Australia rejects SGX

Singapore Exchange (SGX) was one of the first to rock the exchange equilibrium last year when it entered into an agreement to acquire the Australian Securities Exchange (ASX), pending regulatory approval. Now, as a number of other exchanges have entered merger agreements, the Australian government has given the SGX/ASX merger a "no-go," leaving some doubt about the state of other mergers.

The $8.4 billion merger plan that was announced last October hit a wall when Australian Treasurer Wayne Swan confirmed that he planned to nix the deal as not in Australia’s national interest. "Let’s be clear here: this is not a merger. It’s a takeover that would see Australia’s financial sector become a subsidiary to a competitor in Asia," he said. "The deal just doesn’t stack up whatever yardstick you use."

While the ASX board has said they will continue to explore partnership opportunities with SGX, the outcome has left doubt over the outcomes of other exchange mergers that currently are in the works, particularly the proposed acquisition of TMX Group (TMX) by the London Stock Exchange (LSE).

"The chances have increased that [the LSE/TMX] deal will not be allowed to happen based on what happened in Australia. It’s one of those things where domestic pressure will be to do the same, even though in the long-run it is easy to argue that TMX being bought by LSE would be a good thing," says Paul Zubulake, senior analyst at
Aite Group.

Singapore Exchange (SGX) was one of the first to rock the exchange equilibrium last year when it entered into an agreement to acquire the Australian Securities Exchange (ASX), pending regulatory approval. Now, as a number of other exchanges have entered merger agreements, the Australian government has given the SGX/ASX merger a "no-go," leaving some doubt about the state of other mergers.

The $8.4 billion merger plan that was announced last October hit a wall when Australian Treasurer Wayne Swan confirmed that he planned to nix the deal as not in Australia’s national interest. "Let’s be clear here: this is not a merger. It’s a takeover that would see Australia’s financial sector become a subsidiary to a competitor in Asia," he said. "The deal just doesn’t stack up whatever yardstick you use."

While the ASX board has said they will continue to explore partnership opportunities with SGX, the outcome has left doubt over the outcomes of other exchange mergers that currently are in the works, particularly the proposed acquisition of TMX Group (TMX) by the London Stock Exchange (LSE).

"The chances have increased that [the LSE/TMX] deal will not be allowed to happen based on what happened in Australia. It’s one of those things where domestic pressure will be to do the same, even though in the long-run it is easy to argue that TMX being bought by LSE would be a good thing," says Paul Zubulake, senior analyst at
Aite Group.

Is the “carry trade” coming back?

The most important current fundamental for forex traders is the anticipation of an exit strategy from extreme accommodative policy in the West. When will quantitative easing and related monetary stimulus in response to the global credit crisis end? The central banks of the G7 are at a point where they are looking at ending stimulus and beginning to increase interest rates to slow down inflation, which depending on who you are talking to already is here or on the way. Some already have increased rates, and those that have not now are facing a post-quantitative easing era. Now is the time to prepare trading strategies that can benefit from this historic shift.

A key step for the forex trader is to realize that a change in interest rate policies across the globe will create ripple effects in almost every currency. When interest rates go up in one country, an imbalance is created in capital flows throughout the world. It is not necessarily the actual interest rate level that is important, but the anticipation that rate increases will continue; that attracts even greater demand for the currency. This is because of the "carry trade" where low-interest currencies are sold or borrowed against and the capital raised goes to the higher-interest-rate currencies. The carry trade collapsed in 2008 as capital had to be repatriated back by the borrowers who had to pay off bad debt. The yen, which has been a favorite funding currency in the carry trade, took a big hit when heavy yen buying followed the tragic earthquake in Japan earlier this year.

That was more of a temporary psychological reaction than one driven by interest rate fundamentals. The yen, with G-7 intervention, resumed a weakening direction and the yen carry trader, in-effect, has reappeared as a weaker yen is technically and politically favored. An easy way to detect the resumption of the carry trade as a strategy is to watch the iPath Optimized Currency Carry ETN (ICI). ICI is designed to reflect the total return of an "Intelligent Carry Strategy" and is now forming a triple top at $47. If it breaks out, it will be a clear signal that global conditions favor a carry trade revival (see "Back to the carry"). The challenge for the forex trader is how to participate in this powerful force.

For traders to take advantage of increased interest in the carry trade, they must closely monitor interest rate differentials. When one currency is actually increasing rates while another is not, capital will flow away from that currency to seek the higher return. Following this pattern, several currency pairs can be traded to take advantage of carry as well as to anticipate increased differentials. For example, the EUR/GBP crosspair is likely to strengthen — if the European Central Bank raises rates and the Bank of England does not. Similarly the Swiss franc, a low-yielding safe-haven currency that has strengthened against the euro by over 3,700 pips in the last four years, finally may be able to weaken. The Swiss central bank desires a weaker currency and may keep rates low as the ECB raises rates.

The yen is likely to keep its status as the lowest yielding currency and as a result the AUD/JPY and EUR/JPY cross-pairs will receive the benefits of bullish sentiment. If rate increases in the G7 continue in the coming months, the Brazilian real will become more vulnerable to a sell off. Even though its interest rate is at an astronomical level of 11.75%, a change in its differential with other currencies may be the tipping point for weakening this currency. However, when it comes to the U.S. dollar, the situation is more tentative. The U.S. dollar is still a low-yielding currency and also may suffer from the carry effect. Yet, if Fed Chief Ben Bernanke signals the end of quantitative easing or signals vigilance on inflation, the U.S. dollar may attract investors and traders anticipating a potential rate hike. In any case, interest rate differentials and expected changes in interest rate differentials, rather than risk aversion, will become the major fundamental force for traders to contend with in the coming year. Forex traders should watch out, as the carry trade offers some extraordinary opportunities.

Abe Cofnas is the author of "Sentiment Indicators" (Bloomberg Press). He can be reached at abecofnas@gmail.com.

The most important current fundamental for forex traders is the anticipation of an exit strategy from extreme accommodative policy in the West. When will quantitative easing and related monetary stimulus in response to the global credit crisis end? The central banks of the G7 are at a point where they are looking at ending stimulus and beginning to increase interest rates to slow down inflation, which depending on who you are talking to already is here or on the way. Some already have increased rates, and those that have not now are facing a post-quantitative easing era. Now is the time to prepare trading strategies that can benefit from this historic shift.

A key step for the forex trader is to realize that a change in interest rate policies across the globe will create ripple effects in almost every currency. When interest rates go up in one country, an imbalance is created in capital flows throughout the world. It is not necessarily the actual interest rate level that is important, but the anticipation that rate increases will continue; that attracts even greater demand for the currency. This is because of the "carry trade" where low-interest currencies are sold or borrowed against and the capital raised goes to the higher-interest-rate currencies. The carry trade collapsed in 2008 as capital had to be repatriated back by the borrowers who had to pay off bad debt. The yen, which has been a favorite funding currency in the carry trade, took a big hit when heavy yen buying followed the tragic earthquake in Japan earlier this year.

That was more of a temporary psychological reaction than one driven by interest rate fundamentals. The yen, with G-7 intervention, resumed a weakening direction and the yen carry trader, in-effect, has reappeared as a weaker yen is technically and politically favored. An easy way to detect the resumption of the carry trade as a strategy is to watch the iPath Optimized Currency Carry ETN (ICI). ICI is designed to reflect the total return of an "Intelligent Carry Strategy" and is now forming a triple top at $47. If it breaks out, it will be a clear signal that global conditions favor a carry trade revival (see "Back to the carry"). The challenge for the forex trader is how to participate in this powerful force.

For traders to take advantage of increased interest in the carry trade, they must closely monitor interest rate differentials. When one currency is actually increasing rates while another is not, capital will flow away from that currency to seek the higher return. Following this pattern, several currency pairs can be traded to take advantage of carry as well as to anticipate increased differentials. For example, the EUR/GBP crosspair is likely to strengthen — if the European Central Bank raises rates and the Bank of England does not. Similarly the Swiss franc, a low-yielding safe-haven currency that has strengthened against the euro by over 3,700 pips in the last four years, finally may be able to weaken. The Swiss central bank desires a weaker currency and may keep rates low as the ECB raises rates.

The yen is likely to keep its status as the lowest yielding currency and as a result the AUD/JPY and EUR/JPY cross-pairs will receive the benefits of bullish sentiment. If rate increases in the G7 continue in the coming months, the Brazilian real will become more vulnerable to a sell off. Even though its interest rate is at an astronomical level of 11.75%, a change in its differential with other currencies may be the tipping point for weakening this currency. However, when it comes to the U.S. dollar, the situation is more tentative. The U.S. dollar is still a low-yielding currency and also may suffer from the carry effect. Yet, if Fed Chief Ben Bernanke signals the end of quantitative easing or signals vigilance on inflation, the U.S. dollar may attract investors and traders anticipating a potential rate hike. In any case, interest rate differentials and expected changes in interest rate differentials, rather than risk aversion, will become the major fundamental force for traders to contend with in the coming year. Forex traders should watch out, as the carry trade offers some extraordinary opportunities.

Capturing commodity backwardation

The last decade has seen a resurgence of interest in commodity futures as an investment class, particularly from institutional investors. Their commodity allocations have grown dramatically with total commodity-linked assets under management rising to $257 billion in 2009 from $18 billion in 2003, according to Barclays Capital.

The vast majority of these investments are linked to long-only commodity indexes, with exchange-traded funds (ETF) and exchange-traded notes (ETN) based on single commodities such as crude oil, also attracting considerable interest. Much of this popularity has been fed by the notion of the commodity supercycle as propounded by Jim Rogers. The potential for inflation hedging also has been a strong draw.

However, correlations with traditional asset classes, such as stock indexes, are rising, and issues with the shape of the futures curve have meant that indexes based on futures, as well as single commodity ETFs, have failed to capture rises in spot prices. Several markets, such as crude oil, have been in contango where the spot contract is a discount to further out contracts. This acts as a drag on returns of a long commodity portfolio. For example, owners of shares of the USO crude oil ETF lost 0.7% in 2010 because of the persistent contango, although the front-month WTI contract gained 15% over this period.

Actively seeing alpha

Although the popularity of long-only indexes remains strong, there is an increasing awareness that active approaches to commodity investing might perform better.

We can construct a new class of active dynamic strategies designed to capture normal backwardation in commodity futures markets. Normal backwardation happens when the expected futures spot price is higher than the current spot price, and hence a long position in the underlying futures contract is likely to generate a positive return.

The original hedging pressure hypothesis of Keynes (1930) was that commodity futures markets always were in normal backwardation, as they served an insurance function, allowing producers to transfer price risks to speculators who would thus earn a risk premium. The Keynesian hedging pressure hypothesis provides the theoretical justification for long-only commodity indexes and single commodity ETFs. However, the empirical evidence, both long-term and current, strongly suggests that the markets are not always in backwardation and hence capturing phases of backwardation is crucial to commodity futures investment.

Our strategies are long flat weekly rebalanced strategies, in that every week either they go long an individual commodity futures contract or do not invest. We assume the underlying position is fully collateralized, but consider the performance of the timing aspect of the strategy and do not incorporate the return due to investment in Treasury bills. The return to the strategy hence may be regarded as an excess return.

Our measure of backwardation is based on the position of large hedgers and is estimated using the Commodity Futures Trading Commission’s (CFTC) Commitment of Trader’s (COT) report. We consider two kinds of backwardation — individual and aggregate. Individual backwardation is an "intrinsic" property of a commodity, which has been shown to be a determinant of future returns. Aggregate backwardation is a more recent phenomenon and refers to the increasing correlation across different commodities, which could be the result of the increasing "financialization of commodities." Our strategies endeavor to capture both of these phenomena to decide when to invest.

Data and strategy

We consider 10 of the most liquid commodities: copper, corn, crude oil, gold, live cattle, natural gas, silver, soybeans, sugar and wheat.

The basic source for hedging pressure data is the CFTC website (www.cftc.gov). It releases the COT report each Friday at 3:30 p.m. EDT. The positions refer to the Tuesday of that week, and the date reflects that. The aggregated data, which is available at a weekly frequency since 1993, is now released under the Legacy Reports (see weekly Market Pulse).

For this analysis, we need the number of long and short positions held by commercial hedgers. Commercial hedging pressure (CHP) is the ratio of long positions to the sum of long plus short positions held by commercial hedgers.

The individual commodity futures returns and the commodity index returns are based on end-of-day prices, aggregated to a weekly frequency. The futures returns are based on the front-month contract, except for the expiry month in which the next-to-front-month contract is used. The data source is Bloomberg.

We use the notion of "relative" backwardation in designing our strategies. This means we look to go long when commercial hedging pressure is low relative to the recent past. To implement this strategy, we need to decide what constitutes the recent past and what level of hedging pressure is considered to be low. The most natural time period based on harvest and storage considerations is one year, or 52 weeks. The levels for hedging pressure are based on estimated levels for "individual backwardation" and the first strategy invests when the current hedging pressure is below this level. The second strategy uses a predictive variable that measures aggregate backwardation and invests when this level is high.

Results are based on real-time out-of-sample analysis. Because strategies are executed via futures, the notional cost is zero and the basic assumption is that the investment is fully collateralized with the value of the underlying futures contract. The strategy return is reported in excess of Treasury bills and can be interpreted as an excess return.

Strategy performance

We first analyze the performance of buy and hold strategies for the 10 commodities as well as an equally weighted portfolio over the 2005-10 period. This six-year period incorporates a bull phase (2005 to mid 2008), a short sharp bear phase (second half of 2008) and another possibly bull phase (2009-10). Nine of the 10 individual commodities achieve positive returns as shown in "Market returns" (below), with Sharpe ratios ranging from -0.9 (Natural Gas) to 1.15 (Gold).

The equally weighted portfolio is the best overall performer in terms of Sharpe ratio because of diversification, achieving a Sharpe ratio of 1.28. Individual commodity returns are volatile, and the maximum drawdowns for eight of the 10 commodities exceed 50%, with the equally weighted portfolio having a drawdown of 48%. Thus, even in a predominantly bull phase, commodity futures returns are volatile and buy and hold investments can incur sharp losses. The Sharpe ratios are quite high over this period and higher than equity investments in many cases, but the volatility and drawdowns are considerably higher.

Our strategy performance over the 2005-10 period is shown in "Long strategy returns" (below). Because it is a long-only strategy, the appropriate benchmark for comparison is the Sharpe ratio. Seven of the active strategy Sharpe ratios are equal to or higher than the buy and hold, and of the three that are lower, corn, soybeans and wheat, two are slightly lower. Also interesting, six of the seven strategies that outperform have higher mean returns than the buy and hold. Thus, even over a predominantly bull phase, several of our backwardation timing strategies are able to achieve higher mean returns, suggesting that timing backwardation has considerable economic benefit.

The other benefit of our long flat strategies, which is more intuitive, is the reduction in volatility and drawdown. The reduction in drawdowns is particularly interesting, being lower for all commodities, and dramatically lower for copper and crude, for which the strategy Sharpe ratios are much higher than buy and hold. The equally weighted portfolio achieves a slightly higher mean, somewhat higher Sharpe ratio and a much lower maximum drawdown of 15%. This equally weighted portfolio has the second moment (volatility and drawdown) characteristics of an equity type investment, while achieving a high mean.

We now focus on the 2008-10 period, covering the period of the financial crisis. "Crisis performance" (below) shows the performance of the buy-and-hold strategy over this period, and the decline is evident. Three of the 10 commodities have negative returns and the Sharpe ratio of the equally weighted portfolio is 0.51. The maximum drawdowns all occurred over this period, and the average volatilities are higher. Not all of the commodities performed worse, though, with sugar achieving a higher Sharpe ratio over this period.

In sharp contrast, the performance of the active strategy is not much different from that over the entire period (see "Stable under pressure"). Five of the 10 individual long flat strategies have higher Sharpe ratios over the 2008-10 period than over 2005-2010, indicating that a successful timing strategy could have made good returns even in this period. The dynamic strategies outperform their buy-and-hold counterparts both in terms of Sharpe ratio as well as mean return. The equally weighted portfolio achieves a Sharpe ratio of 1.46, slightly lower than that over the entire period, but considerably higher than the buy and hold over this period. The difference in performance over this period, which includes a short sharp bear phase, illustrates how important timing backwardation successfully could have been.

CTA comparison

We can compare the performance of our dynamic equally weighted portfolio to that of the Barclays commodity trading advisor (CTA) index over the 2008-10 period. The geometric mean returns for the Barclays CTA index were 14.1% in 2008, -0.1% in 2009 and 7.0% in 2010, indicating that managed futures as a category weathered the financial crisis quite well.

Our equally weighted portfolio had mean returns of 32.1% in 2008, 23.8% in 2009 and 20.7% at probably similar levels of volatility (around 16%). Thus, our portfolio’s outperformance is particularly marked in 2009 when the average CTA did not perform particularly well, and overall the results seem to indicate that the "commodity supercycle" quite likely is still intact. Nonetheless, capturing backwardation seems to be quite important in any market environment.

The recent performance of commodity indexes and commodity ETFs shows that capturing the benefits of a commodity supercycle are not straightforward because of the presence of phases of backwardation. Indeed a more appropriate title for Jim Rogers’ book might be "Backwardation Now." Backwardation is present both at the level of the individual commodity and increasingly across the cross section of commodities. Timing backwardation, even over a bull phase, can provide considerable economic benefits. We have described the performance of a class of strategies that tries to capture backwardation, and our results provide some indications as to the magnitude of these benefits.

Devraj Basu, with the SKEMA Business School, can be e-mailed at devraj.basu@skema.edu.

Investors Build Confidence, Quickly Adopt New Online Trading Tool

Since online investing firm Scottrade unveiled its new real-time trading tool, Scottrader® Streaming Quotes, customers have rapidly embraced it. From December through March, customers who have adopted the tool increased 66 percent, while trades per customer increased 55 percent.

Helping customers understand the features and functionality of the new tool – launched in November – Scottrade offers free branch seminars that educate them in a small-group setting. Since attending these seminars, customers have expressed increased confidence in investing on their own.

“Customers attending our branch seminars are able to find new opportunities once they learn how our online trading tools can help them take control of their financial future,” said Rancho Cucamonga Branch Manager Quan Lee. “During the next two weeks, Scottrade branch offices throughout the Los Angeles area will offer more than 20 seminars on the Scottrader tool – in addition to a variety of other seminar topics.”

Scottrader Streaming Quotes is free and part of Scottrade’s Trading Website. It is customizable by online trading style and strategy, and allows users to quickly and more easily trade from any window. Other benefits include:

Easy to Use

Immediately access stocks by creating double the number of watch list symbols as before (now 40)Receive help at all times with quick reference points on all screensResearch and execute trades more quickly with intuitive navigationUse fewer clicks to update all windows with the linker featureSimply enter any type of trade from tabbed browsing options from a basic order to a more advanced oneAccess all linked accounts from a drop–down menu

More Research

Charting has also been enhanced by added growing trend lines and increased indicators providing more in–depth researchDow Jones News can be searched by entering symbol, category or keywordFind the bid and ask from all market participants and combined market maker quotes in an aggregated price view

Find Opportunities

See the daily high and low performing market movers in real–timeContinuously monitor accounts with the active ticker, which scrolls the symbols from watch lists at a customizable speed, allowing for it to be sped up or slowed down depending on personal preferenceFind the top 10 gainers, losers and most active symbols in one place across the various exchangesCreate custom alerts to track the symbols of interest

New Research on Retirement Saving

 When it comes to saving for retirement, Generation Y is not taking a cue from their Boomer parents, many of whom are facing financial challenges as retirement looms. The majority (55 percent) of Gen Yers have not started to save for retirement, and fewer than a quarter (21 percent) are actively planning for retirement.

A new survey, commissioned by online investing firm Scottrade, shows that 60 percent of Gen Yers (born 1983-1991) saved nothing toward retirement last year and 40 percent plan to save nothing in 2011. An additional 21 percent plan to save only one to two percent of their income this year.

“What Gen Y may not realize is that older generations based their retirement planning on the three-legged stool of Social Security, savings and employer pensions,” said Craig Hogan, director of customer intelligence at Scottrade. “The approach their parents and grandparents took toward saving is no longer appropriate because the old model doesn’t exist. By the time Gen Y retires, they may have only one reliable leg to stand on – their own savings – and they need to plan accordingly.”

When asked what age they’d recommend people start saving for retirement, Gen Yers recommended a mean age of 29.2 years old, giving even the oldest of the group two more years before this generation thinks they need to start saving.

Boomers’ Regrets
As the first class of Baby Boomers (born 1945-1966) turns 65 and evaluates whether they can retire, many have regrets that can provide an important lesson for Gen Y. Nearly half (46 percent) of Boomers didn’t start saving for retirement until age 35 or older. However, if given a second chance:

The majority of Boomers (58 percent) would have started saving at a younger ageNearly half (45 percent) would have saved moreFifty percent would recommend starting to save earlier than age 25

Learning from the Past
Gen Y need look no further than Boomers’ current retirement picture to see the effects of delaying saving for retirement. Almost half (47 percent) of Boomers have $100,000 or less saved, and more than a third (37 percent) are concerned that they will have to work in their retirement years. Almost a quarter (23 percent) think they’ll still be working at age 75 or older.

“Considering the Boomers’ plight and how easy it is to invest on your own in a very low-cost way, we would have expected to see Gen Y reacting by increasing its savings,” Hogan said. “But our data shows that the vast majority – 73 percent – currently has less than $25,000 saved for retirement. And that number has been about the same for the past three years.”

Youth, Enthusiasm on Their Side
“There is no shortage of lessons to be learned from the Boomers’ retirement planning experiences,” Hogan said. “The good news for Gen Y is that they have the advantage of Boomers’ hindsight, youth and enthusiasm. If Gen Yers focus their interest in investing toward their retirement portfolios, there is still plenty of time for them to get where they need to go.”

Gen Y’s lack of action doesn’t stem from lack of awareness or interest. Almost three-fourths of Gen Yers (73 percent) realize that they are not saving enough for retirement, and previous Scottrade survey data revealed that Gen Y finds investing fun and interesting. In addition, they are the most likely to manage their own investments.

“We strive to make planning and saving for retirement easy and accessible for every generation, including tech-savvy Gen Yers,” said Scottrade’s Chief Marketing Officer Kim Wells. “Our social media support, mobile, online community and Knowledge Center with online education and research tools, such as IRA and retirement calculators, give investors the resources and convenience they need to be confident in planning their own financial futures.”

Customer Education through Online Communities Extends to Chinese-Speaking Investors

 Online investing firm Scottrade is one of the few financial services firms actively communicating with its investors through social media networking communities. Today, the firm launched its first Chinese–language Online Community.

The site, chinesecommunity.scottrade.com, extends online conversations to Scottrade customers who speak Chinese. Mirroring the English–language Online Community (community.scottrade.com) in form and function, the Chinese version will have blogs and group discussions, as well as videos, profiles, photos and file sharing.

The English–language community, with more than 42,000 members today, continues to grow. The password–protected, customers–only site launched in April 2008. Some popular discussion groups in the community include Active Traders, Long Term Investors, New Traders, Options Traders, Technical Analysis and Sector–Based Discussions.

In addition, Scottrade Advisor Services provides community.scottradeadvisor.com for its registered investment advisors to collaborate and meet with other like–minded financial professionals online.

The three online communities hosted by Scottrade go beyond providing personal service, which is offered through Scottrade’s more than 475 branch offices across the country, its Facebook and Twitter pages, e–mail correspondence, online chat and national service center. The peer–to–peer and peer–to–expert conversations and content in the online communities work to educate investors and provide answers to investing questions that aren’t account–specific.

One Scottrade Online Community member, who goes by the screen name Paperchase, said being a member of the community has improved her skills tremendously. “Online trading can be so isolating, and I am not one to be isolated!” she said.

“Dialogue with our customers is essential,” said Rodger Riney, Scottrade’s founder and chief executive officer. “With our online communities, we’ve further opened up a conversation between our product specialists and our customers. Our associates are passionate, and customers can connect with them and each other to build their knowledge and provide feedback. This ensures everyone wins.”

Free for customers and easy to join, the communities tie all of Scottrade’s educational resources together, add peer–to–peer interaction and a direct way to communicate with Scottrade product developers. Because of this, community members’ participation in beta testing new products and services has helped identify and prioritize significant product upgrades.

Another community member, who goes by the screen name Kosterma, said, “I’m brand new to this site and must say I’m very impressed. I’ve only been logged in for an hour and already have picked up some very valuable info. I’m really excited. I haven’t traded in a while, but intend to get back in the game.”

Scottrade places the same importance on investment education as it does offering affordable $7 online trades*, convenient branch offices and outstanding, consistent customer service, said Nina Card, Scottrade’s online community supervisor. “We created the communities to encourage communication and collaboration. It grew exceedingly fast, which is proof to us that traders were looking for a safe place to meet and talk with others who share similar strategies or goals.”

About Scottrade
As a leading online investing firm, Scottrade offers a full line of investment products, online trading services and market research tools to help investors take control of their financial future. Founded in 1980, Scottrade is dedicated to personalized customer service and value, providing customers the convenience of buying many stocks online at just $7 per trade and the support of the largest branch network among online investment firms, with more than 475 nationwide branch offices. Scottrade has been named one of FORTUNE magazine’s “100 Best Companies to Work For” in America for the past three consecutive years. For more information, visit www.scottrade.com and follow us on Facebook, Twitter, YouTube and Flickr.

Advantages of Trading with the Wave Principle - Stock Trading Strategies

Learning the advantages of trading with the Wave Principle and using them to your benefit in real-time will add the potential for improved trading results.

Not only will you discover a way to identify improved, lower risk entry points for new trades, but once in a trade, you'll have a method to determine where to place protective stops.

This is crucial because managing open positions properly can have the greatest positive effect on one's trading results over the long term.

Many people enter a trade with an "idea" of where they want to exit, such as 5% or 10% profit, but once they have reached these targets, then they adjust their goals even higher. Then, what happens if the price falls instead of continuing to rise? Most people will wind up holding onto their positions like they're riding a roller coaster...

Using a system or method such as the Wave Principle to pre-determine where to place protective stops will give some reinforcement to your decisionmaking. All that's left is for you to follow through.

The following article provides some details about using the Wave Principle for both entry and exit signals and provides links to a free ebook(a no-brainer trading resource) which goes into depth even more on these topics.

What advantages does the Wave Principle offer to traders?

Here's one of the big advantages of using the Wave Principle when trading: you can increase your understanding of how current price action relates to the market's larger trend.

Other tools fall short in this regard. Several trend-following indicators such as oscillators and sentiment measures have their strong points, yet they generally fail to reveal the maturity of a trend. Moreover, these technical approaches to trading are not as useful in establishing price targets as the Wave Principle.

Here's another big advantage of using the Wave Principle in your trading, which comes directly from the free eBook "How the Wave Principle Can Improve Your Trading" -

"Technical studies can pick out many trading opportunities, but the Wave Principle helps traders discern which ones have the highest probability of being successful." 

Indeed, this valuable free eBook shows you how to identify and exploit the market's price pattern, as shown in the Elliott wave structure below:

The Wave Principle also helps you to identify price levels where you may want to place protective stops.

"...although the Wave Principle is highly regarded as an analytical tool, many traders abandon it when they trade in real-time -- mainly because they don't think it provides the defined rules and guidelines of a typical trading system.

But not so fast -- although the Wave Principle isn't a trading "system," its built-in rules do show you where to place protective stops in real-time trading."
"How the Wave Principle Can Improve Your Trading"

Before you attempt to identify price levels for protective or trailing stops, you should first become familiar with these three rules of the Wave Principle:

Wave 2 can never retrace more than 100 percent of wave 1Wave 4 may never end in the price territory of wave 1Wave 3 may never be the shortest impulse wave of waves 1, 3, and 5 

The details and specific instructions for placing protective and trailing stops are in the BONUS section of the free eBook, "How the Wave Principle Can Improve Your Trading."

Here's what you'll learn: How the Wave Principle provides you with price targets How it gives you specific "points of ruin": At what point does a trade fail? What specific trading opportunities the Wave Principle offers you How to use the Wave Principle to set protective stopsKeep reading this free lesson now.

Stock Trading Plan - Stock Trading Strategies

Today's article is based on the concept of creating a stock trading plan (sometimes referred to as a stock trading strategy, trading rules or trading system).

Even though this can be and is often considered a "basic" concept by many, it really is the primary building block to become successful at stock trading.

Taking a different approach to look at this first, if you are in high school and would like to become a doctor, accountant, attorney, software engineer or any specific career for that matter, your best chance of reaching that goal is to develop a plan or strategy which involves specific courses, schools and potential companies that may hire you in your chosen field.

In contrast, someone who wants to work in a specific career field as mentioned above and drops out of high school because they have no desire to continue schooling and goes to work part time at Taco Bell, would most likely not reach their specific career goal.

Granted, there is always the possibility that the latter will succeed also, but there would be a greater chance of meeting the end objective to those who develop and follow their plan or strategy.

Having a goal of becoming successful at stock trading is very similar in this respect - developing a stock trading plan will increase the odds of meeting the end objective.

Of course, all plans and strategies will not work as expected all the time and you should be willing to spend time making adjustments and some sort of trial and error period to see what works for you individually. As an example, if you want to spend time scalping the markets and limit your trading time to the first hour of trading each day but you live in California, you will either have to wake up very early, move to the east coast or come up with a different stock trading plan that fits your lifestyle better.

Some basic ideas on creating a stock trading plan to get started would be: 1) what markets or stocks to trade, 2) what the current overall market trend is, 3) when to buy (what will signal or trigger a buy), 4) when to sell once a position is opened (stop losses), 5) position sizing, 6) recordkeeping requirements. These are just a few ideas to get started with and you can develop a plan as simple or complex as fits your individual needs.

Once you have a specific stock trading strategy created, be sure to stay focused, disciplined in following the plan and keep good records so that you will be able to review your progress and make adjustments for improvement. Remember to set realistic goals as well. You don't have to be right 100% of the time in order to be profitable overall if you develop the plan correctly. Many successful traders are only correct on 50-60% of trades and are still profitable.

Introduction To Margin Trading Account:

A Margin Trading Account at an online brokerage firm has the same capabilities of a cash account, plus some additional features. Understanding the risks and benefits are a must for any successful trader.

To open this type of account, you must submit a separate account application and it must be approved just like a loan application.

Once approved, the account acts similar to an equity line as you no longer have to get approval each time to trade using margin, just initially when you open the account.

You also have to have a minimum account balance of $2,000 to be approved for margin trading.

An additional type of account that you can test trading strategies with zero risk is a Simulated Trading Account.

Having a margin trading account enables you to borrow money from your online broker to place trades, just as you would a loan from your bank. There are limits to the amount you can borrow, of course, based on certain percentage multiples of your account balance.

You are basically able to purchase stocks on credit, while paying interest on the amount borrowed. Each online broker has different interest rates so be sure to check what the rates for your broker are ahead of time.

Another benefit of this type of trading account is that it enables you to place orders for additional trades before the funds from previous trades have cleared, as long as funds are still available based on your total purchasing power. This is possible because of your ability to borrow money as stated above.

Having a margin account also enables you to be able to short stocks. Shorting stocks is covered in more detail here, but it is basically the process of trying to profit from a decline in a stock price.

Using margin can also be used to increase the leverage of your account, meaning it enables you to trade with more money than you normally would be able to in a cash account due to the amount you can borrow. A standard margin account has two times the account value in purchasing power.

If you are classified as a "pattern day trader", your margin trading account will have four times the account value in purchasing power. A pattern day trader is also required to keep a minimum account balance of $25,000.

With a standard margin trading account, having an account balance of $10,000 you can now trade using $20,000. A 10% profit on $20,000 would produce a gain of $2,000. Since you only used $10,000 of your money, you now made 20% on your investment instead of 10%.

While this can be a great advantage, margin trading can also have disadvantages.

Consider the following example of benefiting from leverage:

Say you have an account balance of $10,000 to start with; in a cash account you place a trade with $10,000 and make 10%, or $1,000 on a trade. You risked $10,000 to make a 10% profit, or $1,000.

With a margin account you can use $5,000 of your own money, borrow the other $5,000 on margin, and still make $1,000 while only risking $5,000. You made the same total amount profit and percentage on the account balance, while risking less of your own money.

Now consider the following examples of margin trading being a disadvantage:

Say you have an account balance of $10,000 to start with: in your margin account you place a trade using your $10,000 plus $10,000 on margin; you close your position and lose 10% on the trade, or $2,000; Since you only had $10,000 of your money invested and you lost $2,000..... you actually lost 20% on the trade!Consider the "gambler", pattern day trader who uses four times his purchasing power; he uses four times the amount and therefore loses four times the amount, or 40% of his money in our example.

As in other types of trading accounts, if you go over your limits of available funds, your account may be placed on restriction from trading. I have seen accounts placed on restriction for 90 day periods on more than one occasion.

In conclusion, a margin account used for buying stocks or shorting stocks, can be a very beneficial resource at your disposal. Some traders have several types of online trading accounts and use each one for different types of trades.

Always keep in mind that there are risks involved with margin trading and to be aware of them at all times. As always, to be successful at trading, you must educate yourself, develop a good trading plan and stick to the plan at all times.

What is NAV - Net Asset Value

At one point in your investing experience you'll likely wonder what is NAV. As I pointed out in the heading above, NAV stands for Net Asset Value.

Net Asset Value is an investment company's (as defined by the SEC) assets minus liabilities, divided by the number of shares outstanding.

These invesment companies put together a portfolio of multiple investments into one such as stocks, bonds, mutual funds, index funds and etf's.

Typically you'll come across NAV when researching mutual funds, closed-end funds or certain Trust's, with the most common being the mutual funds or closed-end funds.

The Sec requires mutual funds to have their NAV re-calculated once per day and it is typcially done at the end of the regular trading session. If you place an order to buy OR sell shares of a mutual fund during the day, your order will be executed based on the "next" NAV which will be calculated after the day's close. This can mean a difference of several percentage points from one day to the next.

As an example for the calculation of the NAV, if the total value of a mutual fund is $10,000,000 with 1,000,000 shares outstanding, the NAV per share would be $10,000,000 divided by 1,000,000= NAV of $10.00 per share. (assuming zero liabilities in our example)

If more people sell shares the next trading day and the total number of shares is now 900,000, then the new NAV would be: $10,000,000 divided by 900,000= NAV of $9.00 per share. (also assuming zero liabilities in our example)

Another way the NAV can change is when the value of the individual components of the mutual fund itself change, thus causing a change in the funds total NAV also.

If you're still following up to here, great, there's a twist in understanding what is NAV: most of the above ir referenced using mutual funds. The NAV of closed-end funds are calcualted the same way, but closed-end-funds trade in the open market during the day like stocks do, at the market price. Meaning, what ever people are willing to pay, not the actual NAV.

here's a chart displaying the price performance of a closed-end fund caompared with it's own NAV over the same time period:

You may hear that a fund is trading at a discount or premium to it's NAV, this would be on a closed-end fund. Keep in mind that just because a closed-end fund is trading at a discount to it's NAV doesn't necessarily mean it's a good buy. You should research and understand WHY it's trading at a discount before making any investment decisions.

A good website to learn more about closed-end funds and their respective NAV prices is http://www.cefconnect.com/

Return From "What is NAV" To "Stock Trading Terms"

Blue Chip Stocks

What exactly are Blue Chip Stocks? Let's take a look at some of the background information, definitions and examples that are out there to find out.

First a little background: oddly enough, or maybe not that odd at all, the term "Blue Chip" comes from Poker. In Poker, using a standard 3 color chip set there are typically white, red and blue chips with blue having the highest value.

So if you look at the origin of the term "Blue Chip Stocks", you would realize that gambling has some sort of tie, at least by definition.

Just as the blue chips in poker represent the highest value in comparison to other chips when using a standard 3 color chip set, Blue Chip Stocks are supposed to represent the highest value among other stocks.

A definition from the NYSE describes them as such: A blue chip stock is stock in a company with a national reputation for quality, reliability and the ability to operate profitably in good times and bad.

Expanding on the definition provided by the NYSE you could consider stocks that are Blue Chips to be: 1) large cap stocks, 2) have a track record of performance and 3) profitable with good debt management and then run your own stock screener to come up with results that meet your requirements.

Typcially, the Dow Jones Industrial Average (DJIA), which contains stocks of 30 large companies (large cap stocks), is considered to include Blue Chip Stocks which many investors and traders look tawords when performing research and stock selection.

Here are the current stocks (as of 12/28/2010) that the DJIA consists of (you can check the current components at any time here: http://www.djaverages.com/:

Online Forex Trading Guide

Forex online trading is undoubtedly one of the largest businesses in the world. Due to this fact lots of people are eager to become thoroughly engrossed in forex online trading right now but at first it's necessary to understand that it's not for everyone as far as it's not so simple as it may seem to be for any average man. In order to trade forex, it's important to know how it works and to get a proper education about forex online trading.

It's obvious that there is a great variety of different online and traditional courses, which provide necessary education, different books and online sources and it's really hard to choose one or two reliable and useful sources. We suggest that, in such situation of endless number of offers to buy forex online trading secrets which will make you a millionaire overnight, you questioned the competence and proficiency of those who will teach you, before you pay for this or that course of source. Learn the benefits and drawbacks of forex trading, learn how to get profit out of buying and selling currency pairs. Do remember that there is no dearth of information and the only thing you have to do is to dedicated as much time as possible to careful learning of forex trading. This is not just mere words, sound knowledge and its reasonable and rationale usage is a key to your success and victory.

In case your are going to trade forex first time in your life, you should remember that losses are inevitable part of any kind of online trading and forex online trading is not an exception to the rule. That's why you should raise your profits steadily in order not to experience big losses and don't ever risk an amount of money which you can't afford yourself to lose. Sound risk and money management is a basic rule of forex online trading. Do create your own money investment technique and strategy correspondingly to your online trading time frame.

Emini S&P 500 Day Trading Futures HOW TO READ PREMIUM DIVERGENCE

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HOW TO READ THE PREMIUM DIVERGENCE www.rsksys.com inforsk@comcast.net 303-750-8234 Besure to subscribe to our videos and comment on them! RSKsys Intl is committed to the ongoing development of consistently profitable Emini trading systems and strategies for the S&P Futures commonly called the Spoos. Our accomplishments thus far have been nothing short of remarkable. This site will give you a glimpse into one of the most robust S&P trading systems to be found anywhere at any price.

Emini S&P 500 Day Trading Futures Trading with RSKsys “Reading the PREM” Dec 4, 2009

How to Read the Premium: New Details. Very Informative! www.rsksys.com inforsk@comcast.net 303-750-8234 Besure to subscribe to our videos and comment on them! RSKsys Intl is committed to the ongoing development of consistently profitable Emini trading systems and strategies for the S&P Futures commonly called the Spoos. Our accomplishments thus far have been nothing short of remarkable. This site will give you a glimpse into one of the most robust S&P trading systems to be found anywhere at any price. Our E-Mini S&P 500 Day Trading Futures Strategy and Video Training Course addresses more than just price action and volume. We track the ES with as much as 6 different studies including the MACD, Detrended Price Oscillator (DPO), Adaptive Price Zone (APZ), Bollinger Bands, %R and Linear Regression. Our proprietary method for calculating the MACD trend allows us pinpoint accuracy on trend changes even on Tick Bar Intervals as much as 440000 tick bars. We can identify on a 25 Tick Bar chart the moment trend changes happen allowing us the ability to enter trades with as little as a .75 stop. We teach our traders how to identify divergence on market internals including the Advance Decline of the S&P 500 ($ADSPD), divergence on the Trin, Vix as well as $Tick. By keeping a close eye on the premium (PREM) we are able to identify when institutional trading may change market direction as well as how program trading may affect the market. Our traders learn how to identify the pattern …

Online Trading Is A Straightforward With The Correct Software

Anybody can do on-line trading. When you have a computer with a fantastic connection to the web and also the appropriate software you’ll have immediate access and have the ability to venture into this type of business. On line investing can be achieved in many different ways and classes of engagements like putting your cash to purchase specific currency, stocks, selling of products, buy bonds, goods, and other services.

Online trading is usually a complex business but you will get accustomed to it as you go. Others tend not to want to set out to start online investing unless they first provide themselves of its details with a short course and training with regards to day trading. In short, they intend to make this their career. They know that there must be good financial, political, and social analysts where they could contact with along with show concern anytime as per transaction basis. Experts give their tips at no cost to friends. Others are there to offer professional assistance for a minimum retainer- based-fee. They’ll screen things out as well as filter the selection process for you. They will provide you with the greatest options and solutions before you decide to make investments. Scientific-based analysis, Forecasting- skills, and also technical know-how are essential skills for online trading with a great software back-up.

Online trading goes past to knowing political condition, economic fundamentals, and also safety-nets of business, business trends, and social issues; because they build a domino effect to stocks. Quite often, you don’t have total control over these concerns other than realizing where you should stop, look, listen, and go when it is green. Around the globe, there are market-trend-setters. Their opinion is important, their movements are followed as well as interpreted. I’m certain you know the old saying that “When giants sneeze, everybody gets viral infection.” This is correct in on-line trading. When you are a new-comer, try out the mini Forex financial capital using little bit of investment in order to test trade your self. This is a kind of introduction simply to feel what it’s to be part of trading stocks. There are lots of fine web sites you can visit to know what this is all about.

And so, grabbing an opportunity to definitely invest your money takes a lot of watching out. You need to prepare yourself to decide and get probably the most beneficial price whenever they puff up. Get a better team of advisers. Attend to seminars about this business. You should have good training; be informed and trained about stocks and day trading. Give attention to what you want and specialize on it.

Several have been said already and we are now able to draw a conclusion. On line trading can be viewed as one of numerous careers you can look at. Other people fail in the industry since this business is definitely complicated and unpredictable to lazy-observers and sensitive to the people who are uncertain and procrastinators. Sure it reacts to issues and senses threats however this really is normal and may be used as an advantage towards business. You must have the latest softwares to process your data brief and fast. Even though this is the most challenging job and at the same time a very good revenue stream for those who are trained, skillful, as well as good decision-makers.

Lack Of The Buying And Selling Strategy

In the event you know the pitfalls of trading, you are able to easily steer clear of them. Little mistakes are unavoidable, such as getting into the wrong stock symbol or incorrectly setting a purchase degree. But these are forgivable, and, with luck, even lucrative. What you’ve to avoid, nevertheless, would be the mistakes because of poor judgment fairly than simple mistakes. These would be the “deadly” mistakes which ruin whole trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself carefully and remain diligent.

Consider trading mistakes like driving a automobile on icy roads: in the event you realize that driving on ice is dangerous, you can avoid traveling in a sleet storm. But when you don’t know about the hazards of ice, you may drive as if there were no threat, only realizing your error once you’re already off the street.

Even though buying and selling involves risk, by no means treat it like gambling. You must have a solid trading strategy, one which you strategy, check, and revise repeatedly. You need to stick to this strategy, and never act on spur-of-the-moment choices. All you do whenever you act on the gut feeling is jeopardize any and all of the thoughtful planning you’ve done by giving yourself completely over to chance. Remember that you can never control where just one trade will end up, but you do have control more than a long-term plan.

And don’t evaluate your efficiency around the foundation of individual trades. A gambler may believe that a small loss is really a failure while 1 huge dangerous gain means success. Traders ought to by no means think this way. Instead, judge yourself through the consistency and profitability of your general strategy. This really is the only way to stay in control of one’s buying and selling success.

To do this, of course, you’ve to build a solid strategy. This means developing a set of pre-defined guidelines that you follow consistently. You need to set objectives for each week, or probably every month (but by no means for a single day, as there are too numerous things you won’t have the ability to control over such a brief time period). Next, decide on realistic earnings and losses for each trade. Then, according to these markers you’ve set for your self, carry out your plan with out exceptions.

If your set revenue for a trade is, say, $300, sell when you attain that milestone, even when you’ve a sensation the stock will rise. Otherwise, you corrupt your strategy with too much threat, and you’ll by no means know if your general technique was successful or not. You might have gotten fortunate with 1 trade, but you haven’t determined any type of consistency.

Keeping to a technique allows you to revise what you’re performing, learning which objectives and limits will function and which won’t. Straying out of your technique teaches you absolutely nothing helpful that you simply can apply over the course of your buying and selling career. So, whilst you may gain a few hundred, and even thousands, of dollars on the single trade, who knows how much knowledge you sacrificed, knowledge could have gained you tens and even hundreds of thousands of dollars in the many years to come.