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Jay Norris is a 20-year CBOT floor veteran, author of the Best Seller "The Secret to Trading Forex, Futures, and ETFs: Risk Tolerance Threshold Theory", "Mastering the Currency Market", McGraw-Hill, 2009, and "Mastering Trade Selection and Management", McGraw-Hill,... More
My company:
Trading University
My blog:
Seeking Alpha
My book:
The Secret to Trading Forex, Futures, and ETF's: Risk Tolerance Threshold
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  • Trading: Keep It Simple

    Trading: Keep it Simple

    "Life is really simple, but we insist on making it complicated." Confucius

    The past year definitely favored traders who followed the golden rule of trend trading: "let your profits run". And I see no reason this will change in 2015.

    This past year also once again proved that the most important aspect of trading is knowing which tactic is suitable for the trading environment you are in right now. This determination is based on the pattern on the chart which is a reflection of the underlying fundamentals. If the chart is showing a pattern of higher lows and higher highs, this is a reflection of a fundamentally bullish environment and buying dips is the tactic that provides the path of least resistance to profits. Likewise if the pattern is one of lower highs and lower lows, then this is a fundamentally bearish environment and the path to profits will be selling rallies. The challenge of this, as Confucius pointed out, is keeping it that simple. If you want to help yourself, it is a question of how successful do you want to be?

    The graph in Figure 1, demonstrates the harmony and rhythm that such a simple approach can deliver.

    (click to enlarge)Figure 1. 60-minute charts of the Dollar/Swiss and the Euro/Dollar in late December 2014

    On the left side is USDCHF and on the right side EURUSD. The colored boxes represent low risk price levels to initiate trades in-line with the dominant trends. i.e.: buying dips in an uptrend for the Swissy, and selling rallies in a downtrend for the Euro. Those colored boxes also represent identical retracement ratios of previous impulse moves. This tendency of predictable behavior demonstrated by the regularity of market retracements typifies what Warren Buffett meant when he summarized the Berkshire Hathaway investment philosophy: "Our approach is very much profiting from lack of change rather than from change".

    If something is already working, why would we look for the opposite to happen? If the definition of insanity is doing the same thing over and over again expecting different results, then enlightenment must mean simply doing the same thing over and over again and getting positive results. This outlook in trading or investing becomes particularly clear when we reach the conclusion that the pattern on the chart is a definitive reflection of the underlying fundamentals of that market. With that understanding comes the realization that it is the "effect" of price movement - the pattern on the chart -- which provides a simpler path to wealth accumulation, than otherwise trying to extrapolate, or worse predict, the "cause" or price movement.

    While it might be tempting to watch news about the markets, and hear commentators talk about causation -- why the market did what it did that day or that month, or the year before - by trying to connect the dots of the daily news with what price actually did that day, we are complicating the process instead of simplifying it. Statistically it's more likely that the market will continue to do what it is doing now, rather than reverse itself. Therefore it is always better to trade with the current pattern with the assurance that should that pattern reverse, we can then trade in that new direction.

    While the charts in Figure 1 give us a great look at market behavior on a shorter-term basis, what about the long view? The chart in Figure 2 is a monthly chart of the EURUSD. The purple line marks the 50% retracement level from the 2000 low to the 2008 high. This market ended 2014 at an 8-year low settlement to close below that 50% level for the first time, and this past week posted a lower low to the 2012 low to complement the current 8-year pattern of lower highs. (Many technical studies place emphasis on the 50% retracement level with a close below making lower prices more likely.)

    (click to enlarge)Figure 2. Monthly chart of EURUSD

    With the historic long-term pattern in Figure 2 aligned with the shorter-term patterns on the lower time frames, and all the patterns reflecting underlying bearish fundamentals we see no change from the 2014 trading environment to the 2015 environment.

    Jay Norris is the author of two McGraw-Hill books on trading and teaches the art of trading in live markets at Trading University. To see his weekly forecasts on YouTube going back over 2 years go to: Weekly Forex Forecast.

    Disclosure: The author is long UUP.

    Jan 04 11:29 AM | Link | 1 Comment
  • Seven Rules To Help Your Kids Invest Successfully

    The second time I was published by McGraw-Hill I made sure to provide them with a picture of myself, because after seeing my first book, my 9-year old niece said, "How do I even know this is you? There's no picture on the back!"

    Being skeptical can be a healthy trait for all of us when it comes to long-term investing.

    I was excited to hear from that same niece that she and her little brother are drawing up an investment plan, and asked for my input.

    Here are seven, common sense rules I worked out to get the kids started.

    Rule 1. Make sure each investment you make is supported by a simple concept that is also a truism. Ex: People need to eat; therefore corn has good potential as an investment. Or, currencies are cyclical, so it's a good idea to be long a currency when it's in an up cycle, and avoid exposure to it in a down cycle. State the reason why you are considering the investment and then ask: "Do I absolutely know this to be true?"

    Rule 2. Never make long-term bets against human progress, yet focus on people's needs more than wants. "Pessimists don't make money on Wall Street", is a wise old saying. Looking back over the last 50 years it is obvious we have made great strides in modernization. This is a trend that is not likely to end in your lifetime. Yet there will be many fads and flops along the way. And a great yardstick to differentiate the next great advance from the fads and flops is the question "is it a long-term need or a short-term want?" A great example of this is the cell phone. Plenty of old timers may have said a cell phone was a want. But to a parent, who is lending their car to their son or daughter for a road-trip, that cell phone is a potential lifeline - a need.

    Rule 3. Determine how much of your income you want to invest each payday, or each month, and put that amount into your investment or stock account religiously. Once you have decided which markets or stocks to invest in you will be putting a fixed amount of money into that instrument each month (this age old strategy is known as "dollar cost averaging"). The advantage of dollar cost averaging is you will be automatically accumulating more shares at lower prices and fewer shares at higher prices, and eliminating the temptation to try to "time the market". Never confuse investing with trading.

    The percentage of your account which you allocate to any one investment will be up to you but a good rule of thumb is no more than 20% of the entire account should be put in any one investment.

    Rule 4. Make sure each investment you consider has a heavily traded stock, or ETF accompanying it. Many brokers today offer commission free ETF's. (An EFT is an Exchange Traded Fund which mimics a commodity, currency, or index) This is great for smaller investors who want to invest / dollar cost average smaller amounts of money on a monthly or bi-monthly basis. Investing is like any other business where the lower the expenses the higher the profit. Commissions are definitely an expense you want to avoid when you can.

    Rule 5. Look to profit from lack of change, rather than from coming change. This rule is straight out of Warren Buffett's playbook. No one knows what the futures holds, but it is more likely that something that is working well now will continue to work in the future. Ex: Everyone has to pay their gas bill if they want the house to be heated in the winter. It is very likely they will continue to pay that utility bill. Therefore I will buy on a dollar cost average basis Exelon -EXC - as long as it is in the lower 1/2 of its 15-year price range, because it is the largest energy provider in the U.S. See Figure 1.

    (click to enlarge)
    Figure 1. Monthly price chart of Exelon showing the trading range since the start of the millennium

    Rule 6. A picture is worth 1,000 words. A price chart is factual, and non-emotional, and the most accurate reflection of the actual events that moved a market (investment). Ex: Figure 2 shows the history of corn prices in the U.S. over the last 35 years. We don't need to look up weather records to see what years there were drought conditions - and supply was limited -- they are marked on the chart by price spikes - rallies. We just need access to the ETF CORN. Trust the history of price cycles and charts more than what financial journalists are writing about today. Market's will always bottom on bad news and top on good news which means you need to go against the consensus which means doing the opposite of what financial headlines are screaming. Likewise a price chart will help you to not fall too deeply in love with an investment. The only reason you purchase an investment is to eventually convert it back to cash. Common sense can never be underrated when it comes to investing.

    The single most effective tactic for investors is the simple observation that a market is creating higher lows and higher highs - an uptrend (a reflection of bullish underlying conditions) - or lower highs and lower lows - a downtrend (a reflection of bearish conditions).

    (click to enlarge)
    Figure 2. Monthly price chart of corn in the U.S.

    Rule 7: Have a time horizon - investment expectation -- of as long as 10 years per investment. Bull and Bear moves take time to unfold, and investors need to be more patient than nature herself; both in entering investments and then allowing profits to run. The corn chart in Figure 2 is a great example of this. Buying corn at the beginning of 2005 at $3.00 was a great idea, yet it dropped down to $2.00 and stayed there for much of that year, which would have created a 50% loss for buyers at $3.00! For a patient investor who continued to purchase it every month it was a spectacular investment that yielded nearly 300% by 2012.

    These seven rules will put the kids years ahead in their investment plans. But the most important thing to remember is still the golden rule of getting things done: "keep it simple". If something does not make sense right away, or there is any doubt, then don't do it. Opportunities in the markets are like planes, if you miss one, there will be another one to get on board tomorrow.

    Jay Norris is the author of several books on trading and an instructor at Trading University

    Dec 28 11:28 AM | Link | Comment!
  • The Pax Americana & The U.S. Dollar Bull Market

    How demographics, the economy, and government policy are pointing to a continuation of current trends

    The Generations

    Our outlook of the economic future depends on our age. Ask an American in their 60's or 70's who has more time on their hands to read and research the economy, and you'll likely hear concern for the future. Fear of losing what we have is a natural emotion as our future gets shorter.

    Talk to people in their 40's and 50's, Generation X'ers and Baby Boomers, and you might hear talk of the importance of remaining in good physical shape, and having a good 15 or 20 years to invest for their retirements. They may mention their concern that their adult children are still living in the basement, but it wasn't too long ago when they too were young and directionless.

    Talk to people in their 20 and 30's, Generation X'ers and Generation Y'ers, and you'll likely here "What? Why should I worry about that? The county has worked pretty well for the last 20 years. Besides, my landlord is my father… eventually I'm going to inherit the house anyway".

    People's outlook depends much on their past success, or that of the previous generation, and their time horizon. What is significant about this for the future is for all the wisdom and worry of the older generations, the future belongs to their children.

    The U.S. Economy

    Gross Domestic Product - GDP - in the United States has been in a perpetual bull market for the last 50-years with Monthly Retail Sales about to cross the $400B mark for the first time in history - retail sales in the U.S. have doubled since 1997. The U.S. budget deficit meantime is over 900B less than it was in 2009, and currently just 2.8% of GDP. Economic prospects look even better going forward with commodity prices down sharply. Over the last two years corn is down 50%, crude oil -39%, and gold, i.e.: the fear index, -30%. Lower commodity prices mean more money in people's checking accounts at the end of the month as it cost less to fill up the shopping cart, and gas tank. More spending money means an increase in consumer confidence which supports the long-term growth pattern in retail sales, which accounts for 70% of GDP.

    Government Policies

    The two most important long-term U.S. policies for the market and the domestic economy have been immigration, and energy. Without new generations of consumers entering into the work-force it would be unlikely that the U.S. economy would hold its historic growth rate. Demographics are more important to markets than short-term economic developments. With Baby Boomers having fewer children than their parent's generation it was imperative that the U.S. maintained the flow of new people into this country through immigration over the last 20 years. Likewise it was just as important that the countries long-term growth not be compromised by outside threats, such as rising energy costs. The U.S. went to war twice to keep oil flowing unimpeded from the Mid-East, while encouraging new technologies for domestic oil production. While many analysts will say that current retail sales growth, and the recent sharp drop in energy prices are lucky developments for the U.S., that guy in the dark blue suit who said he worked for the State Department and tried to recruit the slightly geeky "A" students in senior year, will tell you they are not. While market pricing tends to only make headlines after sharp, volatile moves, markets, like long-term U.S. government policy, roll on slow but sure. The markets are telling us loud and clear that the U.S. has entered a period of peace and prosperity, and I am definitely not one to argue with mother market.

    Interest Rates & Currency Movement

    The rate that borrowers pay for money, and savers earn for lending money, i.e.: interest rates, is a huge component of the economy. While I subscribe to the "interest rates will rise because they have no more room to fall", school of thought - see Figure 1.--they won't rise very quickly.

    (click to enlarge)Figure 1. 10-year Treasury Yield over the last 20 years - actual interest-rate on the right side of the graph

    I like the idea of going long yield - betting interest rates will rise - right here, right now. And I am currently dollar cost averaging long DTYS - an Exchange Traded Fund --ETF --that goes up when 10-year note yields rise and their price falls. But I do not expect overnight gains and I am in it for the long haul.

    U.S. Treasury Bonds and Notes are popular amongst investors because they provide a guaranteed yield. If you buy a note today you will be guaranteed to receive 2.2% on your money annually. If you're an older investor who is afraid the stock market could have a 20% correction or more - meaning you could lose 20% or more -- or that gold could fall another 30%, a guaranteed 2.2% sounds pretty good. Anything that means "not losing money" is going to sound good to many older people who have money. This means that many bond holders who are earning that guaranteed 2.2% are not about to sell out of those investments - the largest holder of U.S. Treasuries is the U.S. Social Security office. Without current holders of those instruments selling them, it becomes less likely we have a quick market reversal.

    Furthermore, bonds and notes are priced in U.S. Dollars and the U.S. Dollar has just kicked off a long-term bull market, so it is unlikely that foreign holders of those U.S Treasuries will sell because even if interest rates do go up - and the price of bonds and notes go down -- any loss in principle will likely be offset by a gain in the U.S. Dollar. Higher interest rates in the U.S. are bullish for the U.S. Dollar because it increases the yield on U.S denominated securities.

    One of the largest foreign holders of U.S. bonds and notes is Japan. In the last 2 years the Japanese yen has fallen 35% against the U.S Dollar. On the other hand Japanese investors who had their money in U.S. denominated securities have reaped a 50% increase on currency appreciation alone. See Figure 2.

    (click to enlarge)Figure 2. U.S. Dollar-Japanese Yen Weekly Chart

    Such moves in the currency markets do not happen overnight but take years to develop, and we feel the U.S. Dollar's strength against the yen is a harbinger of what will happen in the Euro in 2015 and beyond. I have been long UUP, which is an ETF that mimics the U.S. Dollar Index, for over a year with no plans to exit.

    The bottom line is we see interest rates slowly grinding higher and U.S. Treasuries topping out, not because of selling pressure of existing Treasury holders but because of a comparatively strong U.S. economy and a continued rising U.S. Dollar. And the U.S. Fed will start to nudge short-term rates higher based on continued strong economic data.

    Even prior to the collapse of the price of crude oil global investors were already realizing that the U.S. markets are the place to be. The inevitable rise in U.S. interest rates will only accelerate this trend.

    This year - 2014 - kicked off a paradigm shift in investment trends which will continue well into the future and drive even those global investors who are philosophically opposed to being invested in U.S. Dollars into U.S. denominated assets.

    Whether you want to see it or not, viva the Greenback.

    Jay Norris is a Trading Instructor at Trading University and author of The Secret to Trading: Risk Tolerance Threshold Theory

    Disclosure: The author is long UUP, DTYS.

    Dec 18 7:58 PM | Link | Comment!
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