All posts by Dave McLachlan

Stock Trading

Don’t Become A Statistic: 10 Reasons Why Traders And Investors Fail

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All the old and bold traders and investors will tell you – there are just some things a trader or investor shouldn’t do.

That’s right – you may know a trader or investor who has made these mistakes and become the “statistic”: a recent study found that over 82% of traders made significant losses and closed their accounts after 9 months. For the long term investors it is slightly better, but that doesn’t account for the thousands of retiree who had to return to work after the 2008 bear market.

So here is a list of 10 killer reasons reasons why traders and investors fail. What does it mean for you? Well you can enjoy more success in the market simply by doing the opposite of everything on this list – and you will know what to look out for and avoid in the future. And then click on the link at the bottom for even more things to watch out for!

Ready? Let’s get started!

1: They Don’t Have A Plan. A trading plan is the fundamental place you should start when trading or investing – and yet many people don’t have the time, don’t realize the importance of them, or just couldn’t be bothered.

2: They get attached to a particular stock. Your parents hold the stock. Your boss holds the stock. Your friends are all in the stock. The only thing is – it is sinking faster than the titanic. Don’t get attached! And have a pre-determined point of exit. It could save your account.

3: They don’t have the discipline to stick to their strategy. For example a long term investor who gets shaken out of the market by a short term price fluctuation. If you have a strategy, stick to it. If it really doesn’t suit you, change it.

4: They think the market will stay “this way” forever. If there is anything that’s true about the markets, it is they are ever changing. What works today may not work tomorrow, and today’s bull market will become tomorrow’s bear. The market will never “stay this way forever”. Be prepared, and never stop learning.

5: They over-diversify. Most financial planners will advocate diversification. But the truth is if you are over diversified you become at risk of under performing the overall market. The best investors and traders focus on a handful of great stocks or companies. In fact, it has been proven that between 6 and 12 stocks is optimum, and anything over that, your diversification is wasted.

6: They aren’t prepared for a string of losses. Mathematicians will tell you that even if your win percentage is 70%, probability states that you could still have a run of 10 losses in a row. And if you are investing for a long time, you will experience this in your lifetime. Be ready when it comes, and stick to your trading plan.

7: They put too much emphasis on predicting the future. Traders who predict the future find all sorts of reasons to back it up – but when it doesn’t turn out like they planned, sometimes it can be hard to stay objective in making decisions. Take forecasts with a grain of salt.

8: They don’t watch the trend. Some of my best friends are extremely successful fundamental investors. But even the most successful fundamentalists lost money in 2008 (and some of the best fund managers got absolutely hammered), because they didn’t keep an eye on the trend. The stock market will lead the overall economy by approximately six months, so watch for a trend to emerge regardless of company balance sheets.

9: They pay too much in brokerage. Brokerage can have a devastating effect on a small account. If you are using a full service broker at around $60 one way, making 50 trades a year will cost you $5,000. This is a big drag on your account, especially when you are trying to use compounding to grow it faster. Larger accounts are not so bad, but it still pays to be aware of this pit fall.

10: They want to become millionaires overnight. Becoming a millionaire takes time – time for your compounding to grow your account, and time for your expectancy to show a consistent result. The truth is that people who want to be millionaires straight away usually go bust sooner.

Get 31 MORE reasons why traders and investors fail and things to watch out for at Dave’s free site www.ASXmarketwatch.com.

Stock Trading

How To Avoid A Stock Market Crash Like 1987 Or 1929

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Everybody knows about them: Stock Market Crashes, the likes of 1987 or 1929. And they are feared among many if not all investors.

Tales have been told of investors going bust, of the savings of an entire generation disappearing, and how it happened quickly and without warning. But is this true? Was there really no warning of an impending stock market crash? In this article I am going to show that there are warning signs, and how you can avoid future crashes.

The simple fact is, in both major stock market crashes like 1987 or 1929, there are a few clues we have that will alert us to a crash in today’s market.

Number one is that prices in the market fell quite a while before the stock market crash occurred. In fact in both cases of 1987 and 1929, prices fell for a full seven weeks, from the peak to the start of the crash.

The second is that even though prices did fall for seven weeks prior to a stock market crash, there was a bounce in between. What this means is that prices fell, then they rose for one to three weeks, before falling back down through the previous trough in price. And the week after is when the stock market crash happened.

If we look at this particular movement on a price chart, it will look like a downwards zig zag. And it was so prominent that Charles Dow wrote about it intensively in the late 1800s – making it his own as it is called today: “Dow Theory”.

Pretty simple so far, isn’t it? But there is one caveat – I know what you’re going to ask. Will a stock market crash happen every time we see a downwards zig zag? Unfortunately not. If it crashed every time, we would have seen dozens over the last hundred years.

But Dow Theory will give you fair warning of a bear market also – in fact the same action occurred in 2007 – long before the “experts” were calling an actual bear market or recession. Sometimes the down move will be severe like 1987 or 1929, sometimes it will be prolonged like in 2008, and sometimes it will simply reverse again and resume an uptrend.

Overall, it gets it right around 70% of the time. Not bad considering most fund managers can’t even claim to be right 50% of the time.

So what does this mean for a trader or investor like you? It’s simple. If you see the price on the index fall, then bounce for one to three weeks and then fall again through the previous trough in price, now might be a good time to lighten some of your positions. It pays to be ready, and if it doesn’t occur you can always get back in.

Avoid the next crash! With many more ways to avoid a stock market crash, as well as a free course on trading and investing at www.ASXmarketwatch.com.

Stock Trading

Investing in the ASX Share Market – Don’t Trade Without This

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So you want to increase your wealth by investing in ASX Shares? Start out on the right foot and you could eventually supplement the income from your job. But make one of a few fatal mistakes and you could see yourself right out of the market, never to trade again.

What do I mean? Let me give you an example: Let’s say you started putting $150 a month into ASX Shares in 1980. That’s around $5 a day. It earns an average of 15% per annum over the years including dividends. If you re-invested all your returns, today it would be worth over one million dollars – $1,038,490 to be exact.

But many people when first starting out make a few fatal mistakes – maybe they lose a little (or a lot) of money. And they stop investing. They get scared out of the market. And because of this they lose out on all the rest of the gains over the years – they lose out on that million dollars we just discovered.

So here is the important part – what you need to know when trading ASX shares. It is often the most overlooked part of trading or investing: It’s your Trading Plan. In fact, don’t trade shares without one. But finding a trading plan can be a daunting task. Where do you start?

Well, if you take 100 different people, you will probably get 100 different trading plans. We are all individuals, and we all have different thresholds for risk. Therefore a good place to start with a trading plan is the following:

1: Your Rules for Entry and Exit – or in other words, your rules for when you buy a share and when you sell a share. There are many different ways: some people use fundamental reasons like a company’s earnings before interest and tax (EBIT), and others use technical reasons, like a breakout from price consolidation or the crossing of a trend line.

2: Your Money Management Rules – these are the rules for how much you will invest in a single position, and then in your total positions. This means you decide how much is right for you when putting money in a share. Obviously, if you put too much into one share on the ASX, you will lose all your money if it disappears. But also, if you put your money into too many shares it will be hard for you to outperform the market. Usually between 6 and 12 positions is optimum.

While some people can spend years determining the right trading plan – it doesn’t need to be complicated. With these rules you are well on your way to success in ASX shares.

Learn more about investing in ASX Shares with the free course at www.asxmarketwatch.com . Dave McLachlan also has free research on the Australian Stock Market.

Stock Trading

The Next Bull Market – How To Be Fully Invested At The Bottom

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It is a great dream of most investors to be fully invested at the bottom of the next Bull Market – a Bull Market being a long upward run in the prices of stocks or commodities.

Your financial planner will probably tell you it is impossible – and your stock broker will probably just tell you to keep buying, advocating a long-term approach. But what if there was a way to know that the next Bull Market in stocks was looming, and to know when to be fully invested?

This is where the unemployment rate comes in. Unemployment doesn’t rise too much if the stock market and economy are going well – at least according to economist Ken Fisher in his book “The Wall Street Waltz”. When people are in work, companies are making profits and both are spending their hard-earned dollars, the stock market will usually follow suit and rise with it.

But the opposite is also true – if less people are working (unemployment up), then they are also spending less, companies are making less profit, and the stock market will be in a decline.

Therefore Ken says, if you are watching the news and unemployment figures have risen by more than 1 percent, then the start to a new bull market might be right around the corner. It won’t pick the exact bottom of the market down to the day, time and value, but a rise of over 1 percent will get you in the ballpark to be ready when the next bull comes along.

To put it more simply – major stock market lows over history have never happened without first a rise of at least 1 percent in unemployment. Let me give you an example: Stock market prices had been falling for two years since 1968, when unemployment rose sharply as 1970 started. In May of that year a new bull market began. And not just in 1970, but in every other major low since.

There is one caveat however – the unemployment rate is not as reliable when it comes to predicting peaks in the market. This is because the stock market actually leads the over economy anyway in that regard. But Ken did find that a major peak in stock markets rarely happened without unemployment falling (jobs up) for two years.

Why is this information important? Well next time we are in a bear market and unemployment rises by more than 1 percent, we’ll know it’s time to get ready for a new bull market – it could be just around the corner.

Get free research on stock market trends, at Dave McLachlan’s site, www.asxmarketwatch.com.

categories: stock market, investing, trading, finance, wealth

Stock Trading

How To Know In Advance When The Economic Recession Will End

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Ask two different economists when a recession will end, and you’re likely to get four different answers. That’s right, they don’t really know – at least not in advance. But despite this, I am going to show you a very simple way to find out for yourself when a recession will end.

Knowing anything in advance would be a blessing – from the birth date of your first child to the winning horse at the race track. But imagine if you could see into the future and tell when an economic recession would end? Your business would soar, your job offers would multiply, and you would be ready for it all.

Telling when an economic recession will end can be easy. Especially as this method has been proven over the recessions of the last century.

It is something that you can easily research at home, and something even your kids would be able to discover quite simply.

And this is where we look to the stock market for the answer – as Ken Fisher outlined in his book, “The Wall Street Waltz”, the stock market has a magical way of leading the overall economy. Fisher discovered that the stock market will start going up before the end of an economic recession is announced.

Let’s look at an example: Half way through 1948, the market topped and started to decline. It wasn’t until 1949 that the recession “hit” consumers. Then, just when people were despairing that it might last forever, the began an upward climb half way through 1949, and in 1950 the recession was declared over.

Another example: 1952 and the stock market had begun its decline. Not until half way through 1953 was a recession actually declared. Another score for the stock market!

During every recession going back over the last century, the stock market has predicted an end to economic recession. In most cases the stock market leads the economy by six months. Yes there are some where the time-frame is more or less, but six months was the average.

How can you use this? Well, you can bet in your lifetime there will be another economic recession. But this time, when it happens you’ll be ready to take full advantage of the time when it ends!

Get your free course on trading and investing, at Dave McLachlan’s site ASXmarketwatch.com. Dave also offers independant stock market research to help people just like you.