Forex Trading, meaning Currency Trading, is a world wide, little known market, which will become the most popular source of income for investors in the very near future. It is open for banks, rich investors and small ones alike and, depending on the sum of money they are willing to risk, the earnings demonstrate this is the best way to start getting rich.

Why choose currency trading over stock, real estate or futures trading? The currency trading advantages are speed, liquidity, commission-free transactions, increased safety, short-term trading and great earnings. Let’s study each of these advantages in other trading systems:
-Speed: Currency trading is instant due to a large amount of transactions while future trading implies a longer time to trade certain commodities, agricultural products, financial instruments and goods (contracts need to be written and signed)
-Stock traders must pay brokers a certain fee for each transaction made. The brokerage fee is available for all futures transactions, but not in the case of currency trading. In currency trading brokers earn money by studying and profiting from the difference of price between sold and bought currencies.
-Liquidity: The currency market is opened non-stop, anywhere in the world giving currency traders the chance to trade whenever they find the opportune moment and prices. This is a characteristic attributed only to currency trading.
-Safety: while other trading systems are based on speculation, on the fluctuation of price, on slippage and market gaps, currency trading is controlled with the help of built in safeguards that limit slip-ups.
-Short term trading, like currency trading, is more efficient for profit making than long term trading. Day trading does not increase speculation, risk and does not imply that the broker’s commission will reduce any profit made.
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I am chartist and a technical trader. I believe that the first line of analysis is to find patterns. Line drawing and straight line analysis is the standard. It has been and continues to be the base line tool. Moving averages and range bands are more recent developments and are observatory. Straight line charting has modeled and been used to define patterns and set targets for an awfully long time, and I believe that you can’t throw a pile of lumber of a cliff and have it land in the shape of a house. If it looks like a house, some one has manipulating the lumber.

I want to show you a study that is remarkable in that it shows obvious pattern trading but not in a single stock rather an entire index, in this case the NASDAQ. The slides here are chronologically sequential and can not be put together after the fact to make a point. They were annotated and posted as they happened and were charted in my Trader’s Talk Live training sessions. I have a group of students who subscribe to spend several hours per week charting and being trained to read and trade off chart patterns. What you will see is the break of a trend and the steps it takes to morph into a new trend.

Note that the lines were drawn before the pattern fully developed, demonstrating that the pattern was recognized and laid out before the price played into the lines. Now the pattern could have broken at any time. The lines did not dictate what the stock / Index could or could not do. Rather the lines showed the pattern and the targets that would be reached if the pattern continued. Each pivot point that was reached gave an opportunity to trade off the price reaction to a critical decision point.

Feb 23rd the index dropped to recent support rally with the up trend line just below. A lower top also was formed. We identified the support and noted that the long term line was just below.

Now, notice that the next day held support but reached down intraday to bounce off the trend line. As it moves up it stalls in line with lower tops forming a wedge pattern. Now it is a powerful pivot point as descending tops collide with a long term support trend line. A move to the upside is a break out the target will be 2155. A break in the support line gives weight to the developing down trend.

The next day drops right to the support line the break down signals the end of an uptrend that began in March 2003 and changed angles in November 2003. It moves on down to the bottom of the trading range of the new trend. This set up is another Obvious Bracket Trade. The Resistance line is defining the current trend and the Support and resistance lines show that there is attention being paid to the target points. The pile of lumber is taking the shape of a nice house.

As a double bounce / bottom pounds the support line, the upside target is the top of the range at about 2020. The downside targets would be sliding down the support line or dropping to the next hard price support of 1900, the last major rally point.

Two days later, the big gap and drop to 1900 signals the recognition of the support area. Returning to previous rally points is a common pattern. From here, the market sentiment can be accurately tested. The public is not the critical catalyst here. The big traders here will be testing to see if the public is finished selling off. If there is equilibrium, the public / market may be ready to follow a lead to the upside.

Try as you like, you will not find news to explain what happens the next three days. To quote an analyst on CNBC who speculated at length about what prompted the big move last Thursday,” I guess we don’t really know”.

Well, I will tell you this. The folks who lit that fire were careful to choose that day to test fire the rocket. All of the markets had reached support levels from a trend line / straight line analysis point of view (see the commentaries for the last three weeks).

In our Trader Talk Live sessions we chronicled this as it happened and had opportunities to trade the many stocks that were doing the exact same dance steps.

This morning we are right at the next target. We moved there in the first hour and stopped. It has been an hour so far and it is still there. Gee, do you think that maybe the traders already knew that 1995-2000 was the limit of the current pattern and that many traders would be very ready and willing to take profits here at an obvious pivot point? Now will they? I don’t know… I am not on the floor. But I don’t have to be there to see the targets. When they get there, there will be a struggle to test the waters. If th Read more…

Clearly, anyone who trades does so with the expectation of making profits. We take risks to gain rewards. The question each trader must answer, however, is what kind of return he or she expects to make? This is a very important consideration, as it speaks directly to what kind of trading will take place, what market or markets are best suited to the purpose, and the kinds of risks required.

Let s start with a very simple example. Suppose a trader would like to make 10% per year on a very consistent basis with little variance. There are any number of options available. If interest rates are sufficiently high, the trader could simply put the money in a fixed income instrument like a CD or a bond of some kind and take relatively little risk. Should interest rates not be sufficient, the trader could use one or more of any number of other markets (stocks, commodities, currencies, etc.) with varying risk profiles and structures to find one or more (perhaps in combination) which suits the need. The trader may not even have to make many actual transactions each year to accomplish the objective.

A trader looking for 100% returns each year would have a very different situation. This individual will not be looking at the cash fixed income market, but could do so via the leverage offered in the futures market. Similarly, other leverage based markets are more likely candidates than cash ones, perhaps including equities. The trader will almost certainly require greater market exposure to achieve the goal, and most likely will have to execute a larger number of transactions than in the previous scenario.
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Should you fire your financial advisor and hire a month in order to optimize your asset allocation?

Probably so, if you believe proponents of a time-honored indicator of future stock market performance known as “The January Barometer.” The Barometer simply states that “As goes January, so goes the year,” and it’s racked up a seemingly remarkable forecasting record since well before Yale Hirsch of Stock Trader’s Almanac first popularized it as early as 1972.

Since 1938, the direction of change of the benchmark S&P in the first month out of the gate has matched the year as a whole more than a whopping 80% of the time, making January by far the most predictive month on the calendar. The results are similarly impressive if you use the Dow Jones Industrial Average (DJIA) as a yardstick and, although it somewhat diminishes the accuracy of the forecasting tool, if you assess efficacy over the next 11 or 12 months to avoid double-counting January’s moves in the periods it’s supposed to foreshadow. Dating back to the inception of the NASDAQ Composite Index in 1971, January achieves the greatest success of any month in anticipating the movement of OTC stocks throughout the following 11 or 12 months, and ranks second only to April in its correlation with calendar-year outcomes. Starting from 1950, an up January has meant about a 13% gain in stock prices through the remainder of the year, while opening with a down month presaged about a 1% loss.

Criticisms of The January Barometer

The historical evidence looked even more compelling at the start of this decade, but The January Barometer laid an egg in 3 of the past 5 years. In 2001, a positive January called a premature end to a bear market that got ugly after Al Qaeda suicide hijackers attacked the World Trade Center and Pentagon. In 2003, stocks declined in January, continuing a deep correction in the wake of a sharp initial rally off the final bear market low of the previous October, but turned higher in springtime to climb 26.4% by year-end, still the biggest annual gain since the 1990s. Last year, the market fell again in January, only to see the S&P 500 eke out a 3% gain for all of 2005, although the Dow edged down a fraction of a percent. However, the lackluster display by the blue chips actually understated the effect of the Barometer’s error in a year in which smaller stocks outperformed for a 6th straight time and the average equities mutual fund returned a total 9.5%.

Supporters of The January Barometer sometimes point to the 20th Amendment, a piece of Depression-era legislation also known as the “Lame Duck Amendment,” to explain why it works. The 20th Amendment mandates that presidential terms, as well as those of senators and representatives, shall conclude in January, and calls for congress to convene on January 3. Formerly, they didn’t throw the rascals out until March. Despite ratification in early 1933, the amendment didn’t take effect until 1934. Hence the nation was forced to endure 4 months of lame-duck leadership from a by then wildly unpopular Herbert Hoover after the 1932 election, as the Great Depression deepened and Wall Street surrendered the vast bulk of its spectacular gains achieved during the summer of ’32, following the stock market bottom.

Now, the president delivers his State of the Union Address, highlighting priorities for the year ahead, and unveils his proposed budget in January, making the month particularly influential, or so the theory goes. Of course, they don’t hold national elections every year, and almost all of the leaders are incumbents or politicians with already well-known agendas. If the timing of the presidential inauguration is so important, why didn’t a “March Barometer” foretell stocks’ future before 1934? From 1897 through 1933, the direction taken by the DJIA in January corresponded to the full year’s results 23 times out of 37, versus just 20 of 37 for March. The record throughout that interval stays the same even if you substitute the S&P for the Dow beginning in 1928, the first year they tabulated daily prices for the S&P.

Staunch defenders of the January Barometer like to commence their record keeping in 1938, citing the especially lopsided congressional margins enjoyed by Democrats earlier under the FDR Administration. This smacks of classic backfitting, however. Could the real reason behind the 4-year delay in implementation of their pet prognostic technique instead be the disastrous performance shown by The January Barometer in the 1934-1937 timeframe? In 1934, the S&P jumped a robust 10% in January, only to slide 19% during the next 12 months. If you sold on January’s 4% dip to kick off 1935, you missed a roaring 57% advance. And if a 4% rise in January 1937 enticed you to bite, the stock market’s October 1937 crash left you licking your wounds amid a 41% plunge. Another benefit to choosing 1938 as a starting point, while ignoring the entire 1897-1937 period, rests in the fact that most market years are up years, and the more recent era captures the secular bull markets of 1949-1968 and 1982-2000, leaving out the worst years of the Depression and the relatively dull markets of the first 20 years of the 20th century. In 1897-1937, stocks went up only 23 out of 41 times (56%), compared to 47 of 67 (one year was unchanged), or 70%, subsequently. January historically ranks as the second-strongest calendar month for stocks, trailing only December.

January Barometer’s Notable Failures

Still, in over a century since the advent of reliable daily stock averages, the January Barometer boasts a 72% (78 of 108) success rate, including a level of accuracy approaching 80% during those years in which the market closed higher in January, as was the case this year. Yet the S&P 500, through Friday, February 10, 2006, remains over 1% lower this month after hitting new bull market highs a few short weeks ago. Accordingly, this seems like a good time to examine some of the January Barometer’s most notable failures following those occasions when it appeared to call for further stock price appreciation.

1902: The DJIA established a final bull market peak in June 1901 and continued to edge down slightly in 1902.
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