This is the continuing story of our two imaginary traders, Peter and Paul.

Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not.

Peter and Paul have had vastly different Stock trading experiences - Peter has just made another substantial profit - this time from the Bear market, Paul has lost heavily.

A chance meeting with Peter’s group of friends one day at lunch launches Paul on a learning curve that will see him become a good trader, but not without some hard lessons along the way.

Today Peter shares his trading plan and the importance of having a trading plan with Paul.

"Today we will work on your Trading Plan," Peter told Paul as they sat down for the start of their next weekly mentoring meeting.

Peter handed Paul a copy of Robert Miner’s book, Dynamic Trading, and said, "Here, read this section of this wonderful trading book." Paul read to himself quietly as Peter poured them both a cup of coffee.

"The purpose of Technical Analysis is not to be able to accurately identify every market position, all of the time. While this may be the daydream of many analysts and most amateur traders, it is an impossibility.

"Every method of technical analysis has it’s limitations and at times will provide contradictory information. Unless the analyst, trader or investor is willing to accept that his or her analysis will from time to time not provide a confident opinion of market position, he or she is doomed to failure.

"The objective of technical analysis is to identify those market conditions and the specific trading strategies that have a high probability of success.

"If there is a key concept associated with trading and investing, it must be probability. All consistently profitable traders and investors know that every trading and investing decision only has a probability of success, never a certainty.

"Losses are inevitable and are just as much a part of successful trading as profits. If a trader has a successful trading plan, he or she should have no more emotional response to a loss than to a win. Each will be inevitable.

"While it may be difficult to maintain a completely non-emotional relationship to trading and investing, an understanding that trading is a Business of probabilities will go a long way towards developing a stable attitude towards the Business.

"All successful traders have a defined, written trading plan. The trading plan can take many forms. At the very least, it will provide the minimum guidelines that must be satisfied before a trade will be considered. It may be as complex as a long set of very restrictive rules that must be satisfied before a trade can be considered.

"Each has it’s strengths and weaknesses. Neither method, whether rules or guidelines, guarantees success, but the lack of either will ensure failure.

"Why have a trading plan and not follow it? Each guideline and rule must be included with reason and purpose. All successful traders and investors consistently follow their trading plan and they know that if they violate their trading plan it will always be costly in the long run.

"A trader who does not consistently abide by his or her trading plan is doomed to failure."

Paul looked at Peter after he finished reading, and understood the implications of what Robert Miner had written. He had never had any sort of trading plan. He had just taken the advice of other people and bought, held and hoped for the best.

Peter said, "You need a trading plan my friend if you are ever going to make money in this Business. Then you have to have the ability to follow it.

"The paragraphs you have just read are as important, and maybe more so, than learning any method of analysis or trading strategies or methods.

"Even a trading plan that included technical analysis and trading strategies that were 100% accurate, in other words, would indeed predict the future trend of a Stock or Index every time with perfect certainty, would not result in you making a profit if you do not know and act in accordance with the qualities discussed above."

"With this in mind, I will now share with you my trading philosophy, trading plan and rules.

"I have found having this set of guidelines gives me a high probability of making successful, profitable trades. As Robert Miner said in his book, some losses are inevitable no matter what rules or strategies are used. They are a cost of doing business.

"A Trading Plan and rules that you have tested and trust will help you remove the two biggest enemies traders face - Fear and Greed. These two factors have probably cost more traders more money than anything the market can throw at us.

"By writing down and consistently following a solid plan that you have back tested and proven to be profitable with you paper trading, you put yourself ahead of 90% of market participants who fail to do any research or testing before they risk their capital in the market, and are eventually wiped out or give up because "the market just isn’t for me."

"You must remember however," Peter continued, "These are my guidelines. You might feel comfortable with them or you may not -you have to develop your own style.

"These rules also do not constitute trading advice…you must sit down and determine what your rules and guidelines are going to be. Use these…or not. You must however decide which of the parameters you are going to use for your trading, then -

Write them down into a plan of action - and follow the plan.

Peter’s Trading Philosophy -

He went on, "My trading objective is to enter trades in the direction of the major trend using daily end of day data. There are three conditions under which I will enter a trade -

When pattern, price and my mechanical filters indicate a trend reversal has taken place.

On the first correction within the new trend, for example, the first higher low in a new uptrend.

On any trend continuation signal once the Stock or Index has signaled the new trend is underway.

"The initial trend reversal position will always be in lots of 2 Futures positions or $20,000 invested in a Stock. A trend continuation trade entry will be 2 or more futures positions and $10,000 invested in a Stock.

Stop loss orders will be placed 5-50 cents or points past the extreme of the most recent swing pivot at the time the trade is placed - the number of points or cents used depends of the Stock or Future being traded.

"These numbers will be different for every trader depending on risk tolerance and account size. Only take on as much as you can handle psychologically, or you set yourself up for failure.

"If your position size is too large, you will tend to jump out at the first sign of trouble, often at the worst possible time. Trade within you comfort zone and success is much easier.

"My initial capital exposure never exceeds 5% of my available account equity. Additional positions will not be taken unless the initial position is in profit and taking the additional position keeps the risk of the entire position below 5% of account equity. In other words, additional positions are only taken using the markets money.

Trading Rules and Trading Plan -

Peter continued as Paul took notes, "My Trading Plan and rules offer two types of trades - Trend Reversal entries and Trend Continuation entries.

"Trend Reversal entries are taken any time a Stock or Index completes a reaction and appears to be going into an Impulse Trend.

They are also taken when a clear 5 Wave sequence has completed, as we can expect at least a substantial correction, and possibly a change in trend at the end of a 5 Wave sequence.

The rules for Trend Reversal trades are -

The price must break a valid trendline.

The Moving Averages must cross, indicating a change in the short term trend.

For Long Trades, the Stock or Index MUST make a higher swing high, followed by a higher swing low on the daily chart. We enter the trade once the price rallies from the higher low.

For Short Trades, the Stock MUST make a lower swing low followed by a lower swing high on the daily chart. We enter the trade once the price falls from the lower high.

"Trend Continuation entries are taken within the Impulse legs of Trends. They are not taken when price is within a consolidation period or a reaction.

The rules for Trend Continuation trades are -

For Long Trades, the Stock price must be above a valid Trendline.

The price bars must be above the longer term (usually 18 days) Moving Average on the daily chart.

The Stock must be making higher swing highs and lows on the daily chart.

The reactions within the uptrend must be less than 4 days.

For Short Trades, the Stock price must be below a valid Trendline.

The price bars must be below the longer term (usually 18 days) Moving Average on the daily chart.

The Stock must be making lower swing lows and highs on the daily chart.

The reactions within the downtrend must be less than 4 days.

"Moving average periods are Stock or Index specific, in other words, try to find a combination that works on the markets you are interested in trading that don’t give too many whipsaws. For example, 9 and 18 periods work well on many Stocks. Sometimes you can go as low as 6 and 13, or you may need as much as 15 and 30.

"Play with it and find the optimum Moving Average numbers for the Stocks you trade. Then you can add the Trendline and swing high and low rules and you are ready to look for some trades.

"A Valid Trendline must touch at least 2 and preferably 3 data point extremes - three significant highs or lows within a trend.

So, in summary, this is Peters Trading Plan…

To enter a trade on a Trend Reversal, he needs a Trendline break, a Moving Average crossover, and a swing higher or lower to get set in an uptrend, and a trendline break, a Moving Average crossover and a lower swing low and lower swing high to enter a downtrend.

To enter a Trend Continuation Trade, he needs a strongly trending market with reactions to the main trend of less than 4 days. He enters with the main trend as the reactions come to an end and places his stop loss orders just past the swing pivot extreme in case the trend fails to continue.

"Now we have looked at my rules for entering trades, lets put them to work on a Stock," he said to Paul.

Turning to his computer screen, Peter opened a chart of IGT and scrolled back to 2001 - about half way through the bear market. Charts available at StockTradingReview.com

"We know that at this point in time, the weekly and monthly trend in this Stock was down, so we are looking for a valid entry with the trend at the end of a larger degree reaction - a trend continuation trade.

"I have removed all but two moving averages for clarity - these are 7 and 13 periods.

"You can see that the Stock made a low on August 8th, then rallied for 14 trading days including the inside day after the day of the high.

"It then fell sharply, breaking a swing low. Two inside days then one day up followed, then another inside day, followed by a day that broke the low of the inside day but closed slightly higher.

"The moving averages were coming very close together, therefore the third filter I use to enter was nearly in place, as we had already had the trendline break and lower top.

"The Stock broke down the next day, and at the close, the moving averages had crossed - I sold $20,000 worth of IGT short at the close and it fell sharply for 5 days before recovering.

"It had a two day rally, then a day down, so I moved my stop loss order to above the swing high this day down formed and was taken out of the trade three days later after price rallied.

"My entry was at $13.18, my exit was at $10.70, giving me a net profit after Brokerage of $4,605 for a 13 day trade.

Paul could see the set-up quite easily now once it was shown to him in an example.

Peter continued, "Lets have a look at another example." Peter opened a chart of MER and scrolled back to one of his trades from May 2002. Charts available at StockTradingReview.com

"This trade was also when the bear market was well underway and MER was in a strong downtrend on the weekly and monthly chart.

Looking at the daily chart, Peter said, "This Stock made a low, then rallied for 10 days. It then made a lower swing low and then rallied 2 days - the lower swing low is Filter one.

"It touched my short term trendline 4 times as it rallied before breaking down - that is Filter two.

"It then fell two days, had a one day rally, then gave a sell signal as it took out the low of that day.

"This trade didn’t result in the same quick profit as the one in IGT, but it was very satisfying all the same. My entry was at $40.55 and my exit was at $33.20 as it broke upwards through my stop loss order above a swing high.

"This Stock gave me several more good profits as the downtrend continued. The set-up is always the same.

"A short term Trendline break, a Moving average crossover, a lower low and lower top in a downtrend.

"Let’s have a look at an uptrend so you get the idea of what it looks like in a rally." Peter opened a chart of MSFT from Mid 2003, when the weekly and monthly trend had turned upwards. Charts available at StockTradingReview.com

"You can see here that MSFT made a high in early July and then sold off for nearly over 5 weeks.

"Then the moving averages crossed and the short term downtrend line was broken convincingly by a large rally off multiple lows at around $25.50. This set up a 5 day rally, then the Stock fell one day before recovering at the close to be up on the day.

"The buy signal was generated at the close, as this met all of the conditions. The Stock rallied over 20% during the next 5 weeks - that was very pleasant to watch."

Paul could see the simplicity of Peter’s trading methods and was keen to go out and apply them in the Stock market.

Peter cautioned him however, "Remember Paul, not all trades are this easy and turn out as well, but by trading these types of trends on the daily chart, when the weekly trend is also in the same direction, we have a high probability of a profitable outcome in a large percentage of cases.

"Trying to guess tops and bottoms is a dangerous practice. It is a high risk trading strategy that rarely produces consistent profits.

"It can be done using time, price and pattern to help us, as I did at the low in the S&P 500 the other day, but the easy trades are when we take a piece out of the middle of each with-the-trend range, and leave the tops and bottoms for others until our understanding improves.

"Before you trade the market with actual money, I want you to paper trade for 3 months, or until you are profitable 70% of the time.

"Once you are profitable with your paper trading, only then are you to risk your money in the market - is that understood?"

Yes Paul replied.

Peter continued, "Stay well within your comfort zone, preserve your capital and build your account over time. Your success should then be assured.

"The rules are there for you to learn and apply, but your greatest enemies are your own fear and greed.

"These two will rob your account if you don’t gain control over them. You must take every trade your system gives you, follow your rules exactly, and cling to your trading plan like a shipwrecked sailor does to a life raft.

"Imagine that your life depends on you following your trading plan perfectly…because it does.

"At least the life you wish for yourself and your loved ones does."

Paul agreed to study hard and to try to overcome his emotions of fear and greed. He knew it wouldn’t be easy, but he was going to do whatever it took to succeed as a trader.

With that, the lesson was over for that week.

Paul left Peter’s office feeling like he had just been handed the keys to the Bank vault and knew his trading would never be the same again.

When he arrived home, he went straight to Incrediblecharts.com and studied his watchlist. He picked out some Stocks that looked promising and started to paper trade them.

He couldn’t wait for his next meeting with Peter - he was again filled with hope and gratitude for the time Peter was spending with him, and he vowed that once he was a profitable trader, he would help others succeed in the market.

His new trading life was about to begin…

To Your Trading Success,

Tony Spann and the Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Join our FREE "Stock Trading Review" NewsLetter http://www.stocktradingreview.com/stock-trading-newsletter.html to get your hands on some real world "insider" stock trading tips and techniques and access to our exclusive "Members Only" Free Stock Trading System.

You have permission to publish this article electronically or in print, free of charge, as long as the bylines are included. A courtesy copy of your publication would be appreciated.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

(c) 2005 Stock Trading Review - All Rights Reserved.

Where is the beef? Or maybe it should be where is the bull? Market, that is? The chief investment strategists and analysts of the major brokerage houses have been promising us a new bull market.

So far the bull hasn’t come in from the distant pasture.

Some of the cows have been wandering back. I see stocks and mutual funds with names like Small Cap Value, Real Estate, Leisure Group and Gold, but all the rest of the herd are not coming to the barn. If you look at the herd, as scattered as they are, they don’t seem to want to participate in any kind of a bull move.

If you are a very smart farmer (investor) you know which ones are the best ones to milk right now. The others should not be fed any more of your green. And you know what that is.

When I look at the 10 largest mutual funds in the U.S. I see there is only one that is going up and that is a bond fund. All the rest are now headed south again looking for those September low prices.

Why are you holding on to losers that can only get worse?

When I lived on the farm and we noticed livestock might be runts we immediate took them to market and sold them. It was better to get a few dollars now than to keep feeding an animal that would not make a profit. My Dad would take that money and buy another animal. When you are in the stock market you must have the same philosophy. You cannot fall in love with a loser. It will only break your heart and your pocketbook.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

1-888-345-7870; al@mutualfundstrategy.com

Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not. Peter has agreed to meet with Paul to help Paul become a more successful trader.

Paul was early for his first appointment to see Peter a few days later - he was feeling both excited and apprehensive. Peter had told him he would show him how to use technical analysis and swing trading strategies to trade Stock market trends with confidence - but could he really do it?

Did he have the ability to become a successful trader after losing so much money in the market these last two years? Was he just wasting Peter’s time?

As he waited, he thought about the look Beth had given him when he had told her about his trading losses…the sense of failure he had experienced as she just walked away. The feeling of utter helplessness he had felt as the enormity of his losses had finally dawned on him. He had been so close to financial freedom, but now that had been taken away from him.

He was just starting to feel sorry for himself again when Peter strode into the foyer of the office building and wished everyone good morning - feeling sorry for himself would have to wait until later.

Peter motioned him to follow him to the elevator. Paul did so and they chatted as the lift took them to Peters 30th floor office. It was smaller than he had imagined, just a receptionists desk in the waiting room and one office with a view of the city.

He expected something grander, but the office was functional, and besides, Peter didn’t have a need for any more space as he had only 1 staff member, Kim, his Secretary and receptionist, host, coffee maker and confidant.

The focal point of Peter’s office was his trading screen - a triple screen plasma display monitor over 4 foot wide. "Not that’s a screen," Paul thought to himself.

Kim brought in coffee and then left them alone. Paul poured them both a cup and took a seat.

Peter gazed out the window towards the city for more than a minute before speaking. "So you want to be a trader?" he finally asked. "Yes, but more than that, I want to be a great trader," Paul answered, "Like you."

"How do you know I am a great trader? And anyway, what is your definition of a great trader?" Peter asked.

"I heard you talking at the diner the other day - you certainly know what you are doing, and the market is up 5 days straight and more than 130 points since you bought the S&P 500 Index, that’s 20% in a week!" Paul explained. "I think anyone who can take their profits on the day of a major low like that and then have the ability to turn around and buy…and be dead right, is a great trader."

"That is true, the Index is up a long way. And yes, I did get in at the low, didn’t I? So I guess, by your definition, I am a great trader," Peter chuckled to himself.

"How far do you think the market will go up before it has a breather?" Peter asked. "I have no idea," Paul replied. "Neither do I, that’s why I have placed my sell orders below the daily lows each day in case it turns around again and I’m ready to go short again," Peter explained.

"It’s not so much picking the low that is important or even necessary, it’s managing the trade as it progresses that makes the money," Peter added.

"But we’ll get to that later, let’s have a look at a chart and tell me what you see," Peter said. He opened his charting software and soon they were looking at a monthly chart of the S&P 500 Index. Chart available at Stock Trading Review.com

"This is the last 3 years price history of the S&P 500 - what can you tell me about the direction of the trend?" Peter asked.

"It’s been going down," Paul replied. "Correct, and which way have you been trading this market that has been in a clear down trend?" Peter continued. "I haven’t been trading it at all, I’ve just been fully invested, losing money," Paul replied.

"Then you have indeed been trading it, my friend." Peter continued. "By sitting on your hands for the last 2 and a half years while prices continued to fall, you have been fighting the trend. People who fight the trend always lose money.

"Then, you finally sold in a panic, like all the other small traders who finally gave up hope last week. You sold to people like me. The same thing happens every time there is a correction or bear market - the small traders hang on until they can’t stand to be in the market any longer, they all sell together in a panic and then the market goes up."

"Tell me, looking at this chart, when did the downtrend start?" Peter asked.

"Well I guess around December, 2000 is where it looked like it started to fall away," Paul replied. "Correct," replied Peter.

"That means that from December 2000, there was no reason to be buying this Index, or buying Stocks that were showing the same chart pattern, and there was every reason to have your Stock portfolio hedged if you didn’t sell or have your money in cash."

Paul looked at the chart and of course it was easy to see the trend was down with hindsight.

Before he could say anything, Peter continued. "Of course, hindsight trading is perfect, so how would you have known the best time to get out of the market or hedge your portfolio?" Paul looked at the chart and said, "I guess when the moving averages crossed over."

"Correct," said Peter. "So, for the last 2 and a half years, the trend on the monthly chart was down. "What else does this chart tell you about the market?"

Paul looked at the chart, but he wasn’t really sure what Peter wanted to know. "I’m not sure," he finally confessed.

"Take a close look at the reactions within the downtrend. Notice that the largest one only managed to go against the trend for 3 months. In any timeframe, a market or Stock that can only go against the major trend for a few bars like this is in a very strong trend.

"Also, the Index was consistently closing below the short term moving average, and always closed below the longer term moving average - this is not something you want to sit through fully invested, holding on and hoping," Peter continued.

Paul could see now the reason for his huge losses. He had looked at charts before but he had never looked at the big picture. The monthly chart showed the trend clearly - and it had been down. A simple moving average crossover sell signal would have saved his fortune…

"This simple timing system is what I use for my long term portfolio," Peter continued. "I have 70% of the funds I have allocated to the Stock market invested for the long term in leveraged S&P 500 Index Funds. My investment in these funds forms the core of my Stock portfolio.

"I initially entered when I got a buy signal in 1994 and added more funds each month - 50-70% of my net short term trading profits and other income. I kept an eye on the monthly chart and didn’t get a sell signal until the end of 2000. I was fully invested in those funds from around 500 points to 1450 points."

Peter then showed Paul a monthly chart going back to 1994. Paul looked at it in disbelief. He was looking at probably the greatest wealth creation trend in history and he had missed most of it because of his short term focus. Chart available at Stock Trading Review.com.

"Remember this Paul," Peter said as they studied the long term chart, "Wealth comes from looking at the big picture. Many people believe that holding for the long term means forever. I prefer to hold things that are rising in value. If the trend turns down, I take my money and wait until the trend turns up again.

"This strategy of timing the market with a simple moving average crossover has made me a fortune while millions of people in this country have lost their life savings.

"Smart investors always invest the majority of their capital for the long term, but have clear guidelines for preserving it if the trend changes. They only trade with a small amount of money that they are prepared to lose.

"Your trading will be more profitable if you know that you have a substantial portfolio invested long term and it is increasing your wealth. By trading your entire account, and not managing it properly, you risked, and finally lost, most of it.

"And even though I bought a small position in Index futures a few days ago, my long term portfolio is still fully invested in Mutual Funds that trade inversely to the Index - in other words, the unit price of those Funds increases if the Index goes down.

"The trend is still down on the monthly chart as you can see, so that’s the way I want to be positioned with the majority of my portfolio. I think we have seen the low, but I am not prepared to risk my wealth on it. If the trend changes, then I will change with it. As you can see, I don’t have to make decisions very often.

"The market took nearly a year to form a top and start down. It might take a year to form a base if I am right and we are near the low. Patience and emotional control will make you a fortune -fear and greed will destroy your wealth."

Peter let the enormity of the previous rally and subsequent bear market sink in, and then said, OK, "Now we’ve had a look at the big picture, let’s have a look at the weekly trend." Chart available at Stock Trading Review.com.

As they looked at the weekly chart, Peter continued, "We know that the monthly trend is down - this weekly chart shows the most recent leg down that may have brought in the low for this bear market. The remaining 30% of my Stock market allocation is used to trade shorter term trends using both this timeframe and the daily chart.

"Bearing in mind that we are looking for trades with the major trend, we are looking to enter this market as soon as it confirms that the fast move down is indeed under way again after each of the bear market rallies that typically come along every few months. I have drawn a swing chart over the bar chart to highlight the swings of the market as it moved lower.

"Tell me what you see here," Peter asked. "Again I see a down trend - the moving averages are more often than not heading down and the swing chart you have drawn over the bars is making lower tops and bottoms - the trend is definitely down," Paul replied.

"And still you held on, while billions of dollars was wiped off the value of the Stock market all around you!" Peter said. "You knew the market was going down as you are somewhat familiar with charts, why did you not do anything to protect yourself?"

"I was always told that I should hang in for the long term - that the market always came back, and that it had never failed to make a new price high after every bear market. I guess I was too scared to do anything in case I got out right at the bottom. As it turned out, I did that anyway," Paul said.

Peter continued, "Notice on this chart that the rallies were also no more than one or two bars. This indicates a very strong trend - not something anyone should be buying into or holding if they want to protect their wealth.

"There were many people buying the dips as the down trend unfolded. This strategy had worked well in the bull market, but it failed miserably when the bear market came along. Every rally failed, forcing buyers to become sellers as the trend continued down.

"Trading the market requires us to adapt - the market has seasons - if we are out of season with the market, we get crushed.

"The rallies were just traps. Every bear market has them, and every time, traders think they have picked the bottom, only to find that they have not."

Paul looked at the chart and for the first time, with the help of the swing chart overlaid on top of the bars and the moving averages set as they were, he could see how simple it was to determine the trend. Especially the last few weeks - it was certainly a panic.

"Now, let’s have a look at the last few weeks to see what we can determine." Chart available at Stock Trading Review.com.

"Again, I have drawn a swing chart over the price bars on this daily chart. Once you understand swing charts, you will be able to draw these lines in your mind and you will not need to draw them on your charts any more," Peter said.

"As you can see, the moving averages are again moving down at a fair clip and the reactions to the down trend are no more than 3 bars. With the Monthly and Weekly trends strongly down, and a daily trend that is showing very weak rallies in this fashion, what else is a trader to do but short sell this market?" Peter asked.

Paul could see it clearly now, the trend was blindingly obvious -why had he not taken any notice before? There had been a fortune for the taking and he had not seen it.

"But how did you know for sure the market would turn on that day?" he asked Peter. "Ah, that is a lesson for another day my young friend. For now, lets make sure you understand trend trading first. Once you know what a trend looks like, you will be in a position to make consistent profits from the market, not before."

With that, their first meeting was over. Peter had some important visitors waiting in the reception area to discuss a Joint Venture in a property development. It was time for Paul to go.

He thanked Peter for his time and left the office. As walked out through the reception area, Peter called out behind him, "When you get home, set up all the Stocks you owned in a watchlist on Incrediblecharts.com, set it to monthly, put some moving averages on them and work out where you should have exited - that is your homework for this week. I will see you next Wednesday at 8.00am. Don’t be late…"

Paul arrived home with a renewed sense of purpose.

He did as Peter ordered and as he went through his previous portfolio, he saw that he should have sold every Stock he had owned by January 2001 at the latest. He felt disgusted with himself at having not been able to see this sooner, but he consoled himself that at least now he was on the right track.

He was still apprehensive, but he had a chance to put things right for his family. He was determined to make it as a trader, and with Peter’s help, he felt he could indeed succeed…

To Your Trading Success,

Tony Spann and the Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Join our FREE "Stock Trading Review" NewsLetter http://www.stocktradingreview.com/stock-trading-newsletter.html to get your hands on some real world "insider" stock trading tips and techniques and access to our exclusive "Members Only" Free Stock Trading System.

You have permission to publish this article electronically or in print, free of charge, as long as the bylines are included. A courtesy copy of your publication would be appreciated.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

(c) 2005 Stock Trading Review - All Rights Reserved.

Now that you have some money burning a hole in your pocket and the stock market is going up you have decided to buy some stock or maybe a mutual fund, but you have the momentous decisions to what to buy.

At this point you have three decisions to make besides which equity to buy:

1. How much to buy.
2. When to buy.
3. When to sell.

Which of these is the most important decision? Let me tell you this as a professional trader. What to buy and when to buy are the two least important of these decisions. Maybe only 10%. I know that comes as a shock to you because everyone is trying to find that one perfect stock that will make him a millionaire almost immediately. It’s not going to happen.

Trading is an occupation. Just like the business or profession you are in now it takes time to learn. There are certain basic rules that apply to every occupation. Most brokers and financial planners don’t know them, but as a former floor trader I had to learn them or I could not have survived.

What to buy is the least important because there are always several good buying opportunities every day. When to buy is not anywhere as important and when to sell. Every professional trader I know will first determine the risk, his potential loss, before buying. At the same time he makes his buy he puts in a sell order called a stop-loss order to automatically exit the position should it go against him. He is not thinking about how much he will make on a trade. He is thinking about protecting his capital should he be wrong. Professional traders are right less than 50% of the time, but they never take big losses.

The loser’s philosophy is always thinking about how much he will make and he refuses to face up to the very possible fact that he could lose money, a lot of money if he does not have a loss limit of some kind on his position. The loser is willing to be wiped out rather than admit he is wrong. Brokers tell you you have not lost money until you sell. Believe that and I will sell you my flying pig.

The other very important concern for your investments is how much of this stock should I buy. A good rule of thumb is between 10% and not more than 20% of your portfolio. Most mutual fund managers limit a risk position to about 5%, but they have other considerations. Never put all your money in one trade because it looks so good. That is super dumb.

Before you decide what to buy be sure you have in mind the amount you are willing to risk and the size of the position you wish to take (number of shares or dollars). When you have learned this you will be a successful stock market investor.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

1-888-345-7870; al@mutualfundstrategy.com

Spread trading is a technique that can be used to profit in bullish, neutral or bearish conditions. It basically functions to limit risk at the cost of limiting profit as well.

Spread trading is defined as opening a position by buying and selling the same type of option (ie. Call or Put) at the same time. For example, if you buy a call option for stock XYZ, and sell another call option for XYZ, you are in fact spread trading.

By buying one option and selling another, you limit your risk, since you know the exact difference in either the expiration date or strike price (or both) between the two options. This difference is known as the spread, hence the name of this spread treading technique.

VERTICAL SPREADS

A Vertical Spread is a spread where the 2 options (the one you bought, and the one you sold) have the same expiration date, but differ only in strike price. For example, if you bought a $60 June Call option and sold a $70 June Call option, you have created a Vertical Spread.

Let’s assume we have a stock XYZ that’s currently priced at $50. We think the stock will rise. However, we don’t think the rise will be substantial, maybe just a movement of $5.

We then initiate a Vertical Spread on this stock. We Buy a $50 Call option, and Sell a $55 Call option. Let’s assume that the $50 Call has a premium of $1 (since it’s just In-The-Money), and the $55 Call has a premium of $0.25 (since it’s $5 Out-Of-The-Money).

So we pay $1 for the $50 Call, and earn $0.25 off the $55 Call, giving us a total cost of $0.75.

Two things can happen. The stock can either rise, as predicted, or drop below the current price. Let’s look at the 2 scenarios:

Scenario 1: The price has dropped to $45. We have made a mistake and predicted the wrong price movement. However, since both Calls are Out-Of-The-Money and will expire worthless, we don’t have to do anything to Close the Position. Our loss would be the $0.75 we spent on this spread trading exercise.

Scenario 2: The price has risen to $55. The $50 Call is now $5 In-The-Money and has a premium of $6. The $55 Call is now just In-The-Money and has a premium of $1. We can’t just wait till expiration date, because we sold a Call that’s not covered by stocks we own (ie. a Naked Call). We therefore need to Close our Position before expiration.

So we need to sell the $50 Call which we bought earlier, and buy back the $55 Call that we sold earlier. So we sell the $50 Call for $6, and buy the $55 Call back for $1. This transaction has earned us $5, resulting in a nett gain of $4.25, taking into account the $0.75 we spent earlier.

What happens if the price of the stock jumps to $60 instead?

Here’s where the - limited risk / limited profit - expression comes in. At a current price of $60, the $50 Call would be $10 In-The-Money and would have a premium of $11. The $55 Call would be $5 In-The-Money and would have a premium of $6. Closing the position will still give us $5, and still give us a nett gain of $4.25.

Once both Calls are In-The-Money, our profit will always be limited by the difference between the strike prices of the 2 Calls, minus the amount we paid at the start.

As a general rule, once the stock value goes above the lower Call (the $50 Call in this example), we start to earn profit. And when it goes above the higher Call (the $55 Call in this example), we reach our maximum profit.

So why would we want to perform this Spread?

If we had just done a simple Call option, we would have had to spend the $1 required to buy the $50 Call. In this spread trading exercise, we only had to spend $0.75, hence the - limited risk - expression. So you are risking less, but you will also profit less, since any price movement beyond the higher Call will not earn you any more profit. Hence this strategy is suitable for moderately bullish stocks.

HORIZONTAL SPREADS

We now look a Horizontal Spreads. Horizontal Spreads, otherwise known as Time Spreads or Calendar Spreads, are spreads where the strike prices of the 2 options stay the same, but the expiration dates differ.

To recap: Options have a Time Value associated with them. Generally, as time progresses, an option’s premium loses value. In addition, the closer you get to expiration date, the faster the value drops.

This spread takes advantage of this premium decay.

Let’s look at an example. Let’s say we are now in the middle of June. We decide to perform a Horizontal Spread on a stock. For a particular strike price, let’s say the August option has a premium of $4, and the September option has a premium of $4.50.

To initiate a Horizontal Spread, we would Sell the nearer option (in this case August), and buy the further option (in this case September). So we earn $4.00 from the sale and spend $4.50 on the purchase, netting us a $0.50 cost.

Let’s fast-forward to the middle of August. The August option is fast approaching its expiration date, and the premium has dropped drastically, say down to $1.50. However, the September option still has another month’s room, and the premium is still holding steady at $3.00.

At this point, we would close the spread position. We buy back the August option for $1.50, and sell the September option for $3.00. That gives us a profit of $1.50. When we deduct our initial cost of $0.50, we are left with a profit of $1.00.

That is basically how a Horizontal Spread works. The same technique can be used for Puts as well.

For more information on spread trading, visit: http://www.option-trading-guide.com/spreads.html

Steven is the webmaster of http://www.option-trading-guide.com. If you would like to learn more about Option Trading or Technical Analysis, do visit for various strategies and resources to help your stock market investments.

No, this is not a symbol for some Latin number. The Wall Street mavens talk about this market timing device as if they knew how to use it to determine which way the stock market is going – up or down. It is pretty obvious that brokers, analysts and financial planners have not learned the language.

What does it mean and can it be used to predict market moves? The VIX is actually a measure of volatility for those who buy and sell stock options think about the market. To make it simple you can find it displayed as a chart on the Internet at www.cboe.com. It measures the volatility of the market calculated by taking a weighted moving average of the implied volatility from eight puts and calls on the S&P 100 index. I hope I didn’t lose you here. Stay with me a moment and I’ll try to make it simple.

Every trader is looking for the Holy Grail indicator and recently the VIX seems to be it. Of course, like all indicators it will work until too many use it and then it will fail taking with it the spoils of the market – their life savings.

It seems relatively simple to use and therefore attracts novices as well as professionals. When the indicator goes below 30 it would be a time to be short the general market such as the DOW, the S&P or the Nasdaq. When the numbers go above 45, which is supposed to show panic of investors, it is a time to buy. It is an inverse indicator. The lower the number the more complacency of the little investor – SELL; the higher the number the greater panic – BUY. Maybe it has become too simple because there is a sing/song that goes “When VIX is high it’s time to buy, when VIX is low its time to go”.

If it were only that simple. Every timing device has its shortcomings. With the VIX the numbers can remain in excessive high and low levels for prolonged periods and therefore cause the trader to experience losses before the desired market movement occurs. Like all other timing methods it is best when combined with other signals such as the 50-day moving average, P/E ratios and other devices.

Having been a trader for many years I can assure there is no Holy Grail indicator. The VIX is but one letter in the alphabet of market language. You cannot be successful with one syllable. You must take the time to learn the entire vocabulary.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

1-888-345-7870; al@mutualfundstrategy.com

A few years back – it seems like an eternity today – the U.S. stock market experienced a severe bubble burst. Legitimate stocks rose beyond reasonable valuations and ideas merely in the germination stage sold for prices far beyond those of real proven companies. When the bubble burst, billions of dollars of shareholder value evaporated. One would have thought we’d learned our lesson.

Today, Yahoo and EBay, the two leading internet companies, again sell for prices beyond reasonable value. Again, people seem content to listen to a good story and place unrealistic valuations on companies that have no earnings or real prospects. Google’s recent IPO is proof positive that the market is still bubble-icious. Even stocks like General Electric are selling at prices above what the market should bear. What’s the story?

The story is, very simply, that we don’t learn lessons very well. Also, if you think about it, a lot of people actually made money back in the late 90’s during the bubble. So, there’s a case to be made for gambling on another similar adventure. If we can survive the “greater fool” theory, and find someone willing to pay more than we are, it almost doesn’t seem dangerous to buy a stock that has little or no intrinsic value, as long as there’s a belief that someone else might eventually pay more. So much for value investing!

No, the “experts” are now convinced that stocks and markets do not move in line with actual events, but instead move along with emotions and trends. Thus, the big money is chasing itself, going where it goes simply because it is going there. Does that make sense to you? I hope not.

We’ve held firmly to the seemingly outdated position that value does matter. We differ from some value investors, such as Warren Buffett, who avoids technology and new ideas: we do believe such stocks can have merit. We also hold firm to the idea that stocks will eventually return to their real value…or at least move toward that point in the end.

In these days when emotion seems to dominate reason, it is not unlikely for the whipsaw effect to be stronger than the reality effect. But we believe that, even in the midst of such insanity, having a focus on reality is worth something…even if no one else believes it.

For questions or comments, Scott Pearson can be reached directly at Scott@valueview.net or by visiting www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor’s Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

Yesterday I received my monthly issue of MONEY magazine. This issue has the special feature called “The Ultimate Investment Club” that highlights their picks for the top mutual fund managers. Let’s see how their members made money for their shareholders.

My readers know that the only thing that counts in my book is performance and performance means they make money and do NOT lose money so I went back to preview their record since these experts took over. When you see the results of this club you will be glad you did not go on any camping trips with them. Here are six who manage stock mutual funds.

As we go along you must keep in mind that fund managers get paid for the amount of money they have under management and not on how much they make for you.

MONEY magazine has given them titles. I will not mention their names, but will give you the fund along with the stock exchange symbol so you can look it up on the Internet at www.bigcharts.com.

“The Survivor” who manages Seligman Communications Fund (SCICX) since it was founded has seen the share price start at $35 and rise to $54 only to fall back to $15 today. He is surviving with your money, but you are not.

“The Value Master” of Legg Mason Value Trust (LMNVX) sure doesn’t know when the value has run out. Under his tutelage the fund has gone from $45 to $78 to $43.

“The Maverick” of CGM Capital Development (LOMCX) has been thrown by his horse. Share price in 1976 started at $10, went to $43 and is now $18. Tough ride for the shareholders.

Now we come to “The Bargain Hunter” who took over management of Oakmark Select (OAKMX) in 2000 when the market was at its peak. It was $22 and went up (!) to $37 and is now trading at $32. He is the only winner in the group. Congratulations.

Another loser is “The Opportunist”. This guy should be getting his buy recommendations from cab drivers. He could not do any worse for the Strong Opportunity Fund (SOPVX). It started at $45 and has nothing but a downward journey to its present $29.

For the Brandywine Fund (BRWIX) we have “The Growth Guru”. The only thing that grew fat was his wallet off of your money. He took over in 1998 at $45 and it went down to $22 in 1999, then up to $53 and is now $20. Actually he can only be given credit for the advance from $45 to $53.

In all fairness to these losers I did not include any capital gains or dividend payouts which during the few good years they had may have been very good, but probably not good enough to keep you at “even”.

There are all kinds of clubs you can join, but obviously this is not one for you. When you see advertising for various mutual funds or how wonderful some fund manager is please look beyond the hype and check out the performance.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

1-888-345-7870; al@mutualfundstrategy.com

Minority Report the movie may not be far off if the Head of the SEC has anything to say about it. At a Senate Banking Committee hearing on CSPAN, William Donaldson said that the beloved SEC can no longer sit back and "mop-up" after scandals break. This idea of Mopping up is interesting, because if the SEC has anymore regulations then everyone will be reduced to cleaning homes for a living although even Service Master owner of Merry Maids is doing lots of legal insider trading of their stock options and that alone is telling us that maybe just maybe all that Form 4 Action is a sign of things to come?

Bill Donald-Duck as they call him at the yacht club in Long Island’s Oyster House, is working on ways to detect and prevent fraud before it happens. And yes that is his job to regulate, but what is he going to do, read everyone’s mind? Hire mind readers and psychics? The regulation now is hurting business and money flow to markets. What is so funny is that today they are using psychics to find corporate fraud when yesterday they were attacking the psychics? Go figure these crazy insane regulators;

http://www.weeklyplanet.com/2002-03-27/cover2.html

The SEC chairman is also forming a policy-planning group, which is another word for COMMITTEE, yah we need more committees with more juice to bring on more headlines? This NEW COMMITTEE, with ample power is designed to anticipate problems in the markets and aims to foster more collaboration, which means conspiracy theorist parties of openly homosexual regulators, among the agency’s five divisions, all of which have access to the mass media anytime they pick up the phone and want to crush another free enterprise job creating company. The SEC has now been upstaged by New York state prosecutors under Spitzer and his clan (looking to run for VP of the US on the Democratic or Governor of NY soon), and some liberals think it needs to be more aggressive. Yah, sure we had to destry free enterprise to save the village to raise a child?

Although now in OKC we are seeing other power grabs for potential mass media headlines. Some possible examples of the SEC’s new tone: its recent report on hedge funds and its ostensibly aggressive attempts to root out mutual fund fraud.

http://biz.yahoo.com/rb/030930/financial_sec_donaldson_5.html

But no one was actually damaged in the Mutual Fund trading issue? Destroying free enterprise, why are we doing this? Communism, then they will run for office once they have enough free media to insure a podium spot amongst other naysayers of this great country. Bill, Mr. William Donaldson THE CHAIRMAN of the S-E-C to YOU later, you won’t last long with that attitude, took forever to commit to any position about the NYSE self regulation, since he was worried to make a career death comment until Reed took over and got to the bottom of things and changed some of this insanity of 29 board members who are in fact the same people they regulate.

http://biz.yahoo.com/djus/030930/1303001122_3.html

What we need is some fixing and a little less destroying. Every time the headlines come out against any company people start losing jobs in those companies whose stocks take a hit and then the investor is worse off due to a hit in those share they own, whether it is in a mutual fund or individual stocks. And this was caused by the regulators who are suppose to protect the investor. Can anyone see the hypocrisy of the unending PR agenda of our regulatory bodies? They are the worst terrorists to your portfolio there ever could be. Osama is a nuisance compared to their worthless purported contribution to our civilization,

We need strong and stable markets, but these headline grabbers are not making for healthy investor confidence levels. Play it smart guys, walk slowly through the valley of death, because even if you are the biggest, bad-est TV podium story this evening, it will not matter if the valley is gone. We must take care of these gambling casino back door games but slowly and not at the expense of all we are and all we have built. The longest one-syllable word in the English language is "screeched." And we ought to make sure that our financial markets do not come to a screeching halt.

"Lance Winslow" - Online Think Tank forum board. If you have innovative thoughts and unique perspectives, come think with Lance in the Online Think Tank and solve the problems of the World; www.WorldThinkTank.net/

You must take the time once a month to review your investment portfolio. It won’t take long - less than one hour, maybe 15 minutes.

I don’t believe the average working person or business owner should own anything but mutual funds because these are the easiest to buy and evaluate. However, if you do own some stocks the first thing to ask yourself is if each issue is selling for more than you paid for it. If it isn’t you must realize this is not where you want to have your money so the best course of action is to sell it NOW and put those funds into some other stock or fund that is going up. You may have a stock you bought 3 years ago and it has risen only 10% or 25% and you can’t decide what to do with it - keep it or sell it - because it has been going sideways for a long time. It might go up. It might go down. Call your broker (a discount broker, I hope) and place a 10% good-’til-cancelled (GTC) stop-loss order. Each month review your stop and move it up (never down) if the stock has risen. This way you don’t have to think about it and the market itself will tell you when you should be out.

Stops make you money! Brokers almost NEVER recommend stops especially when they want you to buy something. If it goes down they say it is a correction and "it will come back". But when? Remember how they were touting Boston Chicken at $35 and $40 per share? Today it is 50 cents per share.

It is my strong opinion that very few people have the ability to pick winning stocks. I’ve been trading more than 30 years and I’m right only 50% of the time. Even when I was an exchange member for 17 years and floor trader I would put in a stop as the same time I made the purchase.

If your portfolio is not making a better return than the S&P500 Index you would be better off having your funds in something like the Vanguard Index500 mutual fund. You will then be staying even with the market as a whole.

There are some basic things that move a particular stock. According to a recent study, 49% of the movement of an individual issue is due to the sector in which it resides: technology, financial, automotive, real estate, etc., 31% is due to the general direction of the market itself and only 20% is due to the quality of the company. In other words owning stock in a great company doesn’t mean the stock will go up. The whole group must find favor with institutions, banks and pension plan buyers. They move the market.

Easier said than done: you have to be in the right place and at the right time to see your stock go up. That is why you must take the time to review your invests once a month to keep up with any changes that might be necessary.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

1-888-345-7870; al@mutualfundstrategy.com