For several years now, a very popular investment choice among traders and investors has been ETFs, which are Exchange Traded Funds. They are most analogous to mutual funds in the respect that they are comprised of a portfolio of stocks or other assets, but they move more similarly to stocks and can be traded like stocks.

A mutual fund is created by an investment company or an insurance company that pools investor dollars together using the money to purchase large blocks of whatever type of securities the fund was created to invest in. There are many different types of mutual funds that are very common, such as stock funds, bond funds, and index funds. One of their biggest benefits is the diversification that they provide to their investors; however, they can be very cumbersome in some respects. They are not easily bought and sold on open exchanges, they are only priced once each day when the market closes, their internal costs can be very high, the commission structure to purchase them can be cost prohibitive for shorter term moves because it can be based on a percentage of the amount invested and, in some cases, you need to buy them through financial planners or stock brokers.

ETFs have a similar structure to mutual funds in the respect that they are diversified, there are the same, or similar, types of ETFs as there are mutual funds, they are comprised of pools of securities of individual companies or assets, and ETFs that invest in metals may actually hold the metal, such as gold bullion. ETFs are traded, just like stocks, on open exchanges with constant updates to their pricing, which makes moving into them and back out of them very easy and fluid. You can hold them for the long or intermediate-term or you can trade in and out of them regularly. Their commission structure is the same as it is for stocks. So if you use a good discount stockbroker, the commission can be so small it won’t have much of an affect on the outcome of the investment. Mutual funds can only be purchased and are held until they go up, but ETFs can be sold short.

There are a variety of ETFs that are available, such as leveraged ETFs and inverse ETFs. Leveraged ETFs are designed to move 2 or 3 times more than their underlying investments, which means that if you purchase shares of a leveraged gold ETF, the price movement, on a percentage basis, will be a multiple of times greater than the actual price moves of gold. Inverse ETFs are an interesting concept because their entire portfolio consists of short positions; this means that, as the underlying positions that are held in the ETF drop in value, the value of the ETF itself goes up, which can be very useful under certain circumstances in some specific types of accounts.

Generally speaking, when it comes to investing in ETFs or trading them, you really can get the benefits of both worlds. You can get the fluidity and low cost of trading stocks, while you have the diversification of the pooled investment concept of mutual funds. They also make trading or investing in specific sectors very easy, which includes the S&P 500, the Dow 30, European stock averages, gold and silver and other, very specific commodities and industries. Most of the larger, high-volume ETFs will be optionable, which can also be a huge benefit over mutual funds.

While there is no “one size fits all” when it comes to investing, ETFs should at least be considered as possible additions to investors and traders portfolios, due not only in large part to the aforementioned benefits, but also because of the simplicity of trading them and the wide variety of opportunities that they provide. If it is likely that there will be something good or bad happening in a given industry, economic sector, or region of the world, ETFs can allow you to participate in whatever opportunity comes from it without a lot of difficulty and without having to take the time to follow specific stocks from the region or industry.

Today we are going to discuss the importance of knowing your strategy. Your strategy tells you the reason why you enter and exit a trade. It will give you the conditions you need to see in order to buy and sell. If you don’t know your strategy, you will never develop the confidence or discipline you need to be successful.

Many new traders begin with the idea that they will make lots of money trading. In thinking this, they will spend lots of time trying to find a strategy to trade. This constant search for the perfect strategy causes them to spin their wheels, while going nowhere. This can also be a problem with experienced trader as well. They have tried many strategies but have never focused in on one in order to become profitable with it. The problem is not a lack of strategies, the problem is a lack of understanding of the strategies.

If we did an experiment and gave everyone only one indicator to trade and told them to develop a strategy with it, what would happen? Then, if we told them that it was the only indicator they could ever use for the rest of their life, what would happen? Well, if we could actually do this, we would find that traders would either quit or find a way to make it work. Those that decided to make it work would look at how they could trade with the indicator to make it profitable. Now, I’m not suggesting you do this, but what I am suggesting is that you take a strategy you have and begin working with it so you can make it profitable. Stop looking for the next best strategy to trade. If you do this, you will find that you will likely be more successful faster than if you spend the rest of your life looking for a perfect system.

Once you decide on which strategy you are going to trade, you will want to get to know it. You will want to know how it works in good conditions, as well as bad conditions. You will want to know exactly what your entry conditions are so when you see them, you will know you should take the trade. You will want to know the exits and any adjustments you will make to the stop and targets. You will want to figure out when it is most likely to be profitable and when the least likely time will be. You will also want to know what external condition might affect the strategy, such as news or geopolitical events.

Once you know the ins and outs of your strategy, you will be able to trade it with confidence and once you are confident with it, you will develop the discipline to trade it so you can be profitable. Take some time to look at your strategy and make sure you know it in and out. If you are still looking for a strategy, pick one and begin to get to know it so you can trade it profitably.

We all have probably used stop loss orders to limit our risk in a trade, but how can you use the stop loss order to help manage your trades? You can adjust the initial stop order or “trail” the stop as the position moves in your favor. The initial stop loss orders are an important tool to manage your initial risk. However, let’s discuss using trailing stops on your trades once they are made.

So what are trailing stop loss orders and how do they work? Just like initial stop loss orders, the trailing stop promotes trading discipline by taking most of the emotion out of the exit decision, thus helping you to protect profits and capital. There are two different kinds of trailing stops – first, automatic trailing stops and, second, manual trailing stops. The benefit of an automatic stop order is that it can be set at a predetermined percentage away from the current market price. A trailing stop for a long position would be set below the position’s current market price. For a short position, it would be set above the current market price. A trailing stop is designed to protect profits in the security by enabling a trade to remain open and continue to profit as long as the price is moving in a positive direction, either long or short, but then closing the trade if the price changes direction by a specified percentage, letting the trade exit or being “stopped out” at the trailing stop level. With a manual trailing stop, you would move the stop up or down, whether going long or short, in the direction of the trade, using some method, such as the low of the last 3 bars for a long trade, or the high of the last 3 bars for a short trade, for example. The advantage to using a manual trailing stop, depending on the method used, allows you to scale the trailing stop using current market ranges, instead of preset percentage as in an auto trailing stop.

An example of an automatic trailing stop is a stock that is $50 dollars at market and you place an entry order. At the same time, you place a trailing stop 5% or $2.50 away from the market price. As the stock price moves 5%, the trailing stop will move to break even and then continue to trail on up every time the stock moves another 5%.

One of the trickier things about a trailing stop is where to place it away from the market. In our example, if you place the trailing stop at 5% and that is too tight for the market, you will often get stopped out prematurely. Or, on the other hand, you place it too wide, you run the risk of losing too much capital if it starts to move against you. This issue applies to either a manually adjusted trailing stop or to automatically moving trailing stops.

In conclusion, the real advantage to using trailing stops is that you will be able to reduce your risk as the stock or other security moves in your favor and, once you move to breakeven, you can start to protect profits along the way. So always use an initial stop loss order and then trail it in order to extend the potential profits; instead of using a fixed target, use a trailing stop loss to exit your trades. This can potentially improve your winning trades as they move.

I have seen a lot of trading methods over the years. Some of them have been created by traders that are supposed to be leading trading experts in specific markets, some are from wannabe experts that purport to be expert traders, and some are from regular people, like myself, that are just trying to figure out how to make money. There are two broad categories that I put them in when I see them; there are methods that are templates and methods that flow with the movement of the markets.

The methods that I consider to be templates would be methods with very rigid rules that are not very forgiving; they are very dogmatic in their nature and, when applied to a given chart, the security either passes or fails. They will typically have a lot of rules and conditions and they can be very complicated and time-consuming to apply and analyze. When they were created, they very likely worked well under the market conditions at the time and they would have looked good when they were back tested, which, often times, will make the past data conform to the methodology, justifying its existence and usefulness for its creator.

One of the consistent problems that I see over and over again with this type of method is that, as the market changes, the method cannot. Due in large part to their rigidity when the flow of the market fits the method, it is like fitting a round peg into a round hole. But when the movement of the market in general, and specifically of the price action, changes, it becomes more like trying to fit a square peg into a round hole, which can result in a long string of losses; they simply no longer fit together. The normal ebb and flow of the markets will make this cycle repeat itself, whereby the market changes to fit the method, and then changes to go out of sync with it, and then changes back to fit. This type of method requires the market to fit the method, but the market doesn’t know or care anything about the method; it just goes where it goes based on the supply and demand of traders and investors. Investors and traders make their decisions based on some knowledge, some current events, and some emotions.

The other type of method that I see will have a way of flowing with the market, getting into its rhythm. This type of method fits the market regardless of what the market is doing, versus trying to make the market conform to it. Methods that flow with the rhythm of the market can expand as the breadth of the market expands and contract as the breadth of the market contracts; to an extent, they are subservient to the market, rather than trying to make the market subservient to them.

In the past, I believed, to a certain extent, that using a lot of indicators was a good thing because the more of them that were used and that came into line meeting specific criterion, the more likely a predictable outcome would be. But, as time goes on, I notice that I am using fewer and fewer indicators. All technical indicators are lagging indicators because they are based on the price action, which, of course, must occur before the data can be interpreted to create the indicator. I also notice that of the very few indicators that I still use; they are typically shorter-term indicators, which more closely reflect what is actually going on in the market at that specific time. From trading in the markets for many years and seeing a lot of ways of trading from others and, of course, myself, I have come to believe that, with regard to the number of indicators that are used in trading methods, less is definitely more.

Today we are going to discuss a bit about trading using the various Fibonacci retracement levels. We won’t get into all the details of what Fibonacci numbers are or how they are derived, just know that this is a commonly used indicator by many traders and something we can use to look for possible entry and exit points. As you know, the forex market is one of the largest markets for traders, so we have a lot of traders using this indicator. If only because of this reason, we should look at this as a potential strong tool to use in our trading.

When using the indicator on our charts, the simplest way to apply it is to draw the indicator beginning at the start of the trend. Then as the trend comes to an end, you will end the line you draw. So, start at the beginning, and stop at the end of the trend. That means, in an uptrend, you would draw it from the low point to the high point on the trend. On a downtrend you would draw it from the high point down to the low point to get your Fibonacci retracement levels.
Take a look at the chart below and you can see an example of both an uptrend and a downtrend.

The chart on the left shows where to start and finish in an uptrend, while the chart on the right shows where to start and finish in a downtrend.
Once we have placed our Fibonacci levels, we can now look at the retracement areas to help us identify possible areas of support and resistance. These levels will act as areas for where we can look to enter and exit trades.

You will notice on the chart that the indicator will draw various lines on the chart, representing levels based on the Fibonacci sequence that will show where there may be a retracement back down to. As the price retraces back down, we can look to buy and sell at these points. So if we see the price retrace back to the first level of retracement at the 23.6 line, we can look to do two things.

First, we can look to see if it will act as an area of support or resistance. If it does, we will look to buy or sell on a bounce back off of it.

Second, we can look to see if it will be broken support or resistance, which will give us an area to go long or short as the price tries to move to the next level.

Regardless of how we use these levels, they can give us an idea of what we should be doing. This should not be any different than trading regular support and resistance where we look to enter a trade on the bounce or break of the support or resistance.

Take some time to review the Fibonacci retracement indicator to see how it might help you in your trading.

Last week I discussed a couple of basic candlestick patterns, i.e. the doji and engulfing patterns. These are some of the most basic reversal patterns to identify areas of indecision and potential reversals in the market.

Today I am going to discuss some additional reversal patterns as follows:

1. Shooting Star Candlestick Pattern

The shooting star is an uptrend reversal pattern, meaning this pattern will be found at the top of the market or bullish trend. It is associated with a trend reversal from a long trend to a short trend, or Bullish to Bearish. In the diagram above, you will notice that it has a small body at the bottom of the candle and a longer wick or shadow on the top of the candle, with no lower wick or shadow beneath the candle body. The long upper wick or shadow indicates the bull’s inability to close higher and the bear’s rejection of the bullish trend. It is not important to the shooting star whether it is an actual up or down candle, either one tells the same story. This pattern indicates, in an uptrend, the loss of momentum to the upside and, perhaps, a potential reversal to the downside.

2. Hammer Candlestick Pattern

The hammer candlestick is a downtrend reversal pattern, which is the opposite of the shooting star. As illustrated in the picture above, the hammer has a small body on the top of the candlestick and a longer wick on the bottom of candlestick. It indicates a potential reversal in a bearish, downtrending market to a bullish uptrend. The long shadow indicated the bear’s inability to close lower and the bull’s rejection of the bearish trend. Also, as with the shooting star pattern, it does not matter if the actual candle is an up or down bullish candle, it is the wick and body relationship that is important.

3. Evening Star Candlestick Pattern

The evening star is a bearish reversal pattern, consisting of 3 bars in an uptrending market. As illustrated in the picture above, the first candle is a long-bodied, bullish candle, extending the current uptrend. The second candle is a short-middle candle that gapped up in the open. The third candle is a bearish, long-bodied candle that gapped down on the open and closed below the midpoint of the body of the first candle. If the pattern is found in a strong uptrend, it may be a very good indication of severe weakening of the uptrend and potential reversal.

4. Morning Start Candlestick Pattern

The morning star is the opposite of the evening star and is a bullish reversal pattern, which occurs at the bottom of a market. As illustrated above, the pattern consists of three candlesticks in a downtrending market. The first candle is a long-bodied bearish candle, extending the current downtrend. The second candle is a short-middle candle that gapped down on the open. The third candle is a bullish long-bodied candle that gapped up on the open and closed above the midpoint of the body of the first candle.

Conclusion
These four additional candlestick patterns are good indicators of a change in market sentiment and, when they occur at the either the tops or bottoms of the market, indicate a very good possibility of a change in market direction. Look for these patterns and identify any possible reversals in the charts that you follow.

What can we do as traders and investors to find new areas to invest in? While looking at emerging markets is a good option, I have noticed recently that some of the old standbys are making an attempt to reinvent themselves. I have seen this specifically in the fast food industry. Taco Bell® is going to begin to serve breakfast, trying to take part of the market away from McDonald’s®, currently, the undisputed fast food breakfast king. McDonald’s® itself is experimenting in a few of its stores by having customers place their own orders on touch screens. They are also increasing the ways that their burgers can be built by adding several new topping choices. It will be interesting in both cases to see how customers like the changes. In the wake of the new style of McDonald’s® restaurants, high school cafeterias look like they may get a boost from a greater menu selection and customers may like being in control of placing their own orders. The wait staff at a lot of sit-down restaurants have been using tablets and iPads® for order placement for a good amount of time so it was really just a matter of time until the fast food companies started using them. It seems as though it may be especially helpful for drive through ordering, at some point, since the drive through of many restaurants are notorious for getting orders wrong.

No matter what you think of fast food in general, or these specific restaurants, the point is that these are the types of things that we need to pay attention to. So we can be ready to jump on opportunities, regardless of if they are new opportunities from new companies or opportunities from established companies.

A new opportunity that was worth paying attention to a few years ago was in the electric car market. When Tesla® came out as an IPO, the stock stayed, basically, flat for over two and half years before it gained momentum. Investors and the marketplace eventually began to take them very seriously. I remember being very impressed with them the first year they had a presentation at Detroit’s North American Auto Show®. They had one high-end car on display that was driven across the country and one slightly less expensive one displayed, with the goal of producing affordable, all-electric cars for the masses. Once their sales and appeal took off, their stock hasn’t stop climbing from their initial price, running up over 1200%.

Today, one of the things that have gotten my attention is the makers of 3D printers. There are only a few of them and, with the prediction that every household will have one within 5 years, means that someone is going to be selling a lot of them. The commercial side is interesting too because most large companies that use 3D printing in more and more of their day to day operations state that they have no interest in developing their own. So the companies that are currently in the market could see a lot of success for a very long time.

I remember reading an article a long time ago about one of the legendary mutual fund managers. When he was asked how he made his investment decisions for the fund’s holdings he stated that he observes what’s popular at the time and the things that people are wearing, eating, buying and doing. He also stated that he observed what his kids are interested in. When you really think about this, it is a pretty good way to get investment ideas in general. If you add in another one of the great fund managers philosophies, which was to be fully invested in stocks 100% of the time, observing the things that are hot, at any given time, and adjusting your holdings as other things take their place, you would have had holdings in Microsoft®, Apple®, Google®, Facebook® and, more recently, Tesla®, with more new and interesting industries and ideas coming up quickly.

Today we are going to look at the longer-term, weekly chart for gold to get an idea of where it is currently sitting and where it might be going. Right now we are seeing gold sitting at an area where some important moves might be getting ready to happen. If we are prepared and watching for the moves, we can take advantage of what might happen.

Before we look at the chart, I want to mention the fact that gold is, and most likely will be, a place of safety when the world becomes a bit uncertain. We saw this happen recently as there have been some military pressures happening over in Ukraine. As Russia deployed their military into an already unstable situation, the market saw that as a potentially bad situation and caused the price of gold to jump sharply this last Monday, March 3, 2014. It also saw a quick reversal to that big move up the next day as the uncertainty cleared a bit. I want to bring this up, as it can cause the price of gold to move differently than what we are seeing on the charts. Remember, news will supersede all indicators on the chart and move the price, regardless of what we see.

Take a look at this weekly chart:

On this chart, you will see two lines drawn that represent areas of support or resistance. The first one to look at is the downward moving resistance line. For a long time, the price was remaining below this resistance. Several weeks ago, we saw the price move above this line. This was our first significant sign showing that the price was gaining some bullish momentum. The next line, the horizontal one, is where the price is currently sitting at. This area acted as support in the past, as well as resistance. Whenever we have multiple areas acting as support and resistance, we need to be aware of what price is going to do there. I mentioned that we are currently at an important level right now and this is because we are at a place where the price can either breakthrough and stay bulling or fail to do so and retrace back down. The most important thing for us right now is to be prepared to take advantage of either situation.

Situation #1
Short on a bounce down from the weekly resistance and look for price to move back and test lower areas.

Situation #2
Enter long as price shows confirmation of a break above this resistance line as it heads back up to the last high area.

Regardless of the price moving up or down, we want to be prepared to take action if we see the opportunity to enter a trade. As with any trade, we will want to make sure we use the correct risk amount so that our position size is at the appropriate level. Take some time to review this so you can make the best decision for your trades.

What are Japanese Candlestick patterns and how are they used to identify potential price movements? During the 17^th century, Japanese rice traders developed candlestick charts to plot price movements. The individual candlesticks are simply graphical representations of price movements for a given period of time. They are formed by the open, high, low, and close of any time frame.

If the opening price is above the closing price, then a solid candlestick is drawn and is a solid or “filled” candle. If the closing price is above the opening price, then a “hollow” or up candlestick is drawn. Each candlestick is made up of two different parts. The first is the “filled” or “hollow” portion of the candle, which is known as the candle body, and is the difference between the open and closed prices for a specific time frame. The second part of the candlestick is the set of lines above and below the candle body, which are normally referred to as the wicks, and represent the high and low prices for that specific time frame. For example, see the diagram below, if the price closes lower for the time frame, a bearish or “filled” candle is formed, like on the left candle below. If the price closes higher, then we have a bullish or “hollow” candle, like the candle on the right side below.

Japanese candlestick charts are often overshadowed by the use of various common technical indicators that are placed on the charts. However, if you learn to recognize a few of the common candlestick patterns, then you can use candlestick patterns to better understand potential market sentiment.

Two simple candlestick patterns to identify are the doji and engulfing patterns, as described below.

The Doji Candlestick Pattern
One of the easiest patterns to identify is the doji pattern. What is a doji? The doji pattern is when the individual stock, or any other market instrument for that matter, opens, moves up or down throughout the market day but closes at about the same price as the open. The lengths of the wicks, the high and low, can vary from short to long. The doji pattern indicates indecision in market direction between buyers and sellers. The long legged doji consists of a doji with longer wicks and indicates stronger indecision between the buyers and sellers.

Traders can use the market indecision indicated by the doji pattern to identify a potential weakening of the current trend. This can often trigger a price reversal in the opposite direction.

The Engulfing Candlestick Pattern
Another one of the basic patterns indicating indecision, and a potential direction change in the market, is the engulfing pattern. Examples of bullish and bearish engulfing candles follow:

The engulfing candlestick pattern is a favorite pattern among candlestick traders because it is a good indicator of a possible market reversal. The pattern consists of two separate candles. The first day is a narrow range candle that closes down for the day. While the sellers are in control of the stock or ETF being charted because volatility is low, the sellers are not very aggressive. The next day is a wider range candle that totally covers, or fully “engulfs”, the body of the previous day and closes near the top of the range. In effect, the buyers have overwhelmed the sellers (indicates demand is greater than supply). Buyers may be ready to take control and push the issue higher. Note in the chart below that the whole market sentiment and trend reversed at the bullish engulfing candlestick formations.

A bearish engulfing pattern would be just the opposite as the bullish engulfing pattern, developing at the top of the market, with the second candle being a down candle, completely engulfing the up candle, indicating a change to the downside.

Conclusion
These two simple candlestick patterns, both dojis and engulfing patterns, can be used to help identify indecisive market sentiment and potential changes in direction. Look for one or both of these patterns to help identify momentum price shifts.

Today we are going to talk a bit about position sizing. This is something that is critically important, as it is the thing that keeps us away from too much risk in our accounts. If our position size is too large, we have the possibility of losing too much in our account. Many traders feel like they want to make a lot of money so they end up taking large position sizes in the hopes that the price will move in their chosen direction and they will become rich very fast. This is a dangerous way to think and trade. If we are right, then things are great, but when they go wrong, they go wrong really bad and really fast. So instead of thinking about how much money we can make, we really need to focus on being able to consistently be profitable while keeping a reasonable amount at risk.

When we start to trade, we are usually better off starting small and building up. This is true with our position sizing. If we start small and learn to make money a little at a time we can, then increase our position size as our trading proves to be profitable. If we start large and have one or two big losses, then we will be forced to decrease our size because our account is now small. So what can we do?

Let’s take a look at a possible way to start position sizing. The general rule is to never risk more than 2% of our account in any single trade. This means if we have a $10,000 account, we would be risking $200. This would be the maximum amount you should risk, but does not mean this is how much you should risk. As a new trader you may decide that you should cut that in half or more to get your feet wet and make sure you know what you are doing. So if you cut it down by half, you would only be risking 1%.

Another way to begin trading is to just use the smallest lot size you can. If you can, you might consider using micro lots to enter your trades. This means that you would be risking $0.10 per pip on the EUR/USD, instead of $1 or $10 with larger lots. By doing this, you can see if you are able to follow your rules and be profitable in your trades. If you can be consistent and profitable using these smaller lot sizes, you will be able to do the same as you begin to increase the lot sizes. The key is to prove that you can be profitable in the beginning and, if you are only risking small amounts, you are likely to be trading better because you are not feeling the pressure of losing large amounts.

Take some time to review your position sizing rules to make sure you are trading with the appropriate size and, remember, it is ok to start small and build up to larger sizes.