Wealthbuilder

Kindle Booklet

(C) Copyright 2014

(Second Edition)

All Rights Reserved

Christopher M. Quigley B.Sc., M.M.I.I., M.A.

www.wealthbuilder.ie

Dedicated to Linda, Aoife

and Niamh Quigley.

Contents Page:

Chapter 1. Introduction: The 12 Cardinal Rules.

Chapter 2. The Difference Between Stock Market Investment and Speculation.

Chapter 3. Three Elements of Investment Success.

Chapter 4.

Understanding Contracts for Difference.

Chapter 5.

Dow Theory: The Key to Understanding Stock Market Price Action.

Chapter 6 .

Successful Day Trading Brief.

Chapter 7.

Introduction to Technical Analysis.

Chapter 1.

Introduction: The 12 Cardinal Rules.

There are few more exciting yet challenging careers than stock market

trading and investment. If you get it right the world becomes your oyster.

This slim volume is meant to set you on the right path to understanding

what it takes to succeed in this area.

Whether you want to earn an income, plan for retirement or trade to try

to become rich, this volume is the place to commence and for a perfect start I

recommend you learn and remember the following 12 cardinal rules to success:

1. To trade/invest successfully you must develop your own system and

approach. To do this you must learn to think and act for yourself. The best way

to start this process is to first learn how others before you mastered this task

successfully. Thus become educated, informed and aware and stay that way.

With the advent of the web this task has never been easier for those prepared to

put in the time.

2. Never purchase equities at market price: always use a price limit.

3. Upon entering a position a stop loss should immediately be put in place.

Be prepared to cut your losses early should the price action go against you.

4. As the price of a stock rises (or falls if you are short) raise (or lower) your

stop accordingly, this allows your winners to run. Allowing your winners to run

is the only way to become rich in the stock market.

5. Prior to investing in any equity, pay particular attention to the

risk/reward ratio. The essence of the market is opportunity and risk so you must

always exploit the potential opportunity by being mindful of the actual risk

exposure.

6. Your portfolio of chosen stocks by fundamental analysis ideally should

comprise of no more than 7/10 stocks. Know everything there is to know about

listing including; price history, financials, business model, management style and

earnings dates.

7. When starting out do not invest more than 10% of your investment fund

until you have proven to yourself your actual ability to make good investment

decisions in real time. Ideally you should paper or virtual trade for 3-6 months

prior to investing this 10% hard cash.

8. Always keep a trading diary for note taking, analysis and review.

9. The ideal time to trade is the last 1-2 hours of trading.

10. Be consistent in your approach. Discipline will help you to eliminate

emotion from the process and allow experience, logic and technique to prevail.

11. Always know the trend of the market and work with it. Remember; "the

trend is your friend".

12. The key to investment and trading success is PATIENCE. If no

investment opportunity presents itself wait. Experience will teach you that very

often the best place to be is in CASH because the cardinal rule above all others

is PROTECT YOUR CAPITAL.

Chapter 2.

The Difference Between Stock Market Investment

and Speculation.

The issue of successful stock market investment affects us all. Even if we are not

directly engaged in the industry, all of us will need some form of pension to fund

our retirement. Whether we like it or not most of our retirement funds will find

their way into the financial markets. For this very reason, the issue of pensions

has moved politically centre stage, in particular the investment strategies used to

direct pension funds. Due to mismanagement over the last seven years, many

retirement portfolios have become under-funded at best, or, at worst, totally

bust. This situation is a direct result of the managed funds having been

speculated rather than invested. Many cynics will say that the whole investment

environment today has more of the characteristics of a casino than of a

professional market of equities and, therefore, they doubt that one can ever

achieve a faithful and fair return on capital. However, this view is erroneous as

there is a distinct difference between speculation and investment. This essay sets

out to explain some simple rules for successful long-term investment.

Benjamin Graham, the father of security analysis, and mentor of Warren

Buffett, long believed in the stock market as a means to achieve financial

freedom. The wealth he accumulated and the school of successful investment

gurus he educated are testament to his insight and genius. The key to his formula

has always been one simple concept: VALUE. His central message never

changed and in a financial community which bores easily, his conservative

investment style became "classical" and then "old fashioned". Graham

ultimately derided the fads and trends that engulfed Wall Street and he

eventually gave up trading and managing funds. However, his "baton" of value

was spectacularly taken up by his acolyte, Warren Buffett, who went on to

become the most successful investor of all time.

Buffett, like Graham, believes the policy of investing does not require high

qualities of insight or forethought, as long as some simple rules are applied. In

essence these simple rules are:

1. Safety of Capital

2. Adequacy of Return

An operation that does not seek both of the above is not an investment but a

speculation.

Now in today's complex, volatile, media-driven and fast-moving market

environment how does one actually apply these simple rules? The essential thing

to realise is that when you buy an equity, you are purchasing part of a business.

Investment is most intelligent when it is most business like. For my part, the best

way to achieve this business-like goal is to focus on price, and through systematic

analysis of this factor, the grail of value will be discovered.

At Wealthbuilder, for pension purposes, we educate clients in how to review up

to three thousand stocks every quarter. Using a number of filters, equity

prospects are identified and compiled into watch lists. Then, through the use of

basic technical analysis, appropriate buy-in and sell-out points are pinpointed.

The main criteria that are used to filter these stocks are:

1. Dividend Yield

2. Financial Strength

3. Price/Earnings Ratio

4. Dividend Growth

5. Sales/Earnings Growth

6. Return On Capital

7. Business Model Strength & Sustainability

Of these seven elements, dividend yield and dividend growth are the most

important. Let me explain.

The big driver of investment returns over time is not figuring out which sector is

going to do best, or which country will surpass the rest, or what investment style

will be in vogue, or which consumer group will prevail. No, the biggest driver is:

INVESTMENT INCOME RECEIVED AND RE-INVESTED. The facts are that

with dividend yielding stocks, over a rolling five-year period, 40% of your return

will be based on income. Over a twenty-five year period (the time frame of most

pension portfolios) 60% of total return will be attributable to income and its re-

investment. The reason being, that income buys more shares, and the additional

shares buy you more income and so on, increasing your overall return through

the power of compound mathematics.

If distributable income received is our key driver, then the objective of successful

investment analysis is to find those higher yielding stocks. Higher yield comes

from high dividends and high dividends are funded from earnings. We must seek

out those superior, earnings-driven companies. However, this alone is not

sufficient. Since we are dealing with pension funds that have correspondingly

long time-frames, those earnings must also be sustainable and growing. The

profile of such profit generating institutions can only come from companies in

large markets with proven solid products, such as: financial services, consumer

staples, healthcare, energy, technology and insurance.

With regard to the power of sustainable growth over investment portfolios, some

statistics may be helpful in understanding the essence of our focus and our

strategy. Earnings growth in the 5-10% per annum range is ideal. If you increase

your earnings and dividends at 5% a year, in 12-14 years you will have doubled

the yield on your entire original investment. Moreover if your increase is 10%

per annum, in just 7 years you will have doubled your return on the original

capital. Studies have shown that the companies with the most consistently rising

dividends and the most quickly rising dividends outperform the market by far.

In summary, the investment formula is as follows:

1. Financially Strong Businesses Plus

2. Large Growing Sustainable Markets Plus

3. Growing Earnings Plus

4. High Dividend Yield Plus

5. High Dividend Growth =

Superior Value.

In terms of value one cannot really compare a company that fits into our high

dividend yield model with a company that offers no return, other than potential

capital gain. Unfortunately, the majority of equities traded on the financial

markets fit into this latter category. These stocks, in the main, benefit only stock

exchanges and brokers who obtain commissions and fees through trading

activity. This is why we classify such stocks as "speculations" and not

"investments".

Despite appearing to be a complex matter, the path to investment success is quite

simple, as pointed out by Graham all those years ago. The financial

achievements of his students: Warren Buffett, Charkie Munger, Ed Anderson,

Bill Ryane, Rick Guerin and Stan Perlmeter, are testament to the enduring

power of his investment philosophy. By applying this philosophy the average

investor, using discipline and patience, has within his or her grasp the power to

earn superior returns in the stock markets and thereby win for themselves and

their families financial freedom and independence.

Chapter 3.

Three Elements of Investment Success.

1. Compounding

Success in a career in investing requires knowledge, patience, focus and

discipline. It is not a path to getting rich quick. When you see such quicky schemes advertised for any investment product you should run a mile. Quick rich schemes aside, disciplined investing can offer excellent returns when married to the magic of compounding.

Here is what Richard Russell, of Dow Theory Letter fame, has to say about

compounding:

Compounding: One of the most important lessons for living in the modern world is that to survive you've got to have money. But to live (survive) happily,

you must have love, health (mental and physical), freedom, intellectual

stimulation -- and money. When I taught my kids about money, the first thing I

taught them was the use of the "money bible." What's the money bible? Simple,

it's a volume of the compounding interest tables.

Compounding is the royal road to riches. Compounding is the safe road, the sure

road, and fortunately, anybody can do it. To compound successfully you need the

following: perseverance in order to keep you firmly on the savings path. You

need intelligence in order to understand what you are doing and why. And you

need knowledge of the mathematics tables in order to comprehend the amazing

rewards that will come to you if you faithfully follow the compounding road.

And, of course, you need time, time to allow the power of compounding to work

for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious --

compounding may involve sacrifice (you can't spend it and still save it). Second,

compounding is boring -- b-o-r-i-n-g. Or I should say it's boring until (after

seven or eight years) the money starts to pour in. Then, believe me, compounding

becomes very interesting. In fact, it becomes downright fascinating.

2. Value

To me the fundamental reality of the stock market is that it is not efficient. Quite

often the market does not correctly value a company and when you diligently

search for value and have the courage to trust your judgment you will beat the market consistently. This is the key to the success of investors such as Warren Buffett and his partner Charlie Munger.

In his classic essay The Superinvestors of Graham-and-Doddsville here is what Warren Buffett has to say about value:

I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and

value. When the price of a stock can be influenced by a "herd" on Wall Street

with prices set at the margin by the most emotional person, or the greediest

person, or the most depressed person, it is hard to argue that the market always

prices rationally. In fact, market prices are frequently nonsensical.

I would like to say one important thing about risk and reward. Sometimes risk

and reward are correlated in a positive fashion. If someone were to say to me, "I

have here a six-shooter and I have slipped one cartridge into it. Why don't you

just spin it and pull it once? If you survive, I will give you $1 million." I would

decline -- perhaps stating that $1 million is not enough. Then he might offer me

$5 million to pull the trigger twice -- now that would be a positive correlation

between risk and reward!

The exact opposite is true with value investing. If you buy a dollar bill for 60

cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of

reward is greater in the latter case. The greater the potential for reward in the

value portfolio, the less risk there is.

One quick example: The Washington Post Company in 1973 was selling for $80

million in the market. At the time, that day, you could have sold the assets to any

one of ten buyers for not less than $400 million, probably appreciably more. The

company owned the Post, Newsweek, plus several television stations in major

markets. Those same properties are worth $2 billion now, so the person who

would have paid $400 million would not have been crazy.

Now, if the stock had declined even further to a price that made the valuation

$40 million instead of $80 million, its beta would have been greater. And to

people that think beta measures risk, the cheaper price would have made it look

riskier. This is truly Alice in Wonderland. I have never been able to figure out

why it's riskier to buy $400 million worth of properties for $40 million than $80

million. And, as a matter of fact, if you buy a group of such securities and you

know anything at all about business valuation, there is essentially no risk in

buying $400 million for $80 million, particularly if you do it by buying ten $40

million piles of $8 million each. Since you don't have your hands on the $400

million, you want to be sure you are in with honest and reasonably competent

people, but that's not a difficult job.

3. Patient Risk Aversion

Of all the personal qualities required to make a successful investor for me

patience is on the top of the list. The patient investor waits until he finds value.

Once invested the patient investor allows time for the target investment to grow

in value. The patient investor avoids the emotion of daily swings and

roundabouts. The patient investor if she does not find value sits on her hands, in

cash, protecting her capital. The patient investor seeks to avoid losses first and

make money second.

Now patience might seem like a simple everyday quality but unfortunately it is

not. Many investors equate activity with success. In fact in my experience the opposite is the case. Smart inactivity is the key to long term portfolio growth.

Now risk aversion does not mean you completely avoid risk. No, risk is the

nature of the investment game. However, the risk must be worthy and this means

that the risk reward probability ratio of the chosen equity or instrument must

provide excellent upside potential once the market starts to correctly price in

identified inherent value. Taking the time to ferret out correct risk reward

candidates and then waiting for the market to signal the correct time to invest is

not something that is exciting or sexy.

Patient value investing does not require two, three or four workstations; it does not require subscription to forty financial publications; it does not need five

TV screens tuned into CNN, Bloomberg, CNBC, BBC World News and Asia

Today. For these reasons it is almost the exact opposite to the fashionable media

driven profile of the modern investor. But who ever said making money had to

be sexy or exciting. This is why most investors lose money because instead of doing what they should be doing they do what they think they should be doing.

Of course the perverse reality about this state of affairs is that the longer the

majority of investors carry on chasing their tail, trading instead of investing and losing their fortunes the easier it is for patient intelligent investors to

prosper. Long may it last.

Chapter 4.

Understanding Contracts for Difference.

One of the most innovative financial instruments that have been

developed over the last decade or so is the CONTRACT FOR DIFFENCE, better

know as a CFD. The explosion in the use of this product is one of the reasons

why London, as opposed to New York, is becoming the financial location of

preference for many financial managers and hedge traders. CFD's are not

allowed in the U.S. due to legal restrictions imposed by the American Regulators.

Contracts for Difference were developed in London in the early 1990's.

The innovation is accredited to Mr. Brian Keelan and Mr. Jon Wood of UBS

Warburg. They were then initially used by institutional investors and hedge

funds to limit their exposure to volatility on the London Stock Exchange in a

cost-effective way, for in addition to being traded on margin, they helped avoid

stamp duty (a government tax on purchase and sale of securities).

A CFD is in essence a contract between two parties agreeing that the

buyer will be paid by the seller the difference between the contract value of the

underlying equity and its value at time of contract. This means that traders and

investors can participate in the gains and losses (if shorting) of the market for a

fraction of capital exposed if the equity was purchased outright. In This regard

the CDS's operate like option contracts, but unlike calls and puts, there are no

fixed expiration dates and contract amounts. However contract values are

normally subject to interest and commission charges. For this reason they are

not really suitable to investors with a long-term buy and hold strategies.

CFd's allow traders to invest long or short using margin. This fixed

margin is usually about 5-10% of the value of the underlying financial

instrument. Once the contract is purchased there is a variable adjustment in the

value of the clients account based on the "marked to market" valuation process

that happens in real time when the market is open. Thus for example if a stock

ABC Inc. is trading at $100 it would cost approx. $10 to trade a CFD in ABC. If

1000 units were traded it would therefore cost the investor $10,000 to "control"

$100,000 worth or stock. If the stock increased in value to $110 the "marked to

market" process would add $10,000 to the client's account (110-100 by 1000). As

we can see the situation works very similarly to options but for the fact that there

are no standard option contract sizes and expiration dates and complicated

strike levels. Their simplicity has added greatly to their popular appeal amount

the retail public.

Contracts For Difference are currently available in over the counter

markets in Sweden, Spain, France, Canada, New Zealand, Australia, South

Africa, Australia, Singapore, Switzerland, Italy, Germany and the United

Kingdom. Their power and scope continue to grow. This development poses a

problem to American financial institutions in that unless there is a change in

security regulation Wall Street will lose out on a financial instrument that is

changing the manner in which the greater public and aggressive financial

managers are investing for the future. It is expected that Contracts for

Difference will become the medium of transaction for the majority of World

traders within the next decade.

If you are interested in becoming a successful trader, introduce yourself

to CFD's immediately.

Chapter 5.

Dow Theory: The Key to Understanding Stock

Market Price Action.

Dow Theory has been around for almost 100 years. Developed by Charles

Dow and refined by William Hamilton, many of the ideas put forward by these

two men have become axioms of Wall Street.

Background:

Charles Dow developed the Dow Theory from his analysis of market price action

in the late 19th. Century. Until his death in 1902, Dow was part owner as well as

editor of the Wall Street Journal. Even though Charles Dow is credited with

initiating Dow Theory, it was S.A. Nelson and William Hamilton who later

refined the theory into what it is today. In 1932 Robert Rhea further refined the

analysis. Rhea studied and deciphered some 252 editorials through which Dow

and Hamilton conveyed their thoughts on the market.

Main Assumptions:

1. Manipulation of the primary trend as not being possible is the primary

assumption of the Dow Theory. Hamilton also believed that while individual

stocks could be influenced it would be virtually impossible to manipulate the

market as a whole.

2. Averages discount everything. This assumption means that the markets

reflect all known information. Everything there is to know is already reflected in

the markets through price. Price represents the sum total of all the hopes, fears

and expectations of all participants. The un-expected will occur, but usually this

will affect the short-term trend. The primary trend will remain unaffected.

Hamilton noted that sometimes the market would react negatively to good news.

For Hamilton the reason was simple: the markets look ahead, this explains the

old Wall Street axiom "buy on the rumour and sell on the news".

Even though the Dow Theory is not meant for short-term trading, it can

still add value for traders. Thus no matter what your time frame; it always helps

to be able to identify the primary trend. According to Hamilton those who

successfully applied the Dow Theory rarely traded on too regular a basis.

Hamilton and Dow were not concerned with the risks involved in getting exact

tops and bottoms. Their main concern was catching large moves. They advised

the close study of the markets on a daily basis, but they also sought to minimise

the effects of random movements and recommended concentration on the

primary trend.

Price Movement:

Dow and Hamilton identified three types of price movement for the Dow:

A. Primary movements

B. Secondary movements

C. Daily fluctuations

A. Primary moves last from a few months to many years and

represent the broad underlying trend of the market.

B. Secondary or reaction movements last for a few weeks to many

months and move counter to the primary trend.

C. Daily fluctuations can move with or against the primary trend and

last from a few hours to a few days, but usually not more than a week.

Primary movements, as mentioned, represent the broad underlying trend.

These actions are typically referred to as BULL or BEAR trends.

Bull means buying or positive trends and Bear means negative or selling

trends. Once the primary trend has been identified, it will remain in effect until

proven otherwise. Hamilton believed that the length and the duration of the

trend were largely undeterminable. Many traders and investors get hung up on

price and time targets. The reality of the situation is that nobody knows where

and when the primary trend will end.

The objective of Dow Theory is to utilize what we do know, not to

haphazardly guess about what we do not. Through a set of guidelines. Dow

Theory enables investors to identify the primary trend and invest accordingly.

Trying to predict the length and duration of the trend is an exercise in futility.

Success according to Hamilton and Dow is measured by the ability to identify the

primary trend and stay with it.

Secondary movements run counter to the primary trend and are

reactionary in nature. In a bull market a secondary move is considered a

correction. In a bear market, secondary moves are sometimes called reaction

rallies. Hamilton characterized secondary moves as a necessary phenomenon to

combat excessive speculation. Corrections and counter moves kept speculators in

check and added a healthy dose of guess work to market movements. Because of

their complexity and deceptive nature, secondary movements require extra

careful study and analysis. He discovered investors often mistake a secondary

move as the beginning of a new primary trend.

Daily fluctuations, while important when viewed as a group, can be

dangerous and unreliable individually. Getting too caught up in the movement of

one or two days can lead to hasty decisions that are based on emotion. To invest

successfully it is vitally important to keep the whole picture in mind when

analyzing daily price movements. In general they agreed the study of daily price

action can add valuable insight, but only when taken in greater context.

The Three Stages of Primary Bull Markets and Primary Bear Markets:

Primary Bull Market Stages:

Stage 1. Accumulation

Hamilton noted that the first stage of a bull market was largely indistinguishable

from the last reaction rally in a bear market. Pessimism, which was excessive at

the end of the bear market, still reigns at the beginning of a bull market. In the

first stage of a bull market, stocks begin to find a bottom and quietly firm up.

After the first leg peaks and starts to head down, the bears come out proclaiming

that the bear market is not over. It is at this stage that careful analysis is

warranted to determine if the decline is a secondary movement. If is a secondary

move, then the low forms above the previous low, a quiet period will ensue as the

market firms and then an advance will begin. When the previous peak is

surpassed, the beginning of the second leg and a primary bull will be confirmed.

Stage 2. Movement With Strength

The second stage of a primary bull market is usually the longest, and sees the

largest advance in prices. It is a period marked by improving business

conditions and increased valuations in stocks. This is considered the easiest stage

to make profit as participation is broad and the trend followers begin to

participate.

Stage 3. Excess

Marked by excess speculation and the appearance of inflationary pressures.

During the third and final stage, the public is fully involved in the market,

valuations are excessive and confidence is extraordinarily

high.

Primary Bear Market Stages:

Stage 1. Distribution

Just as accumulation is the hallmark of the first stage of a primary bull market,

distribution marks the beginning of a bear market. As the "smart money" begins

to realise that business conditions are not quite as good as once thought, and thus

they begin to sell stock. There is little in the headlines to indicate a bear market

is at hand and general business conditions remain good. However stocks begin to

lose their lustre and the decline begins to take hand. After a moderate decline,

there is a reaction rally that retraces a portion of the decline. Hamilton noted

that reaction rallies during a bear market were quite swift and sharp. This quick

and sudden movement would invigorate the bulls to proclaim the bull market

alive and well. However the reaction high of the secondary move would form and

be lower than the previous high. After making a lower high, a break below the

previous low, would confirm that this was the second stage of a bear market.

Stage 2. Movement With Strength

As with the primary bull market stage two of a primary bear market provides

the largest move. This is when the trend has been identified as down and

business conditions begin to deteriorate. Earnings estimates are reduced,

shortfalls occur, profit margins shrink and revenues fall.

Stage 3. Despair

At the final stage of a bear market all hope is lost and stocks are frowned upon.

Valuations are low, but the selling continues as participants seek to sell no

matter what. The news from corporate America is bad, the economic outlook is

bleak and no buyers are to be found. The market will continue to decline until all

the bad news is fully priced into the stocks. Once stocks fully reflect the worst

possible outcome, the cycle begins again.

Stage Signals:

Identification Of The Trend

The first step in the identifying the primary trend is to analyse the individual

trend of the Dow Jones Industrial Average and the Dow Jones Transport

Average. Hamilton used peak and trough analysis to ascertain the identity of the

trend. An uptrend is defined by prices that form a series of rising peaks and

rising troughs [higher highs and higher lows]. In contrast, a downtrend is

defined by prices that form a series of declining peaks and declining troughs

[lower highs and lower lows].

Once the trend has been identified, it is assumed valid until proven

otherwise. A downtrend is considered valid until a higher low forms and the

ensuing advance off the higher low surpasses the previous reaction high.

Conversely, an uptrend is considered in place until a lower low forms.

Averages Must Confirm:

Hamilton and Dow stressed that for a primary trend or sell signal to be valid,

both the Dow Jones Industrial and The Transport averages must confirm each

other. For example if one average records a new high or new low, then the other

must soon follow for a Dow theory signal to be considered valid.

Volume:

Though Hamilton did analyse statistics, price action was the ultimate

determinant. Volume is more important when confirming the strength of

advances and can also help to identify potential reversals. Hamilton thought that

volume should increase in the direction of the primary trend. For example in a

primary bull market, volume should be heavier on advances than during

corrections. The opposite is true in a primary bear market. Volume should

increase on the declines and decrease during the reaction rallies. Thus by

analysing the reaction rallies and corrections, it is possible to judge the

underlying strength of the primary trend.

Trading Ranges:

In his commentaries over the years, Hamilton referred many times to "lines".

Lines are horizontal lines that form trading ranges. Trading ranges develop

when the averages move sideways over a period of time and make it possible to

draw horizontal lines connecting the tops and the bottoms. These trading ranges

indicate either accumulation or distribution, but is was virtually impossible to

tell which until there was a clear break to the upside or the downside.

Conclusion:

The goal of Dow and Hamilton was to identify the primary trend and catch the

big moves up and be out of the market the rest of the time. They well understood

that the market was influenced by emotion and prone to over-reaction, both up

and down. With this in mind, they concentrated on identification and following

the trend.

Dow theory [or set of assumptions] helps investors identify facts. It can form an

excellent basis for analysis and has become the cornerstone for many

professional traders in understanding market movement. Hamilton and Dow

believed that success in the markets required serious study and analysis. They

realised that success was a great thing, but also realised that failure, while

painful, should be looked upon as learning experiences. Technical analysis is an

art form and the eye and mind grow keener with practice.

Chapter 6 .

Successful Day Trading Brief.

Judging from the contents of an increasing number of emails more and

more investors are choosing to "actively" trade the market rather than "buy and

hold." In the main, this is due to the fact that in a bear market the latter strategy

creates losses that are difficult to accept long term. However another reason is

that with limited business opportunity available investors are seeking "income"

rather than capital gain from their investments.

Accordingly I set out below some parameters to help these new "traders"

avoid the worse pitfalls and hopefully guide them towards the mindset required

for long term success.

1. Start: Markets are rational. The best theory to gain this insight is Dow

Theory. Learn everything you can about Hamilton's and Dow's perceptions and

make it part of your investment "macro-view".

2. Due to the growing complexity in financial reporting and the

opportunity for abuse therein, with its concomitant risk, it may be advisable to

trade through exchange traded funds (ETF') or Contracts for Difference

(CFD's). These funds trade like stocks but offer exposure to equity sectors,

commodities, currencies and interest rates. Thus you have better opportunity for

diversification with less risk.

3. When you enter a position know beforehand your exit point. Always

place a sell stop thus limiting your potential loss.

4. As your profits rise adjust your sell stop upwards thus locking in your

profits.

5. A trading platform offering discount commissions is absolutely vital. I

like IG Markets or Ameritrade.

6. Technical analysis data is vital to judge your entry and exit points. Get

a good system that offers "real time" streaming providing one minute, five

minute, ten minute and one hour ticker readings in addition to the regular daily

timelines. I prefer the five minute screen. I use Worden Bros.

7. Using too many technical indicators creates "paralysis by analysis".

Get to know the indicators that work for you and stick to them. Consistency will

bring greater reward. I like MACD (moving average convergence divergence, 10

and 20 DMA's (daily moving averages) and purchase volume. For price I use the

candlestick format rather than the simple line as it gives more information on

the market psychology of actual price movement. See note 1. below on MACD.

8. You must adopt a trading strategy. If you do not have one find one. If

you are new to trading use the many simulation packages available online to test

and retest your knowledge and approach. Do not start to spend a major part of

your capital until you have proven to yourself that you can consistently make

good investment decisions in real time. It is better to be losing time rather than

time and money. For me the best strategy to successfully day trade is our

Wealth-builder MOMENTUM STRATEGY. This strategy highlights top stocks

which are going long and going short. Our BUY indicator is a BULLISH

ENGULFING candlestick moving up through a DMA on high volume. Ideally

with a MACD changing from negative to positive. Our SELL indicator is a

BEARISH ENGULFING candlestick moving down through a DMA, ideally with

MACD moving from positive to negative.

9. The holy grail of trading is patience. If you do not have a trade that has

a good probability to work profitably for you the best place to be is in cash. This

is hard to learn but is absolutely essential.

10. If you think trading is gambling you have missed the point and need to

be re-educated. Go back to "start" and get your thinking rational.

Note 1:

Moving Average Convergence Divergence (MACD):

Developed by Gerald Appel, MACD is one of the simplest and most reliable

indicators available. MACD uses moving averages, which are lagging indicators,

to include some trend following characteristics. These lagging indicators are

turned into a momentum oscillator by subtracting the longer moving average

from the shorter moving average. The resulting plot forms a line that oscillates

above and below zero.

The most popular formula for the standard MACD is the difference

between a stock's 26-day and 12-day exponential moving averages. However

Appel and others have since tinkered with these original settings to come up with

a MACD that is better suited for faster or slower securities. Using shorter

moving averages will produce a quicker, more responsive indicator, while using

longer averages will produce a slower indicator.

What does MACD do?

MACD measures the difference between two moving averages. A positive MACD

indicates that the 12-day EMA (exponential moving average) is trading above the

26-day EMA. A negative MACD indicates that the 12-day EMA is trading below

the 26-EMA. If MACD is positive and rising, then the gap between the 12-day

EMA and the 26-day EMA is widening. This indicates that the rate-of-change of

the faster moving average is higher than the rate-of-change for the slower

moving average. Positive momentum is increasing and this would be considered

bullish. If MACD is negative and declining further, then the negative gap

between the faster moving average and the slower moving average is expanding.

Downward momentum is accelerating and this would be considered bearish.

MACD centerline crossovers occur when the faster moving average crosses the

slower moving average. One of the primary benefits of MACD is that it does

incorporate aspects of both momentum and trend in one indicator. As a trend

following indicator, it will not be wrong for long. The use of moving averages

ensures that the indicator will eventually follow the movements of the underlying

security.

As a momentum indicator, MACD has the ability to foreshadow moves in

the underlying stock. MACD divergences can be a key factor in predicting a

trend change. For example a negative divergence on a rising security signifies

that bullish momentum is wavering and that there could be a potential change in

trend from bullish to bearish. This can serve as an alert for traders and

investors.

In 1986 Thomas Aspray developed the MACD histogram in order to

anticipate MACD crossovers. The MACD histogram represents the difference

between MACD and the 9-day EMA of MACD. The plot of this difference is

presented as a histogram, making centerline crossovers and divergences more

identifiable. Sharp increases in the MACD histogram indicate that MACD is

rising faster than the 9-day ema and bullish momentum is strengthening. Sharp

declines in the MACD histogram indicate that the MACD is falling faster that its

9-day ema and bearish momentum is increasing. Thomas Aspray recognized the

MACD histogram as a tool to anticipate a moving average crossover.

Divergences usually appear in the MACD histogram before MACD moving

average crossover. Armed with this knowledge, traders and investors can better

prepare for potential change. Remember the weekly MACD histogram can be

used to generate a long-term signal in order to establish the tradable trend, thus

allowing only short-term signals that agree with the major trend to be used for

investment action.

Chapter 7.

Introduction to Technical Analysis.

1. Technical analysis is a tool to gain insight into market price behaviour

and so enable you to more profitably judge investment entry and exit points.

2. In essence Technical Analysis, correctly used, will motivate investment

action that brings a higher probability of success than decisions made through

the mechanism of pure random choice.

3. Dow Theory demonstrates that the market is not random.

4. This theory has proven itself over more than 100 years.

5.Technical analysis works because price action is a result of human

decisions.

6. Historical observation indicates that price conditions may change but

human nature does not.

7. Thus Technical Analysis is basically a form of behavioural (social)

science.

8. Technical study cannot predict the future, else there would be no

market as it is a zero sum game, but it can be a guide.

9. In my experience too much use of Technicals leads to Paralysis by

Analysis. Thus I advise the use of some technical indicators but not too many.

10. My favourite analysis indicators are:

A. Moving Averages.

B. MACD.

C. Stochastics.

D. Price (Candlestick Format).

E. The A/D line.

A. Moving Averages to use:

10 Day Line

20 Day Line

50 Day Line

100 Day Line

200 Day Line

Moving averages even out price action to enable one ascertain overall trend.

B. MACD to use:

Moving Average Convergence/Divergence

Use the histogram format 12 26 9

MACD turns two trend following moving averages into a momentum

oscillator by subtracting the longer moving average from the shorter. Thus it

merges trend with momentum into one indicator.

C. Stochastics to use:

Fast: 14 - 3 - 3

Slow: 28 - 7 - 7

The stochastic oscillator is a momentum indicator that shows the price

close relative to the high low price range over a set number of periods. Thus it follows the momentum of price. As a rule momentum changes before price. It

can be used to show oversold and overbought price conditions.

D. Price: Candlestick Format

Japanese Candlestick charts are one of the oldest types of charts used for

price prediction. They date back to the 1700s when they were used for

predicting rive prices.

The Candlestick format shows the full range of price movement i.e. high,

low, open and close. Thus we get a sense of the market sentiment behind price

changes. This cannot be observed through looking at the standard line format

which simply records closing prices.

E. The A/D Line:

The Advance Decline Line is a breadth indicator based on Net Advances,

which is the number of advancing stocks less the number of declining stocks.

The AD Line is a cumulative measure of Net Advances. It rises when Net

Advances is positive and falls when Net Advances is negative.

This indicator is excellent for finding the actual trend in operation in the

market at any one time. I use the 10 DMA crossing over the 20 DMA to ascertain

short term trend changes and when this is confirmed by the 20 DMA crossing

over the 50 DMA I know that the trend is solid. The A/D line performed

brilliantly foreseeing the tech crash in 2000, the Iraq war rally in 2003, the Sub-

Prime bust of 2007 and the Obama election rally of 2009.

Chapter 1.Introduction: The 12 Cardinal Rules.Chapter 2.The Difference Between Stock Market Investment and Speculation.Chapter 3.Three Elements of Investment Success.Chapter 4.Understanding Contracts for Difference.Dow Theory: The Key to Understanding Stock Market Price Action.Chapter 6 .Successful Day Trading Brief.Introduction to Technical Analysis.