The breakout system is based on the laws of Newton: Objects in motion will tend to remain in motion unless other outside forces stop them. Stocks, Currencies, Bonds, Options, and Futures are no different that objects of matter. If a stock has been bouncing between $23 a share and $25 a share for a weak and finally breaks above $25 on heavy volume this would be an example of a breakout. Now if I told you that the Stocks 52 week high was $25.43 and the stock just ran past $25.78 would you be inclined to buy or sell at this point? If you said sell then you may want to skip down to the next paragraph as the fade trading strategy may better suite you. For all those that would like to buy after a 52 week high you would be correct in your thinking because not only has the stock broken a shorter term timeframe of one week, but also a much longer term trend over the course of a year. A breakout trader loves to go long stocks breaking their all time highs. When you talk to old veteran floor traders they will tell you that stocks always go higher and lower than anyone ever expects. If a stock has broken out and has surpassed its 52 week high it has a lot of momentum behind it and it would make much more sense to go with the trend. Haven’t you heard, “the trend is your friend” from other experienced traders? There are many more indicators, patterns and even fundamental analysis that professionals use when making a breakout trade, but this gives a good premise for the strategy. Now for those that do not like buying at the top there is the exact opposite system available to you.

The Fade Trade – As one would guess the Fade Trade sells tops and buys bottoms opposite to what the breakout system would do. The idea is very simple and conforms well to human nature. In a minute you will see how this is not always a good thing in trading. If prices of a stock have gone up for 3 weeks in a row well past a previous 52wk high many traders are very reluctant to purchase the stock. They are upset that they missed the great run up and do not want to pay higher prices then other traders. They fear that as soon as they get in the party will end. In itself this is not terrible thinking. However, to be a successful fade trader it takes more than guessing that the rally is over. When taking a fade trade the trader will sell the stock after they believed it is well over priced to the high side. To be successful the trader must use filters. First they should never place the sell trade until they see price action to confirm it. For instance if a stock has risen from $50 to $75 a share and then dropped below $70 this is a sign the rally has ended and a sell would be warranted. A trader would not want to watch the stock trade up to $74, $75, $76 and then place a sell hoping at that instant the price will head down. This is wrong on so many levels. Firstly, this trader would be relying on the premise that they are all knowing and can predict the exact instant the trade will turn around. The statistics behind this are staggering. Nostradamus would not be able to make this kind of trade. Secondly, people don’t want to wait for it to come back down because they are afraid that they have already missed some of the profits and the trade will not go much further. This greed results some traders to, “try and catch a falling knife,” this refers to traders trying to fade a downward move by going long while the stock is still moving down. A fade trade can be very profitable if done intelligently, by waiting for the prior tend to cut out and be aggressive in opening the trade in the other direction.

So which strategy is right? To be honest it must be the system that works for you. Both systems have been used profitably by many traders. The important thing is making intelligent choices and forgetting greed. Potentially a trader could use both systems. For instance picture a stock that has traded between $35 and $37 for the week and its 52 week high is $43. If the price of the stock suddenly breaks though $37.60 on strong volume an intelligent trader should open up a long position. If the stock continues up to $43.50 what would you do? Since it has not retraced at all and has now broken its 52 week high you should add to your long position as this is another sign of strength. You made a good decision and the stock churns higher to $55, but then stalls out there for a few days and drops sharply to $49 the next day. This would be a great opportunity to fade the move. You went long with the momentum you increased your position as the momentum increased. Now that the charge is over and the stock has already been marked up considerably where it was just a week ago it is an intelligent time to sell it. You could place your stop at the previous high of $55 with $6 of downside risk, whereas the stock could move all the way back to its normal range of $35 and $37 which would net you a gain of over $11. This is a fade trade worth taking since the risk to reward is good and you are not trying to catch a falling knife.

Again it is more important that you trade with a system that suites you. There are plenty of systems out there to choose from, but these are two very common foundations for which systems are built. I would encourage you to select one of the systems that you are the most comfortable with and practice paper trading. As you become more experienced and see how the trades play out you will have a better sense of how the market works and this will help you develop trust in your system. One helpful hint is to trade longer timeframes. As you back your charts out from intraday to the 4 hour and daily charts you will have more success as your trades have more time to play out.

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There are many unconventional theories to the stock market. Everyone has heard of random walk. Statistically it has been proven that if you throw darts at stock tickers in the newspaper you are likely to do as well as the average mutual fund return. If random walk works, it might be fun to explore these other theories. Please note: thetrademachine.com does not endorse or use any of these theories in its expert advisors.

The Boston Snow Indicator – If Boston has a “White Christmas” meaning that they received significant snowfall the indicator would predict the stock market will rise over the course of the next year.

Presidential Election Years – The stock market generally rises during presidential election years. Now just because out of the last 21 election years the market has risen 18 times does not make this an obvious indicator. In 2008 when Obama took office the stock market fell 37%. This would have been a bad year to follow the theory, however had you checked for new moons and seen that it did not snow in Boston maybe you could have avoided getting crushed this year.

Trading should be simple. There are many indicators and theories out there to choose from. If you are feeling overwhelmed with it all check out some of the automatic trading programs from www.thetrademachine.com They have all been tested over an 8 year period with positive results. Best of all they do not require any time or decisions on your part. Just set the programs and let them work for you.

For Example: If there are 500 stocks trading below the open and 400 stocks trading above the open the absolute value would be 500-400 = 100.

If there were 650 stocks trading higher and only 50 trading lower the value would be 600.

The higher the number shows that at the current time period being examined that prices of issues are moving strongly in one direction. Whereas a low number would indicate that issues are moving in both directions so there is not a strong push in the market.

A few tricks of the trade for Contrarians. Firstly, if there is overwhelmingly good news coming out about a company or even news suggesting a currency may move up and Contrarian will be very nervous about following the heard. This does not mean the Contrairna will always go opposite the crowd, but may sit on the sidelines and consider going the other direction when the time is right. A Contrarian will also look at oscillators in technical analysis much differently than the norm. The Bollinger Band is a perfect example of the differences in interpretation. Most traders will buy a currency if they see it has broken above the upper standard deviation on the Bollinger Band. This is a signal of strength as it has broken above a significant range. A Contrarian on the other hand will not purchase and will wait to see if the trade losses momentum and be prepared to short it. The reasons being that the currency has already made a major move to break above the bands and is more likely for it to fizzle out and come back down that keep running up.

Fundamentals also can be interpreted in a different way by a Contrarian. For instance there is a lot of news right now claiming that earnings by many US companies are not as bad as expected and this has been celebrated with the DOW running above 10,000. For a Contrarian this would not be regarded as positive news. The fact that earnings still are low means that the market is likely going to under perform. With Stocks now up over 65% from the bottom most Contrarians wouldn’t touch the market with a 10 foot pole. The optimists are buying, but the Contrarians are either short right now, or waiting for a breakdown signal to sell stocks.

If you are interested in trading, but have a full time job or do not have a trading personality then the fade and trend machines are for you. Simply look at the past and live results. You can make 50% returns a year, by letting your computer trade for you.

The Baltic Dry Index is basically a census on all the shippers in the Baltic. It queries the shippers for how many orders they have and at what prices they have agreed to ship raw materials. The reason this is a leading indicator is that it takes time for the ships to move orders and the materials must be delivered before businesses can use the materials and report profits. Therefore, the index precedes actually economic activity reports by a few months. The BDI is very accurate as it is free from speculation. Businesses are not going to place orders to shippers unless they have something to ship. If economic activity is up, the index will move accordingly.

What does the BDI tell us today. The Index stood well above 11,000 before the financial crisis hit. It quickly dropped below 1,000 a decline of 94% when the credit markets seized up. The Stock market proceeded to drop almost 50% from its all time highs around 14,000. The Baltic index rallied in November of 2008 and climbed from just under 700 points all the way back above 2,000. The stock market made its big moves starting in March of 2009. This was 3 months after the Baltic Dry Index made its strong moves up. The Index continued its strong performance and climbed all the way up to 4,000 points. The stock market has been on a tear the last 6 months and has also made a large recovery just crossing 10,000 for the first time in over a year.

The future. The Baltic Dry Index since crossing 4,200 has taken a hit and dropped below 2,200 at one point and now stands at 2,597. This is a drop of almost 50%. Therefore, in the next 3 months we should be seeing a drop in the stock market. A 50% drop from 10,000 would take it back down to 5,000. This may be a little extreme and we must admit it is too hard to predict a price level. Nevertheless, from past experience especially over the last 2 years the Baltic Dry Index has proved to be a strong prophet and in this current time would indicate a drop is about to come in the stock market.

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The problem for traders is that once they have the news it is not easy to interpret. Sometimes the numbers have already been anticipated into the price so the markets may not move. More often than not good news will result in selling and bad news will result in prices rising. This is because people predicted these numbers and already made their profits. The term buy rumor sell news confirms this activity. Therefore, the big moves happen when the numbers come out vastly different than expected. Sometimes, you can make a good profit in these situations. Yet, it is still hard to know for sure what the direction will be. Sometimes really good news means the market will go down for a couple weeks, but by the end of the quarter it will be up big from the release. All releases are important, but do not always drive the market in one hour.

Now even if you are correct on direction and timeframe you still must overcome the large spread during news hours. Sometimes spreads can be over 15 points. This is some serious handicap to overcome. Further with the wild moves and shakeouts you may exit a winning trade before it moves in your favor. The truth is that short term trading is the most difficult type of investing. It takes full concentration for all market hours with the top trading equipment and an emotion free personality. A much simpler way to still make nice returns is to follow a swing or position trading system. By moving timeframes out further, it is easier to follow longer term trends and not get caught up in the noise of the market.

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The Major pairs and their respected trading volume are as follows: EUR/USD (Euro) 28%, USD/JPY (Yen) 17%, GBP/USD (Cable) 14%, and USD/CHF (Swissy) 4%.

Other notable currencies are the commodity pairs AUD/USD (Ozzie), NZD/USD (Kiwi), and USD/CAD (Loonie). They are considered commodity pairs because their prices tend to move with the price of gold for AUD and NZD and with Oil for CAD.

Finally, we have the cross pairs, non Dollar paired currencies. The most commonly traded cross pairs are the: GBP/JPY (Gopher), EUR/JPY (Euppy), EUR/GBP.

For new traders it is recommended to stick to the majors and even in that group really only focus on one currency pair. The EUR/USD would be the obvious choice since it is the most liquid pair. Selecting a currency pair to trade is only half the battle. It is just as critical to identify the right time period to trade. The forex market is open 24 hours a day five days for the week. There are multiple market trading sessions as the major players come in and out of the market. The three sessions are as follows in order of volatility: The European session 7am – 4pm gmt, the US session 12 pm – 10pm gmt, and the Asian session 11 pm – 8am gmt. Generally it is best to trade the EUR/USD, GBP/USD, and USD/CHF during the European session and the USD/JPY during the Asian session. The greatest volatility for any pair is when the European session and the US session overlap.

Correlations in the forex market do appear to be strong. The EUR/USD has an almost perfect inverse correlation with the USD/CHF. When the EUR/USD makes a strong move up, look for the USD/CHF to move down hard. The EUR/USD also has a strong correlation with the GBP/USD. Other correlations to take note of would include the AUD/USD moving in tandem with the NZD/USD. The EUR/USD has a loose inverse correlation with the USD/JPY as well. This may not be enough information to solely trade off of alone, but when monitoring with a trading system this information could prove to be useful.