Define Yourself: What Kind of Trader Are You?

October 27, 2011

By Elliott Wave International

The idea of being a successful trader is exciting. The reality of becoming one is another thing. You need to understand more than the markets — you need to understand yourself.

EWI’s Senior Analyst Jeffrey Kennedy knows what it takes. He has analyzed and traded the markets for over 15 years. Jeffrey has learned what it takes to be successful, and he has the discipline to apply that knowledge. Enjoy this excerpt from his free Club EWI eBook Best of Traders Classroom, in which he answers: What kind of trader am I?

As a trader, it is imperative that you define your approach to the markets. For instance, do you follow the trend or do you like to play breakouts? Are you a commodity trader or an index trader at heart? What’s your trading time frame, five minutes or five weeks? Moreover, how do you analyze markets, fundamentally or technically? Do you prefer using a black box type trading system or making your own calls?

My trading style is to trade with the trend. Specifically, I like to buy pullbacks in uptrends and sell bounces in downtrends. My markets are commodities, and my time frame is three to five days. If I catch a trade that has some legs to it, and it lasts a little longer, that’s fine with me. Bottom line, though, I’m a take-the-money-and-run kind of guy. This is who I am as a trader.

In addition to the Wave Principle, I include basic chart reading and bar patterns in my analysis. While I do use a few select technical studies in arriving at my decisions, I have always believed that "price" is the ultimate indicator and that everything else is secondary.

Remember, success in trading comes from the consistent application of a proven methodology. If you don’t define your methodology, then your trading style could change with each new issue of Stocks and Commodities magazine. Trying a variety of analytical techniques rather than consistently following one is a problem for traders, and it’s also a great way to lose your trading account.

Read more of Jeffrey’s lessons in his free 45-page eBook: The Best of Trader’s Classroom. This valuable eBook, adapted from the $189 set of the same name, offers the 14 most actionable lessons every trader should know.

Download your free eBook now.

This article was syndicated by Elliott Wave International and was originally published under the headline How You Can Make Yourself a Better Trader. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The world’s foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve

October 26, 2011

By Elliott Wave International

This is Part III, the final part of our series "Robert Prechter Explains The Fed." (Here are Part I and Part II.)

Money, Credit and the Federal Reserve Banking System

Conquer the Crash, Chapter 10

By Robert Prechter

How the Federal Reserve Has Encouraged the Growth of Credit

Congress authorized the Fed not only to create money for the government but also to "smooth out" the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our "fractional reserve" system, banks were authorized to employ that new money as "reserves" against which they could make new loans. Thus, new money meant new credit.

It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand ("in reserve") to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the "multiplier effect." This process expanded the supply of credit well beyond the supply of money.

Because of competition from money market funds, banks began using fancy financial manipulation to get around reserve requirements. In the early 1990s, the Federal Reserve Board under Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely. To do so, it first lowered to zero the reserve requirement on all accounts other than checking accounts. Then it let banks pretend that they have almost no checking account balances by allowing them to "sweep" those deposits into various savings accounts and money market funds at the end of each business day. Magically, when monitors check the banks’ balances at night, they find the value of checking accounts artificially understated by hundreds of billions of dollars. The net result is that banks today conveniently meet their nominally required reserves (currently about $45b.) with the cash in their vaults that they need to hold for everyday transactions anyway. [1st edition of Prechter's Conquer the Crash was published in 2002 -- Ed.]

By this change in regulation, the Fed essentially removed itself from the businesses of requiring banks to hold reserves and of manipulating the level of those reserves. This move took place during a recession and while S&P earnings per share were undergoing their biggest drop since the 1940s. The temporary cure for that economic contraction was the ultimate in "easy money."

We still have a fractional reserve system on the books, but we do not have one in actuality. Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, commercial paper or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. In other words, to a limited degree, banks can arrange to create their own new money for lending purposes.

Today, U.S. banks have extended 25 percent more total credit than they have in total deposits ($5.4 trillion vs. $4.3 trillion). Since all banks do not engage in this practice, others must be quite aggressive at it. For more on this theme, see Chapter 19 [of Conquer the Crash].

Recall that when banks lend money, it gets deposited in other banks, which can lend it out again. Without a reserve requirement, the multiplier effect is no longer restricted to ten times deposits; it is virtually unlimited. Every new dollar deposited can be lent over and over throughout the system: A deposit becomes a loan becomes a deposit becomes a loan, and so on.

As you can see, the fiat money system has encouraged inflation via both money creation and the expansion of credit. This dual growth has been the monetary engine of the historic uptrend of stock prices in wave (V) from 1932. The stupendous growth in bank credit since 1975 (see graphs in Chapter 11 [of Conquer the Crash]) has provided the monetary fuel for its final advance, wave V. The effective elimination of reserve requirements a decade ago extended that trend to one of historic proportion.

The Net Effect of Monetization

Although the Fed has almost wholly withdrawn from the role of holding book-entry reserves for banks, it has not retired its holdings of Treasury bonds. Because the Fed is legally bound to back its notes (greenback currency) with government securities, today almost all of the Fed’s Treasury bond assets are held as reserves against a nearly equal dollar value of Federal Reserve notes in circulation around the world. Thus, the net result of the Fed’s 89 years of money inflating is that the Fed has turned $600 billion worth of U.S. Treasury and foreign obligations into Federal Reserve notes.

Today the Fed’s production of currency is passive, in response to orders from domestic and foreign banks, which in turn respond to demand from the public. Under current policy, banks must pay for that currency with any remaining reserve balances. If they don’t have any, they borrow to cover the cost and pay back that loan as they collect interest on their own loans. Thus, as things stand, the Fed no longer considers itself in the business of "printing money" for the government. Rather, it facilitates the expansion of credit to satisfy the lending policies of government and banks.

If banks and the Treasury were to become strapped for cash in a monetary crisis, policies could change. The unencumbered production of banknotes could become deliberate Fed or government policy, as we have seen happen in other countries throughout history. At this point, there is no indication that the Fed has entertained any such policy. Nevertheless, Chapters 13 and 22 [of Conquer the Crash] address this possibility.

Read the rest of this eye-opening report online now, free!

Understanding the Fed: How to protect yourself from the common and misleading myths about the U.S. Federal Reserve

It’s time to pull back the curtain on the Federal Reserve system. In this revealing 34-page ebook, you’ll learn how the Federal Reserve controls the money supply, you’ll pin-point a few critical points in Federal Reserve history, and you’ll uncover several important myths and misconceptions, like who owns the Federal Reserve Bank.

Representing more than 10 years of research by financial analyst Robert Prechter, this free report goes beyond Federal Reserve history and it’s government mandate and digs into the Fed’s real motivations for being the United States’ "lender of last resort."

Take this important step toward understanding the Federal Reserve system — Download this FREE 34-page ebook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Robert Prechter Explains The Fed, Part III. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Our friends at Elliott Wave International (EWI) have brought back one of their most sought-after free resources, The Best of Trader’s Classroom eBook, for two weeks only. This valuable eBook, adapted from the $189 set of the same name, offers the 14 most actionable lessons every trader should know. Don’t miss your chance to improve your trading by downloading this popular trading resource.

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You know how difficult it can be to successfully trade the markets. The volatility we’ve seen lately does offer great opportunities, but it can also derail even the most experienced trader. That’s why our friends at Elliott Wave International are releasing one of their most popular trading eBooks — The Best of Trader’s Classroom — free through November 7.

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How Moving Averages Can Alert You to Future Price Expansions

October 21, 2011

By Elliott Wave International

To a first-time observer, watching a technical analyst spot a major trend change in a financial market before it occurs can seem as mystical as pulling a rabbit out of hat. But once you learn the tools of the trade, you know there are no tricks up the technical analyst’s sleeve. What you see, is exactly what you get.

On this, EWI’s Senior Commodities Analyst Jeffrey Kennedy speaks to one technical indicator in particular: moving averages. In Jeffrey’s own words:

"There is no magic in moving averages, the magic comes in finding something that you are comfortable with and applying it. I like it because it consistently works and you can customize it to your individual trading style and time frame."

Jeffrey’s appreciation of the measure doesn’t end there. In his highly acclaimed Commodity Trader’s Classroom eBook, Jeffery expands on the many variations of MA analysis used to identify high probability trade set-ups. Among his favorites: the Moving Average Compression. The excerpt below is a direct quote from Jeffrey’s eBook:

"Moving Average Compression works so well in identifying trade set-ups because it represents periods of market contraction. As we know, because of the Wave Principle, after markets expand, they contract (when a five-wave move is complete, prices retrace a portion of this move in three waves.) MAC alerts you to those periods of price contraction. And since this state of price activity can’t be sustained, MAC is also the precursor to price expansion.

The Live Cattle chart above demonstrates three different simple moving averages based on Fibonacci numbers 13, 21 and 34. The point at which all of the moving averages become one and form a straight line is what Jeffrey refers to as Moving Average Compression. As you can see, the compression of the moving averages tells us that the market has contracted, and prompts the expansion shown in April and May 2004."

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This article was syndicated by Elliott Wave International and was originally published under the headline The Simple Magic of Moving Averages. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

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The world’s foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve

October 18, 2011

By Elliott Wave International

This is Part II of our three-part series, "Robert Prechter Explains The Fed." You can read Part I here.

Money, Credit and the Federal Reserve Banking System

Conquer the Crash, Chapter 10

By Robert Prechter

… Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is "backed" primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

In Chapter 9 [of Conquer the Crash], I called the dollar "money." By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term "money" in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.

As you can see, defining the dollar, and therefore the terms money, credit, inflation and deflation, today is a challenge, to say the least. Despite that challenge, we can still use these terms because people’s minds have conferred meaning and value upon these ethereal concepts.

Understanding this fact, we will now proceed with a discussion of how money and credit expand in today’s financial system.

How the Federal Reserve System Manufactures Money

Over the years, the Federal Reserve Bank has transferred purchasing power from all other dollar holders primarily to the U.S. Treasury by a complex series of machinations. The U.S. Treasury borrows money by selling bonds in the open market. The Fed is said to "buy" the Treasury’s bonds from banks and other financial institutions, but in actuality, it is allowed by law simply to fabricate a new checking account for the seller in exchange for the bonds. It holds the Treasury’s bonds as assets against — as "backing" for — that new money. Now the seller is whole (he was just a middleman), the Fed has the bonds, and the Treasury has the new money.

This transactional train is a long route to a simple alchemy (called "monetizing" the debt) in which the Fed turns government bonds into money. The net result is as if the government had simply fabricated its own checking account, although it pays the Fed a portion of the bonds’ interest for providing the service surreptitiously. To date (1st edition of Prechter’s Conquer the Crash was published in 2002 — Ed.), the Fed has monetized about $600 billion worth of Treasury obligations. This process expands the supply of money.

In 1980, Congress gave the Fed the legal authority to monetize any agency’s debt. In other words, it can exchange the bonds of a government, bank or other institution for a checking account denominated in dollars. This mechanism gives the President, through the Treasury, a mechanism for "bailing out" debt-troubled governments, banks or other institutions that can no longer get financing anywhere else. Such decisions are made for political reasons, and the Fed can go along or refuse, at least as the relationship currently stands. Today, the Fed has about $36 billion worth of foreign debt on its books. The power to grant or refuse such largesse is unprecedented.

Each new Fed account denominated in dollars is new money, but contrary to common inference, it is not new value. The new account has value, but that value comes from a reduction in the value of all other outstanding accounts denominated in dollars. That reduction takes place as the favored institution spends the newly credited dollars, driving up the dollar-denominated demand for goods and thus their prices. All other dollar holders still hold the same number of dollars, but now there are more dollars in circulation, and each one purchases less in the way of goods and services. The old dollars lose value to the extent that the new account gains value.

The net result is a transfer of value to the receiver’s account from those of all other dollar holders. This fact is not readily obvious because the unit of account throughout the financial system does not change even though its value changes.

It is important to understand exactly what the Fed has the power to do in this context: It has legal permission to transfer wealth from dollar savers to certain debtors without the permission of the savers. The effect on the money supply is exactly the same as if the money had been counterfeited and slipped into circulation.

In the old days, governments would inflate the money supply by diluting their coins with base metal or printing notes directly. Now the same old game is much less obvious. On the other hand, there is also far more to it. This section has described the Fed’s secondary role. The Fed’s main occupation is not creating money but facilitating credit. This crucial difference will eventually bring us to why deflation is possible.

Read the rest of this eye-opening report online now, free!

Understanding the Fed: How to protect yourself from the common and misleading myths about the U.S. Federal Reserve

It’s time to pull back the curtain on the Federal Reserve system. In this revealing 34-page ebook, you’ll learn how the Federal Reserve controls the money supply, you’ll pin-point a few critical points in Federal Reserve history, and you’ll uncover several important myths and misconceptions, like who owns the Federal Reserve Bank.

Representing more than 10 years of research by financial analyst Robert Prechter, this free report goes beyond Federal Reserve history and it’s government mandate and digs into the Fed’s real motivations for being the United States’ "lender of last resort."

Take this important step toward understanding the Federal Reserve system — Download this FREE 34-page ebook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Robert Prechter Explains The Fed, Part II. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Are you prepared for when the "disconnect" between the market and economy reconnects?

October 14, 2011

By Elliott Wave International

Suppose you see a lovely house — one with great curb appeal. It has new paint and manicured shrubbery out front.

But also suppose that you look more closely. You press your thumb on the window sill and the wood frame crumbles in. Come to find out, the wood is rotten in too many places to count. The deck joists and supports are fractured. Even the terrain underneath the deck looks unstable. And the closer you look the worse the problems are.

It’s obvious that very few people would buy that house. Yet you can be pretty sure that the home’s owner will have "good things" to say about the place.

Likewise, today’s stock market has plenty of cheerleaders — even as the rot spreads throughout the economy. Real estate and homebuilding sector alike continue to decline in the wake of the mortgage meltdown. Municipalities continue to have growing budget problems. We’re not talking about a "small town" bankruptcy, either. An Oct. 12 Reuters headline reads:

"Harrisburg, Pa., Files for Bankruptcy Protection." The story goes on to say that "The Pennsylvania state capital faces a $300 million debt crises…"

This Oct. 12 headline is from Bloomberg: "California Kids Face Days Without School as Revenue Gap Imperils Education." It continues: "Public schools in California…are bracing for a $1.7 billion cut that may wipe out high-school sports and student busing, and trim the academic calendar by seven days next year."

The economic problems run much deeper and wider than these stories can reflect — yet they are indeed today’s stories. The capital of one of our biggest states is filing for bankruptcy? That should serve as an alarm. Then again, the market is rallying just weeks after the downgrade of U.S. Treasury debt.

So when will optimistic financial investors wake-up to reality?

"At some point in the trend toward negative social mood, fear, and then panic, will bring to light the risks that people today are ignoring. Global credit deterioration is objectively real; but disaster will strike only when it becomes subjectively realized."

Elliott Wave Theorist, September 2011

Collective psychology could "catch up" to the objective economic reality sooner than later.

Will you be prepared when the economic reality hits?

Robert Prechter has just released a FREE report — with urgent analysis from his August and September 2011 Elliott Wave Theorist letters, including an excerpt from a special video presentation that he created for his subscribers in August.

Stocks — Buying Opportunity or Another "Free Fall" Ahead? will help you put these uncertain markets into perspective so that you’ll be better positioned to both protect your investments when needed and prosper when opportunities arise.

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This article was syndicated by Elliott Wave International and was originally published under the headline A Rising Market Won’t Stop the "Economic Rot" Beneath. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The world’s foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve

October 13, 2011

By Elliott Wave International

The ongoing economic problems have made the central bank’s decisions — interest rates, quantitative easing, monetary stimulus, etc. — a permanent fixture on six-o’clock news.

Yet many of us don’t truly understand the role of the Federal Reserve.

For answers, let’s turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter.

Today we begin a 3-part series that, we believe, will help you understand the Fed as well as Prechter does. (Excerpted from Prechter’s Conquer the Crash and the free Club EWI report, "Understanding the Federal Reserve System.")

Here is Part I; come back next week for Part II.

Money, Credit and the Federal Reserve Banking System

By Robert Prechter

An argument for deflation is not to be offered lightly because, given the nature of today’s money, certain aspects of money and credit creation cannot be forecast, only surmised. Before we can discuss these issues, we have to understand how money and credit come into being. This is a difficult chapter, but if you can assimilate what it says, you will have knowledge of the banking system that not one person in 10,000 has.

The Origin of Intangible Money

Originally, money was a tangible good freely chosen by society. For millennia, gold or silver provided this function, although sometimes other tangible goods (such as copper, brass and seashells) did. Originally, credit was the right to access that tangible money, whether by an ownership certificate or by borrowing.

Today, almost all money is intangible. It is not, nor does it even represent, a physical good. How it got that way is a long, complicated, disturbing story, which would take a full book to relate properly. It began about 300 years ago, when an English financier conceived the idea of a national central bank. Governments have often outlawed free-market determinations of what constitutes money and imposed their own versions upon society by law, but earlier schemes usually involved coinage. Under central banking, a government forces its citizens to accept its debt as the only form of legal tender. The Federal Reserve System assumed this monopoly role in the United States in 1913.

What Is a Dollar?

Originally, a dollar was defined as a certain amount of gold. Dollar bills and notes were promises to pay lawful money, which was gold. Anyone could present dollars to a bank and receive gold in exchange, and banks could get gold from the U.S. Treasury for dollar bills.

In 1933, President Roosevelt and Congress outlawed U.S. gold ownership and nullified and prohibited all domestic contracts denoted in gold, making Federal Reserve notes the legal tender of the land. In 1971, President Nixon halted gold payments from the U.S. Treasury to foreigners in exchange for dollars. Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as "obligations of the United States," they are not obligations to do anything. Although a dollar is labeled a "note," which means a debt contract, it is not a note for anything.

Congress claims that the dollar is "legally" 1/42.22 of an ounce of gold. Can you buy gold for $42.22 an ounce? No. This definition is bogus, and everyone knows it. If you bring a dollar to the U.S. Treasury, you will not collect any tangible good, much less 1/42.22 of an ounce of gold. You will be sent home.

Some authorities were quietly amazed that when the government progressively removed the tangible backing for the dollar, the currency continued to function. If you bring a dollar to the marketplace, you can still buy goods with it because the government says (by "fiat") that it is money and because its long history of use has lulled people into accepting it as such. The volume of goods you can buy with it fluctuates according to the total volume of dollars — in both cash and credit — and their holders’ level of confidence that those values will remain intact.

Exactly what a dollar is and what backs it are difficult questions to answer because no official entity will provide a satisfying answer. It has no simultaneous actuality and definition. It may be defined as 1/42.22 of an ounce of gold, but it is not actually that. Whatever it actually is (if anything) may not be definable. To the extent that its physical backing, if any, may be officially definable in actuality, no one is talking.

Read the rest of this eye-opening report online now, free!

Understanding the Fed: How to protect yourself from the common and misleading myths about the U.S. Federal Reserve

It’s time to pull back the curtain on the Federal Reserve system. In this revealing 34-page ebook, you’ll learn how the Federal Reserve controls the money supply, you’ll pin-point a few critical points in Federal Reserve history, and you’ll uncover several important myths and misconceptions, like who owns the Federal Reserve Bank.

Representing more than 10 years of research by financial analyst Robert Prechter, this free report goes beyond Federal Reserve history and it’s government mandate and digs into the Fed’s real motivations for being the United States’ "lender of last resort."

Take this important step toward understanding the Federal Reserve system — Download this FREE 34-page ebook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Robert Prechter Explains The Fed, Part I. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.