This newsletter is separate from the Trading Diary and is published every two to four weeks as the need arises. It is an extension of the What's New page, updating readers regarding new developments on:

the Incredible Charts Pro charting application;
the Trading Guide; and
the website in general.

Incredible Charts Pro

Not much progress to report here. We are still busy with intra-day data feeds for forex and US markets. These will start with 15-minute delayed updates to avoid exchange royalties.

We also plan to port Incredible Charts to handle end-of-day data for a wide range of additional exchanges from Yahoo.

When this is completed we will be in a position to tackle our lengthy To Do lists.

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Tricks of the Trade

This is the first in a series of articles on the traps and pitfalls that newcomers face on entering the stock market. Education is expensive, and a stock market education can be the most expensive education of all.

The market is where people with money meet people with experience; The people with experience get the money;
And the people with money get the experience.

~ an old proverb

In order to make money, market professionals know that someone else has to lose money. The market is not a zero-sum game but it is close enough for our professional to know that he is not going to make a decent living out of investing for dividends. Profits are made from buying low and selling high -- and enticing punters to do the opposite.

A Zero-Sum Game?

Currencies and futures are a zero-sum game where one man's profit is another's loss. This is pure speculation: traders take positions solely to profit from a rise or fall in prices. Equity markets are not a zero-sum game: they pay dividends. Stocks combine an element of investment with an element of speculation. Investors purchase stocks hoping for dividends and for capital appreciation. Dividend growth ensures that stock prices steadily increase by an average compound rate of about 3.3% p.a. in the long-term (roughly equivalent to GDP growth).

The Pump and Dump

Also referred to as ramping, this is an old trick blamed on market professionals but often perpetrated by some sly old hands who prey on newcomers.

The Ingredients:

One penny stock. Either a former high flier that has fallen from grace or a newer issue that has failed to attract investor interest. It is important that the stock has been flat-lining at a few cents over the past 6 to 12 months.
No institutional following. This is a key ingredient -- too many cooks may spoil the broth. Our chef does not want outside interference.
Low liquidity. Often large tranches of stock in small companies are tied up in the hands of controlling interests, management, family interests or other connections who are not ready sellers.
An industry that has the capacity to generate excitement - gold mining is the tried and trusted favorite but there are a number of new variations: dotcom, telecom, biotech, the list is endless. Basically anything that will make a good storyline.
A large supply of mug punters, invited to the feast without realizing that they are the main course.
A complete lack of conscience.

For the complete Recipe - click here.

The Shakeout

If a stock is trending strongly, our market professional may want to accumulate a large position, either for his/her own account or for a major client. How does he do this? If he starts placing buy orders in the pool, he will chase the stock up sky high, without being able to build a big enough line. The golden rule is: buy into weakness.

To read the entire article - click here.

False Breaks: the Fakeout

If a market professional sits with a few large sell orders and the stock is consolidating (a sign that the market is in equilibrium) he knows that he cannot merely dump his orders on the market. That would upset the equilibrium and he would sell into a weak market, chasing prices down. The golden rule is: sell into strength, so our trader bides his time and waits for the market to test resistance at the top of the range. If impatient, he may even help to nudge prices across the line with a few well-timed buy orders.

To read the entire article - click here.

Economy

Cause for Concern: Serious imbalances in the US economy

Paul Volcker, former chairman of the Federal Reserve (1979 - 1987), in his February 2005 address to the Stanford Institute for Economic Policy Research, highlighted serious imbalances in the US economy:

personal savings have almost completely disappeared;

consumers are buying housing at ever increasing prices;

and using equity in their homes to fund rising levels of personal debt;

the only positive is that businesses are re-building their reserves;

but this is more than offset by the huge federal deficit.

To read the full article - click here.

Fiscal Discipline: Central Banks and Interest Rates.

Central banks are often subjected to huge pressure through the media to maintain low interest rates; from politicians, banks, economists, business and other interest groups. If the economy is flat, economic collapse is predicted if the central bank does not reduce interest rates. During a boom, if the central bank considers a rate hike, we face constant warnings of imminent financial disaster. How should the bank respond?

To read the full article - click here.

Regards,
Colin Twiggs

.....where Fortune is concerned:
she shows her force where there is no organized strength to resist her;
and she directs her impact there
where she knows that no dikes and embankments are constructed to hold her.

~ Niccolo Machiavelli, The Prince (1532)

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