The Parabolic SAR is a technical indicator that can help you determine the direction of an instrument’s price movement. Developed by Welles Wilder, it is a very simple indicator to interpret because it only consists of a series of dots above or below an instrument’s current price on the chart. A rising price momentum will have the Parabolic SAR dots appear below the current price, and a falling price momentum will have the dots appear above.

Setting a stop loss position with the Parabolic SAR indicator is simple: Just set it to the level of the most recent Parabolic SAR dot. Note that the Parabolic SAR indicator only works in trending markets, as it whipsaws too much during non-trending markets.

This book is excellent for traders that are ready for it. You need a foundation in trading to understand its importance and take the principles seriously. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.

Here are the six universal principles of successful traders:

1. Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.

2. Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend.

3. Developing a trading style

You must choose your own personal style of trading, swing trading or trend trading. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term.

4. Selecting Markets

Ideal markets to trade have volume and price transparency, liquidity, 24 hour coverage, zero counter party risk, low transaction costs, and are honest and efficient. They also must have the necessary trading attributes of volatility, research, simplicity, ease of short selling, specialization, opportunities, growth, and leverage. These are the markets that afford you the greatest chances of money trading.

5. The Three pillars of trading.

Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.

Methodology: Choose a method that works for you and your personality from the ones available. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it 30 times by e-mailing a trading partner for accountability to verify it works in the real world.

Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.

6. Putting it all together

Monitor performance consistently. Positive reinforcement. Equity momentum.

I have been actively and successfully trading the market for a decade and agree 100% with the authors principles.I have also learned a lot from this book even though I have read over 100 books on trading at this point. The author finishes up his book by asking many legendary traders and some that are successful private traders what one advice they would give to aspiring traders. This advice alone is worth the price of the book. Here is a summary:

Money Management:
Trade small
Focus on risk

Methodology:
Pick a method that suits your personality
Develop a simple methodology
Avoid the majority, learn to anticipate reversals
Look for alignment in set ups
Good defense wins games
Identify low risk set ups
Know your methodology using software

Psychology:
Deep practice before trading
Expect to lose. Trade to win
Be disciplined. Be patient
Be humble
Be in control

This book is the real deal, as the author warns of the pains associated with trading. If you trade you will experience those ten losing trades in a row in any system. You will experience the 10% draw down in your account the only question is when. 90% of people who enter the markets to trade will lose. The majority of successful traders who win in the markets usually start out by losing most of the money in their first trading account. Be warned the market uses maximum adversity at all times, so the majority of traders lose long term.

This book is in the top five I have ever read on trading and is a must for any serious trader’s library. Even with the lengthy review I have not even scratched the surface of this excellent books trading wisdom. It is like combining all the best trading books wrapped into one. I would give this book six stars on Amazon if possible.

Get Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets on Amazon now.

How To Trade Using The Parabolic SAR

The beauty of the Parabolic SAR lies in its simplicity. The default settings for the Parabolic SAR (0.02, 0.02, 0.2) is perfect for probably any time setting. Trading using the Parabolic SAR is straightforward, but works well only in a trending market. If the market is ranging, then the Parabolic SAR is prone to whip-saws.

Quotes from the famous trader Jesse Livermore, who started his successful trading career when he was fourteen years old:

“No trader can or should play the market all the time. There will be many times when you should be out of the market, sitting in cash waiting patiently for the perfect trade… – Jesse Livermore

“I never buy a stock on declines, and I never short a stock on rallies. Let the market tell you what to do. Get your cues from what the market; do not anticipate; follow the message you received from the market..” – Jesse Livermore

“Remember that it is dangerous to start spreading out all over the market carrying several positions. Do not have an interest in too many stocks at any one time. It is much easier to watch a few than many…” – Jesse Livermore

“As long as a stock is acting right, and the market is right, be in no hurry to take a profit… ” – Jesse Livermore

“The doctrine for the trader was to insure himself against considerable losses by taking the first small loss…” – Jesse Livermore

“The stock market goes up approximately a third of the time, sideways a third of the time, and down a third of the time. Therefore, if a trader only trades in anticipation of a stock rising in price he is wrong on the trade two thirds of the time!” – Jesse Livermore

“It is foolhardy to make a second trade, if your first trade shows you a loss… As an ironclad Livermore rule, never average losses. Let that thought be written indelibly and forever upon your mind…” – Jesse Livermore

“Your timing should never be dictated by high prices. High prices were never a timing signal to sell a stock. Just because a stock is now selling at a high price does not mean it won’t go higher… ” – Jesse Livermore

“Observation, experience, memory and mathematics – these are what a successful trader must depend on.” – Jesse Livermore

Words from other notable people

“I measure what’s going on, and I adapt to it. I try to get my ego out of the way. The market is smarter than I am so I bend.” – Martin Zweig

“Our greatest glory is not in never falling, but in rising every time we fall.” – Confucius

“Buy that which is showing strength – sell that which is showing weakness.” – Richard Rhodes

“To be a money master, you must first be a self-master” – J. P. Morgan

“The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher.” – Richard Rhodes

“Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.” – Richard Rhodes

“Be impatient. As always, small loses and quick losses are the best losses.” – Richard Rhodes

“Never, ever under any condition, add to a losing trade, or “average” into a position.” – Richard Rhodes

“When sharp losses in equity are experienced, take time off. The mind can play games with itself following sharp, quick losses.” – Richard Rhodes

“When trading well, trade somewhat larger. Trade aggressively and trade larger.” – Richard Rhodes

“Think like a guerrilla warrior. Fight alongside the winning forces. If neither side is winning, then we don’t need to fight at all.” – Richard Rhodes

“Markets form their tops in violence; markets form their lows in quiet conditions.” – Richard Rhodes

“The final 10% of the time of a bull run will usually encompass 50% or more of the price movement.” – Richard Rhodes

“My first rule is not to lose money. Losing an opportunity is minor in comparison, because there are always new opportunities around the corner.” – Burt Dohmen

“Those who have knowledge don’t predict, and those who predict do not have knowledge.” – Lao Tzu

“Never hesitate to add shares in a stock that is moving higher but always avoid averaging down.”

“Learn to take losses. The most important thing in making money is not letting your losses get out of hand.” – Marty Schwartz

Stage 1: Incompetence

Fresh and inexperienced, new traders all enter the markets at this stage. Their minds are giddy and full of overconfidence about how they can amass great wealth overnight. The new trader has a mixture of successful and unsuccessful trades, and gets disappointed that he always gets in a wrong trade. Frustrated, he doubles up on every trade, and starts to trade beyond his limit. This is the point of time that will test a trader’s limits and may completely wipe out a trader.

Stage 2: Education

After being burnt by the market and understanding how things work better, the trader now sets out to educate himself better. He reads widely, attends courses and seminars, and tries out different trading packages. He looks at advice and entry signals from other traders online and around him, and wonder what he’s doing differently.

Stage 3: Realisation

Finally the trader realises its never been the system that’s the problem – the issue lies with himself. A simple system based on simple indicators can make money if he can control his emotions and practice good money management. At this point, the trader cares less about what others say, and about which system is better. He finds a system that he’s comfortable with, and sticks to it. Every trading opportunity is executed with discipline and without emotions as he knows that individual losses don’t matter at all, since he knows that his system is profitable over the long run.

Stage 4: Competence

At this stage, the trader now automatically makes trades whenever his system tells him to, and fully understands and accepts the risks of each trade. Losses are cut short very quickly, and the trader makes trades with confidence as he has a plan to follow.

Stage 5: Mastery

Finally, the trader is at a point where he is so used to trading that it becomes second nature to him. Big trades can be executed, and he is not only able to take losses, but is also able to let his winning trades run to their full potential. Emotions are now never a part of his trading, and he is able to become consistently profitable.

The above shows you the typical route that people take to be a successful trader. Some people give up at some point, and it’s hard to fault them, because the losses that they bear are so huge. However, it’s important to honestly evaluate yourself and know what you need to do to get to the next stage.

All the best!

Next, you should see the company’s operating expenses. These are the Selling, General and Administration (SGA) expenses, the Research and Development (R&D) expenses, and Depreciation.

Deducting the operating expenses from the GR will give us the next figure, which is the Operating Profit or Loss of the company. A company that has a very high GR is not necessarily a good thing, because if they have very high expenses, then there’s nothing or very little left for the company’s shareholders.

Theoretically, the higher the profit margins of a company, the better an investment it’ll make.

The next part of the income statement is the Interest Expense, Gains or Losses from sale of assets and Others. Deducting all these figures will give us the income of the company, before tax.

Interest Expense is a point of importance on a company’s income statement because it shows us the financial health of a company. Borrowings is what is known as leverage. Ideally, we want to make sure that the company is not too heavy in debt, and not paying too much for the interest on its leveraged assets. It is very common and in fact, almost a standard that companies are leveraged, but having too high an interest is dangerous, especially during a financial crisis (where business may dry up, and interest may rise, simultaneously).

The next part of the Income Statement would show the taxes paid by the company. Deducting this figure will show us the net earnings of the company.

1. Cash Flow from Operations
2. Cash Flow from Investments
3. Cash Flow from Financing Activities

Cash Flow from Operations

Cash Flow from Operations is an accounting item that shows you the amount of cash that a company brings in from their business activities. This is cash flow from purely business activities, and does not include long-term capital or investments. Clearly, a positive cash flow is desired, and the higher the cash flow, the better.

Cash Flow from Investments

This shows the change in a company’s cash position resulting from any gains or losses from the company’s investments. Investments can be in the form of instruments in the financial markets, or investments in the company’s operating subsidiaries. Investments can also be in the company’s capital assets such as plants and equipment.

Sometimes, the value from Cash Flow from Investments may be negative, but this may be because of heavy investment expenditures. While this may affect their quarterly figures, it may not necessarily be a bad thing in the longer term.

Cash Flow from Financing Activities

In the section Cash Flow from Financing Activies, this shows the cash used in the payment of dividends to shareholders, or in the buy back of shares. Generally, shareholders like dividend payouts, and with share buy-backs done by the company, the value of their shares rise. So in this section, negative cash flow is actually a good thing for shareholders.

Conversely, a positive cash flow in this section is gained from the comapny selling new shares or issuing bonds. This is actually bad for the shareholders since their shareholdings are diluted, and bonds have to be repaid with interest. This is not always bad, but only if the company is able to demonstrate that the funds raised can increase value for its shareholders.

Having a REIT that gives out more than a 5% annual dividend yield assures you of a good return.

2) Historically Strong AFFO and Dividend Growth

A REIT that has a strong track record of growing their AFFO and dividends for the past 5-10 years will ensure that you can get both higher dividend payouts and capital appreciation from the REIT’s price.

3) High Expected FFO and Dividend Growth

Besides a good track record, a REIT also needs to have a good projected growth. This is primarily determined by the quality of properties in the REIT’s portfolio, and the acquisition plans of future properties. Sometimes it is even prudent to actually visit the properties and see if they are popular places with high-quality tenants.

4) Low Gearing Ratio

Generally, the lower the gearing ratio, the better. Discard all REITs that have a gearing ratio of more than 50%.

5) Valuation of REIT’s Stock Price

A simple way to valuate a REIT is to see how its current stock price stands against its NAV. If the stock price is less than its NAV, then the REIT is undervalued, and vice versa.

1) Gearing Ratio

Gearing ratio tells you how much a company is lending. Like all forms of lending, the more a company borrows, the more it is vulnerable to economic downturns because the company must continue to service its debt regardless of how bad sales are, and is also more exposed to interest rate spikes. Gearing ratio is calculated by:

Gearing Ratio = Total Debt / Total Assets * 100%

2) Distributions Per Unit (DPU)

DPU simply means the dividends per unit (which is another word for share) that is distributed to shareholders. DPU for REITs in Singapore are usually distributed quarterly (3 months) or half-annually (6 months)

3) Dividend Yield

DPU is just an absolute number, and if you want to see how well a REIT is performing, you’ll need to calculate its dividend yield. This is calculated by:

Dividend Yield = Annual DPU / Current Price * 100%

4) Net Asset Value (NAV)

The NAV of a REIT determines its intrinsic value, because it tells you the market value of all its assets after deducting all its liabilities. The formula to calculate NAV is simple: NAV = Total Assets – Total Liabilities. Logically, when a REIT’s share price is below its NAV, it means that it is undervalued.

5) Funds From Operations (FFO)

FFO can be viewed as a measure of a REIT’s operating performance and is calculated by:

FFO = Net Income – Depreciation + (Gains/Losses from Property Sales)

6) Adjusted Funds From Operations (AFFO)

AFFO is a measure that shows the amount of funds/cash available for distribution. AFFO is calculated by:

AFFO = FFO – Operational Expenditure

A Real Estate Investment Trust (REIT) is a security that is traded like a stock on the stock exchange. A REIT invests in real estate assets (e.g. shopping malls, office buildings, apartments, etc) directly, through the capital that it raises from shareholders. REITs distribute a large chunk (typically over 90% of the rental income generated) back to the shareholders as dividends regularly. This rate can be found in their prospectus as the DPU, or Distributions Per Unit.

Benefits of Investing in REITs

REITs allow small, individual retail investors to venture into real estate investing other than directly investing in it themselves. This may be a better opportunity for long-term investment as it not only provides you with the chance of capital appreciation (the REIT’s price increases), but also generates regular cash flow from the dividends from the rental income.

In addition, REITs provide the investor with these two main benefits:

1) Professional Management

REITs take out the hassle and troubles of property management. Finding your own tenants and maintaining your property is now not your concern, and you’ll never get a call in the middle of the night complaining of a broken light or burst waterpipe.

2) Diversification

Unlike individual real estate investors, REITs own multi-property portfolios. This reduces the risk of relying on a single property/unit/tenant, which is the usual case with individual real estate investors.

Potential Investment Returns of a REIT

Total returns from REITs can range from 6% to 14% annually, but depend greatly on the individual REIT. Before distributions are made by the REIT, annual managers’ fees, trustees’ fees, property management fees, and other expenses will have to be deducted first.

Investment Risks of REITs

REITs have similar risks as directly investing in real estate.

1) Quality of Property Portfolio

High-quality properties in prime locations are always good, because it means that tenancy is almost guaranteed, and that dividends will be protected. Conversely, lower quality properties in less desirable locations result in poorer returns for shareholders, especially in times of economic crises.

2) Fall in Property Rentals and Prices

Changes in market conditions can cause a fall in rentals, rental income, and/or property valuations. This will affect both the value of your REIT and the dividends that you receive.

As a result, it is very important to be sure that you invest in REITs only at the right time. The adage buy low, sell high applies here. Only invest during economic downturns, or during the early period of economic recovery. This is when real estate prices are still low, and dividend yields are high. Intuitively, you should then sell, and avoid buying when property prices are high.

3) Significant Increase/decrease in Interest Rates

REITs depend on financing heavily, and financing is based on interest rates. When interest rates are high, then the financing costs to REITs increase, leading to lower earnings and subsequently, dividends. However, the converse is true when interest rates dip.