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Lately I've been getting a lot of inquiries from friends,
acquaintances and flat out strangers about how to make money trading. And
it's no wonder. Times are tough and people need extra money. Further,
everyone knows that commodities are booming and the dollar is crashing. People
know that other people out there are making big money on these moves, and
they want to get in on the action. They're wondering, "How can I make
some easy money trading?"
The great trader Jesse Livermore got this question plenty, and it
always annoyed him. Trading was his professional vocation, something that he
put much time, effort and study into. Trading was
serious business, so he thought the question was akin to asking a medical
doctor, "Hey doc, how can I make some quick money doing surgery?" Which is to say that there is no way to make easy money trading.
It takes hard work, discipline and study. Most people, it seems, simply want
tips on buying what is hot. They want to hear about how much money they can make
buying gold and oil. They want excitement.
No doubt, the gold and oil trades are profitable -- if you've been in
them for a while. The trick to making the good money is to get in on the
trend early. Now that gold and oil are going up like rockets, the timing
simply isn't fortuitous for newcomers to get in on the action for short term
trades. These markets are going parabolic, and parabolic rises tend to be
followed by parabolic declines. The trick to making big money trading is to
get in on the trends early, ride them for a long time, and sell
out to the newbies, just as they're going
parabolic. Dig?
So lets leave the excitement of commodities behind and take a look at
the boring old Dow:
 
Note: The following is not investment advice and is
provided for entertainment purposes only. Any trades you make on this
strategy are your responsibility alone.
You can see that the Dow basically topped out in early October just above
14,000. It declined to an intraday low of 11,634 on January 22. Since then,
it has traded in a range between 12,000 and 12,800. This is clear for
everyone to see -- they even talk about it on TV. However, the market can't
stay in this little band forever. There are huge macroeconomic and other
forces at work in the world. We see these forces pushing gold, agricultural
commodities and the dollar into monster moves. These same forces are likely
to get to work on the Dow any time now and start pushing it one way or the
other. And once that ball gets rolling, the trend should keep moving. The
trick is getting in on it early.
The question is, which way will the Dow
break? Will it go down, because the economy is headed toward recession and
business is going to be terrible, causing profits to suffer? Or is it that
the international stocks that compose the Dow will go parabolic like gold and
oil as the dollar crashes? What will the Fed's impact on the Dow be? Will the
dollar keep falling? We could muse about these topics and more all day long
(and on CNBC, they do - ad nauseam). But regardless of what conclusions we
come to, the market will have the final say.
If you want to make some easy money trading here is one potential
strategy: Watch the Dow. If it breaks above 12,800, buy! If it falls below
12,000, sell! It used to be hard for small "investors" like us to
buy or sell the entire market, but there are now all kinds of ETFs that make it very easy. To go long the market, buy
the Diamonds (DIA). To go short, buy the Proshares
short Dow ETF (DOG). (While you're at it, check out Proshares
to see what other kinds of entire markets you can go long and short. You can
even go double long, or double short if you so desire. The list is
impressive.)
So there is your exceedingly simple plan to make some easy money in
the market: Get on the trend in the right direction as described above, and
keep on riding it. If you want to end on an optimistic note, stop reading
here, and good luck!
The problem, sadly, is that it just isn't that easy. Given this very
simple plan, most people still won't make money, because they won't follow
the plan. They already think they know what the market is going to do. How could the market possibly rally with this terrible
economy, they think. This is the shorting opportunity of a lifetime! Short it
now and go in big, fully margined! Believe me, I've been there and done that,
and it is no fun when the market decides not to cooperate.
Another way of not following the plan is getting tired of watching the
market trade back and forth so predictably in the range. You want some action
and you think you can pick up some quick money while you're waiting for the
breakout, so you decide to try to play the range itself. The market reaches
the bottom of the range, and since you know it is going back up to the
top, you buy it. Only to find out that this, finally, is when the market
breaks. This is what you've been waiting for! And inexplicably, you're on the
wrong side of the trade! Horror of horrors! How did it happen?! Yes, I've
been there and done that too and this is no fun either.
Even if you should be able to follow the plan, the Market has an
infinite way of fooling people. How much of a breakout is a real break out? What
should you do if it looks like a breakout, you commit to your position, but
then it comes back into the range? Furthermore, how do you know when you
should take your profit? These are all things to think about before you put
the trade on. The answers to these questions require a certain amount of
wisdom, which results from experience.
If you're interested in acquiring some wisdom on someone else's dime,
I invite you to follow along. Think of this market the same way as you think
of a baseball game. Most of the time nothing happens. But suddenly, in short
bursts, there can be a flurry of activity. The past few weeks have been one
of those periods when nothing happens with the Dow. It has been up and down
big but with no net progress either way.
But I expect fireworks shortly. The big employment report comes out
this Friday (3/7/2008). This report, released the first Friday of each month,
has a tendency to move markets big, one way or the other. A week and a half
later is the FOMC meeting (3/18/2008) at which the Fed will announce its
interest rate policy. Either of these events could trigger some increased
activity that will push the market out of its range. Whichever way the market
breaks, you should look to get on board. If the market still can't make up its
mind, the first quarter ends this month (3/31/08), and companies will start
releasing their earnings in April. We'll get a good idea from the firms as to
whether the slowdown is real, or whether the Fed's interest rate cuts are
helping to revive the economy.
Like any good baseball game, you need to stay tuned with at least one
eye on what is going on, and ready to act! It might not be as exciting as
watching gold & oil run through the roof, but action in the Dow could
happen at any time, without notice, and could be dramatic. I'll write the
next update should anything develop. Thanks for tuning in!
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By :
Michael A. Nystrom
Editor, Bull not Bull
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