Full Text: Federal Reserve’s December Statement

Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.

Swing Trading– Rules first

Rules of swing trading:

A swing trader must always remember the fact that he is risking a huge cash pile on a single trade. The consequences can be either extremely rewarding or completely disastrous. So, a swing trader cannot succumb to psychological influences like greed, ego, hope that make a trader behave like a loser, only to realize it later. I strongly believe in six golden rules whenever I pursue a swing.

If the trade moves in your favor, carry it overnight–the odds favor follow-through.

Yes. you heard it right. The prima-facie motto of the swing trader is to ride the swing. So, let the profits run for the next day. Remember that any swing will happen with a series of gap-up openings for 3 to 5 day period. Why let the profits go away when you are already in a commanding position.

If your entry is correct, the market should move favorably almost immediately. It may come back to test and/or exceed your entry point a little, but that’s OK.

You understand the point here. As said in the previous post(Usine de Largent Securities: What trader are you ?–Swing Trader), swing traders have an edge over the others because their entry is the first when compared to other traders. So, a swing trader needs to capture the momentum right at its inception and the position should immediately reflect profits. If it is not, get out of it with out any qualms. Don’t let your ego or greed make you hold a losing position.

Do not carry a losing position overnight. Exit and play for better position the next day.

Yes. A swing trade is not meant to give you a loss on the first day. If it does, you misjudged the swing inception. Get out of it and wait for another chance. Doesn’t matter how much loss you book. Simply Get-out.

A strong close indicates a strong opening the following day.

Yes. The momentum of a swing sustains for 3 to 5 days on a minimum. Every closing is as important as the next opening. The closure which is nearer to the day highs is termed as a strong closure and such a strong close will only amplify your profits the next day.

If the market doesn’t perform as expected, exit on the first reaction.

If at any given point, the market doesn’t meet the expectations of a swing, it is the time to exit. No more thinking – Just exit.

When in doubt–get out! You have lost your road map and your game plan!

A swing trader must take up a position with extreme confidence and high caution(have a stop-loss. ALWAYS). Once you lose the confidence in your trade or the position you are holding, it’s the moment you lost the trade. Get out of it. No matter you are in profit or a loss, just GET OUT.

Understand that swing trading is subjected to extreme risk and can give a trader enormous amount of profits if applied effectively.

Come back here later to learn about how to ride a bull swing or a bear swing, how to develop a cautious yet effective approach to handle a swing. until the, “Happy Trading”

 

What trader are you ?–Swing Trader

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton

Swing trading is a form of short-term trading seeking to maximize profits and minimize risks. Swing traders identify the trends established and try to ride the swing, in the direction of the trend. A swing trader must be very cautious in identifying the beginning of the trend, so as to reap as much profits as he can by riding the swing.

As said by Sir John Templeton, swing traders are to identify the time of maximum pessimism and maximum optimism. And, the question lies here – How does a swing trader identify the trend.

A swing trader needs to approach the market cautiously, else the consequences are a disaster for the entire trading journal. A swing trader needs to have basic yet complete understanding of the technical aspects of chart reading so as to identify the trend right during its inception. Nevertheless, the basic swing trading method is that - Most Swing Traders assume the "Trend is your Friend" and trade with the main trend of the chart. If the security is in an uptrend, the online trader will "go long" that security by buying shares, call options, or futures contracts. If the overall trend is down, then the trader could short shares or futures contracts, or buy put options.

A trending stock rarely moves in a straight line, except during the initial and final phases of the trend. Trends form in a step like pattern and identifying the supports and resistance of a particular security or stock will help the swing trader to take formidable positions in order to pocket the gains. The below chart shows a step by step formation of a bullish trend and the swing trader takes up a position at every support and gets out of it every now and then to book the profits or when he observes that the swing has come to an end.

Pros:

• highly profitable.
• less holding period, ranging from 2 to 10 days.
• Technically sound trader can make profits multiple times during a stock’s trending phase.
• Multiple entry points available, so a chance to make profits always exists.

Cons:

• Disastrous if the entry is wrong.
• Possibility of blowing out the whole account in a single misplaced trade.
• Difficult to identify the trend during its inception.
• Not always profitable if the entry or exit is not made at the right time.
• Demands more psychological strength when compared to seasonal trader/long term investor.

There are three phases of swing trading, which a trader should be familiarized with.

1. Identifying the trend,
2. Riding the trend
3. Exit or booking the profits.

The next post will let you know how a swing trader should be able to identify the bullish and bearish trend and ride the swing, exit at the maximum profitable point. Get back here to know that.

Until then, “Happy Trading”

Images courtesy: Google.

What Trader are You ?– Long term Investor/Seasonal Trader

“Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed." – Benjamin Graham (1894 – 1976)

Benjamin Graham, or Ben Graham as he is commonly called is one of the most prolific and celebrated investor of the recent past. He is regarded as the father of two fundamental investment disciplines – Security Analysis and Value Investing.

“A bird in the hand is better than two in the bush” – sounds familiar right ? That is the primary conception of an investor. A investor patiently waits for his turn to get into the market. He doesn’t trade all the time. Investor believes in taking a position with a long term view and almost all the time will stay only on the buying side of the market. Seasonal Trader/Investor constantly avoids the bearish phase of the market and doesn’t get into speculating. In other words, an investor prefers holding positions in the equity market rather than speculating them on the derivatives market.

Usually - retired personnel, People with high paying jobs and less time to focus on the market, those who have a huge stash of money in their accounts and craving to hold a portfolio prefer seasonal trading/investing. This kind of trading has its own advantages and disadvantages.

Advantages:

- Need not worry about daily and short term fluctuations of the market.

- Investments in heavily capitalized stocks and consistent amount of returns.

- Since most of the long term traders go for holdings of a stock, chances are high to obtain yearly dividend in case of exceptional performance of the stock held.

Disadvantages:

- Long waiting time to take up a position.

- Vast amount of research need to be done in order to invest bulk money into a portfolio.

- Positions always susceptible to various industry related conditions and performance of the companies that are held with.

- Money stagnated in the portfolio for months, sometimes for years, until desired returns are achieved.

In order to be a profitable trader in the long term, an investor must be aware of market cycles that repeat over months and years. Either he should be well equipped with the knowledge of stock markets over a 10 to 15 year period of time or should have a good investment advisor at hand to guide and manage the portfolio. Long term investing may backfire at times, given the high volatility and unpredictability of the stock markets in the near term. Nevertheless, an investor should be able to part away with his money for at least 3 to 5 years of time with out any qualms and wait for the company to bloom in order to achieve desired returns over a long period of time. All said and done, A seasonal trader/long term investor needs to believe and follow Value Investing(term never been used by him, nevertheless perfectly describes his principles of investing), according to Ben Graham.

Value Investing - Buying stocks at less than their intrinsic value. An investor needs to have an advisor who can calculate the true value of a stock in the market and find out whether the stock has appropriate “Margin of Safety”, the difference between the true value of the stock and the discount currently provided by the market. If this MOS is appropriate, say 15 to 20% of the true value, then the stock is deemed as a worthy investment.

Knowledge required by an investor to perform value investing varies from a range of topics including Government policies, Company Management’s vision, future forecasting, thorough analysis of past balance sheets, political affiliations of the company and how they interfere with the operation of the company in long term.

Some common value investing methods are to buy stocks with low PE ratio, low price to cash flow ratio, low price to book ratio. A value investing will not give the same amount of returns as that of investing in stocks with high growth forecasting. Nevertheless, the risk involved in value investing is far less than other forms of investments/speculations and provides with a sense of confidence and assurance for the investor/seasonal trader with respect to the heavy amount of money spent in building the portfolio.

The current scenario in the Indian stock market indicates that most of the stocks, if not all – are high valued and none of the big names serve the requirement of the “Margin of Safety”, a matter of concern for long term investors. Best to stay out of holding positions until the market corrects to a lower level.

12 Mistakes of any trader

The Twelve Most Expensive Things a Trader Can Do –

Making mistakes in your trading is not cheap. Here are the twelve most expensive things a trader can do. This does not apply only to new traders, even professionals with long track records can make these fatal flaws and cost themselves money.

1. A big ego that wants to prove they are right by stubbornly staying with a position that is wrong because they want to be right eventually so bad.
2. A trader that want to prove he is a hot shot by trading big position sizes especially in options or futures.
3. Not wanting to take a stop loss and instead just hope the trade comes back.
4. Trading with emotions instead of a trading plan can get very expensive very fast.
5. Being a bear in a bull market.
6. Being a bull in a bear market.
7. Being overly eager to start trading with real money before fully testing out a trading system.
8. Trading without doing adequate homework on how to win.
9. Dollar cost averaging down in a trade is many time expensive to fight that trend.
10. Ignoring the charts and just trading your opinion.
11. Ignoring the probability of the risk of ruin based on your current position sizing.
12. Not really understanding the true danger of ‘Black Swan’ and ‘Fat Tail’ events.

What Trader are you ?

 

Stock market – a lucrative destination for many with dreams of making money more and better than any other profession on the earth. In India, where a herd behavior is more or less obvious, the stock market has been a point of discussion in every nook and corner, thanks to the recent market developments, aggressive marketing by financial institutions and better returns in the past couple of years. For any individual planning to venture into the industry with lots of dreams about making money from home, it is important to understand what the market asks from the trader in order to give him the returns he expects.

Every trader has his own style, some risk a lot in the hope of getting a huge reward, while some tend to limit their risk and be content with minimal yet consistent returns. No style is wrong in this regard and each type of trader has his own advantages/disadvantages compared to others. What every trader requires is – an edge. An edge that keeps a trader apart from the others, that proves critical in achieving his goals. Developing the edge isn’t an easy task. An introspection needs to be done on the part of trader before he decides on what he wants to be.

On a broader scale, we see two types of traders in the market, Defensive trader, Aggressive Trader.

A defensive trader is one whose prima facie objective is to protect his capital. No matter what the market offers him, the trader will stay put on the safety of the money he owns. Above all, Defensive trader believes that “A bird in hand is better than two in the bush”.

A defensive trader is bound to make money slowly, yet consistently. Defensive trader doesn’t take huge risks and will not be tempted to get into the wild swings of the market. The defensive trader values mental peace more than any thing else, even more than the profits he may gain. Defensive traders stay for a long time in the market due to their careful strategies and the methods that doesn’t expose them to too much risk. If a defensive trader sees risk building upon his account, he liquidates it, no matter in profit or loss. Defensive traders seldom brag about their achievements or profits, because they don’t really have an incredible achievement to brag about. While some defensive traders make it big at times, the number and probability of such a scenario is one in a million. But a defensive trader is content with the miniscule profits he makes, a personality trait that sets him different from others.

Some rare yet gem like qualities of a defensive traders are

- A defensive trader knows clearly about the position he is taking, where to exit and how much loss he can bear and how much profit he is targeting.

- A defensive trader will never jump from trade to trade in search of opportunities and will stop his activity if he met with a loss once. He will retrospect his decisions, circumstances that led to his loss, spends more time on finding out the mistakes.

- A defensive trader will always look for high profitability trades, has the patience to wait for the right opportunity and is reluctant to take a position if all his entry criterion are not met.

On the Other hand, An aggressive trader tries to make the most of every opportunity he observes, often creating himself an opportunity even if the market offers none. Aggressive trader takes pride in risking too much of his money, believes that he can take on the market any given time and will not try to miss even the slightest of the opportunity he observes. Aggressive trader spends a lot of sleepless nights due to the risk taken, money lost due to his aggression, yet he is proud of his battle wounds. Aggressive trader sees wild swings in their trading account and is hell bent upon making money, no matter how the market responds.

Aggressive traders do achieve spectacular results once in a while, that tempts them to take high risks, use heavy leverage.

An aggressive trader doesn’t dwell on his past losses. He is too busy jumping from stock to stock, making trade after trade, searching the market for an opportunity.

An aggressive trader makes huge sums of profit that others envy about, yet he accepts huge losses that only encourage him to be more aggressive.

An aggressive trader will get back to looking at his mistakes only after the day ends and he doesn’t have a market to trade. Until then, he is too busy hunting opportunities.

Aggressive trader commands a huge pile of money in his accounts and will not bother even most of it is lost. Some times they lose all of it and not regret their acts.

It is up to the trader to decide what approach they pursue in their trading career, depending on their financial capabilities, risk taking attitude, mental strength and the stomach for profits.

Once you have decided what you are going to be, then it is time to decide on which of the following categories you want to be in and what you actually fit into.

There are three categories of traders we see in the market. Each category has its own requirements, complications, ramifications and rewards, which will be elaborated in further posts of this ‘Trader type’ series. For now, lets just know what are the categories.

1. Day Trader

2. Swing Trader

3. Seasonal Trader.

Get back here later if you want to know what constitutes in each category of traders. Until then, “Happy Trading”

Ask Yourself before your Trade…

1. Does this trade fit my chosen trading style? Whether it is:  swing trading, momentum, break out, trend following, reversion to the mean, or day trading? Does this trade fit into the parameters of who I am as a trader, or is it just based on my own fear or greed?

2. How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital? Knowing where my stop will be how big should my position size be to limit my risk?
3. What are the odds of my risk of ruin based on my capital at risk?
4. Why am I entering the trade here? What is the entry trigger to take the trade? Is this a quantified entry on my trading plan?
5. How will I exit with a profit? A price target or trailing stop?
6. At what price will I know that I was wrong? Where is my stop loss based on the position size?
7. Will I be able to admit I was wrong and exit the trade if my stop is hit, or will my ego make me hold and hope? Can I trade this position size and keep my ego out of the trade?
8. Is the risk small enough that I can emotionally handle the loss without blaming the market or myself? Is my risk small enough to keep my mind and trading plan in control?
9. Can I really risk this money or do I need it for upcoming bills? Trade with risk capital not living expenses.
10. Am I committed to staying disciplined and following my trading plan on the trade? Free-styling a trade that is losing is usually a formula for disaster.

I believe the answers to these questions will determine your success in any one trade more than anything else.

The World’s Greatest Credit Collapse (Source: EWI Weekly Select)

This post is intended at just sharing the information. All credits and copyrights go to EWI Financial Forecast.

(excerpted from The Elliott Wave Financial Forecast -- August 2, 2013)

 

This chart (a similar version was originally produced by Comstock Partners) shows the age-old story of easy credit. Once rates rise and growth slows, key sectors that took the full advantage of the readily available easy money find the debt they’ve accumulated impossible to pay back. A credit crisis ensues, and financial markets falter. The reliability of this sequence over the last half century allowed The Elliott Wave Financial Forecast to envision key elements of the last crisis well ahead of time. In April 2007, EWFF re-published the above chart from our May 2005 issue, noting a 70% rise in rates that was comparable to prior crisis-inducing spikes. By August 2007, EWFF cited a “succession of climactic credit events, from the bludgeoning of the subprime mortgage market to a booming demand for ‘covenant lite’ commercial loans” and stated that this blend was the “set-up to the onset of a new conservatism that would drive the greatest credit crisis in history.” The yellow highlights on the chart show our forecast for the ensuing months. Over the next two years, the subprime crisis expanded into the biggest real estate crash since The Great Depression; derivatives imploded, which led to the bankruptcy of Lehman Brothers and the forced bailout of financial giants ranging from AIG to Merrill Lynch; GM and Chrysler went under, and 11 airlines became insolvent.

With the help of a historically accommodative Fed, record fiscal stimulus and the decline of U.S. Treasury rates to their lowest level in history, some of the losses have been recouped. But our June 2012 Special Report on the bond market identified a key set-up for the next crisis. The first-ever combined issue of The Elliott Wave Theorist and EWFF called for a “Major Top in the Bond Market” that would lead to outright deflation and an even more devastating credit crisis than that of 2008/2009. U.S. Treasury bonds made a historic top within weeks. Now, a year later, the next crisis is fast approaching.

Through the first half of 2013, EWFF has observed the same climactic credit events that we cited in early 2007. In some ways, the conditions are more extreme, as the demand for junk bonds continued to push yields to a new all-time low in May and covenant lite loans account for twice the percentage of leveraged loans that they did in 2007 (see discussion in the June issue). The broader scope of the unfolding crisis is already evident in a more pronounced interest-rate spike. The 10-year U.S. Treasury yield jumped 97% from its low in July 2012, a one-year percentage increase that is already the largest since interest rates peaked back in 1981. As rates continue higher, trouble will ensue. Many of the borrowers that managed to survive or were bailed out during the last credit crisis are barely hanging on despite the rate relief and economic recovery. For example, since 2009, 46% (306,000) of the homeowners that received help from the U.S. government’s main foreclosure prevention program have “re-defaulted.” In the resuming crisis, credit stress will reappear in all of the areas that EWFF cited in 2007. Additionally, whole new areas of default will become focal points, as the orange highlighted list on this next chart shows. Let’s look at some of the upcoming attractions...

 

Source: http://www.elliottwave.com/grpcontent/Special-Club-Report-Worlds-Greatest-Credit-Collapse.aspx?utm_source=ws083113non-subs&utm_medium=Ezine