Trend reversals can be very powerful signals and offer profitable trading opportunities if you spot them early. They offer a large upside with a limited downside and you can operate with tight stop loss prices. This means that if your reading of the signal turns out to be right, you are looking at large profits. If you read the signal wrong [which happens to the best traders occasionally as well], you should be able to close out your position with only a modest loss. You should hone your abilities to lead market sentiment and the trend reversals that follow the changes in these sentiments. You should also remember that different trend reversals vary in strength and you should be careful in your choice of which trend to act upon. This way, you can maximize the opportunities for high probability trades.

Broadly speaking, when you see a signal that indicates a trend reversal in a trend that has been in place for a long time, you are probably looking at a major reversal in the primary trend of the stock or the market. If the overall market trend is also in the direction of your signal, it should be considered a strong signal. If, however, indicates a reversal after a short period of time [3 weeks or less] or if some of the important conditions are not fully achieved, it should be regarded as a weak signal.

Reversals can take place during the trading day if there is a sudden surge of buying or selling and these are known as intraday trend reversals. They can also take place outside trading hours when the market is closed because of some significant news or development and these are referred to as inter-day trend reversals. Intraday trend reversals can happen because of different reasons. They can happen because of important economic or political developments that have an impact on the stock market as a whole. This causes active traders to revise their views and hence change market sentiment. They can also happen because large and influential traders start to buy or sell stocks in large quantities to benefit from what they perceive as overvaluation or undervaluation. These are abrupt changes that can cause unwary investors to be taken by surprise.

Inter-day trend reversals happen for the same reasons except that the news is disseminated outside trading hours when the market is closed. This is often company specific information or news because many countries including the United States prohibit companies from releasing sensitive information affecting stock prices during trading hours. This necessarily means that the information becomes available only before or after trading hours. At the opening of the markets, there can be a sharp decline or rise in the stock price.

The advantage of using signals to decide your timing for entry and exit is that you can be decisive and objective about your investment decisions. It is by no means uncommon for traders to be afflicted by what is called paralysis by analysis which causes them to be ambivalent about when to buy and sell. Signals also eliminate all emotions and preconceived notions from your investment decisions because they are based on objective and measurable criteria. It is important that your trading system provide clear signals about when to buy and when to sell.

Even the best traders occasionally make mistakes and some of them regard the signal that has failed as the most reliable. I am sure that you have at some time made a trade that looks like the trade that cannot lose because it meets all of the textbook conditions. All your research and indicators tell you that this is the perfect investment. However, after you buy, the stock suddenly tanks and leaves you licking your wounds. You have just stepped into what market insiders call “the bull trap”.

It happens when a technical buy signal is generated and price rises because many other people in the market are watching this signal just as you are and jump in along with you to buy. Sometimes, what actually happens is that the price rise attracts buyers but not in sufficient quantities to continue the momentum. As the stock runs out of steam, the price starts to drop and triggers in a number of stop losses along the way. This accentuates the selling pressure and forces prices to decline even further. Only when the selling pressure eases will the stock price start to find some stability.

As you would have guessed, the bear trap is exactly the opposite and affects people with short positions as opposed to people with long positions. Shorting the stock will increase the upward pressure on price as stop loss positions are squared and traders cover themselves. The resulting bullish trend will result in losses for short sellers.

Now you can see why failed signals are reliable. Instead of simply closing the trade and retreating from the market, you can cut your losses by switching your investment to the other side of the trade. This will save you the trouble of looking for another trade and executing the trade on the information that you already possess. Sometimes, a failed signal can result in a trade with a high probability of success.

The Tokyo Stock Exchange was found in 1878 and is one of the most influential stock markets. It uses electronic trading and the benchmark for tracking is the Tokyo Stock Price Index (TOPIX). The TOPIX is an index that is adjusted for free float and weighted by market capitalization and incorporates approximately 1700 domestic Japanese companies. These companies make up what is called the First Section and they are exclusively large cap companies. It has separate sections for mid-cap companies (roughly 450 companies) and for 200 companies that represent high-growth and emerging stocks.

The Hong Kong Stock Exchange was set up in 1891 and is one of the largest Asian stock exchanges. Trading is electronic and roughly 1450 companies are listed on this exchange. The performance benchmark is the Hong Kong Stock Exchange Hang Seng Index which is adjusted for free float and weighted by market capitalization. The index is made up of approximately 40 companies and is computed by a subsidiary of Hang Seng Bank and is available from 1969. The constituents of the index are divided for sub indices based on their business including finance, utilities and real estate. The index is also regarded as a surrogate for the Hong Kong economy and, because of the close links with China, there are many Chinese companies listed on the exchange.

The London Stock Exchange dates back to 1698 though it officially started operations in 1773. It is the largest stock exchange in Europe and arguably the most international offering the opportunity to buy stocks in more than 50 countries. Trading is electronic and the market benchmark is called the Financial Times Stock Exchange (FTSE) 100 Share Index, which is also affectionately known as the “Footsie.” it is made up of the hundred blue-chip stocks that trade on the exchange and, like most major exchanges, is adjusted to free float and weighted by market capitalization.

The New York Stock Exchange (NYSE) traces its existence back to 1792 and securities trading on commission was set up. This is the largest stock exchange in the world by market capitalization and the market capitalization of its listed companies is over $12 trillion. It is an interesting combination of the traditional open outcry exchanges and floor traders shouting orders blended with electronic execution of trades. Each stock that is listed has one or more specialists who oversee every aspect of trading in that stock. Orders can be placed with the specialist electronically or by shouting orders. The benchmark is tracked by the NYSE Composite Index which is made up of roughly 1650 US companies and around 350 foreign companies. This index is also adjusted for free float and weighted by market capitalization.

A relatively recent service has been introduced that permits you to mimic the trades of a fund manager that you admire while the flexibility of making any changes that you wish. These investment platforms are called mirrored investing services. You are provided with the ability to study the daily trades of dozens of different fund managers and if you want to stay right on top, you can also request streaming real-time data. If a particular manager that you are following makes a trade in a particular security representing say 2% of his total assets, the service will make a similar trade for you representing the same percentage of your assets. The minimum amount required for a mirrored service is typically less than what is required for a self managed account.

The advantages of mirrored services are as follows:

• You have much more control over your investment than you would in a conventional mutual fund investment
• You have the highest level of instant transparency which you will not get with a mutual fund
• You can get information instantly on how your chosen managers react to market developments rather than wait for weeks to get a report on you mutual fund holdings.
• Most importantly, you get much greater control on your account including the ability to sell any stock at any time. You can also create a list of companies in which you do not wish to invest.
• You can choose to mimic the trades of a wide range of managers with different investment goals and trading styles.

The disadvantages of mirrored investment services are:

• They are relatively new and have yet to establish a credible track record
• Their fees are on the high side when compared to mutual funds. Be prepared to pay up to 2% a year instead of the 1% to 1.5% that you would pay for a mutual fund
• Most of these funds require you to open an account with a brokerage with whom they have a working relationship and you have no choice in the matter
• All you have no protection against the front-running by the mirrored services provider. For instance, he could execute a buying order on his own account before the pressure of buying for his clients drives up the price.

In summary, it would be fair to say that there are investing services offer a number of useful services even though they more expensive than mutual funds. They can, however, expect to take their place in mainstream investing only after they have demonstrated that they can outperform mutual fund investment.

When you are planting a garden, one of the major prerequisites is the availability of good soil. Without good soil, your efforts are unlikely to succeed in growing good plants. Similarly, in stock investing, your strategy is the soil from which you can reap good returns. Continuing the garden analogy, you can expect both good weather (bull markets) and bad weather (bear markets) and both are necessary to create the market volatility that gives you the trading opportunities. In fact, if you are well prepared, you can profit from any kind of market conditions.

The best way to create fertile soil for your investment garden is to rely on academic research. The advantage of academic research is that it is subject to a stringent review process where the objective is to ensure truth and the depth of knowledge. Because the motive is not profit, you can find objective and neutral information which is what you need to make your investment decisions. If you can distil this knowledge into a few key points that are relevant to your investment style, you can easily put the knowledge into practice.

For instance, you should have a clear understanding of the relationship between risk and reward and the fact that higher returns entail investment in higher risk stocks. For anxiety free investing, make sure that the risk that you take is in line with your own personal tolerance and appetite for risk. There is no point in making investments that you are not comfortable with and then suffering through sleepless nights. Similarly, you can add to your comfort level if you understand the theory of portfolio investment. In short, you do not put all your eggs in one basket or investing too much of your money in a single stock. If you can control stock specific risk, you then only need to worry about market risk.

You can achieve this portfolio diversification quite easily by hedging your stock investment with the appropriate index or inverse ETF. Eventually, what will determine the size of your investment in a particular stock will be the trade-off between greed and fear? For instance, if you greed is greater than you fear, you will probably be tempted to undertake some margin investing. Leverage is a double-edged sword but, properly used, you can multiply your returns. If your fears outweigh your greed factor, choose investments with a lower degree of risk such as ETF’s that provide you with automatic diversification. However, in keeping with the risk/reward principle, limiting your risk automatically limits your return.

Volatility can be defined as the tendency of a market or a stock to move up and down sharply in price and it is measured by a statistical measure known as a standard deviation. Standard deviation indicates the range of movement that might be expected. For instance, the standard deviation of the S&P 500 index is about 15% whereas the standard deviation of a certificate of deposit is zero because there is no change in the return regardless of the condition of the market. Volatile markets typically see rapid price fluctuations as well as heavy trading volumes. They are often caused by a mismatch between supply and demand. Many people believe that volatility is created by emotions and investor sentiment. Whatever the underlying cause, volatility is a fact of life and investors must learn to deal with it.

One way of dealing with volatility as to construct a long-term portfolio which you will hold regardless of the market gyrations. This is an extremely difficult solution particularly when you watch the value of your portfolio plummet sharply. One of the most common misconceptions about the buy and hold strategy is that you must hang onto the stock for years without touching it in any way. Long-term investing still requires a lot of research and an understanding of the fundamentals of the company. It is true that short-term fluctuations are unlikely to affect corporate fundamentals. However, if you are convinced that the company is a good long-term investment, you should take advantage of declines in the price to increase your investment. This is the strategy called averaging down which means that while average cost comes down, your potential profit increases.

You should bear in mind that, in many volatile markets, market intermediaries will often follow procedures to decrease their own risk first and foremost. For instance, a market-maker may stop executing orders automatically and instead process them manually so that they are in complete charge of the situation. Here are some of the implications of these moves:

• There may be delays in executing your order because of the large volumes to be handled and you may finally get execution at a price that you do not like.
• The large volumes can hinder access to your online trading broker because of the limitations of the system in handling high volumes. Make sure that you have alternate ways to contact your broker such as the telephone
• You can expect to see significant discrepancies between the prices on your screen and the prices at which your trade is actually executed. Even real-time quotes may not be able to keep up and delayed quotes are completely useless

Panic is an irrational emotion that leads you to react irrationally, sometimes by selling stocks that you should be holding or buying stocks when you should not be buying. Panic is a natural human emotion and cannot be eliminated altogether but you can certainly learn to control it and to channel it into more productive ways… The really successful investor is not immune from panic but uses the panic to drive him into conducting further research and to devise methods to stay ahead of its competitors and the market. Making constructive use of panic is a good move. Don’t rush into investment decision but take a few seconds to weigh the pros and cons before making a trade. Learn to take bad news philosophically and avoid knee-jerk reactions.

Even if you are a long-term value investor who operates a buy and hold strategy, you should always examine short-term events that have an impact on the market. For instance, auto stocks look really cheap right now and some investors would be tempted to buy. However an imminent rise in oil prices can actually depress the value of the stock further and rob you of any potential profit. As a long-term investor, you should also be evaluating short-term events to determine when you should buy the stock.

You should always create a contingency plan or a fallback trading position in the case of unexpected developments. You don’t have to actually execute these plans but having them around is convenient when you need to react quickly. For instance, if you are a large investor in auto stocks and you believe that oil prices are going to rise, one possible fallback position as to buy some oil company stock. Similarly, if you own consumer product company’s stock and believes that buying in the US is going to decline, you may choose to pick up stocks of consumer product companies which largely sell overseas. The point of this exercise is to mitigate your risk to avoid a large downside.

There is money to be made in bucking the common trend but, as a general rule, you as a small investor are better off trading with the trend than against it. In other words, if you are looking to buy and the market is falling, you are better off waiting for the decline to level off and signs of a rise in prices begin to manifest themselves. That are always continuous possibilities in the stock market and you are unlikely to profit if you react without thinking against the market trend.

Strategy considerations:

• It is as important for you to know when to sell your ETF as it is to know when to buy. Many investors make the mistake of hanging on to their investment for too long despite attractive exit opportunities presenting themselves. It is particularly important in a depressed market to consider a proactive selling stance.
• Your appetite and your tolerance for risk is always an overriding consideration in considering your investment. If you are uncomfortable with your existing exposure, you should do something about it and the best way to ensure a good night’s sleep as to reduce your exposure by selling. If you are already losing money, it is best that you cut your losses.
• Stop orders have long been standard risk management techniques in stock trading and protect you against potential loss. Fortunately, the same techniques are available for ETF trading and you can use the entire range of stops including trailing stops, volatility stops and limit stops.
• If you require cash for a definite purpose in the near future, it may be a good idea to sell some stocks and use the proceeds to invest in lower risk and less volatile ETFs.

All sophisticated investors devise strategies for asset allocation so that their portfolio is protected and an adverse move in one asset category is often offset by a positive move in another. Because ETF’s represent an investment in a pool of assets rather than a single stock, they make asset allocation and diversification possible for even the smallest investor. You can construct a portfolio that is tailored to your personal investment objectives and risk preferences. For instance, if you are bullish about a particular sector, you can buy an ETF that specializes in that sector. Similarly if you are concerned about your existing investment in a particular sector, you can short an ETF that specializes in that sector. In some cases, you may be able to hedge with an inverse ETF where the value of the ETF moves in the opposite direction from the movement of the underlying index.

If you believe that sectors of industry move in a cyclical pattern and go through peaks and troughs, an ETF is an excellent way to balance your portfolio to reflect your investment belief. You can either buy an ETF that specializes in a particular sector or short an ETF that specializes in a particular business sector. You can extend this activity if you desire to an ETF that specializes in a particular geographical location or even an ETF that represents a particular asset class such as commodities.

Reserves are the umbrella term for the quantity of natural gas and other hydrocarbons that are present in the properties owned by the gas company. These reserves may either be proven reserves, probable reserves or possible reserves. The most important of these proven reserves which have the following characteristics:

• These are natural gas and hydrocarbons that have been demonstrated to exist on the property with the use of geology and engineering techniques
• They are recoverable from known reservoirs in which they are found
• They can be recovered economically using current technology under the current operating conditions and can be done so in accordance with the current government regulation
• The economics of the operation are determined to by taking the average of the prices on the first day of each of the months of the previous year.

Many natural gas companies use the differing prices in their presentations of proven reserves and these may not necessarily be the standard prices. This is often done to put a higher value on the company. If you are analyzing a company and making comparisons with other companies, you should adjust the figures to standard prices like the average above in order to make a meaningful comparison. Companies may also disclose the amounts of their probable and possible reserves but you should not rely too heavily on these numbers in making your investment decision. This is because there is no certainty that these reserves can be recovered in an economical fashion so as to result in a profit.

The next thing you will need to look at is the ratio between reserves and production. This ratio is measured in terms of years and is calculated on the basis of the number of years that it would take to exhaust the proven reserves. Naturally, the higher the ratio, the better it is for the company because they would be able to derive more advantages from their existing properties. If a company has proven reserves of 200 million BOE and production of 20 million barrels per year, the reserves to production ratio will be 10 years. If a competitor has a ratio of 20 years, it would be regarded as more valuable because it has double the time in which to profitably exploit its reserves.

The other important factor to remember is what is known as “basis differentials”. These refer to the price discounts that apply when gas companies sell in some regional markets. The discounts are triggered by many factors that include climatic conditions, gas pipeline capacity and quality. For instance, natural gas producers in Wyoming selling to the Rocky Mountain area receive about three fourths of the price of natural gas sold in Louisiana. This will naturally have a considerable bearing on the price realization and the profits of the company.

The first metric is called Return on revenues. The income statement of the business is critical to this analysis and towline growth that is generated by same-store sales and the opening of new stores is an important indicator. More importantly, you should ensure that these sales are growing in a manner so as to generate a satisfactory profit. This ratio measures what is the net income from these revenue figures and how profitable you are. What is equally important is the gross margin on sales because this will enable you to undertake the expenditure that you must and still leave enough to provide a satisfactory net margin.

The next metric has to do with inventory which of necessity every store must carry. By taking this figure from the asset side of the balance sheet and comparing it to the sales figure from the profit and loss account, you can calculate how often the inventory turns over in a 12 month period. Naturally, the higher the number, the more profitable the operation. A commodity retailer or a retailer of consumer staples has a much lower profit margin than a retailer of top end and luxury goods and therefore needs a much higher inventory turnover ratio in order to produce acceptable profits.

The third metric is the measurement of operating cash flow. While it is true that a profitable business may not generate a positive cash flow because of the unfavorable terms of trade, it is equally true that a one profitable business can sometimes generate positive cash flow. Take the case of a retailer who sells for cash but gets 60 days credit from the suppliers. Because the cash comes in well ahead of the payments to be made, the cash flow will always be surplus. Of course, in the course of time, the losses will catch up and business will go bankrupt.

The last metric you should look at is the big picture or, in other words, the return on total assets. Here the higher the number the better. However, the exact number will depend on the nature of the business of the retailer. If the retailer specializes in a niche category, he will require a lower level of assets by way of inventory, retail space and so on. On the other hand, if you are trying to be Wal-Mart which is all things to all people, the levels of investment in assets will be proportionately higher. This is not necessarily a bad thing because it reflects the way of doing business in your chosen field. You should therefore compare like-for-like when comparing a retail operation with its competition.