25 per cent per year in a business is not satisfied if he

doubles his capital every month in Wall Street. Many people

are satisfied with 4 per cent in a savings bank, but when they

come to Wall Street and put up $1,000.00 they expect to

make $1,000.00 in two or three weeks. They are the people

who buy on a 10-point margin and always lose.

Do not expect the impossible in speculative markets.

Great and unusual opportunities, when you can start at the

bottom or top of a move, pyramid and make a fortune, occur

every few years. Two or three times each year, when stocks

are at the extreme high or low, there are opportunities for

making 10 to 40 points’ profit.

You may think an average of 1/2 point a day, or 3 points

a week, is too small a profit to bother with. Yet, in 52 weeks

it would amount to 156 points, or $1,560.00 a year, on a

10-share trade. Make speculation a business, not a gamble.

Go into it to stay, not to gamble all on a few trades, lose and

quit. Be patient. If you can double $1,000.00 the first year

and keep doubling it for ten years, you would have over a

million dollars.

Active leading stocks make major moves of 10 to 40

points three to four times a year. If you are able to catch

half of these major moves on conservative trades, your

profits will be enormous. Do not try to catch all the minor

fluctuations. The inside manipulators themselves do not get

one-tenth of the minor fluctuations. Why should you expect

to?

In beginning to trade in stocks the most important thing

to know is the amount of capital required. Many traders

make the mistake of thinking that about 10 points margin

is enough. Nothing is more erroneous. The man who starts

trading on 10 points’ margin is gambling, not even making

safe, speculative ventures. When you start to trade use your

capital as you would in a business, and in such a conservative

way that you can continue.

For trading in stocks selling at $100.00 per share or

over, you should have $5,000.00 for each 100 shares you

trade in; $2,500.00 for trading in stocks selling over $50.00;

$1,500.00 for stocks selling around $25.00; $1,000.00 for

stocks selling at $10.00 to $15.00. This amount of capital

is not to margin stocks and let them run against you 10 to 30

points. It is to be used to make a large number of trades

and pay small losses when they occur. You should always

limit your loss on each trade to about 3 points and never

more than 5 points.

If you have only $300.00 to start trading with, when you

buy or sell a stock, place a 3-point stop loss order on it. This

will allow you to make ten trades on your capital. Suppose

you make five consecutive trades and lose, your capital will

be half gone, but if on the next trade you are right and

make 15-points’ profit, you will regain all of your losses; or,

if you make three trades with 5 points’ profit, they would

wipe out the losses of five trades with 3 point losses on each.

2ND: LIMIT YOUR RISK

A strong will power is just as essential as plenty of

capital. If you have not the firmness, will power, and determination

to protect every trade with a stop loss order, do not

start trading, for you will fail.

I have often heard traders say “If I place a stop loss

order at a certain point the market is sure to catch it.” Yet

they realize afterward that the stop loss order being caught

was the best thing that could happen to them. There is

nothing better than getting out quickly when you are wrong.

The man who refuses to get out when he is wrong usually

stays until his money is gone and the margin clerk sells him

out.  A lot of people do not know how to place a stop loss

order on a trade when they make it. A stop loss order is an

order given to the broker that becomes a market order when

the stock reaches the price at which it is placed. For

example:

We will assume that you buy 100 shares of U. S. Steel

at 106. You feel that 2 points is enough to risk on the trade

And that if it declines to 104 you would sell it out. It is not

necessary for you to sit in a broker's office and watch the

ticker until Steel declines to 104 and then get up and tell

the broker to sell 100 Steel at the market. When you buy

the stock simply give your broker an order reading as follows:

Sell 100 U. S. Steel at 104 Stop G. T. C.

which means “good till cancelled.” Now, suppose that Steel

declines to 104. When it reaches this price, your broker

sells 100 at the market. He may get 104 for it or he may

get 103 7/8 or 103 3/4, but you know that when it reaches this

price your stock will be sold. A broker can not guarantee

to sell your stock at the limit of your stop loss order, but he

does sell it immediately at the next best price after your stop

loss order price is reached.

Suppose that you sell U. S. Steel short at 1o6 instead of

buying it, and that you want to protect yourself against loss.

You give your broker an order to buy 100 U. S. Steel at 108

stop G. T. C. If it reaches this price, he buys in the stock.

If your stop is not reached and the market goes in your

favor, you must then cancel your stop loss order when you

close out your trade with a profit. You can, of course, give

a stop loss order good for one day, one week, or any specified

length of time, but the best way to place the order is G. T. C.;

then you do not have to worry about it.

3RD: OVERTRADING -- THE GREATEST EVIL

Overtrading is the cause of more losses than anything

else in Wall Street. The average man does not know how

much capital is required to make a success and he buys or

sells more than he should. Therefore he is forced to get out

of the market when his capital is nearly exhausted and probably

misses opportunities for making profits. Make up your

mind how much loss you can afford before you make a trade

and not afterward.

Stick to small quantities. Be conservative. Do not overtrade,

especially at the bottom or top of long moves. Fortunes

are lost trying to catch the last 3 to 5 points in extreme

moves. Keep cool. Avoid getting overconfident at tops

and bottoms. Study your charts carefully and do not allow

your judgment to be influenced by hope or fear.

Many a trader has started out trading in 10 shares and

made a success because he started near top or bottom; then

when the market had reached extreme, he began trading in

100-share lots and lost all of his profits and capital too,

because he violated the conservative principle which helped

him to make a success.

If you make one trade and it starts to go against you,

you are wrong. Then why buy or sell more to average a

loss? When things are getting worse, day by day in every

way, why do your best to make them get worse in every way?

Stop the loss before it is eternally too late. Every trader

should remember that the weakest point of all is overtrading,

and the next, failing to place a stop loss order, and the third

fatal mistake of all, averaging a loss. Eliminate these three

mistakes and you will make a success. Cut short your losses,

let your profits run, pyramid or increase your buying or selling

when the market is moving in your favor, not when it is

going against you.

Remember that wild, active markets are brought about

by feverish manipulation, and that they increase the imagination,

exaggerate your hopes, and take away all sense of

reason and proportion. Therefore, in extreme markets try

to keep a cool head. Remember that all things come to an

end, and that a train going 6o miles an hour will cause a

greater smash-up if it leaves the track than one traveling

5 miles an hour. Therefore, in a wild runaway market,

jump before she bumps, for you will never be able to get

out once the crash comes. When everybody wants to sell,

and no one wants to buy, profits run into losses fast.

The great bull market of 1919 shows plainly what happens

when everybody gets crazy bullish, and can see no top

in sight. This bull market reached a point where everybody

was bullish and buying, and no one on the outside dared to

sell short. It was one of the fastest markets in history. And

what happened? When the “bubble busted” in the early

days of November and the decline started, some stocks were

off 50 to 6o points in two weeks’ time, and the profits made

during the whole campaign that year were wiped out in ten

days. The man who waited for a rally to get out on after

the move started down never had a chance, because everybody

was trying to get out, and the further prices declined,

the more people there were forced to sell out, with the result

that the market got weaker as it declined lower.

4TH : NEVER LET A PROFIT RUN INTO A LOSS

More traders are ruined by violating this rule than any

other, except overtrading. When you buy or sell a stock

and it shows you a profit of 3 to 4 points, what is the sense

or reason for ever risking any more of your capital on it?

Place a stop loss order where you will get out even or better;

then you have all to win and nothing to lose. If the trade

continues to move in your favor, you can follow it up with

a stop loss order.

People often buy or sell a stock and it shows them a good

profit, but they are “hoggish,” expect more, hold on and

hope and let it run into a loss, which is very poor business,

and the man who follows it will not succeed in the end. Always

protect your principal in every way possible.

5TH: DON’T BUCK THE TREND

The way to make money is to determine the trend and

then follow it. When you are in a Bear market and the

long trend is down, it is always much safer to wait for rallies

and sell short than to buy. If you are in a big Bear market

where stocks are going to break from 50 to 200 points, you

can miss the bottom several times on the way down and lose

all of your capital.

The same applies to a Bull market. You should never

sell short on an advancing market. It is better to wait for

reactions and buy than to try to pick tops for selling. Big

profits are made by going with the trend and not against it.

One of the most vital and important things for either an

investor or a trader to learn is to take a loss and take it

quickly. When you see that you are wrong there is no use

putting up more margin and holding on and hoping. If you

take a small loss quickly and get out of the market, your

judgment will be much better and you can see an opportunity

to get in again and make profits.

6TH: WHEN IN DOUBT GET OUT

When you buy or sell a stock and it does not act right

immediately or start to move in your favor within a reasonable

length of time, get out of it. Your judgment gets worse

the longer you hold on and hope for the market to go your

way, and at extremes you always do the wrong thing. It is

much better to take a quick loss of 2, 3, or 5 points than to

hold on and hope and eventually take anywhere from a 10

to a 50-point loss.

Stocks are not going to stop going up or down once they

start just for your benefit. Always remember what Jim

Keene said: “If stocks won’t go your way, you must go their

way.” Always go with the tide; never buck it. If you were

on a railroad track and saw a train coming at 6o miles an

hour, would you stand there and hope that the train would

stop before it hit you, or would you hope that maybe you

could knock it off the track? Of course you wouldn’t. You

would get out of the way and do it quick. You should do

the same thing in the stock market -- Get out; let them go

by, or get aboard and ride with them.

7TH: TRADE IN ACTIVE STOCKS

Always confine your trading to standard, active stocks

listed on the New York Stock Exchange. Outside stocks

have spurts, but the active leaders yield more profits in the

long run. Stocks traded in on the New York Stock Exchange

always have a good market and you can get in and out when

you want to. Ninety per cent of the unlisted and curb stocks

disappear sooner or later. Leave the pups, cats and dogs,

and mining stocks alone.

The same group of stocks over a long period of time do

not remain leaders. Changing conditions in the country cause

certain groups to lead for a time, then become laggards,

while new groups become public favorites and leaders.

It is the same thing with individual stocks of the different

groups. As a rule, a stock that becomes a favorite and a

leader will continue active anywhere from five to ten years.

After this period of time, it will pass into the hands of

investors and its activity will cease. Fluctuations will become

narrow because investors do not jump in and out every day.

They hold for a long time, and finally when they do start to sell

out for some good reason, or get scared, then the old time

leaders become active on the down side until liquidation has

been completed.

Of course, the big money is always made in trading in

stocks that fluctuate over a wide range. For this reason,

you must always be on the lookout for a new leader that

will give opportunities for making big profits. Be up-to-date,

keep up with the new stocks as they are listed, watch their

development, and you will be able to pick the new live leaders

and discard the old, inactive stocks. Big money is made, not

from dividends but from fluctuations, if you know how to

trade quickly. That is why it pays to trade in active stocks

that make a wide range. If you have to take a loss in stocks

of this kind, you can make it back very quickly, because

opportunities occur often.

8TH: EQUAL DISTRIBUTION OF RISK

There is an old saying, “Never put all of your eggs in

one basket.” And in the stock market it is a very good rule

to follow. If you are in position to do so, select as many as

four or five stocks, one from each of the different groups.

Buy or sell in equal amounts.

Divide your capital up so that you can make seven to ten

trades with it. Suppose you have $5,000.00. Trade in 100-

share lots and limit risks to 3 to 5 points. You would be

able to stand five or six consecutive losses and still have

capital to work with. By letting your profits run one big

profit will often wipe out four or five small losses. But, if

you take big losses and small profits, you have no chance of

gaining in the end.

If you can only trade in 50 shares, take 10 shares each

of five different stocks. Place stop loss orders on these

trades from 3 to 5 points away, according to the indications

on the stocks you are trading in. Two of these stocks may

go against you and catch your stop while the other three

may not. This will leave you part of your holdings and if

they move in your favor, will make back your losses on the

others and show profits.

If you get into the market right and with a reason,

records show that it very seldom occurs that you would get

the stops caught on all of your stocks. You may not always

make as much profit as you would to trade in one or two

of the active, fast moving stocks, but you will be safer. That

is my aim: To teach you safety; help you protect yourself

and cut short your losses in every possible way and let your

profits run.

9TH: FIXING A PRICE OR POINT TO BUY OR SELL

The majority of people have a habit when they buy or

sell a stock, of fixing in their minds a certain figure at which

they expect to take profits. There is no reason or cause for

this. It is simply a bad habit based on hope. When you

make a trade, your object should be to make profits and there

is no way that you can determine in advance how much profits

you can expect on any one particular trade. The market

itself determines the amount of your profit, and the thing

that you must do is to be ready to get out and accept a profit

whenever the trend changes and not before. Remember the

market is not going to act to please you or go to certain

figures just because you want to buy or sell at those figures.

Many traders lose big profits by fixing the price at which

they intend to sell. Stocks sometimes go within 2, 3 or 4

points of their selling price and start to decline. They hold

on and hope. Just because it does not reach the point that

they have fixed in their minds, they often hold on and hope

until they lose all the profits and take a loss, refusing to see

that the trend has changed. Hope will ruin any man who

follows it in the stock market. To succeed you must face

facts, and facts are often cold and stubborn and do not agree

with your hope, but you must accept them for your own good.

In nearly every bull or bear campaign in the market the

general public gets certain fixed points in their heads where

stocks are going to make tops or bottoms. The newspapers

talk about certain favorite stocks going to 100, 125, 150 or

175. Everybody gets the idea that these prices are going

to be made and they become “hope” prices, but are never

realized.

To illustrate this: During the fall of 1909, when the

bull campaign in stocks was at its height and Steel common

had advanced to around 90, the newspapers began to talk

of 100 for “little Steel.” The public all got the idea in their

heads that Steel was sure to make 100 and that was the place

they were going to sell and take profits. The writer predicted

that Steel would advance to 94 7/8 and no higher, which it

did, and he sold out, while the “hope” crowd held on and

eventually took losses, for U. S. Steel declined eventually to

38. Several years later when it did reach 100, it was the

place to buy and not to sell, for it immediately advanced to

129 3/4.

The man who tries to get the last point or the top or

bottom eighth generally loses all his profits. You do not

have to get in at the bottom and out at the top to make big

money. All you have to do is to look over the list of the active

leading stocks and you will find that they make moves of from

50 to 150 points between bottom and top every few years.

Then, if you can get in after the stock has advanced 10 points

from the bottom, and sell out within 10 points of the top,

you certainly will be able to accumulate plenty of profits.

Never get the idea in your head that you can or will hold

a stock until it goes your way. This is nothing but pure

stubbornness and is not based on any sound logic or reasoning.

In case of doubt, get out. Do not hesitate. Delays

are always dangerous. Do as the insiders do: If they can

not get what they want, they take what they can get; if the

market will not take what they have to offer, they offer what

it will take; if the market will not go their way, they go its

way. A wise man changes his mind, a fool never.

  

10TH: WHEN TO TAKE PROFITS

Never close a trade just because you have a profit. The

time to hold on is when the tide is running in your favor.

When tempted to close a trade just because you have a profit

ask yourself the questions: “Do I need the money?” “Is the

move over?” “Do I have to sell?” “Why should I take

profits?”

Look at your charts; do what they tell you. If they do not

show a change in trend, wait. Protect profits with stop

loss order, but do not take a profit too soon. This is just

as bad as taking a loss too late. Patience to hold on when

you are right and nerve to get out quickly when you are

wrong will make a success.

11TH: ACCUMULATE A SURPLUS

A surplus must be accumulated before you increase your

trading quantities. Margins are not to hold on with, only

“lambs” do that. If big risks are required, do not make

the trade. Wait for an opportunity when you can buy or

sell and place a stop loss order 3 to 5 points away. It is

financial suicide to take big losses when they can be prevented.

You must not expand until after you have made profits.

Every important business concern carefully creates a surplus

and is proud to publish it. No business is run without a loss

at some time and a speculator or investor must expect losses.

Therefore, he must create a surplus out of which he can pay

losses and still continue to trade.

In very active markets, when trading in high priced

stocks, as a rule it does not pay to take a loss amounting to

more than two consecutive days’ fluctuations. If stocks go

against you two days, they are likely to go more. Take your

loss out of your surplus and leave your capital unimpaired

and wait for another opportunity.

12TH: BUYING FOR DIVIDENDS

A great many people make the mistake of always wanting

to buy stocks that will pay dividends. Do not buy stocks

just because they pay dividends, nor sell them because they

do not. Often people hold stocks because they continue to

pay big dividends, only to see their capital half or more

wiped out; then the dividend is cut or passed altogether.

Look to the protection of your capital, not for dividend

returns. Trade for points of profit, not dividends. Fluctuations

yield more money than dividends and you will be able

to tell when stocks are being accumulated or distributed for

an advance or a decline.

If a stock is selling very low or out of line according to

the dividend it pays, there is probably something wrong and

it is a better short sale than a purchase. If a stock is selling

very high and pays no dividend, there is a reason for it and

you should not sell it short. Probably it is going to pay a

dividend or it is in a very strong position. Otherwise it

would not be selling at a high price.

Manipulation for a time will force stocks above or below

their intrinsic value, but in the end Supply and Demand

govern the course of prices, and values are based on these

factors. I intend to teach you how to tell when Supply and

Demand show the place where you should buy or sell.

The word “dividend” means a division of profits or earnings,

but often when you buy Curb or mining stocks the word

means “divy,” or that you divide up your capital with the

other fellow and later lose all.

Except from the book - Truth of the stock tape. By W.D Gann

I hope this informations helps our Newbies, Amateurs  and a refresher

to Professional Traders alike...Goodluck in your Trading!

-PinoyGtrader