The Investor and Inflation

Inflation, and the fight against it, has been very much in the public’s mind in recent years. The shrinkage in the purchasing power of the dollar in the past, and particularly the fear (or hope
by speculators) of a serious further decline in the future, has greatly influenced the thinking of Wall Street. It is clear that those with a fixed dollar income will suffer when the cost of living advances, and the same applies to a fixed amount of dollar princi-pal. Holders of stocks, on the other hand, have the possibility that a loss of the dollar’s purchasing power may be offset by advances in
their dividends and the prices of their shares.

On the basis of these undeniable facts many financial authorities have concluded that (1) bonds are an inherently undesirable form of investment, and (2) consequently, common stocks are by their very nature more desirable investments than bonds. We have heard of charitable institu
tions being advised that their portfolios should consist 100% of stocks and zero percent of bonds.* This is quite a reversal from the earlier days when trust investments were.

By the late 1990s, this advice—which can be appropriate for a foundation or endowment with an infinitely long investment horizon—had spread to indi-vidual investors, whose life spans are finite. In the 1994 edition of his influ-ential book, Stocks for the Long Run, finance professor Jeremy Siegel of the Wharton School recommended that “risk-taking” investors should buy on
margin, borrowing more than a third of their net worth to sink 135% of their assets into stocks. Even government officials got in on the act: In February 1999, the Honorable Richard Dixon, state treasurer of Maryland, told the audience at an investment conference: “It doesn’t make any sense for any-one to have any money in a bond fund.”restricted by law to high-grade bonds (and a few choice preferred stocks).

Our readers must have enough intelligence to recognize that even high-quality stocks cannot be a better purchase than bonds under all conditions—i.e., regardless of how high the stock market may be and how low the current dividend return compared with the rates available on bonds. A statement of this kind would be as absurd as was the contrary one—too often heard years ago—that any bond is safer than any stock. In this chapter we shall try to apply various measurements to the inflation factor, in order to reach some conclusions as to the extent to which the investor may wisely be influenced by expectations regarding future rises in the
price level.

In this matter, as in so many others in finance, we must base our views of future policy on a knowledge of past experience. Is infla-tion something new for this country, at least in the serious form it has taken since 1965? If we have seen comparable (or worse) infla-tions in living exp
erience, what lessons can be learned from them in confronting the inflation of today? Let us start with Table 2-1, a condensed historical tabulation that contains much information about changes in the general price level and concomitant changes in the earnings and market value of common stocks. Our figures will begin with 1915, and thus cover 55 years, presented at five- year inte
rvals. (We use 1946 instead of 1945 to avoid the last year of wartime price controls.)

The first thing we notice is that we have had inflation in the past—lots of it. The largest five-year dose was between 1915 and 1920, when the cost of living nearly doubled. This com
pares with the advance of 15% between 1965 and 1970. In between, we have had three periods of declining prices and then six of advances at varying rates, some rather small. On this showing, the investor should clearly allow for the probability of continuing or recurrent inflation to come.

Can we tell what the rate of inflation is likely to be? No clear answer is suggested by our table; it shows variations of all sorts. It would seem sensible, however, to take our cue from the rather con- sistent record of the past 20 years. The average annual rise in the consumer price level for this period has been 2.5%; that for 1965–1970 was 4.5%; that for 1970 alone was 5.4%. Official govern-ment policy has been strongly against large-scale inflation, and there are some reasons to believe that Federal policies will be more effective in the future than in recent years.* We think it would be reasonable for an investor at this point to base his thinking and decisions on a probable (far from certain) rate of future inflation of,say, 3% per annum. (This would compare with an annual rate of about 21/2% for the entire period 1915–1970.)

What would be the implications of such an advance? It would eat up, in higher living costs, about one-half the income now obtainable on good medium-term tax-free bonds (or our assumed after-tax equivalent from high-grade corporate bonds). This would be a serious shrinkage, but it should not be exaggerated. It would not mean that the true value, or the purchasing power, of the investor’s fortune need be reduced over the years. If he spent half
his interest income after taxes he would maintain this buying power intact, even against a 3% annual inflation.

But the next question, naturally, is, “Can the investor be reason-ably sure of doing better by buying and holding other things than high-grade bonds, even at the unprecedented rate of return offered in 1970–1971?” Would not, for example, an all-stock program be preferable to a part-bond, part-stock program? Do not common stocks have a built-in protection against inflation, and are they not almost certain to give a better return over the years than will bonds? Have not in fact stocks treated the investor far better than have bonds over the 55-year period of our study?

The answer to these questions is somewhat complicated. Com-mon stocks have indeed done better than bonds over a long period of time in the past. The rise of the DJIA from an average of 77 in 1915 to an average of 753 in 1970 works out at an annual com- pounded rate of just about 4%, to which we may add another 4% for average dividend return. (The corresp
onding figures for the S & P composite are about the same.) These combined figures of 8%
This is one of Graham’s rare misjudgments. In 1973, just two years after President Richard Nixon imposed wage and price controls, inflation hit 8.7%, its highest level since the end of World War II. The decade from 1973 through 1982 was the most inflationary in modern American history, as the cost of living more than doubled.per year are of course much better than the return enjoyed from bonds over the same 55-year period. But they do not exceed that now offered by high-grade bonds. This brings us to the next logical question: Is there a persuasive reason to believe that common stocks are likely to do much better in future years than they have in the last five and one-half decades?

Our answer to this crucial question must be a flat no. Common stocks may do better in the future than in the past, but they are far from certain to do so. We must deal here with two diff
erent time elements in investment results. The first covers what is likely to occur over the lo
ng-term future—say, the next 25 years. The second applies to what is likely to happen to the investor—both financially and psychologically—over short or intermediate periods, say five ye
ars or less. His frame of mind, his hopes and apprehensions, his satisfaction or discontent with what he has done, above all his deci- sions what to do next, are all determined not in the retr
ospect of a lifetime of investment but rather by his experience from year to year.

On this point we can be categorical. There is no close time con-nection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvi
ous example is the recent period, 1966–1970. The rise in the cost of liv-ing was 22%, the largest in a five-year period since 1946–1950. But both stock earnings and stock prices as a whole have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.

Inflation and Corporate Earnings

Another and highly important approach to the subject is by a study of the earnings rate on capital shown by American business.This has fluctuated, of course, with the general rate of economic activity, but it has shown no general tendency to advance with wholesale prices or the cost of living. Actually this rate has fallen rather markedly in the past twenty years in spite of the inflation of the period. (To some degree the decline was due to the charging of more liberal
depreciation rates. See Table 2-2.) Our extended stud- ies have led to the conclusion that the investor cannot count on much above the recent five-year rate earned on the DJIA group— about 10% on net tangible assets (book value) behind the shares. Since the market value of these issues is well above their book value—say, 900 market vs. 560 book in mid-1971—the earnings on current market price work out only at some 61 ⁄4%. (This relation-ship is generally expressed in the reverse, or “times earnings,”manner—e.g., that the DJIA price of 900 equals 18 times the actual earnings for the 12 months ended June 1971.)
Our figures gear in directly with the suggestion in the previous chapter * that the investor may assume an average dividend return of about 3.5% on the market value of his stocks, plus an apprecia- tion of, say, 4% annually resulting from reinvested profits. (Note that each dollar added to book value is here assumed to increase the market price by about $1.60.)
The reader will object that in the end our calculations make no allowance for an increase in common-stock earnings and values to result from our projected 3% annual inflation. Our justification is the absence of any sign that the inflation of a comparable amount in the past has had any direct effect on reported per-share earnings. The cold figures demonstrate that all the large gain in the earnings of the DJIA unit in the past 20 years was due to a proportionately
large growth of invested capital coming from reinvested profits. If inflation had operated as a separate favorable factor, its effect would have been to increase the “value” of previously existing capital; this in turn should increase the rate of earnings on such old capital and therefore on the old and new capital combined. But nothing of the kind actually happened in the past 20 years, during which the wholesale price level has advanced nearly 40%. (Busi-ness earnings should be influenced more by wholesale prices than by “consumer prices.”) The only way that inflation can add to common stock values is by raising the rate of earnings on cap- ital inve
stment. On the basis of the past record this has not been the case.
In the economic cycles of the past, good business was accompa- nied by a rising price level and poor business by falling prices. It was generally felt that “a little inflation” was helpful to business profits. This view is not contradicted by the history of 1950–1970,which reveals a combination of generally continued prosperity and generally rising prices. But the figures indicate that the effect of all this on the earning power of common-stock capital (“equity capital”)
has been quite limited; in fact it has not even served to maintain the rate of earnings on the investment. Clearly there have been impor-tant offsetting influences which have prevented any increase in the real profitability of American corporations as a whole. Perhaps the most important of these have been (1) a rise in wage rates exceed- ing the gains in productivity, and (2) the need for huge amounts of new capital, thus holding down the ratio of sales to capital
employed.
Our figures in Table 2-2 indicate that so far from inflation having benefited our corporations and their shareholders, its effect has been quite the opposite. The most striking figures in our table are those for the growth of corporate debt between 1950 and 1969. It is
surprising how little attention has been paid by economists and by Wall Street to this devel
opment. The debt of corporations has expanded nearly fivefold while their profits before taxes a little more than doubled. With the great rise in interest rates during this period, it is evident that the aggregate corporate debt is now an adverse economic factor of some magnitude and a real problem for many individual enterprises. (Note that in 1950 net earnings after interest but before income tax were about 30% of corporate debt, while in 1969 they were only 13.2% of debt. The 1970 ratio must have been even less satisfactory.) In sum it appears that a signifi-
cant part of the 11% being earned on corporate equities as a whole is accomplished by the use of a large amount of new debt costing 4% or less after tax credit. If our corporations had maint
ained the debt ratio of 1950, their earnings rate on stock capital would have fallen still lower, in spite of the inflation.
The stock market has considered that the public-utility enter-prises have been a chief victim of inflation, being caught between a great advance in the cost of borrowed money and the difficulty of raising the rates charged under the regulatory process. But this may be the place to remark that the very fact that the unit costs of electricity, gas, and telephone services have advanced so much less than the general price index puts these companies in a strong strategic position for the future. They are entitled by law to charge rates sufficient for an adequate return on their invested capital, and this will probably protect their shareholders in the future as it has in the inflations of the past.

Investment versus Speculation: the Intelligent Investor

Investment versus Speculation

What do we mean by “investor”? Throughout this book the term will be used in contradistinction to “speculator.” As far back as 1934, in our textbook Security Analysis,we attempted a precise
formulation of the difference between the two, as follows: “An investment operation is one which, upon thorough analysis prom-ises safety of principal and an adequate return. Operations not
meeting these requirements are speculative.”

While we have clung tenaciously to this definition over the ensuing 38 years, it is worthwhile noting the radical changes that have occurred in the use of the term “investor” during this period.After the great market decline of 1929–1932 all common stocks were widely regarded as speculative by nature. (A leading author-ity stated flatly that only bonds could be bought for investment.)Thus we had then to defend our definition against the charge that it gave too wide scope to the concept of investment.

Now our concern is of the opposite sort. We must prevent our readers from accepting the
common jargon which applies the term“investor” to anybody and everybody in the stock market. In ourlast edition we cited the following headline of a front-page article of our leading financial journal in June 1962:

SMALL INVESTORS BEARISH, THEY ARE SELLING ODD-LOTS SHORT

In October 1970 the same journal had an editorial critical of what it called“reckless
investors,” who this time were rushing in on the buying side.
These quotations well illustrate the confusion that has been dominant for many years in the use of the words investment and speculation. Think of our suggested definition of investment given above, and compare it with the sale of a few shares of stock by an inexperienced member of the public, who does not even own what he is selling, and has some largely emotional convi
ction that he will be able to buy them back at a much lower price. (It is not irrel-evant to point out that when the 1962 article appeared the market had already experienced a decline of major size, and was now get-ting ready for an even greater upswing. It was about as poor a time as possible for selling short.) In a more general sense, the later-used phrase“reckless investors” could be regarded as a laughable con-tradiction in terms—something like “spendthrift misers
”—were this misuse of language not so mischievous.

The newspaper employed the word “investor” in these instances because, in the easy language of Wall Street, everyone who buys or sells a security has become an investor, regardless of what he buys, or for what purpose, or at what price, or whether for cash or on margin. Compare this with the attitude of the public toward common stocks in 1948, when over 90% of those queried expre
ssed themselves as opposed to the purchase of common stocks. About half gave as their reason “not safe, a gamble,” and about half, the reason “not familiar with.”* It is indeed ironical

The survey Graham cites was conducted for the Fed by the University of Michigan and was pub
lished in the Federal Reserve Bulletin, July, 1948.People were asked, “Suppose a man deci des
not to spend his money. He can either put it in a bank or in bonds or he can invest it. What do you think would be the wisest thing for him to do with the money nowadays—put it in the bank, buy savings bonds with it, invest it in real estate, or buy common stock with it?” Only 4% thou
ght common stock would offer a “satisfactory”return; 26% considered it “not safe” or a “gamble.” From 1949 through 1958, the stock market earned one of its highest 10-year returns in history,

(though not surprising) that common-stock purchases of all kinds were quite generally regarded as highly speculative or risky at a time when they were selling on a most attractive basis, and due soon to begin their greatest advance in history; conversely the very fact they had advanced to what were undoubtedly dangerous lev-els as judged by past experience later transformed them into “invest-ments,” and the entire stock-buying public into “investors.”

The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an inst
itu-tion would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses,which those who suffered them had not been properly warned against. Ironically, once more, much of the recent financial embar-rassment of some stock-exchange firms seems to have come from the inclusion of speculative common stocks in their own capital funds. We trust that the reader of this book will gain a reasonably clear idea of the risks that are inherent in common
-stock commit-ments—risks which are inseparable from the opportunities of profit that they offer, and both of which must be allowed for in the investor’s calculations.

What we have just said indicates that there may no longer be such a thing as a simon-pure investment policy comprising repre-sentative common stocks—in the sense that one can always wait to buy them at a price that involves no risk of a market or “quota- tional” loss large enough to be disquieting. In most periods the investor must recognize the existence of a speculative factor in his common-stock holdings. It is his task to keep this component within minor limits, and to be prepared financially and psycholog-ically for adverse results that may be of short or long duration.

Two paragraphs should be added about stock speculation per se, as distinguished from the spe
culative component now inherent averaging 18.7% annually. In a fascinating echo of that early Fed survey, a poll conducted by BusinessWeek at year-end 2002 found that only 24% of investors were willing to invest more in their mutual funds or stock portfolios, down from 47% just three years earlier.

in most representative common stocks. Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and
unavoidable, for in many common-stock situations there are sub-stantial possibilities of both profit and loss, and the risks therein must be assumed by someone.* There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seri-ously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.

In our conservative view every nonprofessional who operates on margin† should recognize that he is ipso facto speculating, and it is his broker’s duty so to advise him. And everyone who buys a so-called “hot” common-stock issue, or makes a purchase in any way similar thereto, is either speculating or gambling. Speculation is always fascinating, and it can be a lot of fun while you are ahead of the game. If you want to try your luck at it, put aside a portion— the smaller the
better—of your capital in a separate fund for this purpose. Never add more money to this account just because the * Speculation is beneficial on two levels: First, without speculation, untested new companies (like Amazon.com or, in earlier times, the Edison Electric Light Co.) would never be able to raise the necessary capital for expansion.The alluring, long-shot chance of a huge gain is the grease that lubricates the machinery of innovation. Secondly, risk is exchanged (but never elimi-nated) every time a stock is bought or sold. The buyer purchases the primary risk that this stock may go down. Meanwhile, the seller still retains a residual risk—the chance that the stock he just sold may go up!

Investors who have given up on the gold market should realize

Investors who have given up on the gold market should realize
that now is a great time to get back in.

Primary wave c of cycle wave B is now in progress. Since it is a third wave, it should cause the price of
gold to rise substantially, because the third wave in any Elliott pattern is a powerful wave. Hence,
primary wave c will probably unfold in one of the following two ways:
• Primary wave c will rise to $633.78, the point at which cycle wave B will have retraced 0.618 of cycle
wave A.
• Primary wave c will travel a distance that is 1.618 times the length of primary wave a. Primary wave a
traveled for a distance of $195.95; primary wave c is likely to rise for a distance of $317.04 ($195.95
× 1.618), topping out at $662.29.
Investors who have given up on the gold market should realize that now is a great time to get back in.
Horatio Miller is editor and publisher of My Point of View, PO Box 27712, Philadelphia, PA 19118, Stocks & Commodities V. 9:4 (172-173): Elliott Wave And Gold by Horatio Miller

Elliott Wave And Gold

Ask any Elliott Wave analyst about the outlook for gold, and he will without doubt say that the
precious metal is on its way down to the $100-200 range. A divergent-Elliott Wave interpretation,
however, suggests that over the near term, gold will rally to the area between $633.78 and $662.29.

This hypothesis is supported by a wave count that classifies the 1980-90 drop in the price of gold as an unfinished zigzag correction. Within this interpretation, cycle wave A of the zigzag ended when London gold fell to $284 on February 25, 1985. Cycle wave B of the zigzag is still in progress. It is this wave that should carry gold over the $600 threshold.

A detailed look at London gold from 1980 to 1990 will confirm this forecast. Supercycle wave (II), the decline in the price of gold from the 1980 top, began in the typical manner of a zigzag, with five descending waves that formed cycle wave A . This wave finished on February 25,1985, the day that London gold dropped to $284. Cycle wave A is followed by cycle wave B, three ascending waves that are still in the process of unfolding. Cycle wave B started with primary wave a, five rising waves that ended at $479.95 on May 20, 1987 . Primary wave b, a correction, took the form of what R.N. Elliott called a double-three, and it terminated at $345.25 on June 14, 1990.

What are forex Trading strategies and Currency Trading Strategy?

Currency Trading Strategy Number One:

When you are just starting out, strive to carve out 20 pips per session, and that’s it. Then, turn it off, and study some more. When you get really good at it, you can then “graduate” to higher returns. So, set your goal at 20 pips and stick to it, until you are a grand master at this wonderful “business” called forex trading. I stress the word business. This is not a game, especially where your “hard-earned money” is involved.

Currency Trading Strategy Number Two:

Spend most of your time on the 15-min chart.

Currency Trading Strategy Number Three:

When you first start out in any particular session, look at the 1 hr chart to get an overall perspective on trend from one session to the next, and what it’s likely shaping up to be at the beginning of the upcoming new session.

Currency Trading Strategy Number Four:

Only look at the 5 min chart if you absolutely have to see what’s behind the current 15 min bar – especially where the bar is elongated, and may have just penetrated a pivot point; in other words, is price reversing course on the 5 min chart, which would obviously not yet be reflected on the 15 min chart?

Currency Trading Strategy Number Five:

Don’t dwell on the 5 min chart, as it contains a lot of “noise” that will whipsaw you to death.

Currency Trading Strategy Number Six:

MACD rules on the 15 min chart. Even if MACD is, say, trending up on the 1 hr chart, if it is trending down on the 15 min chart, that’s what you take your cue from. That’s not to say a shift in price direction is not in the works. It just means it’s coming, but not yet. In the meantime, you don’t want to miss what’s happening “in the now,” which is what is reflected in the 15 min chart.

Currency Trading Strategy Number Seven:

If MACD is trending down on the 15 min chart, and price is wanting to go north, price will sooner than later head south as it perhaps bounces off a pivot point, or gets turned around at a juncture caught by one of the other three “tools” you should be using (“reading bars,” MACD divergence, or trendline analysis). Same thing if MACD is trending up, and price is trying to head south.

Currency Trading Strategy Number Eight:

Only use MACD for divergence, not for buy or sell signals. It is a lagging indicator, and as such is useless as a trigger. It is too slow for that in the forex world.

Currency Trading Strategy Number Nine:

Again, MACD divergence on the 15 min chart is more significant than what you see on the 1 hr chart in the near-term. For those of you who don’t understand what divergence means, keep looking at my own personal forex trading examples on this page on a daily basis for examples of divergence. Basically, what it means is where you see MACD waves “waving” in the opposite direction to price action. That’s why I connect the top of the waves (in a downtrend) and the bottom of the waves (in an uptrend) to illustrate that the waves are “waving” higher in an uptrend and lower in a downtrend – in the opposite direction to where price is going.

Currency Trading Strategy Number 10:

Always “protect” your money by using 20-30 pip stops. Mental stops are okay, but not if you are dead serious about using a “disciplined” approach to managing your money. You will lose three out of ten trades. The three losses should be kept to 20-30 pips. Your wins will by far surpass your small losses, and that’s what stop-losses are all about. Don’t be afraid to lose. Even professional batters strike out six out of 10 times. Lions are only successful 20% of the time in their chase for the kill. Professional golfers lose 95% of the time. Professional poker players lose 50% of the time. So, your chances are better at trading the forex, using my system of course, than in any other venue. Even businesses have “bad inventory.” And, life in general is not always “100%” for sure.

Currency Trading Strategy Number 11:

That all said and done, if you entered a trade close to a pivot point, or a particular significant bar pattern (like a double top, for instance, or a trendline breakout), place your stop on the other side (but not too close to) the event that caused you to take action. This is because price has a tendency to snap back to that situation that caused it to bolt away from it in the first place. If you follow the 20-30 pip stop rule, but a 33 pip stop on the other side of that event would safeguard you against such a reaction, then so much the better. So, yes the stop rule is 20-30 pips, but within reason of course.

Currency Trading Strategy Number 12:

Stops (read “stop-loss”) are for insurance purposes only – not necessarily for taking profits. However, you can most certainly employ “trailing stops,” whereby you keep moving your stop up (or down, whichever the case may be) to protect your profits, as price advances, or declines.

Currency Trading Strategy Number 13:

Only use “reading bars,” MACD divergence, pivot points, and trendline analysis in your forex trading toolkit. That’s all you need for this market. Be a technical bigot. Focus on pure technical analysis, and avoid funnymentals. Even news is factored into price action, so you don’t need to be up on it each and every nanosecond. If you don't have my .pdf file on reading bars, please send me an e-mail, and I'll forward it to you: prbain@tradingsmarts.com As was pointed out to me by a client, "reading bars" includes spotting double, or even triple, tops and bottoms.

Currency Trading Strategy Number 14:

And now for the tough part. I know my documentation says that the forecast low and high for the next trading session can be M1/M3 or M2/M4. However, trading is shades of gray. It is not a black and white business. If it were, the world would be paved in gold, and everybody would be rich. Now, we wouldn’t want that would we? The forex would be nothing more than a Church at the end of a road connected to a river bank at the other end with nothing in between. The point I am trying to make is that the “actual” low and high for the next session could very well be any combination of M1, M2, M3, and M4. It could be M1/M4, M2/M3, or combinations of the other five pivot points. The M1/M3 and M2/M4 calculations are just guideposts, but are not poured in concrete. Price is the number one indicator. It will determine what the low and high are going to be. And one other thing, you should use these forecasts in conjunction with the other three “tools” in your forex trading toolkit – “reading bars,” MACD divergence, and trendline analysis. In other words, if price has been trending down from the past session into the current one, price is trading at, say, M3, and price is still going down, then M3 may very well be the high for the new session, regardless of the fact that my system may have called for M4 to be the high. So, use the pivot points in conjunction with other three possible signals – “reading bars,” MACD divergence, and trendline analysis. I have seen it happen, as in the example just given, where price was trending down from one session to the next right through M3 at the open of the next session – simultaneous with the formation of a “double top” bar pattern. Well, there you have three indications that price was headed south for sure. And, I believe MACD was also trending down in that particular case. So, that was another clue that the high for the session had probably already been put in.

Currency Trading Strategy Number 15:

When you are first starting out, pick one currency of the four major pairs (EUR/USD, USD/JPY, GBP/USD, and USD/CHF) to trade, and become a specialist in it. I would personally recommend the Euro, especially if you are going to be asking me questions, as that's what I focus on with my clients around the world. Get to know its rhythm. When you are doing well with it, then move on, and trade the other three major pairs, as you see fit. When you are in learning mode, you will have your hands full trying to figure out what to look for, and how to manage your trades – enough so that you don't want to be skipping back and forth between currencies.

Currency Trading Strategy Number 16:

Keep a log of all your trades – both good and bad. Analyze where you went right and wrong, and vow not to repeat those situations that could have been done better. This is all part of being organized as a "professional" trader - with good habits. This is not about gun-slinging and winging it with "Hail Mary" passes.

Currency Trading Strategy Number 17:

Important point here: If price action opens in the upper end of the projected range for the session (all the way up to R2, and beyond) – in other words, in the sell area (that area above the central pivot point) – and there are other suggestions that price is too high (such as a particular bar reading, MACD divergence, or trendline breakout), then price has probably achieved the upper end of its price range for the session. The same holds true where price action opens in the lower end of the projected range for the session (all the way down to S2, and beyond) – in other words, in the buy area (that area below the central pivot point) – and there are other suggestions that price is too low (such as a particular bar reading, MACD divergence, or trendline breakout), then price has probably achieved the lower end of its price range for the session.

Currency Trading Strategy Number 18:

If there is nothing to do, then don't do it. Don't just do something because your "gut" tells you to. That can get you in a lot of trouble in this business. Only react to bona fide signals provided by the four indicators talked about above – "reading bars," MACD divergence, pivot points, and trendline analysis.

Currency Trading Strategy Number 19:

Only use an "industrial strength" market maker with the lowest pip spread in the industry.

Currency Trading Strategy Number 20:

Occasionally, you will see a huge spike up in price, as we did 11 May 03. This just happened to be on a Sunday, shortly after re-commencement of trading, after the weekend respite. Ordinarily, I would take the OHLC numbers from Friday, but given the nature of the wild swing up that evening on one of the 15 min bars, I would then use the OHLC numbers from Sunday night's session close to get a better reading on support and resistance levels for the next session. This is, of course, if you are using a market maker that delineates its break between trading sessions in the late evening - anywhere between 20:59:50 and 24:00 (midnight).

Eastern Europe Trade,Trichet Rate-Cut Resistance Empowered

March 3 (Bloomberg) -- Europe's expanding economy is helping buy Jean-Claude Trichet time to overcome the region's worst bout of inflation in a decade.

Signs are mounting that growth is holding up in the 15 nations that use the euro, fueled in part by demand for exports in eastern Europe and other emerging markets. That gives the European Central Bank's toughest inflation-fighters ammunition to block any push for lower interest rates.

Instead, pressure for higher borrowing costs may increase, with the European Commission forecasting inflation in 2008 at a nine-year high. ``The data is starting to favor the hawkish camp'' on the ECB council, says Elga Bartsch, an economist at Morgan Stanley in London.

Central banks around the world are split on how best to respond to the twin threats of a U.S. recession and a global inflation scare. While Ben S. Bernanke has slashed rates at the Federal Reserve, pushing the euro to a record against the dollar, policy makers in at least seven nations, including Sweden and Australia, have raised borrowing costs. ECB President Trichet and council members including Germany's Axel Weber have said the demand in markets such as eastern Europe and Asia is helping to compensate for the effect of the U.S. slowdown.

``Emerging markets are motoring on, and growth could well reaccelerate'' in the euro region, Bartsch says.

Staying Power

Among recent signs of the region's staying power, business confidence in Germany, Europe's largest economy, rose more than economists forecast in February and unemployment dropped to the lowest level since 1992. Meanwhile, growth in Europe's services industries accelerated.

``People still underestimate the strength and resilience'' of the European economy, says Kenneth Broux, an economist at Lloyds TSB Group PLC in London.

Those are all welcome developments for Trichet as his inflation concerns mount. Weber said last week investors are ``clearly'' underestimating the scale of the threat. The European Commission says prices will rise 2.6 percent in 2008, the most since the euro was introduced in 1999. The ECB tries to keep inflation below 2 percent.

To be sure, pressure for rate cuts hasn't evaporated because growth in some euro nations is faltering. Morgan Stanley says Italy may slip into a recession this year. Deutsche Bank AG forecasts that Spanish house prices, an engine of growth during the past decade, may drop 8 percent in 2008, the first decline on record.

Bets on Lower Rates

Investors, who reduced their expectations of ECB rate cuts early last month, have since replaced those bets as the euro's 15 percent appreciation against the dollar over the past year threatens to stall growth. The implied rate on the Euribor interest-rate futures contract maturing in December dropped 8 basis points, or 0.08 percentage point, on Feb. 29 after the euro rose to a record $1.5239.

Trichet himself stoked expectations of rate cuts just a month ago, when he spoke of ``unusually high uncertainty'' about growth. Now, as signs of price pressures multiply, he's been forced to tamp down investors' speculation that the ECB will soon cut rates.

German steel workers won a 5.2 percent wage increase this year, and Grandi Molini Italiani SpA, Italy's largest wheat miller, said last week it has tripled flour prices since July.

Sarkozy Worried

Even French President Nicolas Sarkozy, one of Trichet's strongest critics, said Feb. 21 that accelerating inflation in France ``worries me.'' Inflation in the euro region climbed in January to a year-over-year rate of 3.2 percent, the fastest in 14 years.

Trichet has stressed that the bank is in a neutral stance, unwilling to commit on policy until the economic outlook clears. The ECB, which all 54 economists surveyed by Bloomberg News say will keep its benchmark rate at 4 percent on March 6, will publish revised growth and inflation forecasts this week.

``Inflation will not slow as markedly as supposed,'' Weber said Feb. 27. Juergen Stark, who's in charge of the ECB's economics division, said last week he's ``highly dissatisfied'' with the current pace of price increases.

Buttressing the case of those who say this is no time for interest-rate cuts, the euro region's economy is getting a lift from the European Union's expansion since 2004 to include 12 mostly former Communist nations.

`Awash With Money'

Demand from eastern Europe ``buys the ECB time,'' says Andrew Bosomworth, a fund manager at Pacific Investment Management Co. in Munich. ``Growth is incredibly dynamic. The place is awash with money and booming.''

Sales to new member countries have more than doubled since 2000. Exports to Russia, which now sits on the European Union's eastern border, have almost tripled. By contrast, exports to the U.S. have expanded just 12 percent in the same period. The euro region now exports more to new EU members than to the U.S.

Sales to Poland and Russia jumped 22 percent in November from a year earlier, and exports to the Czech Republic rose 18 percent. By contrast, sales to the U.S. fell 1 percent.

The region's export boom is also cheering executives trying to shield their businesses from the U.S. slowdown.

Vienna-based Wienerberger AG, the world's biggest brickmaker, said Feb. 14 that growth in eastern Europe will help it cope with ``further weakness'' in the U.S. Deutsche Bank AG Chief Executive Officer Josef Ackermann said Feb. 7 that the bank's wealth-management businesses in eastern Europe and Asia are growing as much as 30 percent a year.

Euro's Rally

Trade with eastern Europe is also helping the euro region's exporters cope with the currency's rally against the dollar in the past year. All of the EU's newcomers have pledged to switch to the euro at some stage, meaning their currencies move in closer tandem with the euro than the dollar.

Some of their central banks are already raising rates. Trichet said Feb. 14 that policy makers around the world are ``doing what is necessary, each of us in our own environments, which are very different.''

Besides the central banks of Sweden and Australia, policy makers in Russia, the Czech Republic, Poland, Romania and Serbia have all increased borrowing costs this year. The Fed has slashed its benchmark rate five times since September. The Bank of Canada cut interest rates in January, and the Bank of England cut its key rate in February.

Weber argues that traders would be wrong to expect the ECB to follow the Fed and the Bank of England. Since the ECB's last forecasts Dec. 6, which projected inflation of around 2.5 percent this year, oil and wheat prices have touched records.

Investors expect euro-region inflation to average 2.24 percent annually during the next decade, yields on European bonds show. That's close to the highest rate since 2005.

``The ECB is facing genuine inflation risks and, unlike the Fed, it won't choose to ignore this threat,'' says Dario Perkins, senior European economist at ABN Amro Holding NV in London.

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net Gabi Thesing in Frankfurt at gthesing@bloomberg.net .

In January Construction Spending in the U.S. Decreased 1.7%

March 3 (Bloomberg) -- Spending on U.S. building projects in January fell by the most in 14 years as the housing slump worsened and construction slowed on hotels and highways.

The 1.7 percent decrease, more than twice the fall economists forecast, followed a revised 1.3 percent drop in December that was steeper than initially reported, the Commerce Department said today in Washington. Construction spending has contracted for four straight months.

Homebuilding is in a third year of declines as sales weaken and builders halt new projects to lighten inventories. Stricter borrowing rules and lower demand are also restraining commercial developers, creating an even greater drag on growth.

``The collapse in non-residential building is the next shoe to drop,'' Joseph Brusuelas, chief economist at IDEAglobal Inc. in New York, said before the report. ``Right now we have a very weak investment environment.''

Economists forecast construction spending would fall 0.7 percent after a previously reported 1.1 percent decline in December, according to the median of 48 forecasts in a Bloomberg News survey. Estimates ranged from a drop of 1.5 percent to a 0.2 percent gain.

Private residential construction spending dropped 3 percent after a 2.6 percent decline the prior month.

``Ceaseless talk of a recession continues to dampen the mood of consumers,'' Robert Toll, chief executive officer of homebuilder Toll Brothers Inc., said in a conference call Feb. 27. ``This drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines.''

Plants, Offices

Weakness has spread from the housing market to other parts of the economy. That includes construction of plants and office buildings, which are affected by businesses' reticence to spend in slower economic times.

``After growing robustly through much of 2007, non- residential construction is likely to decelerate sharply in coming quarters as business activity slows and funding becomes harder to obtain, especially for more speculative projects,'' Federal Reserve Chairman Ben S. Bernanke said last week in testimony before Congress.

Non-residential construction, including public projects, fell 0.8 percent in January, compared with 0.5 percent decrease a month earlier. Public construction declined 0.2 percent, led by a drop in road-building projects.

Private non-residential construction fell 1.2 percent, reflecting a slowdown in hotels, hospitals and power plants, the report showed.

Some Optimism

Some builders have a more optimistic outlook on business.

``The run-up in non-residential construction has been very restrained and gradual and I don't see any likelihood of a sharp downturn,'' Frank MacInnis, chief executive officer of Emcor Group Inc., said in a Bloomberg Television interview Feb. 27.

Emcor, a construction and facilities management company, had a record amount of backlogs going into this year, MacInnis said. The company is helped by demand from clients in the oil and gas business, he said.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net