One of the best ways to learn how to understand something complex is to first understand something simple, something that works the same way…

To understand the complex motion of the stock market, we can use simple waves on the water. The water waves can help us visualize what can often seem difficult to comprehend and make it easy to understand.

During my days in the College of Engineering when they were teaching us physics, advanced calculus and engineering analysis it was not uncommon for the professors to use water waves in the examples to help us learn to visualize what was happening in many different complex and dynamic systems. All those fancy equations were hard to understand but the waves rolling along the water made it easy for us to see the ideas in our mind’s eye…

So if the stock market is a complex and dynamic system and we can use advanced calculus or simple waves on the water to figure things out, lets choose the simple water method…

It’s all about watching, understanding and timing the different waves as they move through the market. Then watching to see how they all add up…

So we can start with the really big long term waves or market tides. Long term things. You can think of the tide as a really big, long wave. That is something that comes along slowly to raise the level of the market. Things like Demographic Shifts, Unemployment Rates, Interest Rates and Election cycles. Things that change slowly with long term trends that are measured over the course of years. Seasons and annual events like Christmas Shopping come each year but they are always different. Earnings season comes quarterly and so on. The market tides are all big, slow moving stuff that affects the market trend over the long term.

As the time frame gets shorter we go from tides to add in the waves. Market waves can be large or small and even though they have a predictable rhythm they are each totally unique, with differences in size and timing. These are more frequent things that we consider. Market waves have an affect that is more immediate and shorter duration. This could be things like Summer Hurricanes or Winter Storms. They come in, run their course and have an effect for a while but it is not always long lasting. Things from months to weeks are in the wave range I use.

Then there are the ripples. The things that are short duration and small effect. From weekly, down to daily or even hourly events. Things that come and go. Maybe a company announces a new product, a merger or layoffs. Something that runs its course fairly quickly. When I get up at 5 AM to look at what happened overnight in the markets in Asia and Europe, the little market news events of the day over there will come along and affect the US market at the open and the results may not last more than a few days, hours or even minutes.

Finally there are splashes. That is something that makes a big unforeseen impact. An earthquake or a terrorist attack might fall into this category. You may never see it coming and it can totally change your life and the market you trade, it can come without warning in one unpredictable instant and change things forever…

Everything adds up over time, the tides, waves, ripples and splashes all serve to come together to create that single point where the market is trading at any given time.

So the tide may rise to lift our boat while the waves may serve to take us lower and lower for a time…

You can see how simple, yet complex, it is to add up all the different tides and waves to determine where you are at any given time. Then the trick is to figure out how they will all interact and where they will take the market in the future.

This can take a lifetime of study to get it right and we will never be perfect. The goal is not to be perfect. The goal is to get good. Good enough…

So now it is time to look at my portfolio and see my stocks in terms of their own waves and then look at what tides, waves, ripples and splashes may be affecting each of my stocks. Do I think there is a rising tide that will lift them to new highs or is it time to sell because of a coming wave? Should I move on to other opportunities because there may be ripples on the way? Beware the unknown splash that can come at any time.

The waves in the market are always changing so we have to always be ready to change as well…

Watching the waves and learning to time the events and how they come together can take a lifetime. Successful timing can result in making a lot of money or losing a lot of money. It is a journey and every day there is something new to learn.

Join me, follow along, have fun but most important be careful out there…

Look to the extremes to understand. In the market and in life…

If we were to take all of everyone’s money, that is a 100% tax rate, there would be minimal financial incentive for people to buy stuff and do things. There would be maximum government funding for institutions to benefit society.

If we were to take no money from anyone, that is a 0% tax rate, there would be maximum financial incentive for people to buy stuff and do things. There would be minimum government funding for institutions to benefit society.

That is easy. Now let’s add a degree of difficulty. Where do you set the rate between all or nothing?

Do you set up a system with a 50% tax rate? That is in the middle. Most of us do not want to see half of our money taxed away, if it were, our incentive to work harder would be taken away as well.

So where do you set the taxes? How much of your money do you want to give from each paycheck? That’s the great debate. I am not a political person, never have been and I sure don’t plan to be. I have never donated as much as a single dollar to any political party or candidate. I am not a member of any political party, never have been. I look at each issue on its own merits. I learn learn from the world, not what politicians say about the world…

Now that my nonpolitical credentials have been established for you. I also want you to know that this is not a political blog but the decisions politicians make will affect the market and the market is what we are here to learn from. So I am not going to ignore the politicians, they are a big part of our lives. I will simply point out what they say and do, as it affects our markets and our world.

Today I’m looking at taxes because I see an opportunity to observe and learn from an extreme in the news. As an exercise you can decide now, what you think the outcome will be and we will find out the reality from what the market tells us over time, as events unfold.

I see in the headlines that there are proposals for a 75% tax rate. Give that some thought… You make a hundred bucks and they take seventy five.

If you were taxed at that rate, What would you do? What do you think other people would do?

Look to your world to learn. Look to France. The French president plans to impose a 75% tax on people making more than a million. As a result, the rich are leaving France and taking their money with them. Who will be left to buy what the French people have to sell? Will this help their businesses? How about the French economy? Maybe 75% is like 100%, a bit too much.

Don’t listen to what the political marketers tell you about this. We know they will benefit. Watch the French economy. Over time that will tell us if this is a good idea by how much this new tax rate affects business, the people and the market.

As the tax rate debate continues in the US, between what I like to call the “Government Team”, that is the Democrats and the “Business Team” that is the Republicans, you can watch their comments and watch the extreme case across the ocean to see what happens. As the “teams” present their ideas to you, think about the extremes and how it would be best to handle the middle where most of us live.

Don’t listen to me and definitely don’t listen to what some politician says. Watch the reality play out in the market. Learn from reality, not what someone tells you reality is.

Be sure to look where they don’t want you to look. Look for the data they don’t mention…

In this case I am watching England. As France increases their regulation and taxes to chase away the rich. England is making it known that the rich are welcome there. Their money is welcome there too. Their rate may not be 0% but it is not 75% either…

What do we expect to learn from this one? The middle class needs rich people to buy their stuff. Poor people can’t afford too much stuff. The rich can afford the stuff but that doesn’t matter when they are gone. I am betting this will not go well for French economy over time. Lets hope France figures this out. For the sake of their middle class…

So who will win? France where they are taxing the rich so much that they are leaving or England where they are welcoming the rich? Welcoming them as a plan for economic stimulus. I am betting on England…

How will we know? As always we will watch the markets for our answers. The French and English economies, their stocks and their stock markets. The markets will tell us the secrets we want to know…

This is one tough market to trade. Especially since my schedule is keeping me away from the office and I can’t follow the market during the day.

Back when there was a clear uptrend and I was in the office all the time, I could get up early, check out some market data and trade all day and make money. I was a genius! That was how it felt anyway. In reality I was just lucky to have the opportunity to be trading in a rising market. This is true of so many who try to sell you on their “genius”.

Everyone is a genius in a rising market. Just listen to them, they will tell you about all their winning trades.

These days when the market is not clearly trending up, it is harder to find a genius. That is why this market is the most valuable to learn from. It is hard to deal with…

So before I have to leave the office today, I am looking at the market and my portfolio. Every day you have to decide to handle your positions. Leave them alone, sell, buy, place threshold orders (stops, limits). So I am looking at my portfolio and considering what to do for the day. Because the world may change today and if it does, the market will change. My portfolio has to be ready for change. I have to be ready for change…

Should I put in stop loss orders? Or should I “let it ride” if the market goes down, it will come back right? Maybe not…

So lets talk about some of my stocks. I bought in when the market was trending down and then stopped going down and leveled off. I was mostly in cash and I wanted to bet on things starting to improve. I was right, for a while. My DRYS was up almost 20% for a while. My DRYS was a play on a Euro solution that came and went. The market changed but my portfolio didn’t… My HERO is up 10% percent today but that is just a number until I sell and lock in gains. I don’t plan to sell just yet…

Today DRYS is up only 6% for me. Have to watch that. Always want to limit losses…

My MGM and IRBT are both down about 10%. Did I mention it is hard to be a genius these days?

Some theories say to sell and limit your losses in the single digits. Others say that you ride it out and it will eventually come back. Both can work if you apply them well and at the right time. Warren Buffett is often credited with being a genius. I don’t think he is a genius. I think he is consistent. Disciplined and consistent…

Trying to stick to my own discipline, I have been using a range lately. If I an down over 10% I start to watch that stock for a sale. In the 15% to 20% range. I watch closer. Over 20% the stock is on my sell list. That way I limit losses. The problem is that I have a lot of work to get back to even. If I lose 20%, I have to make 25% return just to get back to even money!

So these days, in this market, I am looking to limit losses long before 20%. I am thinking more defensively. So I want to limit losses before I get very far into double digits. So I am watching the MGM and IRBT and may sell them soon or put in a “stop loss” order to set a “loss floor” under them.

But it isn’t that easy…

If the market goes down, I want out now. If the market is bouncing along the bottom about to rally, I want to hold. What should I do?

Look at the data. Think. What is the stock history indicating? What is the market data showing? What is the economy telling us? What can go wrong? What are we missing?

So many questions, so few answers… That is the market we have and the life we live. That is where I am at today… So what to do? Not sure. I have to look at the data a little more and make a decision for the day. This day and every day.

Better get to that. For now, I am betting I will let things ride. Based on my read of the economy, the market, these stocks and my guess about what comes next. Hope I get it right and make a few bucks. If I don’t I will learn some valuable lessons but my portfolio is down for the year. I can’t afford too many more lessons…

The weekend! Time to take a couple minutes to look at the stock market data and listen to some financial radio shows and maybe a podcast or two while I get some stuff done around the house. Its fun. Try it. Search out a few and give it a try. That is how you learn this stuff. Take five or ten minutes each day and listen to who is saying what about the market.

Listen to the different voices and see what they are saying and see who you like and figure out who you can trust. Take the time to listen and evaluate and understand the good and the bad in each resource. Then make sure you add in a few voices you disagree with, just to add perspective and be sure that you are not missing anything. Listen and learn from many voices. Listen to a few folks who you can’t trust and learn their tricks so you can learn how to defend yourself… Learn the game and the players. Learn their business model. What are they selling?

Financial TV shows and radio stations sell advertising. Authors sell books. Non profits sell a way to feel like you help a cause. Everybody has something to sell. Figure out what they are selling and how. Mothers are selling “self improvement” to their kids and that guy speaking from the pulpit, he is selling a better way and he may never ask for a penny…

So the sales process is something that we all do. In our own way based on our own goals. If we understand what we sell and what others sell this will help us understand the bigger picture.

People are buying and selling in our world every minute of every hour of every day. Think about it as it happens and you can learn all that you need to know. Watch how that dog sells its master on taking a walk. Simple and effective psychology. Just like everybody else…

So start with a few minutes a day. Listen to some financial radio. Read something new. Listen to a podcast. Learn something new about the market and then evaluate the source. What is their business model? What are they selling? Does it have value to you? If so, listen and learn. If not, listen and learn (but maybe you won’t listen as long).

Don’t buy, just listen. Beware the pump and dump. Beware the free seminar as bait to sell you an expensive seminar… Spend a long time listening and learning. If it sounds too good to be true, it is! Study the art of selling a long time before you ever buy.

Look for the sale they want to make. See if the information they present is affected by the sale they want to make. Are they a genuine educator with a like minded sponsor? Or are they a sellout shill who will do anything to you to take away your money? The difference isn’t always obvious…

Watch how they are doing and how that changes over time.

Here is a resource or two to get you started. Listen as you work. Work… Hmmm. That reminds me, I have to get some work done before bed. Maybe I’ll listen to some streaming financial radio along with you…

Investment Radio Show

Money Talk Radio Station

Wall Street Radio

Money Talk from Manhattan

Look for the link to listen and have fun learning! Have fun and be careful out there…

On Friday, I was planning to get home in time to watch the market and do a little trading during the final hour of the week. That was when the pager went off and I responded to a Brush Fire. Spent that hour and a few more fighting fire instead of trading the market… So no end of week trading and no blog post on Friday.

That is real life. If you are trading as a sideline, you can’t sit and watch the market all the time.

You have a full time job and other responsibilities that come first. So you need to have your portfolio positioned for what happens when you can’t trade. Portfolio positioning with an eye toward event risk, using protective tools including things like stop loss orders and maybe even options as insurance. These things can help smooth the bumps in the road, when you can’t be there to react real time.

Most of the time missing a day or two will not make a big difference because the market doesn’t move in a straight line. It just feels like it does when we sit and watch the tic by tic coverage on the financial TV shows.

If you miss a one day rally, don’t worry there will be more. Probably soon after the next pullback…

So looking back at the market as it ended Friday, I didn’t miss a thing. It wasn’t all that different from the way it looked when it opened Monday.

We spend so much time preparing for the worst, that we forget that most of the time the worst doesn’t happen. Insurance companies remember. That is how they make money. Studying the risks, positioning properly and adapting after the unpredictable. Sounds like a good way to make money.

Trying to find the balance here for you. Time wise and length wise. I don’t want all my posts to be 1000 word booklets but as we get to know one another, I want to put a lot of the info for you in the blogs. The “what I am” and “what I am not” kind of stuff. Later I will have that in another section of the website for new readers to reference, for now I am just putting things out there for you to see. So you can watch me make my mistakes real time…

Remember that is what is different here. I post every few days so you can see what I am thinking and trying and what I get wrong and how I react. I don’t sell investment advice, so I don’t strive for a certain goal at the end of some reporting period type finish line. I just post my opinions and mistakes and let you see them for what it is worth. I will sell some advertising and maybe some books and educational things over time so you know where my financial incentives are and you can decide if they motivate me more than presenting an honest opinion for you. (You should always perform this analysis on any information resource you use).

Ok before I go too far down the foundation information road again, I wanted to post another trade for you to see. I bought IRBT on Friday July 6, 2012. It is now about 6% of this trading portfolio.

The investment club that I belong to bought some IRBT a couple months back. We look at the fundamentals there and we trade a bit but try to pick longer term investments. Then when IRBT warned and the stock crashed the club sold half the position. Hedging their bets. Locking in losses but not totally giving up.

I have been watching it and took a small position Friday. It could go either way, always can… I will probably put a protective stop-limit order under it. I like to call this an “Insurance Floor”. Just in case I am wrong… For now I just bought in and I will be around the office, so I will be watching it but I should put a floor under it to limit my losses even though I think it will probably go up from here.

So we will see if I am wrong. But we won’t know until I sell. What it does between now and the time I sell will not matter. The gains or losses I lock in upon the actual sale will put points on the board (or take them away).

With those F Call options way underwater, I need to put some points on the board. Or take some time off for self analysis. They are only a small speculative portion of my portfolio but they still represent a position that I took and that I got wrong, so far anyway. Remember they didn’t expire and I didn’t sell so I haven’t locked in the losses yet…

The good thing about holidays is that you have some extra time to yourself. To work on your projects. Like your second job. So this week there are some extra blog posts for you.

So lets look at where I am in the trading portfolio. That is what is different here when and how we look at things. Most other sources picks stocks or bonds or options and recommend trades and investments. Then they try to maximize performance for a snapshot when they get to the finish line, like the end of the quarter or the end of the year. I don’t sell stock picks, I don’t sell investment advice. I do use the market to show you how your world works. To do that I show you my methods. Honestly and openly. So you can see the process, mistakes and all… The good and the bad. Makes life easier when you are open and honest. That is another theme of this blog…

So here is where I am in my Moonlighting Trading portfolio. Pre market today July 5, 2012.

MGM up 2%
TQNT up 6%
HERO up 13%
DRYS up 13%

And call options in F.
F $13 Sep 2012 Call down 97%
F $13 Dec 2012 Call down 92%
F $12.5 Jan 2013 Call down 60%

Cash 75%

This is my trading portfolio for Moonlighting. It is my trading account where I try to time the market for fun, profit and understanding. Unlike my conservative investments where I do not take such risks. Those investments are not discussed here. This is my “fun money”. Losing it all would not impact my life one bit. It would embarrass the hec out of me though…

Analysis: Trying to time the bottom of a trend has not gone well so far. Selling my HOV to lock in my losses right before it went up is an example. My theory is that we are near an interim bottom of a slow uptrend and these stocks are higher beta and should go up faster than the market in an upturn. The F Options are even more volatile. You can see that picking the bottom has not worked for me so far. I didn’t plan to cover options in this blog but they were in the account when I started the blog, so I mention them. I am learning by doing when it comes to the Options. They may expire worthless if the market doesn’t turn soon, so I may have to consider them an expensive lesson. They are a small portion of my high risk trading portfolio, so we will see how it goes. It isn’t over till its over…

Now I have to revisit why I bought into these trades and evaluate if the reasons still apply. Consider taking profits and losses. I have been doing more work on the web design here than I have in the portfolio management. Working on balancing that out.

Shorter blog posts, more attention to the portfolio and an occasional Podcast for you are all short term goals here…

Here we go again. Getting back to work on my day off. It is the Fourth of July. Independence Day…

Today we celebrate the birth of this great nation and the system that we enjoy. So I will use the time to catch up on some things and assess where the market stands at the beginning of the second half of 2012. Yesterday was a long post so I will keep it short today. I thought it important to emphasize that I don’t sell stock picks or give professional advice. There is too much competition in that service. I teach stock market study for understanding the world in order to improve our lives. The better you understand the market and the world, the better you can pick your own stocks, live a better life and so much more…

So today I will be looking at the market, the big picture and then I will take the time to look at some of the little details too. I will be looking at the numbers and trends. I will look at the stock market indexes, treasury yields, the yield curve, commodity prices, shipping indices, gold, oil, story stocks, international markets, leading indicators, lagging indicators and whatever else I have time for. Then when I leave the computer and go out into the real world for a bit, I will look at what is going on out there and that can be even more important. The cars on the road, traffic patterns, the price of gas, how many people are in the restaurant and how many people are at the local auction. This stuff is every bit as important as all that fancy technical data…

I know of many people who become successful by getting a fancy Ivy League education and studying the markets from the data side but I know just as many who have become successful by observing and participating…

Yesterday I spoke to the owner of a gas station where I got gas. A nice friendly conversation always helps the day go better. I asked him if he had been busy. He said yesterday was slow and so was the previous weekend. Anecdotal evidence? Sure. But when I look at the market indexes and the shipping indexes and some other fancy technical data, I see the same thing in those advanced technical charts that he sees in his store. Some call this type of thing an “interview” or a “channel check” and they pay big bucks for it. I call it being friendly and observing the world. Whatever you call it, it is a good way to start to look at what is happening out there where all that fancy data comes from…

So enjoy your Independence Day and while you are out there doing what you do, enjoying the fireworks, enjoying a nice meal or just catching up on some things. Greet someone you are doing business with and see how things are going for them these days. Enjoy a nice friendly conversation and remember, what they tell you is every bit as important as what those fancy charts tell you. Have fun with it!

The beginning of another day, another week, another month, another quarter and another half… These are some of the time cycles for us to watch to find the market trends to play.

Play? Yep…

We can call it a game but please remember that a game can be very serious. Think about “War Games”. Can’t get much more serious than that. Or think about the study of “Game Theory”. After people study advanced math subjects in college for years, they can then go on to the advanced study courses such as “Game Theory”. They can spend their entire lives studying the complexities of the games that we all must play every day…

I don’t play war games anymore. I don’t have to choose my senior college electives anymore but every day when I wake up, I have to play this game of living life. I can look for trends and cycles to help me pick stocks and maybe I can pick good stocks and make a lot of money. Maybe I can sell my stock picks to make even more money. Not a bad way to make a living but to win at this game, you need more than money. Making money and making a living can be very different things…

Money is just one way to keep score and it is only one of the tools for success.

New stock market “players” will often focus on making money and keeping score that way, but there is so much more to life and “The Game”. Watch all those new lottery winners as they become multimillionaires overnight. Watch what they do with the money. Look to see if you consider them successful over the long term. If you are keeping score money wise, you might score it as a win for them. However if you look deeper, over time, you may not see the long term success you would expect. There is much more to success than just money in the bank. Money is only one tool…

If I learn to spot trends and cycles, I can go on to pick the stocks that fit in with who I am and where I am in this life. If I do well, maybe I can buy low and sell high and make some money. Maybe, instead, I can buy high and sell higher. Then what? Make more money? Buy more toys? Want more money? Execute and repeat… It will pass the hours of the day, put money in the bank and increase my score. Is a big money score success? Not for me. There is more to success than just money…

While I am indeed working to score points on the money scorecard, it is not my highest priority. I am going to the next level as well. If I can learn the lessons of the market and the trends and cycles, I can learn how to choose a good company. Not just to make money in their stock but maybe to get a good job and maybe find a good career. Maybe I can spot a trend and start a new business or a website or both! Maybe I can find a good place to live, one that is good now and will get even better over time. I can choose a course of study to improve my life and the lives of others, whether I am going for another college degree or looking for a second career in retirement. I can choose who to do business with and try to help them succeed and I can choose who not to do business with when I believe they are traveling the wrong path.

Maybe I will never figure out the big stuff but maybe I will figure out some of the small stuff. Should I fill my gas tank this week? Or should I wait and save a few bucks because I know the price will go down soon? Can I see that trend toward the next fad, so that I can buy that great new Christmas Toy early, before the crowd empties the selves. The possibilities are endless, when you learn the ways of the stock market and then look to the markets beyond…

It is all about so much more than just money. Money is a success tool for sure but it is only one of many…

I will be watching the trends that I believe will lead to long term success. My goal is to pass my success secrets on to others, so they can improve their lives and pass it on. Repeating the cycle of success. Achieving this goal is worth much more to me than just money.

If you only keep score with money, then you can focus on stock picks. Pick the winners yourself or pay someone to pick them for you. There are lots of people out there who will claim to help you pick the winners, for a price. Books, classes, internet, TV, radio and more. Maybe they can help you pick winning stocks and maybe even get rich. If money is your only goal, pick the resource that makes you money and enjoy doing business with them.

I don’t sell stock picks and I don’t offer financial advice. What I do is work a day job. When possible, I moonlight, working this second job. I watch the markets and participate in order to learn how to be successful in life. Some of the lessons I have learned, will be found here, to help you.

If you are interested in learning the life lessons of the market and you are willing to work to achieve true success. You are in the right place. I will show you what I have done and why. You will see what I get right, what I get wrong and I will tell you how and why I did it. So you can learn the decision making process. The process is the key to progress. Progress is the key to success.

So lets begin our study of the market and learn the ways of true success together…

The Supreme Court upheld the individual mandate in the health care law.  Upheld most of the law as is.

Didn’t see that comin.

Did I mention that you can’t predict the future?