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Dummies Guide To Trading Bubbles

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They say its impossible to call tops and bottoms. This is true. How high can a price go? How low can a price fall? No one knows, anyone who can predict a price is just guessing or a liar. Money is made catching the sweet moves BETWEEN tops and bottoms.

So how do we know when gold tops out and when to sell? You can only know a top AFTER it has happened. You can do this by using a pair of moving averages as an "indicator". The most common is the 200 period moving average and the 50 period moving average. When ever the 50 period moving average crosses above the 200 period moving average you can buy then AT ANY TIME and hold until it crosses back over. Most share price websites allow you to set moving averages on their charts for free..

Brown and blue lines denote moving averages in the graphs below.

Here's the NASDAQ (dot-com bubble), Buy at any point after 1991, SELL in 2001

http://bigcharts.marketwatch.com/charts/big.chart?symb=nasdaq&compidx=aaaaa%3A0&ma=2&maval=200%2C50&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=3291&style=320&freq=2&startdate=1%2F4%2F82&enddate=9%2F28%2F2002&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=8305&mocktick=1

DOW http://bigcharts.marketwatch.com/charts/big.chart?symb=dji&compidx=aaaaa%3A0&ma=2&maval=200%2C50&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=1643&style=320&time=20&freq=2&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=7490&mocktick=1

Big Yellow Group (close enough to the UK property market)

Buy anytime after 2004, sell late 2008. UK property not a buy yet, even today.

http://bigcharts.marketwatch.com/charts/big.chart?symb=uk%3Abyg&compidx=aaaaa%3A0&ma=2&maval=200%2C50&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=176191&style=320&time=13&freq=2&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=3146&mocktick=1

FTSE100 - Market is undecided where it wants to go:

http://bigcharts.marketwatch.com/charts/big.chart?symb=uk%3Aukx&compidx=aaaaa%3A0&ma=2&maval=200%2C50&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=123797&style=320&time=13&freq=2&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=2324&mocktick=1

And heres gold

http://bigcharts.marketwatch.com/charts/big.chart?symb=38099901&compidx=aaaaa%3A0&ma=2&maval=200%2C50&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=2212&style=320&time=13&freq=2&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=7233&mocktick=1

Things to note, you may get false signals so never risk an amount you can't afford to lose - ideally no more than 3% of the trading account per investment/trade. If more, than that, then you must becareful. You may be just be unlucky and buy today, and the market crashes and a sell signal activates tomorrow. Prices may also be stagnant or be "stuck" in a trading band/range for months despite a buy signal is still active- patience is required.

If you get many false moves try using different moving averages which may "fit" better and give less false signals, and catching the tops/bottoms sooner. Try 300,25 period moving averages as a pair, or experiment with any number and stock/commodity. Play with it. Make it fun.

Its not a perfect system by anymeans, but sticking your finger in the air or arguing with RB has got to be worse ;)

Always do your own research - do not take this as investment advice.

Edited by Money Spinner

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This graph places gold above the bottom points and below the top points, These points are all stated as bubbles, so why isn't god a bubble yet? I'm not a pesemist, just trying to understand what the graph is saying, apart from tulip bulbs suck.

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This graph places gold above the bottom points and below the top points, These points are all stated as bubbles, so why isn't god a bubble yet? I'm not a pesemist, just trying to understand what the graph is saying, apart from tulip bulbs suck.

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To be honest, the author will have a vested interest in making gold look good at whatever price. If gold was $5000/oz next week, we'll still get very convincing articles proclaiming gold is not in a bubble. And if it is in a bubble - is that a bad thing? Not really.

You have the tools to trade. You know, when to buy, when to sell and how much to risk.

money.jpg

Until the sell signal comes up, I don't really care about "fundamentals" (too much) as long as the price is doing something.

Heres another cyclical share that matches the global economy pretty well, that I watch closely http://bigcharts.marketwatch.com/charts/big.chart?symb=uk%3Ahyc&compidx=aaaaa%3A0&ma=2&maval=200%2C50&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=1274439&style=320&time=20&freq=2&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=3267&mocktick=1

Edited by Money Spinner

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An alternative to moving averages, another technique is breakouts. I posted this on another thread, and it is copied here:

Gold has made a new high

article-1204054-05EEE27D000005DC-259_634x423.jpg

^Stay on the bull "Yahoo!"

The market tries to trick. It would be natural for new "investors" to sell on a new high and to take profits.

But actually, you'd make a fortune (in any commodity/stock/houseprice*), by resisting and doing the opposite. I.e - depending on your trading timescale

- Sell on a new monthly/yearly (delete as applicable) LOW

- Buy on a new monthly/yearly HIGH.

Mr Donchian wrote a book on this subject.

---

*See my link in the signature - uses a 2year trading timescale. Waits for new 2year high/low.

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Additional note, why do breakouts work?

It is completely against our nature to buy on a new high and sell on a new low. But it works because new traders/investors/speculators don't know how markets work.

Lets say an oil company, "ACME" trades in a range between 50p-75p for the last 8 months. Loss making. There aren't many shares in issue, but not many shares trade hands on a daily basis. Pretty boring. It now needs to raise money, to maintain its exploration program.

100,000,000 shares are issued. The share price does not fall, as some institutional investors soak the excess up.

A few months later ACME announces an oil discovery in one of its properties.

The markets hot money starts flowing into ACME buying up shares in high volumes over the next few weeks, draining the 100,000,000 newly issued shares in the market. This continues until a tipping point is reached. There are more buyers than sellers. The price then breaks out, making a new yearly high, closing on the day at 100p. A buy signal. Some investors take their profits here, and the price does fall back a little to 90p the next day (Not a sell signal, as the yearly low would be 49p).

ACME announces it is fully funded to bring this oil to the market and will not need to issue more shares. It is even confident it will soon issue dividends.

The market goes into a feeding frenzy and the shares are now 300p. People who sold out at 90p are kicking themselves, and buy back in. The shares stablise out 280-300p over the next year. Some directors of ACME sell shares but not in large quantities to affect the price. As interest fades, the share starts to fall, making a new yearly low, closing price at 250p. This is a sell signal as it is a break out on the downside. For some reason there are suddenly less buyers than sellers. Is there an insider selling?

One day ACME announces one of its old oil wells is running low, and the lifespan of it is shorter than expected. Problems are now being encountered at the new well. They may have to cut the dividend hard.

The market does not like the news, and the share price makes another new yearly low at 200p. New investors buy here thinking they're getting a bargain, but it is like catching a falling knife. Over the next long slow months, the share makes another yearly low closing at 150p. The new investors get burned, and sell at a loss.

Edited by Money Spinner

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Yes. The orignal work by Mr Donchian used monthly high and monthly low.

But I have read the people have used a shorter timscale for the sell signal if going long, so the "stop" is tighter. E.g. buy on a new yearly high, sell on a new monthly low.

Gold has worked well using new yearly high as a buy so far.

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And now, for some directed reading. I have read many trading/fund management books. This is one of the best, and here's a copy. Get cracking.

You can get Stans book here http://www.ebookee.com/Stan-Weinstein-s-Secrets-For-Profiting-in-Bull-and-Bear-Markets-by-Stan-Weinstein_57465.html Password to extract using Winrar is "static"

Winrar http://www.win-rar.com/

This will keep you busy until houseprices crash ;)

Edited by Money Spinner

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Alright another snippet,

So now we've got some basic principles.

An example portfolio of £10,000 would consist of £250 trades (risking 2.5%), and each trade would have its own system/

E.g.

Trade 1: £250 Long Cotton using new 4week high/low indicator

Trade 2: £250 Long BP shares using 200/50 MA cross-over indicator

Trade 3: £250 Short Gold using technical analyis "double top formation".

etc.

But how do we know when to take profits? What if the market crashes and we give all our profits back!

The key is "R" ratio and trailing stops.

R = Reward / Risk

As a rule, R must be equal or greater than 2 to make the trade worthwhile.

E.g. We buy £250 of a IT company shares at 250p each

Target price for a IT company 750p. Buy at 250p.

500p*/250p = 2

*(Reward = 750p-250p)

We are risking 250p, as these shares can go to zero. Companies can go bust!

So we have a target price. Lets say this is reached. Fantastic, do we sell? No. But put a sell stop just under here to lock in the profits (if it is a junior company - just make a mental note of when to sell, pro traders always run your stops). Now you can keep riding the profits until your sell indicator activates.

Edited by Money Spinner

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I have started a fantasy portfolio using these simple principles last week, starting with £10,000. There are a bunch of GOLD stocks in there as well as others outside of PMs..

Lets see where we go eh?

Updates after Fridays.

Last week

portfolio.jpg

Also running from GEI

Edited by Money Spinner

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If you talk to traders (traders not investors) they will tell you that gold is the hardest thing to trade. I know that most people are investors here, not traders, but a trader's view is important because you are (obviously) trying to detect the top on the narrowest time frame possible.

The 'walk' associated with gold is very 'self-similar' or 'scale-invariant'. This means that you can look at the movements over different time scales and the price pattern or 'roughness' (as the late genius Mandelbrot would say) is much the same. And the scale of the jumps is quite dramatic.

Understanding the details of what I've said above is not really important. It is important to realize that what is described above represents a pattern of chaotic behaviour.

With chaotic behaviour none of the standard sorts of analysis (for example Gaussian stuff) can be applied.

So from this we must conclude that you won't know when a top is in until you can see it was a top. And by then it will probably be too late, you'll be heading well into the bottom.

That is the danger with gold, and it's going to catch a lot of investors by surprise.

Edited by Toto deVeer

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So how do we know when gold tops out and when to sell? You can only know a top AFTER it has happened. You can do this by using a pair of moving averages as an "indicator".

...

Always do your own research - do not take this as investment advice.

:lol:

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The 'walk' associated with gold is very 'self-similar' or 'scale-invariant'. This means that you can look at the movements over different time scales and the price pattern or 'roughness' (as the late genius Mandelbrot would say) is much the same.

:lol:

This is great!

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I definitely do not advocate putting all ones eggs in one sector. There are fat tails of the on gaussian bell curve. Freak events are highly possible in these volatile markets.

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I definitely do not advocate putting all ones eggs in one sector. There are fat tails of the on gaussian bell curve. Freak events are highly possible in these volatile markets.

Q : with reference to Martingale, explain the superiority of your methods.

Fat tails? offs, you must be JPM.

:lol:

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No just a small humble private investor who reads too many books. I believe with simple principles anyone can make a humble 5-10% per year. It is possible, I believe. It has helped me grow my deposit, which is why I am in a position to buy a house now.

Starting a portfolio - to prove there is life after BTL. I know there are posters on here with deep pockets entrenched into property - any money diverted away from property can only be good for the rest of us.

But don't think it will make one a millionaire overnight!

Edited by Money Spinner

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  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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