Money Grab

I was reading my usual news sites and this popped up on the pages.

http://www.news.com.au/business/story/0,23636,22424725-462,00.html

"

HUNDREDS of worried customers of British bank Northern Rock queued for a second day yesterday to withdraw savings, ignoring assurances that the lender will not go bust due to the global credit squeeze.

Panicking savers of Britain's fifth-biggest mortgage lender had begun to withdraw their money en masse on Friday, taking out a reported £1billion ($2.3bn) over counters or online.

"

Now this is despite the bank assuring its customers that they will not go broke and the Bank of England offering liquidity.

If this starts spreading then we have a big issue that can seriously destabilize the banking industry as well as the wider economy.

This is worrying

U.S. payrolls contract by 4,000 in August

Major surprise; economists had been expecting growth of 115,000. It looks like the sub-prime worry are spilling over to the other area of the economy as well.

So does this mean that the US Feds will cut interest rate later this month ? I think so.

Reading Price Action.

The market has really taken a run for the bulls and those of you who did a bit of shopping in the last week or so would be smiling your way to the bank.

I have been developing two systems. One a daily short term system and the other a longer weekly system.

But while all this is happening I am wondering can I just trade by looking at price action ? No use of indicators etc. I'll need help. So lets start some work on it.

Nice Day

Today was a nice day for pretty much all of the market. If it continues this way we are on the track to the best week we had in a while and as I type this the the US Futures are up, so we could have another good day, but I'll let the market say that.

I have started work on my system and I am trying various permutation and combinations to get a decent positive return with low drawdown.

Looks Good, fingers crossed.

Today was a nice day in between all the the doom and gloom. However, don't become complacent and let your guard down. Its not over till its over, and this correction is defnitely not over. Today's rise was too fast and too good and if any more bad news pops out of the subprime market we definitely gonna get hit as well.

Fixed Fractional position sizing

Most of us who have dipped their foot into the market are generally concerned about making money. The first rule I see of making money is to not loose what I already have. While its next to impossible not to loose a trade or two its imperative that I do not loose all or most of my trading capital.

I was lucky enough to stumble across the above term and although it sounds quite sophisticated, its quite a simple concept to implement.

Lets say, for an example, you have a total capital base of $100,000; then you divide the lot into 10 parcels of $10,000 each. You would only invest one parcel on one stock. So you are basically spreading the risk across ten stocks.

Now lets say you wish to trade a $1 stock with the first parcel.
.
You don't wish to risk more than 5% of your capital on the trade.
So maximum risk is 10,000*5/100 = $500.

You plan to buy stock and think that a 5c stop would be best.
So $500/.05c = 10000 so you CAN buy 10000 with a 5c stop.

Lets say you think its going to run so you only have a 2c stop.
so $500/.02c = 25000 so you could maintain the same $500 risk and invest in $25000 of shares.

OK lets say you wish to use a wider stop can you still buy 10000 shares?
So $500/.20 = 2500 obviously no you can't. You must buy 2500 ONLY to maintain the same 5% risk with a 20c stop.

So same maths applies to any position you take.

$15300 capital, 5% risk how many shares can I buy of a stock trading at $1.92c with an 18c stop?

$ at risk = 15300 x .05% = $765.
765/.18c = 4250 shares 4250 x $1.92 = $8160 so you can ONLY buy 4250 shares at an 18 cent risk to maintain the same 5% risk to capital.

I'll go further and talk about Reward to Risk or the R/R ratio.
If you buy and then sell the $1.92 stock for a 54 cent profit you have returned on that trade a 3:1 R/R ratio.
This is calculated by 54c (the profit)/18c (The risk) = 3 so 3 times the risk has been returned.
So if you win 2 out of 3 trades with this sort of R/R ratio then your doing well.

I have a spreadsheet that does the above calculations and anyone of you need it I am happy to post it here. Other wise there are couple of free applications on the net that can do the calculation for you. Two of them are:
TradeSize Pro
This can be found here.

The other one is called MM Calculator and it can be found here.

Lemme know if you know of any other applications that do a similar job. Happy trading.

Feds cut rate

Just saw the news that Fed cuts discount rate to 5.75% to ease credit crunch.

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from regional Federal Reserve lending facilities. It differs from the key federal funds rate, which is the rate at which private institutions lend to other depository institutions overnight.

The result, as I type this, DOW INDUSTRIALS up more than 300 points in opening minutes; NASDAQ up 2.5%.

So we clear of the woods ? Not yet. This will put breaks on further market slide provided there are no more ugly news from sub-prime market coming across.

So now we can look at a few findamentally strong companies. These stocks are best poised for a sustained rebound on the ASX.

BHP
RIO
WES
CBA
CTX
LLC
COH
CSL
OXR
WOR
ANN
ANZ
UGL
NCM

Correction or a Bear Market ?

So is this just a correction in a bull market or the beginning of a Bear Market ? Time to get that crystal ball out. lol. To be honest no one know. Poll 100 people and its likely 50 will be right as it will be either a yes or a no.

One thing is for sure, any stock that is speculative will get its price brought to ground reality. So now would be a good time to get that fundamental checklist out and start looking for stocks that are holing well and are fundamentally strong. QAN, LEI, CBA come to mind.

It keeps coming

There was more pain today although I have been on the sidetracks to protect my capital till things settle down there has been a few good news stocks like JBH CRG etc. So we have been getting these mixed signals but now is a time when extreme caution is to be exercised.

Tonight the US market is at a brink, if it breaks down more the damage will be more difficult to come out of.

More Pain

Investors stayed away from the market today probably cos they have become wiser like me from experience. Everytime they have jumped in, the market has thrown a nice surprise ball at them. I have been on the sidelines for a while now.

It looks like DOW is be going to take a bit of hammering tonight. Stand aside, train wreck coming.

Tuesday

The injection of funds from central banks in US and Europe seems to have stabilised the market a bit but I am hazarding a guess here that its only temporary and there will be more skeletons falling out for the simple fact the the market still does not know the full extent of the sub-prime issue, does any one ?