Monthly Archives: October 2017

Money Management for Financial Markets

If you are serious about trading on any kind of time frame you have to know what you are going to risk before you buy or sell short. This is true in any kind of business. With the stock market you can be extremely specific on your loss expectations because of the vast amount of liquidity in the markets. With a stock exchange that is open 24 hours a day 5 ½ days a week there is ample opportunity to know your risks.

In order to succeed in any kind of venture you have to treat it like a business. You wouldn’t start a successful retail business without planning the various aspects of what to market and who you are going to market towards. You must treat trading the same way. Far too many beginners haphazardly start trading thinking they will make quick fortunes. That is nothing more than a mental trap. The stock market is, as much if not more, a mental business than the technical and fundamental information it trades on. Opening an account without a game plan is a plan for disaster.

If you are brand new to trading you should go out and open a practice account. It is critical that you treat this account like it is real money. Don’t leave trades open that you would profit on with real money and don’t let losers run. You need to prove to yourself that you are a successful trader, and to do that you need to see the beginning balance grow, no exceptions or excuses. After you have successfully added value to your account over a 3 month time period is it acceptable to start trading live.

Gold and the Current Financial Market

When inflation plays tricks on your savings, you cease to trust the banking systems. No bank is able to offer the guarantee of keeping your money safe forever. And you don’t solve the problem by keeping the cash under your pillow. You will realize one day that you only own a pile of paper that has little value although you thought you had a fortune. But what is it that one can do during exhausting periods of recession?

Experts can easily explain your opportunities. What is it that you want? Financial stability. How can you obtain it? By storing your wealth in a safe deposit. And if you are still wondering what is the form of that deposit, the answer is simple: gold. If shares and stocks and other sorts of investment lack stability and have an unpredictable behavior, gold cannot fail you.

History proved that this metal stays firm in difficult times of inflation. When currencies decline, a certificate of ownership of gold bullion guarantees your wealth is protected. An economic crises can show you an empty deposit where you thought nothing could shake your savings. But with gold bullion or bars, coins or jewelry, you physically hold your money. Its notional value becomes real value which nobody can deny.

The Current Financial Market Situation

The last two days the stock market has recovered some lost ground. On Friday, it recovered because of the Fed action to reduce the discount rate. Much was said about this but what does it really mean? It means that banks can borrow money from the Fed at a reasonable market rate that hopefully allows them to invest and earn a profit. This helps with liquidity. It does not, however, address the most fundamental issues facing the market, unless it results in an overall reduction in interest rates along the yield curve.

Let me explain this. The basic problem with the “subprime” crisis is that liberal lending standards have resulted in large pools of assets that investors of all sorts have purchased at relatively low spreads over the market interest rates. This means that there is a low risk premium built into those investments. If in fact, the underlying mortgages have higher than expected default rates, higher foreclosure rates, and higher loss rates, the investors are not fairly compensated and the investments in those bonds are not worth what was paid for them. While we cannot predict the future, it appears that this will in fact be the case. Mortgage default rates are increasing, real estate values are decreasing, and the likely result is that more losses will accrue on those portfolios and the bonds will be worth less than full value.

Now let’s say that you are a Hedge fund. If you purchased a lot of these bonds and in order to increase the return on the equity put into your Hedge fund, you leveraged those bonds by borrowing against them, then the value of your assets may be less relative to the debt you owe against them. Then the value of the equity investments in your fund can rapidly decline or become zero.