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Currency Chart Up/Down Market Cycles

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The response to the last post is that readers want to hear about ALL the different market cycles!

So today I start with the first of a series of blog posts on cycles. I’ll be demonstrating with a currency chart, the forex EUR/USD pair, but what I share also applies to futures and stocks.

We begin with the one that probably comes to most people’s minds – the up/down market cycles.

The currency chart in the following video will demonstrate the basics of this principle. I wish I had more time, but the videos are limited by the space on the servers so I have to keep them around 10 minutes.

The one thing I wanted to add is that to more precisely TIME the entry using cycles, it’s critical to use multiple time frames. I’ve never found any cycle indicator, used alone, to be of much value.

Like all of my trading strategies, whether trading Forex currency charts, stocks, futures or any other market, no ONE indicator is worth its salt. It’s when multiple energies align that we find probability scenarios worth putting our money at risk.

That said, enjoy the video …

Market Cycles Kept Secret From Losing Traders and Investors.

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A stock, Forex or futures chart only has 2 dimensions. Most traders and investors focus only only one: price. But along the bottom of every chart is another dimension: TIME. That axis is fully 50% of any chart’s equation and it measures market cycles.

Stock market cycles (as well as those of Forex, commodities, futures or any other market) are absolutely critical for those trading the markets because they provide the critical element of TIMING when to enter a trade.

A floor trader at the CME once told me that retailers (his word for amateur traders) are usually right, but at the wrong time.

W.D. Gann proposed that time was more important than price.

And yet as I talk to traders around the world, very few of them know anything about market cycles.

One of the most common laments I hear from amateur traders is that they took a position, quickly got stopped out, and then the market turned right around and went soaring in the direction of their original trade!

This happens because they don’t know how to TIME their trade.

When most people think of cycles, they think of up and down oscillations. And that is certainly one type of cycle. Even in a trend, the market moves up and down during its larger directional move.

However there are other types of cycles as well:

  • Contraction/expansion (cycles in volatility).
  • Order/chaos (cycles between high probability setups and low probability setups).
  • Fast/slow (cycles in how fast the market moves).
  • Coupling/uncoupling of sectors, industries and various market pairings.
  • Seasonal and calendar cycles that tend to occur around the same time of year.

… and there are probably many more.

Learning about these various types of cycles can give you a tremendous edge in trading because most traders don’t give them any attention. It can be your advantage that may turn you from an average day trader, swing trader or investor, into a profitable one.

The topic of cycles is a big one, so I decided to simply begin with this introductory article and then let you decide where we go from here.

Are you interested in learning more about these cycles? If so, put your requests (specifically which type of cycles you’d like to learn more about) in the comments section below and I’ll be happy to create blog posts/free videos in the future that cover those areas of most interest to you (majority wins!).

Is Short Selling Stocks Un-American, or Does It Save America?

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I still remember the first time I heard about short selling stocks. I knew all about buying stocks. And I knew that after you bought them you could sell them. But it never occurred to me that you could sell them BEFORE you bought them!

The concept took a little while to get my head around.

As I discussed this new (to me) concept with other investors and traders, I soon discovered that many people feared short selling stocks and the idea made some people mad as they accused anyone who would short a stock as “un-American” because they are “betting against American business.”

For some reason, shorting never bothered me. It didn’t feel scarey and it didn’t strike me as unpatriot. On the contrary it made perfect sense that people should be able to participate in the market whether it is going up or down. To only be able to invest to the upside seemed rather limiting and naive … but I was certainly in the minority in that opinion.

First let’s address the issue of what short selling stock actually is. It can be very confusing to someone new to the markets who have been taught to buy low and sell high.

Actually, shorting the market is still buying low and selling high. It’s just doing it in the reverse order: First sell high, then buy back low!

But the mystifying aspect to most is: How can you sell before you buy?

Actually what you would normally be doing is borrowing the stock (since you didn’t buy it first), then selling it so you you can buy it back later at a lower price (and then return the shares to the lender).  There is also a fee for this “borrowing.”

While that may sound complicated, it’s a fairly simple process with many brokers and can be executed with the simple press of a button (assuming you have meet all the requirements of your broker and the stock is available for shorting).

You can also short Futures which have been historically more friendly to short sellers than the stock market.

One objection is that shorting is more risky than buying because if you buy a stock your risk is limited to the stock going down to zero. But if you short, there is no limit how high the stock can go against your position.

So, is short selling stock really evil?

Does it hurt the stock market?

Does it do damage to American business and our economy?

This is a perennial topic that seems to pop its head up most commonly during bear markets (for obvious reasons). And so as Washington is attempting to “clean up Wall Street,” the topic is back on the table in D.C. again.

One topic on the table: Restore the “uptick rule.” This rule was introduced during the Great Depression and required that a person could only short a stock if it moved up a tick before you shorted it. The intent was to curtail “bear raids” which could send the market crashing down. However at the time, the stock market moved in fractions. Now it moves in pennies and so the uptick rule has less effect as a move up or down by a penny is inconsequential.

It was only last September when the SEC attempted to curtail the bear market by such a policy. But they didn’t simply re institute the uptick rule, they actually implemented a temporary ban on the shorting of hundreds of financial stocks.

Did it work?

Look at where the market was in September 2008 and you’ll see that it wasn’t too successful at holding the market from going down further. Whether it saved some of those financial institutions from going out of business may be another question.

Short Selling Stock

Sometimes investors get overly excited and pump up markets beyond their true value. We’ve seen this with real estate, financial institutions, technology and even tulips!

While it is good to maintain some balance, and it is certainly possible for the market to go to extremes up or down, short sellers provide a valid role in the markets by helping to apply pressure against the infamous “irrational enthusiasm” we’ve experienced in various markets over the years. And if they don’t prevent it, at least they play a role in bringing markets back to their fair value eventually.

That’s my opinion.

What’s yours?

Leave your comments below.

How Day Trading Works According to Einstein

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One of the most common questions I’m asked is how day trading trends are to be evaluated when looking at more than one time frame.

The day trader will be looking at a chart and see the trend is up (for example), but then they look at a chart of another time interval and they see that it is down.

This is very confusing and they ask me which is the “REAL” trend?

I hope this video will help bring clarity to the issue not only for those who are asking how day trading trends are determined, but also for swing trading and even investing trends.

One extra comment not addressed in the video – while I look at the trend on a higher time frame, I actually find it more important to make sure I’m trading in the direction of the momentum and cycle of the higher time frame. These are faster energies and allow me to trade more frequently than if I waited for the trend to align on both time intervals concurrently.

As always, please leave your comments below after viewing the video.