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[W788]Why Stock Markets Crash

by John Piper, Joh

If you look at a chart of the NASDAQ 100 you will see how feeble the rally over the last few years has been compared to the decline that went before. But that is not the most important point. The most important point is that the decline we have seen is only the first part of the bear market and the second leg down is always the most savage. This is a key principle of both Dow theory and Elliott Wave Theory.

This is why I am launching anew free service at this time. We live in historic times! If I am right markets are going to fall savagely and the people who are ready for that are going to emerge at the end a lot wealthier than they are now. Those who are unprepared could easily be wiped out!

Any sell signal now could mark the beginning of this expected collapse.?

But do not expect it to happen all at once. The characteristic of such a move is relentlessness. Falls that simply keep on coming, numbing the bulls until they finally concede defeat - at which point the market will rally. The difference is that this time the economy will fail as well.?

My latest book is called "THE COMING FINANCIAL CATACLYSM" and there are five main reasons why markets may fall sharply.

I have written a book on this but to summarise:

1. Equity markets are extended and vulnerable

2. Property markets are extended and vulnerable

3. The twin US deficits are putting the $ under pressure

4. Personal debt is threatening continuing consumer spending which is keeping the economies of the US and the world going

5. The US is hugely in debt to the rest of the world and if any country decides it wants out that will start a slide in the $.

The dangerous part is that if any one of these five problems starts to unravel it could act as a catalyst for all five. For example vast sums have been take out of mortgage financing by consumers and this has allowed the US and UK economies to grow. There are signs that property appreciation is slowing and this might knock on to reduce such borrowings. This might reduce consumer spending and start a mild recession. Property and stock markets then start to fall and this might unnerve those investing in US dollars, which might also take down US Bond markets. The $ starts to slide and suddenly it is all happening at once.?

This is not a pleasant scenario and I think Alan Greenspan chose his departure date from the Fed fairly well!

As we got to press the S&P is starting to form a sell signal and we will cover this in the next issue when it is confirmed.

TRADING TIP Trade what you see not what you think - Joe Ross?

Wait for your signals, do not anticipate them, do not judge markets on what might happen but on what is happening. This may seem trite but many, many traders make the mistake of thinking a certain move is coming and trading what they think. It is a major mistake and it is to be avoided.

For the uninitiated, the stock market looks either a rosy picture or the dooms day scenario. Actually it is a mixture of both. By investing wisely, you can get the money of life time or if you are not careful, you may lose money of life time. While not every one can become Warren Buffet in stock market, at least you can avoid losses by avoiding the following 10 mistakes.

1. Following the herd mentality: This is one of the top 10 mistakes to avoid. The herd mentality is THE reason why many investors lose their money. Actually when your neighbor or friend is buying, since everyone is buying, stop and think for one moment "is this share worth its money today and does it have a growth potential?" If the answer is a YES after study of the share, go ahead and buy that share. If you have a slightest doubt, refrain from buying. Do not buy just because someone else is buying.

2. Not deciding your time line: When you start investing in stocks, you have to decide your time line or profit margins when you are going to quit. If you do not do that you may pass on the period of greatest value for your stock. Thinking that your stock will go up when it has reached its present peak, is a sure way of losing your money. Of course it is not possible to sell your stock at peak very time, but if you have decided the limits, you will not be sorry.

3. Not Cutting down losses: For every stock, there is a range and depending on the general market conditions and fundamentals of the company you can decide the price of the stock you hold. If either of the above two conditions compel a stock to go down, have predetermined limits when you are going to sell irrespective of market conditions. This will cut down the losses you may have in future.

4. Taking too much risk: If you are a reckless investor, you will have blame yourself for taking too much risk. A calculated risk is what one is expected to take in stock markets. Taking too much risk based on hear say from the market, is a sure way for doom.

5. Failing to take risk: The main motto in stocks is high risk, high gain. While too high risks are to be avoided, not taking enough risk can contribute to reducing your profits. If you are the type of person who wishes to avoid risks at all costs, stock market is not the place for you. You may invest through mutual funds, who will take calculated risks without your knowing it.

6. Investing on basis of tips: You get a sure fire tip from your friend, who has got it from another friend, who has got it from a broker. If you invest on the basis of this tip, you will probably get the shock of your life when the stock that you bought goes down instead of going up. Investing on the basis of tips is generally a sure way of losing your money, avoid it at all costs. You may bet on a horse race instead

7. Selling before the stock has peaked: This is a mistake you may rue for a long time even if you have made a handsome profit. The loss of profit is not a loss in the true sense of word. It is a loss of future profit. Determine and raise your stop loss limits every time your stock goes up and when the stock peaks up and then starts going down, sell at the stop loss limit

8. Failing to diversify: If you depend on one company to give you all the profits in share market, you will perhaps get no profit at all. So spread your investment in stocks to many companies rather than keeping it to one or two companies. The profit you get in this way may not be the maximum, but you will at least make sure that you do not lose.

9. Losing peace of mind over your investment: You are saving for your future. If you are not there, then what is the future for you? Do not lose your peace of mind over stock market unless the markets go into a tailspin. Markets do go into a tailspin many times; your worrying about markets is not going to take them out of that condition. At that time as they say "let the sleeping dogs lie" You will recover your investment when the markets go up once again.

10. Depending too much on stock market alone: Spread your investment taking in account your risk taking capability. When you are young, you have a greater risk capability, it is not so when you are old and about to retire. Therefore plan your investment and use a mix of stock options, real estate, mutual funds and certificate of deposits and bonds. This will ensure that when you lose in one, you get compensated by increase in other and more importantly, you do not loose your peace of mind.

These are the top 10 mistakes to avoid in stock market. If you wish to know more about stock markets and trading please visit the web site and you will know more about it.

Article Source : How Does Stock Works

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Both John Piper & Craig Dawber are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

John Piper has sinced written about articles on various topics from Stock. John Piper is a professional trader and has writen with two books on trading futures and options. Feel free to contact the author atjohn@ttttt.freeserve.co.uk with any comments on thisarticle or visit. John Piper's top article generates over 1000 views. to your Favourites.

Craig Dawber has sinced written about articles on various topics from Stock, computers and the internet and Stock. . Craig Dawber's top article generates over 1000 views. to your Favourites.