Firstly, I call it a "zone", and not a decision to accumulate or distribute, because a decision or recommendation on my part is personal, and involves the study of a number of technical factors plus fundamental, quantitative, and macro-economic factors, whereas a zone is what I see in the market that other traders are doing.

The term "trader" by the way is a more accurate definition than "investor" for encapsulating what owners and managers of capital do " but the two can be interchanged.

An "investor" implies the buying with the intention to hold or control part or all of a company. It is a term that more accurately applies to "direct" investment as opposed to "portfolio" investment.

There may be many reasons for direct investment, for example, the investor has chosen to be a business operator, an employer, or maybe even become an employee. True investors are mostly interested in a bottom up fundamental study of the company's financial position and operating results and prospects. The other studies are also involved, but are less important.

Portfolio investment implies the buying and selling of securities exclusively for the purpose of gain in the securities in the portfolio. True traders are more interested in a top down study of the company's shares and bonds. That simply means that technical, quantitative and macro-economic studies are more important to traders than fundamental analysis, which is also important.

The latter point is the basis of problems that CA/CPA's often have with securities trading. They are overly focused on the corporate fundamentals, and are confounded when they observe companies that are strong and getting stronger also dropping in price in securities markets. They simply have not yet fully grasped the difference between fundamental intrinsic value of a company and the current market price of the securities of that company.

So as a trader, I am interested in the securities, and in my case mostly the shares (equity securities) rather than the bonds (debt securities) of the company.

Next, while I already said that I consider all aspects of studying securities to be important, the most important one (let's just say it's 60 pct of the weight of any decision I finally arrive at) is the trend and cycle study.

I believe that security prices flow in cycles. Over time, the price moves up and down and up and down, continuously, even if my time horizon is monthly data points, or weekly, daily, hourly or in minutes. Price movement is charted, as you know, and trend and cycles analysis involves the smoothing of the price series in order to see those cycles.

If the price cycles move over time in a pattern of higher highs and higher lows, that is a bullish trend. Lower highs followed by lower lows in the price cycles are referred to as a bearish trend.

In mathematical terms there are concepts like amplitude and mean involved, but lets just say the concept is like a wave. And since, over time, water finds its own level (rather than continuously flowing uphill or downhill), that level is referred to as the zero line. Another way of looking at it is simply a detrended line, which is done in order to study "cycle" rather than "trend".

And just like the ocean waves in the real world are unique and constantly changing, there are also sine waves that can be studied in the laboratory that represent what I refer to (in my work) as an idealized wave.

Let's look at an idealized wave in illustrative form.

In the illustration #1 (above), the idealized wave is shown trending both up and down, and also without trend (the middle one).

On the middle wave, I have marked cycle points from 1 to 8. The Cara Accumulation Zone is within points 1 and 3. The Cara Distribution Zone is within points 5 and 7.

Now let's try to take this conceptual approach to the real world, using the Dow 30 component AIG. Here is the Monthly data chart of AIG along with several different technical studies that I follow, including Relative Strength Indicator (RSI) and Moving Average Convergence Divergence (MACD) and so forth. All these indicators do is represent data that is smoothed over time, with indications of extreme price behavior showing up, depending on one's (subjective) perspective of these concepts.

Although the chart lines of the technical studies look like advanced mathematics " and some traders purport (misrepresent) that it really is " there is more art than science involved, and the "indicators" are really that " just indicative of price direction going forward based on actual prices up to that point.

Looking at AIG's price data, anybody can see that right at the start of 2001 (let's call it 1Q01 even though it was the first week of a thirteen week quarter year) there was a cycle peak in the $96-$104 range. Then in the 1Q03 there was a cycle bottom in the $48-$56 range. Then in the 1Q04, there was a subsequent cycle peak in the $68-$76 range.

Not only can you see that the trend and cycle concept important to me, you can see that I refer to price ranges, rather than trying to pick a precise top or bottom. That's because trading is not precise, and you should never think that it is.

So let's call the 1Q01 cycle top say $100, which is between $96 and $104. In the same way, but just to round the numbers so I can make an illustrative point, the 1Q03 cycle bottom was say $50, and the next cycle high was $75.

Therefore, over the past say five years, the amplitude of our idealized cycle for AIG would be defined by $100, $50, and $75, which just happens to be a 50 pct loss in the bearish trend (1Q01 through into 1Q03), followed by a 50 pct gain in the bullish trend (1Q03 through into 1Q04).

If an Extra-Year Trader, i.e., those who have a time horizon to complete a buy and a sell or a short sell followed by a buy, in not less than a year (a year is say 250 trading sessions), were studying AIG, they would try to make the Sell at $100, the Buy at $50 and the next Sell at $75.

Readers know that I categorize traders in the following five groups, depending on their time horizon:
· Intra-day i.e., < 5 session hours
· Intra-week i.e., < 5 session days
· Intra-month i.e., < 18 session days
· Intra-Year i.e., < 250 session days
· Extra-Year i.e., > 250 session days

As I explained in a recent blog, my profit objective for each time horizon is as follows:
· Intra-day i.e., > +0.5 pct per day
· Intra-week i.e., > 1.5 pct per week
· Intra-month i.e., > 5 pct per month
· Intra-Year i.e., > 40 pct per year
· Extra-year i.e., > 30 pct per year

Let's see how this trading concept would have worked out for AIG.

Adding the 50 pct gain on the Sell at 1Q01, which was closed 1Q03, to the 50 pct gain on the 1Q03 Buy, which was closed 1Q04, that would be a 100 pct gain starting in 1Q01 and finishing in 1Q04, which is just over three years.

Does this meet my profit objective for the Extra-Year Trader? From the table above, you can see that I am seeking a 30-pct gain (actually in total return " but let's strike dividend considerations in this case because I am shorting " where I owe the dividend -- as well as going long). So, yes, a 100-pct gain in just over three years is close to my goal.

It is important to understand that I am going back and forth in this discussion from reality to concept. A profit objective or target is a concept. Believe me, if anyone can hit that target continuously, year after year, they'd be richer than Warren Buffett, in time, since his career average return is about 28.5 pct per annum.

But it is important to set targets that are possible, and then to study what was done to achieve them and what happened in real life to explain any failure. The cause/effect paradigm is very important to me, because I am constantly making decisions and following up to see what went right vs what went wrong, and the causes, if you can find them. You should only change your behavior when you understand that you have been making mistakes, and how, and how the change could be beneficial.

Before concluding, I wanted to point out that coin flipping can't cut it in securities trading. After 4 or 5 iterations (coin flips) you lose all your capital. You have to be right more than 50 pct of the time, and your average gain has to be larger than your average loss, if you are going to be successful as an active trader.

If you can't do that, then you ought to be a passive investor by putting your capital under somebody else's management.

I learned the same thing in life as a business operator before switching to securities trading. If you want to directly invest in and run your own business, you have an obligation (to yourself and family) to exceed the performance of the best quality companies in the market you could trade in a portfolio. I set the bar at 20 pct annual Return On Capital Invested.

If you can't do that 20 pct ROCI in your own company, then you ought to consider working for people who do, and investing your savings in securities of listed companies that also do that.

To my regret, nobody ever taught me that in MBA school, or when I was earning my professional accounting designations. It took me a while before I decided to switch from operating to trading.

Now to conclude about the Cara Accumulation/Distribution Zone, here is a final illustration (also called Illustration #1 by mistake):

From this illustration, you can see that there is a conceptual difference between the windows of Accumulation and Distribution in a rising, flat or falling trend.

Your primary objective as a trader is to establish in your own mind the trend direction and to be on the right side of it, e.g., "the trend is your friend" or you "go with the flow". All these sayings really mean is that understanding trend is important and that, if you do understand trends and cycles in concept, you can apply that knowledge tactically in your trading decisions.

For example, in a rapidly rising or falling trend, the window of opportunity (i.e., to Accumulate or Distribute) is shorter than if the trend is flat (and the cycle amplitudes are similar).

You are always going to accumulate from cycle points 1 through 3, and distribute from cycle points 5 through 7. But look at the idealized cycle to see the length of time you have during a rising or falling trend.

So, when I say that I am accumulating a stock in the appropriate zone during a falling trend, I say that my time horizon is small " my window of opportunity is short.

And when you have finished accumulating (point 3), you can see the length of the period from cycle points 3 to 5 (start of distribution) is much longer in a rising trend, and shorter in a falling trend, than the end of a distribution zone (point 7) to the next point of accumulation (point 1).

You can interpret that in another way: after you have accumulated a stock that is early in a rising trend, your risk is low. If you hold that stock past point 7, then your risk is high.

I continuously say that your job as a buy-side participant is to shift risk to the sell-side (those who are in the business of creating and selling you securities) and other buy-side traders who are selling you their positions. You need to always be positioning your portfolio to be minimizing your risk, and maximizing your gain potential " and then let the market prices flow, as they will.

The final point is that my use of the term Accumulate is different from Buy. It could mean that I am buying several times over a period of time to add to my position in a stock, and the Accumulation Zone is the time to do that.

Similarly, a Distribution Zone is the opposite.

Also, a Buy infers opening a long position in the stock. In the Accumulation Zone, it would also be appropriate to sell (close) a short position. You may also want to write (open short) a put at that point of cycle as well.

So Accumulation can also refer to a strategy over a time frame, whereas a Buy is a tactic at a point in time. These are different concepts.

Let's review the idealized cycle one final time to look at the various strategies and tactics that I find appropriate:

Cycle points 1 to 2: Begin to accumulate stock positions; sell any long puts; write new puts

Cycle points 2 to 3: Finish accumulating stock positions; and, on extreme lows, buy new calls

Cycle points 3 to 4: Buy new calls; hold long stock positions

Cycle points 4 to 5: Hold long stock positions; hold calls

Cycle points 5 to 6: Begin to distribute the stock positions; and write calls against stock positions

Cycle points 6 to 7: Finish distributing stocks; (possibly) write naked calls (very risky); and if extreme price spike at cycle top, buy puts and/or (also risky) open short stock positions

Cycle points 7 to 8: Buy new puts; hold short positions

Cycle points 8 to 1: Hold short stock positions; hold puts

To wrap up, I call it the Cara Accumulation/Distribution Zone because it is my perspective based on my approach (strategies and tactics) to securities trading. This is not for everybody. At the end of the day, for every single trade, there is a buyer and a seller, both believing they are going to profit from the trade.

I am always doing something wrong, but at least I am also always trying to be right more often than I'm wrong, and I always try to keep my average losses smaller than my average gains.

You see, whoever you are, I too "LearnFromMistakes".

At least, I try.