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How to play the game

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The January Effect

January Gains.jpg

January - the most important month of the year - why is this I hear you ask?

Well, in the same way that December is statistically the most profitable month - January is the month that sets the tone for the Stock Market for the WHOLE year and this tone is set in the 5 Trading days immediately following New Years Day.

If the Stock Market posts a positive gain in these 5 Trading Days - there is an 85% chance the market will rise during the course of the year. This is obviously a good omen when taking Buy Positions.

On the flip side to that - the Stock Market doesn't have many down January's, but when it does - the stock market will enter into a prolonged Bear Market where the average decline is around 12% - so watching how the market performs in these 1st few Trading Days of the New Year can give you an insight into how the market is likely to perform for the year - and thereby give you (the Trend Trader) a head start on the market.

The S&P 500 has only posted losses in the 1st 5 January Trading Days in the following years - 1966, 1973, 1990, 1994 and 2002 - and these were strongly correlated with active Wars - so the odds are very much in the favor of a strong year if the January effect holds strong and we can see gains during this small time window.

You might be asking yourself - What has history got to do with what's going on now?

Welllll.... at this point - I'd like to point you in the direction of The Stock Traders Almanac - this book will show you that the Stock Market moves in pre-determined cycles and that history actually play a very important role in how the market will move as the market reaction is often the same. Certainly worth a read.

Watch the 1st few trading days closely, and hopefully by understanding what is going on - it will hopefully give you a little head start on the market which will turn into profit.

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Sam McCallumComment