During times of uncertainty in the market, your broker or financial adviser may offer words of wisdom or advice.  There are standard calming phrases you will hear over and over again.  But how true are they?

Here are 10 that need extra scrutiny.

1. “This is a good time to invest in the stock market.”

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that’s no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. “Certainly, sir — step this way!”

2 “Stocks on average make you about 10% a year.”

Stop right there. This is based on some past history — stretching back to the 1800s — and it’s full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they’re expensive, you do a lot worse.

3 “Our economists are forecasting…”

Hold it. Ask your broker if the firm’s economist predicted the most recent recession — and if so, when.

The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict “a slowdown, but not a recession.” That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 “Investing in the stock market lets you participate in the growth of the economy.”

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren’t as rare as you’ve been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 “If you want to earn higher returns, you have to take more risk.”

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, “risky” Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for “risk,” your broker probably thinks that’s “volatility,” which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 “The market’s really cheap right now. The P/E is only about 13.”

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That’s because earnings are so volatile — they’re elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or “Tobin’s q,” which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market’s pretty expensive, not cheap.

7 “You can’t time the market.”

This hoary old chestnut keeps the clients fully invested. Certainly it’s a fool’s errand to try to catch the market’s twists and turns. But that doesn’t mean you have to suspend judgment about overall valuations.

If you invest in shares when they’re cheap compared to cash flows and assets — typically this happens when everyone else is gloomy — you will usually do very well.

If you invest when shares are very expensive — such as when everyone else is absurdly bullish — you will probably do badly.

8 “We recommend a diversified portfolio of mutual funds.”

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that’s good advice.

But too many brokers mean mutual funds with different names and “styles” like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as “midcap blend.” These funds are typically 100% invested all the time, and all in stocks. In this global economy even “international” offers less diversification than it did, because everything’s getting tied together.

9 “This is a stock picker’s market.”

What? Every market seems to be defined as a “stock picker’s market,” yet for most people the lion’s share of investment returns — for good or ill — has typically come from the asset classes (see No. 8, above) they’ve chosen rather than the individual investments. And even if this does turn out to be a stock picker’s market, what makes you think your broker is the stock picker in question?

10 “Stocks outperform over the long term.”

Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: “In the long run we are all dead.”

Traders often ask me if it is necessary to short stocks to be successful.  My resounding answer is NO but you leave a lot of money on the table by just trading Long.  After inquiring deeper I usually find that most traders just have a lack of understanding regarding how shorting stocks works than a philosophical or patriotic issue. So, here’s a quick overview of how it works.

A trader who sells a stock short borrows shares from a broker’s inventory and sells them to another buyer. Proceeds from the sale go into the trader’s account. The trader must buy those shares back (cover the position) at some point in time and return them to the broker.

Thus, if you sell short 1000 shares of IBM at $20 a share, your account gets credited with $20,000. If the stocks price subsequently declines, then you will start thinking about "covering" your short position for a profit. Here's the record of transactions if the stock falls to $8.

Borrowed and Sold Short 1000 shares at $20: +$20,000

Bought back and returned 1000 shares at $8: -$8,000

Profit: + $12,000

But what happens if the stock begins to takes off, from $14 to $19 to $26 and then to $37!  You finally decide that you'd better swallow hard and close out the transaction so you buy back shares of IBM at $37.

Here's the record of transaction:

Borrowed and sold short 1000 shares at $20: +$20,000

Bought back and returned 1000 shares at $37: -$37,000

Loss: -$17,000

Ouch. So you see, in the second scenario, you lost $17,000…which you'll have to come up with. There's the danger….you have to be able to buy back the shares that you initially borrowed and sold. Whether the price is higher or lower, you're going to need to buy back the shares at some point in time.

I hope this was a helpful overview. To learn more about short selling, try reading the following books:

"Tools of the Bear: How Any Investor Can Make Money When Stocks Go Down" – Charles J. Caes;

"Financial Shenanigans: How To Detect Accounting Gimmicks & Fraud" – Howard M. Shilit;

"When Stocks Crash Nicely: The Finer Art of Short Selling" – Kathry F. Staley;

Dummies?…While I love the series of "dummies" books.  (they have helped me on more than one occasion) I can't say that the title or application fits when it comes to the business of swing trading.  I point out on my homepage that bookstores have thousands of books available on the topic of stock trading…yet 90% of traders continue to lose money.  That can't speak well for the content of those books but in all fairness, you could give most traders a solid trading system on a silver platter and they still couldn't make money with it because of their own internal issues as it pertains to fear and greed.  Now, that being said, I don't think it is possible to boil down all of the intricate pieces of stock trading into the typical "dummies" format.   Traders tend  to be some of the most intellectual and analytical people in the world so at the very least I think the book title is a sleight to them as a group. As a matter of fact, after reviewing the book, I would have titled it, "The basics of stock trading and swing trading theories".  If you are a newbie to trading then this book can help you with the basic but "theories" won't get you anywhere.

If you really want to learn the ins and outs of trading I invite you try my swing trading course.  You'll be glad you did.

I am continually surprised to find that there are some traders who do not keep full and accurate records of all their trades. Whether this deficit is due to laziness, or a genuine belief that such accounting of their activities is really not required I do not know.  However, I am quite certain that proper record keeping is very much part of the business of being a successful trader.

Making money consistently, is a question of trading in a consistent manner. If a trader does not keep full and complete records of all their trades, how can they determine whether or not they are attaining such consistency?  Certainly not by looking at the bottom line; we all know only too well that the markets being the fickle entities that they are, doing the right thing does not always guarantee the right result, and so the result in itself is not necessarily an indication that we did the right thing!

Keeping good trading records then, helps us to maintain a consistent approach in our trading, but the benefits go well beyond that. How many times have you placed a trade, believing that everything you are doing is absolutely correct, only to see the trade turn into a miserable loss? It happens to us all. After taking the loss, there is a natural desire to look back at the trade and try and figure out what went wrong. However, immediately following the losing trade is not the best time to analyse it; the trader is still too “close” to the action to look objectively. If they have been keeping quality trading records, they can go back and re-examine the trading session at a much later time, and view what went on from a more detached perspective.

Personally when I log trades, I tend to note down quite a lot of information. I don’t just record entry and exit prices, times and so on, but also the setup type, a rating of how closely the setup matches a textbook example, and even how I am feeling before, during, and after the trade. Before each trading session, I review the previous days trades, and I review the whole weeks worth at the end of the week, and longer timeframes periodically beyond that. In this way, patterns of what is working and, equally importantly, what is not, very quickly become apparent and so I can work on eliminating bad habits or losing setups, and concentrate on what is working.

There’s one extra benefit of keeping accurate trading records as you go along, and that is that you have much less work to do when the tax man comes knocking on the door wanting to know what you’ve been up to all year!

Here's an interesting overview of what happened on the fabled May 6th drop in the stock market where the Dow Jones dropped almost 1,000 in mere minutes.  The largest intra-day drop in history.

I'm excited about the update of Swingtraderguide.com.   There were a lot of resources added for traders to include:

• Video tutorials
• Free interactive stock charts
• A trading system simulator
• Traders glossary, and now
• Ongoing market analysis

You also can now connect and interact with me a variety of ways to stay updated to include

• Blog comments
• Twitter
• Facebook
• RSS
• Email

I hope all visiting traders like the improvements.  Enjoy!

I have just released version 5.0 of my popular swing trading course.

The updated version has been updated with more trading examples as well as modifications to some of my favorite trading methods.

Get it today!

The goal of all swing trading strategies is to enter high probability trades based on an anticipated direction of price.  Swing traders can trade either counter-trend, or trade with the trend.  By going with the major trend, you are following the smart money.  Following the smart money greatly increases your chances of placing winning trades.  There are four main processes of any swing trading strategy.

Step 1:  Identify the Trend

The price trends for a specific time frame can only exist in one of three scenarios;  up trend, down trend or sideways trend. Trades should ideally only be placed in the direction of the main trend.  Trends can be identified using a variety of different tools from price action to indicators.

Step 2:  Wait for a Price Retracement against the Trend

Once the main trend has been identified, you should be waiting or looking for some kind of "pullback".  Pullbacks against the trend are representations of profit taking taking place before another move in the direction of the trend occurs. By trading pullbacks to an area that offers lower risk, swing traders once again increase their odds of entering a profitable trade by making sure they get in at a good price.

Step 3:  Identify Risk vs. Reward

You should only trade when the anticipated profit is two to three times the amount you are willing to risk. By having a 2:1 or 3:1 profit/loss ratio for your trades you only have to win a 35-40% of your trades to make a profit. If the risk/reward ratio is not adequate you should pass on the trade.

Step 4:  Place the Trade

With the trend correctly identified price at a level which is in your favor, you can now place your trade knowing the EXACT possible outcomes.

Learn more about my swing trading course >>