Long Term Investing Dead?

Article from Trading Tutors Newsletter.


A lot of comparisons have been made between the current Global Financial Crisis and the great depression, and indeed there are many similarities. Unfortunately though, such comparisons seem to provide little scope for optimism, especially for the longer term investor. After all, anyone who bought prior to the crash in October of 1929 would have had to wait 25 years before their capital was recovered!

Similarly long periods are quoted for more recent market crashes, such as the 1987 crash where it took 9 years for new highs to be created. So there is little reason to think that even if the market is close to the bottom, we will see a swift return to 2007 levels. But does this mean that people who were invested in the market prior to this most recent correction should abandon all hope?

The long recovery periods that are quoted assume that all your capital is invested at the absolute high of the market. For those who had been regularly contributing to their positions in the years prior to the crash, their breakeven point will be well below that of the market high. This is because a significant run up is usually seen in the lead up to a crash. In the case of the Great Depression, the Dow advanced 244% in the 5 years prior to the crash, and 54% in the year prior. An investor who had been regularly adding $1,000 to their portfolio each quarter for 5 years prior to the crash would have seen their invested capital recover in just 7 years instead of 25. This still isn’t fantastic, but it’s a significant improvement in recovery time.

Continued investment following the crash helps improve the situation further still. In the above example, had the investor continued adding $1000 each quarter, they would have seen a 42% return on invested capital over the same period. This is because we tend to see substantial gains from the low of the market. Following the low of 1932, the Dow rallied 63% in just one year. The annualized growth over the next 4 years was a massive 31%.

Professor Jeremy Siegel, a noted expert in financial markets, has conducted some interesting research in this area. He has demonstrated that for the 7 largest corrections over the past 145 years, the market showed an average improvement of 24% in the year following the crash.Moreover, he noted that there was an observed 21.4% improvement per year over the next 3 years, and 18.4% per year over the next 5 years. Clearly, it pays to invest into the markets following a large correction.

The worst thing investors could do at this point is to pull up stumps and walk away from the market. Indeed, investors should be looking to add to their portfolios, average down their entry prices and position themselves for recovery. It may well take the market 10 years to get back to 2007 levels, but that doesn’t mean you have to wait that long.


Andrew Page.

Weekly Stocks Watchlist - Wk 6/09

Dominion Mining Limited

Current price: $4.15 (11/02/09)
Sector: Resources/Gold
Key Indicators:

• New 35-wk high observed last week, due to current rally in gold prices (US$914/oz).
• STO[50,10] crossed over 50% last week, and looks set to rise; have been rising from low of 8% since Sept 08.
• EMA[30] crossed over EMA[100] 4 weeks ago.

Weekly Chart:
Buy Order (IG Markets), as at 11/02/09:

• Order price: $4.14
• Qnty: 200 shares
• Total: $828 (+ $8 transaction)
  
• Stop loss price: $2.90 (-30% from order price)
• Amount risked: $248 (+ transaction + interest)
  
• Leverage: 75% (margin: 25%)

Trading Forex Using A Breakout System

This is an article from http://theforexarticles.com/2007/10/24/trading-forex-using-a-breakout-system/.

Trading forex breakouts is one of the more basic trading strategies, but nevertheless it can deliver excellent profits. Just because a system is easy to follow does not mean it cannot produce consistent profits as breakout trading is a method used by some of the most successful forex traders around.

It's based around the whole premise that if a currency pair is trading in a very tight range for a sustained period of time, then eventually it will break out of that range and more often than not it will continue moving in the direction of the breakout.

This means that to make consistent profits you need to firstly identify instances where a currency pair is trading in a narrow range, and then place buy and sell orders at or slightly outside the current range to catch the breakout when it happens.

Furthermore if you want to look for the optimum set-up then you can use technical indicators to help you. My own method is to use a weekly 30 minute chart displaying 15, 50 and 100 period exponential moving averages.

When the price starts trading in a narrow range and all three of these EMA's have flattened out and also currently lie within this range, then this to me is the perfect breakout set-up. Why?

Well because with all three EMA's flat, something's got to give. It's like a volcano waiting to erupt. Once the breakout occurs, you could get a very big movement because the longer term EMA (100) can trend for a very long time so you could get a big points haul if this EMA follows the price and moves outside of the current trading range.

As regards targets and stop losses, I personally use the current trading range to determine where I place my stops so if I go long at the top of the range, then my stop loss will be at the bottom of the range. This is only really an emergency stop as most of the time the breakout will follow through and not go anywhere near this stop loss. My target price is usually the same number of points away as the stop at the very least.

The best thing about this system is that it works pretty well across many different time frames, plus not only does it work well for trading forex markets but it's also an equally good system for trading other financial instruments as well.

Risk Aversion

There is a lot of talk about "risk aversion" in the financial markets these
days. It appears that when the markets go into free fall, risk aversion is
associated with the cause. Take this article as an example:

"SYDNEY, Jan 21 (Reuters) - The Australian dollar was on the defensive on
Wednesday after sliding to six-week lows as mounting concerns about the
global banking system hammered equities and drove extreme risk aversion..."

The following excerpt from Wikipedia explains what all this talk is about.

Risk aversion is a concept in economics, finance, and psychology related to
the behaviour of consumers and investors under uncertainty. Risk aversion is
the reluctance of a person to accept a bargain with an uncertain payoff
rather than another bargain with a more certain, but possibly lower,
expected payoff.

The inverse of a person's risk aversion is sometimes called their risk
tolerance (for a more general discussion of the concept, see risk).

Example:

A person is given the choice between two scenarios, one certain and one not.
In the certain scenario, the person receives $50. In the uncertain scenario,
a coin is flipped to decide whether the person receives $100 or nothing. The
expected payoff for both scenarios is $50, meaning that an individual who
was insensitive to risk would not care whether they took the certain payment
or the gamble. However, individuals may have different risk attitudes. A
person is:

• risk-averse if he or she would accept a payoff of less than $50 (for
  example, $40), with no uncertainty, rather than taking the gamble and
  possibly receiving nothing.
• risk neutral if he or she is indifferent between the bet and a certain
  $50 payment.
  
• risk-seeking (or risk-loving) if the guaranteed payment must be more
  than $50 (for example, $60) to induce him or her to take the certain option,
  rather than taking the gamble and possibly winning $100.

The average payoff of the gamble, known as its expected value, is $50. The
dollar amount that the individual would accept instead of the bet is called
the certainty equivalent, and the difference between the certainty
equivalent and the expected value is called the risk premium.

Buying on Dips and Selling on Rallies

In an uptrend, a trader would want to wait for a pullback/retracement to a low, a level of support, and then go long (back in the direction of the trend) with their stop placed just below a recent level of support. This would be referred to as "buying on dips". The oscillator that you mention, could be used to time the entry. For example, entering an uptrend off of a pullback, the trader could use Stochastics as it came from being below 20 and moving above 20 as a sign that momentum would now be in the direction of the trade.

In a downtrend, the strategy would be reversed and we would "sell on a rally".

Take a look at the chart below for a visual...


The USDJPY pair is in a downtrend on the chart so we would only be looking for selling opportunities. Each time the price action moves back up/retraces within the overall downtrend, it would be another opportunity to sell the pair. The stop would be placed perhaps 20-25 pips above the highest point that the pair had traded on that particular upswing.

Also note on the chart below how MACD shows crossovers to the downside indicating that momentum is behind each of the selling opportunities on the chart.

---
Source: Richard Krivo, Power Course Instructor (strategist@dailyfx.co)

Trade Exit: AUD/NZD Long Position, 20-Jan-09

Exited Short Position in Spot FX (mini) AUD/NZD
Closing Price: 1.24374
Opening Price: 1.22885
Contract: 1 (mini)
Closing Contract Value: NZ$12,24374
Opening Contract Value: NZ$12,288.5
Profit: NZ$148.9 (A$120)

Justifications:

• Take profit.

Chart:

AUD/NZD Spot Fx Mini - Hourly

Trade Exit: NZD/USD Short Position, 20-Jan-09

Exited Short Position in Spot FX (mini) NZD/USD
Closing Price: 0.5335
Opening Price: 0.5475
Contract: 1 (mini)
Closing Contract Value: US$5,335
Opening Contract Value: US$5,475
Profit: US$140 (A$212)

Justifications:

• Take profit.

Chart:

NZD/USD Spot Mini FX - Hourly