SMALL CAP MONTHLY PERFORMANCE

Below represents Small Caps average monthly performance the past 84 years

AVERAGE MONTHLY S&P 500 RETURNS

source:
 http://www.moneychimp.com/features/monthly_returns.htm

TRADING CURBS, HALTS, AND PAUSES

A trading curb also known as a circuit breaker, is a point at which a stock market will stop trading for a period of time in response to substantial drops in value.

At the start of each quarter, the NYSE sets three circuit breaker levels at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval. As of the fourth quarter of 2012, these levels are 1,350 points, 2,700 points, and 4,050 points respectively. Depending on the point drop that happens and the time of day when it happens, different actions occur automatically. A one hour halt is triggered at 10%, two hour halt at 20%, and market closes at 30%.

Trading halts usually occur when a publicly traded company is going to release significant news about itself. The halt in trading for the affected security gives investors time to review the news and assess its impact. Another situation in which a trading halt might occur is when the exchange is uncertain "whether the security continues to meet the market’s listing standards."

Also, there are "trading pauses", which are defined as, under NASDAQ, "if a security is subject to a Trading Pause, the Pause Threshold Price field will contain the reference threshold price that deviates 10% from a print on the Consolidated Tape that is last sale eligible as compared to every print in that security on a rolling five (5) minute basis".

 

 

http://www.nasdaqtrader.com/Trader.aspx?id=TradeHalts 

 

 

TEN THOUSAND HOURS RULE

In essence, the 10,000 hour principle is a confirmation of the maxim made famous by Edison: genius is 1% inspiration, 99% perspiration. 

Outliers by Malcolm Gladwell repeatedly mentions the "10,000-Hour Rule", claiming that the key to achieving world class success in any field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours.
 

To find your success zone in trading at 5 hours per trading session equates to 8 years.  During the practicing process, there are no failures, only feedback.

PSYCHOLOGICAL FORCES

THE TRADER

Nothing matches the opportunities, excitement, joy, fear, and defeats, associated with trading.  To become successful in this market, merely sound knowledge about the market does not suffice. It requires out of the box psychological traits to emerge out as a winner. If you go by the rumors and follow what others are doing, chances are there that you may lose out in the end.  Correctly gauging the market psychology will result in success. The more our minds model the market, the more in synch we get. If what you are doing is not working, re-evaluate your strategies and increase the level of our awareness rather than the intensity of trading.   Our internal process dictates the action.  The markets are messy, our information is imperfect, our systems will fail and we can still make money.  Seek the practice rather than the result.  There is no failure, just feedback.

The greatest fault of traders is being bullish at high prices and bearish at low prices.  Fear, greed, hope and despair continue to be key elements in everything that we do including stock market trading.  Overtrading causes anxiety, and following the market beyond a reasonable climax is unprofitable.  Try to catch the trend of a sentiment even if against the fundamentals.  Keep the mind clear and balanced so as to avoid acting hastily on sensational information, acting solely on your own judgment and common sense rather than emotions.  The best approach would to be unbiased to all the stocks.

Social proof is human nature to look to others to determine the best course of action for ourselves.  If we see others getting rich by buying stocks, then it must be a good time to buy. Likewise, the same goes for when everyone else is selling.

Competition is the cornerstone of the stock market.   Scarcity is a natural tendency to want things in limited supply; we rush in and buy stocks at $5 because we are afraid that in a short time they will only be available for $7, $10, or much more. We must buy it now, because this price may not be available for much longer.  We appreciate something most after losing it.  That’s why when there is a large drop in the stock market and we have lost a lot of money, we are timid about buying more. Once we have lost, we want to hold on to what we have for fear of losing more. This influences us to buy when prices are high and sell when prices are low. 

When you are engulfed by the powerful forces of scarcity, you can fall back on your strategy. Before making a stock trade, simply ask yourself this - Does this trade fit into my long-term stock trading strategy and have I heard the best arguments against it?

THE MARKET

A stock chart is nothing more than a graph of human emotions in the market place; printed on price and time axis are the emotions of greed, fear, hope, and euphoria. As a disciplined trader, you capitalize on the psychological demons that plague other traders.

• Should I buy?
• Should I sell?
• Should I take profits?
• Should I take a loss?

These are some of the questions that empty trading accounts because the novice traders asking these questions do not have a plan. So what ends up happening?  They get excited and buy at the worst possible time. Then the stock reverses. Fear creeps in and then the stock goes lower... and lower... and lower. Finally the pain becomes too much to bear so they sell taking a huge loss.

Likewise, when a stock does go in the desired direction:  Excitement! Euphoria! I'm making money! "I had better sell to lock in these profits since I have had several losing trades in a row." The trader then ends up selling too soon!

"Keep your losses small and let your winners run.”  The un-disciplined trader has just done the opposite! They have let their losses get big and they have limited their winners!

This mental anguish can be eliminated by having a trading strategy and the mental discipline to stick with it. Write down a plan for the trade before you trade the stock. Then trade it according to the plan that you have written. Remember that you have devised a plan before you got into the trade when your emotions were stable. Now you can trade your plan with confidence.

Learning to trade stocks and applying technical analysis to charts is mostly about human psychology - not chart patterns and candlestick patterns themselves. You must understand the psychology behind these patterns.

Here is a breakdown of what happens:

 

Breakout Traders - These traders bought the breakout. They operate under the "greater fool theory". They are just praying that other traders come along and buy higher than they did.

Novice Traders - These traders just have no idea what they are doing. They are buying shares of stock that the breakout traders are now selling to them.

Momentum Traders - These traders are buying the pullback and tend to buy near the 10 MA. They are likely going to put their stop below the low of the hammer.

Swing Traders - This is where we come in. The stock falls below that hammer and the momentum traders get stopped out. By now most of the novice traders and momentum traders have sold. See how the volume has tapered off? Previous resistance now becomes support.

Novice Traders - Once again, the novice traders are buying at the worst possible time. We need these traders so that we can sell our shares to them and make a profit.

TECHNICAL ANALYSIS

At the turn of the century, the Dow Theory laid the foundations for what was later to become modern technical analysis. Dow Theory was not presented as one complete amalgamation, but rather pieced together from the writings of Charles Dow over several years. Of the many theorems put forth by Dow, three stand out:
·         Price Discounts Everything
·         Price Movements Are Not Totally Random
·         "What" Is More Important than "Why"

One very popular form of technical analysis until the mid-1960s was "tape reading". It consisted in reading the market information as price, volume, orders size, speed, conditions, bids for buying and selling, etc.; printed in a paper strip which ran through a machine called a stock ticker. 

Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future performance.  Technical analysts consider the market to be 80% psychological and 20% logical. Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technical analysts, fundamental analysts and many others.

Since a market's price reflects all relevant information, their analysis looks at the history of a security's trading pattern rather than external drivers such as economic, fundamental and news events. Therefore, price action would also tend to repeat itself due many investors collectively tend toward patterned behavior – hence technicians' focus on identifiable trends and conditions.

So based on the premise that all relevant information is already reflected by prices, technical analysts believe it is important to understand what investors think of that information, known and perceived.  Technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns.  Technicians use various methods and tools, the study of price charts is but one.

Many technicians employ a top-down approach that begins with broad-based macro analysis. The larger parts are then broken down to base the final step on a more focused/micro perspective. Such an analysis might involve three steps:

1. Broad market analysis through the major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite.
2. Sector analysis to identify the strongest and weakest groups within the broader market.
3. Individual stock analysis to identify the strongest and weakest stocks within select groups.

Technical analysis is not limited to charting, but it always considers price trends.  For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment.  Surveys that show overwhelming bullishness, for example, are evidence that an uptrend may reverse; the premise being that if most investors are bullish they have already bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.

The beauty of technical analysis lies in its versatility. Because the principles of technical analysis are universally applicable, each of the analysis steps above can be performed using the same theoretical background. You don't need an economics degree to analyze a market index chart. You don't need to be a CPA to analyze a stock chart. Charts are charts. It does not matter if the time frame is 2 days or 2 years. It does not matter if it is a stock, market index or commodity. The technical principles of support, resistance, trend, trading range and other aspects can be applied to any chart.

Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.

Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.

Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the relative strength index, and MACD. Other avenues of study include correlations between changes in Options (implied volatility) and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc.

There are many techniques in technical analysis. Adherents of different techniques (for example, candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one technique. Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation.

Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.

Charting Terms and Indicators

Concepts:

• Resistance – a price level that may prompt a net increase of selling activity
• Support – a price level that may prompt a net increase of buying activity
• Breakout – the concept whereby prices forcefully penetrate an area of prior support or resistance, usually, but not always, accompanied by an increase in volume.
• Trending – the phenomenon by which price movement tends to persist in one direction for an extended period of time
• Average true range – averaged daily trading range, adjusted for price gaps
• Chart pattern – distinctive pattern created by the movement of security prices on a chart
• Dead cat bounce – the phenomenon whereby a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement
• Elliott wave principle and the golden ratio to calculate successive price movements and retracements
• Fibonacci ratios – used as a guide to determine support and resistance
• Momentum – the rate of price change
• Point and figure analysis – A priced-based analytical approach employing numerical filters which may incorporate time references, though ignores time entirely in its construction.
• Cycles – time targets for potential change in price action (price only moves up, down, or sideways)

Types of charts:

• Open-high-low-close chart – OHLC charts, also known as bar charts, plot the span between the high and low prices of a trading period as a vertical line segment at the trading time, and the open and close prices with horizontal tick marks on the range line, usually a tick to the left for the open price and a tick to the right for the closing price.
• Candlestick chart – Of Japanese origin and similar to OHLC, candlesticks widen and fill the interval between the open and close prices to emphasize the open/close relationship. In the West, often black or red candle bodies represent a close lower than the open, while white, green or blue candles represent a close higher than the open price.
• Line chart – Connects the closing price values with line segments.
• Point and figure chart – a chart type employing numerical filters with only passing references to time, and which ignores time entirely in its construction.

Overlays:

Overlays are generally superimposed over the main price chart.

• Resistance – a price level that may act as a ceiling above price
• Support – a price level that may act as a floor below price
• Trend line – a sloping line described by at least two peaks or two troughs
• Channel – a pair of parallel trend lines
• Moving average – the last n-bars of price divided by "n" -- where "n" is the number of bars specified by the length of the average. A moving average can be thought of as a kind of dynamic trend-line.
• Bollinger bands – a range of price volatility
• Parabolic SAR – Wilder's trailing stop based on prices tending to stay within a parabolic curve during a strong trend
• Pivot point – derived by calculating the numerical average of a particular currency's or stock's high, low and closing prices
• Ichimoku kinko hyo – a moving average-based system that factors in time and the average point between a candle's high and low

Price-based indicators:

These indicators are generally shown below or above the main price chart.

• Average directional index – a widely used indicator of trend strength
• Commodity Channel Index – identifies cyclical trends
• MACD – moving average convergence/divergence
• Momentum – the rate of price change
• Relative strength index (RSI) – oscillator showing price strength
• Stochastic oscillator – close position within recent trading range
• Trix – an oscillator showing the slope of a triple-smoothed exponential moving average
• %C – denotes current market environment as range expansion or a range contraction, it also forecast when extremes in trend or choppiness are being reached, so the trader can expect change.

Breadth Indicators

These indicators are based on statistics derived from the broad market

• Advance–decline line – a popular indicator of market breadth
• McClellan Oscillator - a popular closed-form indicator of breadth
• McClellan Summation Index - a popular open-form indicator of breadth

Volume-based indicators

• Accumulation/distribution index – based on the close within the day's range
• Money Flow – the amount of stock traded on days the price went up
• On-balance volume – the momentum of buying and selling stocks

 

PORTFOLIO DIVERSIFICATION

Keeping a diverse Stock portfolio means spreading your investments among different industry sectors, so that they work together to build your wealth, while affording you some protection from downturns in any specific industry sector.

Asset allocation is the process of determining what percentage should be placed in cash, and what percentage in each industry sector. Asset allocation may account for the success of your portfolio more than the specific stocks you hold, and even more than the timing of your buy and sell decisions.

Diversification involves dividing your capital across and within a variety of industry sectors. If there is a downturn in any one sector, this practice can help you manage risk.

Each sector offers different types of risks and rewards; each industry is also affected differently by economic events. Investments across different sectors, therefore, gain and lose ground independently. This protects you from losing your entire portfolio should one stock significantly underperform, or even lose all its value. In addition, large fluctuations are often balanced out. For example, if one of your stocks lost significant ground, chances are that in a diversified portfolio you would hold two or three stocks in another sector that would balance the loss with predictable income.

There are two specific types of risk to keep in mind when investing: unsystematic risk and systematic risk.

Unsystematic Risk
Risk that applies only to a specific company. Examples could be as routine as poor sales or as dramatic as an oil refinery explosion. This is one of the reasons why it is unwise to "put all your eggs in one basket;" there is little chance that these events would occur to every company in a diversified portfolio at the same time.

Systematic Risk
This type of risk, however, can affect all the stocks in your portfolio at the same time. Rising interest rates, inflation, wars, and political changes influence the whole economy, not just one sector. It is virtually impossible to avoid these events.

For example, I am speculating over the historically strongest period of November through April rather than day trading in the volatile period May through October.  I am holding 19% full position in AAPL (Technology and Retail), 8% position in LPH (Oil and Gas Refining in China), 8% position in NR (Oil and Gas Services), 8% position in NSU (Gold), and 12% position in XIN (Housing in China and U.S.).

In summary, 19% Retail and Technology, 16% Oil and Gas, 8% Gold, 12% Housing and 45% cash to build positions on dips. I selected the stocks that had the highest rate of growth, strongest fundamentals, and significantly undervalued in each of the sectors.

The only key sector I am underweight in is Banking because I see little growth in the sector into 2013.