Safe Investing - Does It Exist?

Making money in the market is the goal of every trader and investor but is there such a thing as safe investing? Is it possible to speculate with very little risk involved? The answer to that question has to do with the amount of risk a person is willing to expose their money to.

If safe investing is what you desire, you may want to consider a money market account which is guaranteed by the government to retain its value. The downside to such an investment is that there will not be any large gains like you may have experienced in the stock market. For some people money market accounts are the safe investment they are looking for even though the returns are rather small compared to other forms of investing.

Another way of safely investing your money is putting your funds into Certificates of Deposit which will guarantee an interest rate return on your money and is also backed by the government. Just like money market accounts, CDs have low risk and the returns will be low as well. If safe investing is what you are after, then CDs and money market accounts might be just right for you.

On the flip side of safe investing would be to speculate in the futures markets which is extremely risky due to the enormous amount of leverage that is available. The returns on futures trading can be substantial but at the same time so is the risk. Futures trading involves markets such as grains, currencies, precious metals, stock indices and interest rates. I personally prefer to trade these markets using ETFs because it allows me to speculate in various markets around the globe with less leverage which means less risk.

The most popular form of investing is the stock market which can produce spectacular returns but is this considered safe investing? I guess the answer depends on who you ask. There are some methods of trading stocks that have very low risk such as "The Dogs Of The Dow" which is a popular strategy that makes money over time but once again there is risk even though it may be low. Some investors love to play penny stocks with the hopes of multiplying their money rapidly. The problem with this method is that it can be hit or miss. Either you hit a home run or you strike out. If safe investing is what you are looking for, then be sure to stay away from speculating in penny stocks!

In my opinion the best way to safely invest your money in the stock market is to diversify effectively and to always use proper money management. When I say diversify, I don't mean run out and buy GOOG and BIDU which are two stocks that have a high correlation with each other. Diversification in my opinion means placing your money in stocks or investments which move somewhat independently to the overall stock market. Once again, ETFS are a great way to diversify and participate in various markets such as stock indices, gold, oil, grains, currencies etc.

The last thing I'd like to say about safe investing is to always use some form of money management which in my opinion is critical to your success as an investor or speculator. If you are not managing your money correctly I can guarantee at some point you will blow out your account with a massive draw down which will be devastating to your ego, wealth and confidence. I highly recommend educating yourself on various ways to apply money management principles to your trading. I know it's boring but nothing can be more important than learning how to manage your funds and how much risk to place on the very next trade.

The thing to remember about safe investing is that there is no quick way to make your fortune. It takes hard work and dedication to not only learning about the markets but learning about ourselves as well. Find a proven method or approach to investing that you are capable of trading, remember to properly diversify and use money management and I'm sure over time you will find much success!

XLE Caution If You Are Long

I'm becoming cautious on the energy sector (XLE) as we move into the new year even though the sector has been in a nice uptrend. You'll notice on the above chart that XLE (top panel) formed a weekly Bearish Engulfment. XLE has been reversing it's trend every time an engulfment candle appears. XLE had a bearish engulfment in October of 2005 and in January of 2006...Each of these candles correctly warned of a top. The bullish engulfment the XLE formed in September of 2006 also triggered a change in trend which began an eleven week rally. Now we have a bearish engulfment so right away a red flag should go up.

In the lower panel we have a chart of USO which is basically crude oil. Notice how the two markets (USO and XLE) correlate well with eachother. Both markets have been moving the same way until now. XLE has been trending higher while USO has been trending lower (August 2006 to December) . I take this as a bearish sign for XLE and when you combine this with the weekly bearish engulfment, I feel prices will go lower. So if you are long XLE, tighten up those trailing stops!

QQQQ Weekly Bearish Engulfment

I should have posted this chart on Friday but I didn't notice it until today. On Friday the QQQQ had a weekly bearish engulfment. For those of you who do not know what a bearish engulfment is, I suggest you find out... (just kidding) :-)

A bearish engulfment is a reversal pattern that is formed when the real body of one bar engulfs the body of the prior bar AFTER an extended move. The body of the candle is the distance from the open to the close.

What makes this bearish engulfment so significant is that it's on the weekly timeframe and it coincides with many other bearish reasons such as the top of a channel, an extreme in market sentiment, dow theory sell signal..etc

Dow Theory Sell Signal

Dow Theory states that both the Dow Jones Industrial Average and Dow Jones Transportation Index have to make higher highs together in order for a bull market to stay intact. The same goes for a bear market - both indexes have to make lower lows around the same time in order for a bear market to continue. When one index does not confirm the other, within a reasonable amount of time, there is a good chance for a reversal in both indexes.

If you look at the above chart you will see a weekly chart of the Transports and in the lower panel the dow jones industrials. Notice how all the points on both charts lined up with eachother confirming every swing high and low until now. The dow made a much higher high at point 7 vs point 5 but the transports made a lower high. This is condsidered bearish if you follow the dow theory which has been around well over 100 years!

The lower chart is a daily chart of the Transportation index. You can see the head and shoulders pattern and the move that followed. The transports are clearly through their 200 day moving average which confirms that the trend is now down..