Monday, August 3, 2009
Last Monday, we told you to ignore this uselesss trading advice: Before you get started with "real money," you should paper trade.
Thousands of people are getting into trading for the first time in their lives right now. They've tried the investing game for years... only to see brokers and financial advisors lose big for them in the Nasdaq bust, the real estate bust, or last year's stock-market crash.
Plus, the U.S. government is flailing around like a wounded animal right now. It's swiping at banks, car companies, commodity markets, and health care providers in a crazy effort to "do something" for voters.
Many reasonable people don't feel like they can invest for the long term anymore. But they're going to find a lot of bad advice, like the paper-trading nonsense. So here's another dose of reason for new traders...
Folks interested in trading must seek EXTREMES. This is your No. 1 job when it comes regularly pulling money out of the market.
An extreme is when the majority of market participants are leaning heavily to one side of the market. They occur when everyone either gets wildly optimistic toward an asset... or when everyone can't stand the thought of buying an asset.
When folks lean heavily to one side of a market, it's just like a rubber band becoming badly stretched: When it's stretched past the limit, it snaps back... and prices move at super speed.
The archives of Growth Stock Wire and DailyWealth are stuffed with examples of how "extreme" trading works:
In June 2007, Steve Sjuggerud described how commercial real estate was extremely expensive and extremely popular. He recommended shorting the sector. The average commercial real estate stock fell 66% over the next 18 months.
In April 2008, I warned the world of a coming decline in agriculture stocks. Investors were wild for ag stocks... and willing to buy them for extremely high valuation levels of 40-60 times earnings. Ag stocks in general fell over 75% in months.
In January 2009, Jeff Clark told us about an extreme opportunity in platinum. The metal was extremely oversold and extremely cheap. It climbed 50% off its bottom in just months.
And in April 2009, commodity analyst Matt Badiali described how oil-service stocks were extremely oversold and extremely cheap. His readers made more than 100% in just a month on a microcap oil stock.
I'm not mentioning these trades to boast. I simply think there's an incredible lesson new traders can learn by going over how these trades worked.
You see, it's the same story over and over – find assets that are in "rubber band" territory. Find extremes in sentiment, valuation, and price action. Trade against the crowd.
After you've set aside your "trade small" fund, focus on becoming an extreme trader. It's the easiest strategy you'll ever find for making quick profits with your trades.
Steel prices gain 13% in July, their first monthly gain in a year.
Indian outsourcers Infosys, Wipro, and Patni Computer hit new highs.
Paper companies surge... Schweitzer-Mauduit, Orchids, Clearwater make 52-week highs.