The,Big,Lie,amp,#58,What,Wall, finance, share, loan The Big Lie: What Wall Street Does Not Want You to

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Learn more at:www.tradetofreedom.comTrouble in ParadiseKenneth Lay, Andrew Fastow, and Jeffrey Skilling of Enron are the preeminent poster boys for corporate greed, but by no means are the trio unique. In the back alley game of “Fleece the Shareholder”, skilled competitors are abundant. Dennis Kozlowski, Tyco's ex-chairman and chief executive, showed some real creativity. Late last year Morgan Stanley, always promoting an image of steady, conservative, trustworthy values, agreed to pay $50 million to settle federal charges that investors were never informed about compensation the company received for selling certain mutual funds. So much for protecting the little guy. Before that the SEC settled with Putnam Investments, the fifth largest mutual fund company, which allegedly had allowed a select group of portfolio managers and clients to flip mutual fund shares to profit from prices gone flat. A proposal that would force the SEC to give shareholders a greater voice in selecting board members was defeated in October 2004. Commissioner Harvey J. Goldschmid, an advocate of the proposal, said “The commission’s inaction at this point has made it a safer world for a small minority of lazy, inefficient, grossly overpaid and wrongheaded CEOs.” The ugly truth does not stop there by any means. Even the venerable Fannie Mae is accused of fleecing investors. The Wall Street Journal reports that the Justice Department opened a formal investigation in October 2004, following reports that the mortgage company may have manipulated its books to meet earnings targets. This is after Fannie tried to hinder an official investigation by refusing to provide relevant information. Oddly, the Enron scandal ultimately revealed Fannie’s alleged deception, when the energy company’s collapse forced Fannie Mae to replace Arthur Anderson with a new auditor. When Good News is BadAnd that is the good news. The bad news is very bad indeed. As an individual investor, you might begin to suspect the game is rigged against you after hearing the recent spate of charges and revelations. But the real problem lies not with the illegal activity of a few high-profile rogue directors, acting beyond the rather generous and forgiving rules of the SEC. Instead, the frightening truth is that you have much more to fear from what is done legally, with impunity, with the official blessing of regulators. I am a scientist by training, not a professional investor, but I have a substantial portion of my net worth floating about Wall Street in various stocks and mutual funds, mostly in self-directed retirement accounts. I want to protect those assets, so I naturally set out to learn more about stocks, bonds, futures, and commodities. Like any self-respecting scientist, I starting digging and methodically researching the rules, regulations and practices of Wall Street to get an objective picture how my money was handled once I made a transaction. Early on I concluded that the best way to make money was to take control of trading decisions myself, so that I could identify opportunities for the greatest returns without looking through the artificial filter of a broker with his own agenda. I also found that institutional investors managing billion dollar transactions or individuals working with grandma’s “blue chip” stock all share something in common, regardless of the method of trading or the size of the portfolio. All depend on the fundamentally flawed notion that the future is predictable. As a result, all are doomed to fail over time: any attempt to predict the future is utterly hopeless, and no amount of fancy arithmetic will change that immutable fact of nature. The futility of trying to foresee the future, however, has not stopped traders from creating ever more sophisticated methods that rely on predicting market movement. This tragic flaw, this inability to recognize that the future will never be predictable, is often masked by confusing terminology and complicated math to create a comforting image of some higher knowledge. But no matter how clever the system or elaborate the math, the future simply can not be foretold. Oddly, while traders of stocks, bonds and commodities suffer equally from the delusion that the future is knowable, the pernicious effect of this myth is seen with greatest clarity in futures trading. The world of trading futures, therefore, will be the example explored in detail to expose the depth and extent of the big lie. The lesson from futures trading, however, applies universally to all sectors. Futures TradingTraders fall into two distinct camps when it comes to analyzing the market: fundamental traders and technical traders. Fundamental TradersFundamental analysis is a study of the principals of supply and demand and the production and consumption patterns of commodities, and how these relate to future market behavior. The goal is to sift through fundamental economic data to identify discrepancies between the inherent value of a commodity and the current market price of that commodity. A fundamental trader seeks to profit by buying or selling during this period of discrepancy before the market catches up to reflect the correct information. Technical TradersTraders in the second major camp rely on technical analysis, which is a study of price behavior over time. Technical trading attempts to foresee the future, an impossibility. But hope seems to spring eternal, and so technical traders have developed an arsenal of tools to predict market direction. The big gun in technical analysis is the bar chart, which is a graph that represents market price changes over time. Using the bar chart, traders evaluate historic price behavior, seeking to identify any indicators that will predict market movement in the immediate future. The various patterns of peaks and valleys create “chart formations” that analysts use to predict prices. Eighteen basic signals and chart formations establish the basis for technical analysis: trend lines, rounded bottoms, consolidations, tops, bottoms, support, resistance, retracements, reversals, head and shoulders, continuation formations, triangles, coils, boxes, flags, pennants, diamonds, and moving averages. The only signals missing are tea leaves, scattered bones and eyes of newt. A few of these chart formations, explained clearly by Russel Wasendorf in All About Futures, are discussed below as a means of illustrating how traders use analytical signals to determine when and why to enter and exit the market. The Trend LineThe simple theory behind this most popular analytical tool is that market prices tend to follow straight lines. As such, prices are almost always drawn back to the line if they bounce off. Trends can be upward, downward or sideways. Trend Liners believe that prices tend to cling to straight lines because traders resist paying more for a commodity than others are willing to pay. As long as prices move up, for example, traders will continue to buy until the trend appears to reverse. The Rounded BottomThis formation is perhaps the easiest to recognize, and many traders believe that a rounded bottom is a strong signal of an impending change in market direction. The formation begins with prices gradually moving either up or down and then gradually changing direction. The rounded bottom is evident in the absence of an abrupt change in market direction. Head-and-Shoulders FormationConsidered by many to be the most reliable analytical tool available, the head-and-shoulders formation has become increasingly popular among traders as an indicator of a sizeable market reversal. The pattern is developed from three rounded bottom formations situated such that the middle one is higher than the other two, both of which are sitting at approximately the same level. The resulting configuration resembles a person’s head and shoulders. The formation indicates the end of an up trend in the market; while the reverse head-and-shoulder formation indicates the end of a down trend. Sideways Channels – Trading the BreakoutThis trading strategy involves looking out for markets that appear to be trending in a horizontal direction. If a market seems to be trading sideways, with the same tops and bottoms along the way, it may be ready to break out of that trend either up or down. The difficulty of course lies in determining for how long the horizontal trend will continue, and then predicting the direction of the breakout. Triangle FormationsThese formations are similar to sideways channels in that the market being analyzed has been moving within a relatively narrow range for a considerable time. The difference is that in a sideways channel the upper and lower limits of market movement tend to be parallel, whereas in a triangle formation these areas converge until a breakout one way or another occurs. Three types of triangle formations are recognized: symmetric, ascending and descending. Descending triangles develop when the higher price limits converge toward the lower price barrier, which has tended to stay flat. Symmetric triangle formations resemble sideways channels except that their upper and lower price limits continue to converge. Ascending triangles form when the upper price limits tend to stay flat, while the lower price limit converges upward. The 1-2-3 FormationThe theory of this strategy is embedded in the belief that a particular market will indicate a new trend in three steps. When a market has reached a new 12 month high or low, a trader begins to look for a 1-2-3 formation. The trader labels the position of the high or low on the chart as point #1. If the market rebounds from point #1, this theory claims the rebound will only be of a certain magnitude. When the limit of the rebound has occurred, this is labeled as point #2. If the market then retraces itself back toward point #1, but does not reach point #1 before reversing, this new secondary low is labeled point #3. Once this third point has been identified, the trader waits to see if the market will move past point #2. If the market breaks out from the second point, then the trader would enter the market in the direction of the breakout (opposite of the direction that the market was moving when it originally hit point #1). Simple and Weighted Moving AveragesMoving averages are the product of a mathematical analysis of the market. Generally, the analyst selects a pre-determined number of days to examine (usually four), and then totals all of the prices for that time frame. A division of this total by the number of days being analyzed will yield an average. With each day going forward, the first day is subtracted and the new day is added, thus giving a new average. This is done for however many days one chooses to examine. Once the moving averages are calculated, the results are charted on a graph. Some analysts calculate a weighted average using a formula that places more value on the more recent prices. This strategy is called a Weighted Moving Average. The Big LieSoftware packages are available today that can assist with culling through historical data. All of that is futile. At the exact moment a trader enters the market, there exists precisely a 50.000000% chance that market will move up or down from that point of entry, completely independent of any analysis that led the trader to enter at that point. No amount of hand waving, and no amount of fancy math, will change that reality. Denying that fact is the Big Lie. Why is trading near the level of chance the death of a system? To trade successfully, a trader must win enough to generate earnings that exceed the costs of commissions, slippage and losing trades, and this requires a wining average greatly exceeding 50%. For every losing trade, you must win another just to break even: that means two trades for no gain, and all the cost of trading. If the third trade happens to be a win, that means that 3 commissions, slippage 3 times and one loss must be subtracted from the win. Because of these downstream impacts of a loss, as a general rule of thumb at least 7 out of 10 trades must be winners to trade profitably. Not gonna happen. To rely on any of these methods of analysis in making trading decisions would be the height of folly. The hard reality is that all of these analytical methods are down right silly. They are the product of hope triumphing over reason. Traders are desperate for anything that will give them longevity and profit in the market in the face of desperate losses. But all of these technical trend methods, and fundamental methods as well, fail at a primary level, and placing any hope in them is a form of financial suicide. That 80% or more of traders lose is no surprise when the majority place faith in methods that by definition can never work over any extended period of time. All is Not LostYes, Virginia, there is a way out of this mess. Accepting that the future can never be predicted requires a shift in world view, one that rejects virtually every assumption embedded in the current world of trading, and the leap may simply be too great for many. But for those who reject the big lie, step across to the other side, and realize there is no leverage in tea leaves and eyes of newt, a tremendous freedom and clarity await. Unshackled by false hopes, trading becomes predictable and mechanical, freed from the agony of watching the market move in the “wrong” direction because in fact no prediction of market direction is involved at all. The idea is to create a position in the market that is truly cyclical, and therefore independent of underlying market movement, and of known amplitude. How to establish such a position is described in: A Simple Guide to Astronomical Wealth. Go to www.tradetofreedom.com.