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~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 4 July 2007 Table of Contents (1) Quote on Gambling (2) Article - The Efficient Market Hypothesis ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ RSS Feed Stay up to date with all that is happening at Trading Plan, by subscribing to our 'Trading Blog' (no email address necessary). I am continually adding content and every update of this site is announced here, including minor content updates, page additions, and product releases. So stay plugged in by subscribing to this site's RSS feed. Copy and paste the address below into your RSS reader to receive the Trading Plan RSS feed... http://www.trading-plan.com/Trading-Plan.xml Not sure what RSS is? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Previous Issues Only just joined the mailing list? That's OK - you can read all of the previous issues of the Trading-Plan ezine. Visit http://www.trading-plan.com/ezines_previous.html to access the archive. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Filtering software may prevent you from receiving Trading-Plancommunication, including my ezines. To ensure that you never missan e-mail from me, please follow these tips... http://www.trading-plan.com/whitelisting.html ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Online Trading Forum Do you want to learn from the experiences of others in a friendly online trading forum? I now frequent and contribute to the online trading forum called Stock Meeting Place. Membership is easy and free. You can come along and ask any trading question in one of the numerous sections of the forum and receive a helpful response from one of the many members (approximately 2000). This forum is the only place online where you will also find Daryl Guppy, the well known trader and author. Remember, there is no such thing as a silly question so visit, sign up and ask a question. Visit http://www.trading-plan.com/trading_forum.html for more information. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -- 1 -- Quote on Gambling "If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time." Chinese Proverb -- 2 -- Article - The Efficient Market Hypothesis Unfortunately there are many people who view anything to do with a stock market as just gambling. They would suggest that you would be better off going to the casino or buying a lotto ticket. This is an unfortunate situation as the stock market provides everybody the opportunity to profit from inefficiencies inherently part of the market. The fact is that different people view information differently. What someone may think to be a reasonable piece of price sensitive news released by a company might not be the opinion shared by the majority of people. Advocates of Modern Portfolio Theory and the Efficient Market Hypothesis would suggest that it is not possible to make any more money than the performance of the general market index (i.e., the S&P/ASX 200 for Australia, the S&P 500 index for the United States, the Hang Seng, FTSE, Nikkei, Straits Times Index, DAX and the list goes on). They would suggest changes in prices are strictly random, and therefore it is difficult to ‘beat the market’. An efficient market is one where all available ‘price sensitive’ information is known to the public. Therefore, any new information can come at any time, unpredicted and therefore randomly. Advocates of these theories would also suggest that anybody who attempts to ‘beat the market’ is purely speculating and perhaps even gambling. Having said that, any person who can consistently generate greater returns than the benchmark index, jeopardises the validity of the Efficient Market Hypothesis. Whilst it is acknowledged that most markets are reasonably efficient, they are by no means absolutely efficient. There are always anomalies in a stock market that allow individuals to achieve greater returns than the benchmark index. If this notion was true, stocks would not trend and provide individuals the opportunity to profit from them (beyond that of the benchmark market index performance). A more practical example is using some specific index data. In Australia, the financial year (FY) has just come to an end on 30 June. Throughout the 2006/07 FY (as it is known), the performance of the general market index (S&P/ASX 200) was as follows: S&P/ASX 200: 30 June 2006 - Value of 5073.930 June 2007 - Value of 6274.9 FY Return: 23.7% During this same time, of over 1800 stocks listed, more than 250 achieved a capital return on greater than 100% and more than 80 achieved more than 300% return. They are staggering numbers by anyone's standards. Now the reason why I quote these numbers is to illustrate a point – I know you can consistently beat the index. In the last 12 months, there have been plenty of trading opportunities to achieve returns greater than the market index of 23.7%. However, it is important to accept what will help you find these types of stocks that experience such staggering growth and that will allow you to consistently beat the market. The answer is simple – you can’t find them! There are no set of indicators, chart patterns or financial information that will find the perfect setup for them. They key is your exits. If the trade doesn’t work out, you exit. If it does, then you stay with it for as long as you can. When you buy anything, you rarely have little idea of where it is going, let alone knowing it is going to appreciate more than 100% over the next 12 months. The key is to develop a set way of exiting trades at both a loss and when in profit. This will hopefully provide you the framework to allow stocks that continue to appreciate over time, the freedom to move and the discipline for you not to exit too early. Even when markets experience extended down periods (months to years), there are always stocks that move higher – there are just fewer of them. Even if you catch on to one, you still have the most important part ahead of you and that is to exit at the most appropriate time. The fact is that many stocks do trend and do so over extended periods of time (many months and years for example) and develop and maintain sufficient momentum in the meantime. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
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