12/31/2006
Disclaimer: Not knowing anything about what I was doing, but having the confidence gained by my ignorance and sustained by nothing much better to do, after studying many charts, reading many articles and a few books I created this web page.
Below is a chart that should be your road map top success
Trading / Investing (my rules)
Much like my favorite recipes I whittle them down to the ingredients that make the recipe "POP". Just like soy sauce and brown sugar marinade for salmon the trend is your friend. Most people have heard this before BUT would they know a trend if it hit them in the face? Second most important question is how long do trends last. We know the bull market lasted 20 years and many people came to the conclusion that buy and hold was the correct attack when in fact they were simply going with the trend. Try not to be confused by too much general information provided.
"Your emotions are often a reverse indicator of what you ought to be
doing." - John F. Hindelong
Don't buy (go long) stocks in a down trend
It didn't work last time and it wont work this time. There is always the the outlier but you need the odds in your favor, This game is hard enough without going against the trend.
Going with the trend.
This is easy, simply plot a 20 dma and 50dma as well as a 200 dma on a chart of the S and P 500 "SPY or SPX. You can do this at Yahoo finance and many others for free. It should look like this. Below this is a chart prior to the Oct 87 crash.
Safe to go long. Even better when bouncing off the 50dma. See the nice fairly even parallel lines of the 20 and 50dma
There was plenty of time to get your stops in place in this down turn of OCT 1987. First clue: Below 50dma (1) Second Clue: 20dma below 50dma (2) Any trader is "looking" at going short here at the (2). I say looking because you don't want to be greedy but wait for the trend to develop. Day traders can take better advantage of 1-2 day swings like this. Remember everything works until it doesn't work anymore. Stocks rarely make a "V" shape bottom.
What to trade
Invest in what you think should happen. E.G.: Gold should rise as investors place their money in hard assets as the US dollar drops on high debt.
Trade in what is happening. E.G.: Tech shares are rising as shorts are being covered by hedge funds because of excess liquidity.
Pitfalls
There are many newsletters and pay for play stock suggestions. They all mean well and that is deceiving.
If a stock is suggested all the readers jump on board and send the price up undeservedly. It goes up and then trails off leaving the trader not knowing what to do.
They can also give out so many tips that the reader doesn't know which ones to take and or pass on.
Some are not even technically correct even though they either have proprietary computation or inside strategy.
Some of them don't even trade there own suggestions even though they would have you believe they do. I personally like www.stockscores.com
Stops too tight or loose. If the stock is an up trend and the market is in an up trend then it would seem to me to less important to have stops. Long tails can kick start your stops. Once you have decided on a stop based not just on a percentage but support then you must only give it 1-2 day grace before selling at market price. Once the market rolls over as outlined above all stops should be in place and the tighter the better. This simply allows you to protect profits and buy at a lower price.
Know your style
This is not something new or acquired, it is an accumulation of life experience and not likely to change.
For myself, my style is to operate in a vacuum. Once I am on track any added information is just a distraction.
I am also cheap and don't like to overpay for anything. My style is to bottom feed. This has it's own pitfalls but it comes down to what you know and feel comfortable with. Even so you you must muster up some courage everyday and face the lions. I have heard people capitulate and say "I might as well buy an mutual fund". My answer would be that if you feel you haven't the time to take care of your money then you should simply put all your money in the DIA or XIU.to ETFs. This will reduce transaction costs. Any mutual fund I have tracked is running close to the index anyway.
When to buy
I would say that volume is more important than price. Price follows Volume. Think of it as the number of people in a new car showroom. The more people the more likely that sales are increasing.
When to sell
I look take profits when the stock is twice the value of the 200dma. That is not my rule but it is the first thing I look at.
Stops
How to use stops is easier said than done. My experience is that manual stops are best. I say this because stocks can spike down and then rebound only to close the day only down slightly. I buy right and use a stop of 10% to 25% depending the action. You have to have a discipline of love'm and leave'm. . My experience also teaches me not to reenter the stock after getting stopped out because of lack of confidence.
Justification
Everybody likes to justify there position. I have a saying that goes like this..." Lie to your friends but don't lie to yourself"
Timing the market
This is actually easy to do without charts as you will notice that stocks rise on bad news to mark a bottom and drop on good news to mark a top.
Pacing the market is a much more fruitful ambition. You don't want to be the first one in and the last one out.
Cycles
From a top to a bottom and back again whether in a minor form or macro is the experience that will set the pace. Observation is the key. The pain felt at every level and remembered will help guide your way.
Newsletters Groups etc
These can be very enticing.
Results are never the same. Why? Moving targets. Too many stocks suggested to own them all. Pump and dump before you know what hit you. The odd success to trap you. The best stuff in life is free. Use'm and lose'm.
Suggestion: learn TA. Teach a man to fish and he is fed for life.
Funny thing about learning this particular gig, it is mostly about unlearning bad ideas and habits!
They may only be paper trading and come off like they are playing for real.
Summary
- Swing Trading / Day trading: Easy to do with online trading and important to understand and practice but hard to continue doing because of time commitment. It also forces you to continually rethink your strategy and you must keep it separate from the over all market trend. Very disconcerting. Example going short in an up trend.
- Investing / Buy and Hold: Heavy losses and dead money VS The occasional double and profitable trade. Also low trading commissions and taxes and the potential for making the problem worse.
Indictors that will change the way you trade
- VIX I like a 10 dma on this indictor. Down is good. A 10% deviation from this line indicates a reversal may be in order.
- NDX I like a 20 dma on this indictor. Stocks seem to respond better for long positions when above the 20dma line
- DOW 200dma and the percentage of deviation
Why use stops
- I took this from www.stockscores.com ...
"Consider the investor who is not very good at picking stocks, but when she
does hit a winner, it really does well. Out of 10 stocks, 3 go up 40%, and
the other 7 go down 30%. If a thousand dollars is invested in each stock,
her net loss is $900 (the three stocks that go up 40% are now worth $4200,
but the seven stocks that go down 30% are only worth $4900, $4200 + $4900
is $9100, which is $900 less than the initial $10000).
Now, if our investor has simply limited her losses on any one stock to 10%,
her performance would go from a loss of $900 to a gain of $500. While she
remains a poor stock picker, her ability to manage her losses kept her with
a positive gain."
Terms
- DMA (Day Moving Average) Day is also mentioned as session, interval, period etc.
- A Moving Average drops the last day 20 days ago and adds the most current day. Buying above 50 dma and selling at 200 dma is an example of a very simple trading system.
- An ETF (Exchange Traded Fund) is a group of stocks like a mutual fund that is traded on the stock market.
Web sites that will change the way you trade.
- Before you spend, trade or invest a dime and every time you do. Read this...17 Rules
- Yahoo Finance Lots of free stuff as well as Real time quotes, charting and news for $10.00 (USA) a month.
- Signal Watch free news letter
- Change Wave with Toby Smith (free news letter)
History is unwavering in proving that EVERY malign, pernicious deflation came as a result of misguided economic policies where a currency was pegged to an artificial standard (i.e. gold) that reduces buying power so horrifically that demand deflates as consumers' buying power deflates. Case in point: the Depression of the 1930s. Our own terrifying deflation from the Depression was cured quickly as FDR took the dollar off the gold standard (devaluing it against gold). Prices changed from a fall of 10.3% in 1932, to a fall of 5.1% in 1933 and a rise of 3.4% in 1934. (Note that 1934 was also one of the best years in the stock market in the 20th century.) - Stockscores.com Rates your stock and free news letter.
- Stockcharts.com Charts and free news letter.
- Daily Reckoning Great news letter
Others
- Barron's weekly paper
- Decision Point
- BCA Research
- Investor Insight
- Dollar Converter
Software
- MetaStock. Requires a download of data from Reuters at a cost of approx. $40.00 per month. Very useful for studying charts and line studies.
- Indigo. Good for back testing and not more. An expensive stepping stone.
Players and Influences
- Institutional ownership is too broad a term to fully understand so I will break it up.
- Mutual funds. Watch these guys. In a bear market they need to free up cash for redemptions. That's caused by the little guys like you and me who just got whacked and call the broker to move funds into T-bills. It can take 3 days to liquidate 3% percent of the funds holdings.
- Hedge funds. These guys cause huge market run ups when they are forced to buy to cover shorts.
- Retail investors count for 2/3 of all trading. These are the guys (guilty) wearing the lampshade at the party because nobody told them it was over. They drive the markets too low and too high because they are followers. The big money is coming in to clean up and most of us are still in reverse. We all claim we just want the middle out of the trade but...
- Stocks that move the markets... Wall Street loves nothing more than earnings from big blue chip companies that surprise such as IBM, United Health, Kodak, United Technologies, Nokia, Intel, Motorola and Microsoft. So I guess you could say visa versa.
- Seasonally strong period of November to January when investors and companies fund their pension contributions.
Since the “collapse” of 1987 the market has shown strength during the US Thanksgiving week. The first week of the year most always the first two or three days are up. - Demography
- News: If investors are optimistic, it is the good news that will matter, and the bad
news will catch the headlines if investors are pessimistic.
Books that will change the way you trade.
- "Fooled by Randomness" Nassim Nicholas Taleb Read this one first
- "Gann Simplified" by Clif Droker
- "Rule the Freakin' Markets" by Michael Parness
- "Design, Testing and Optimization of Trading Systems" by Robert Pardo
- Currently Reading "The power of full engagement" Jim Loehr and Tony Scwartz
- "Financial Reckoning Day" by William Bonner and Addison Wiggin
Ideas from the books mentioned above.
- Your money is not safe in the stock market, you must use (mental) stops.
- Look at volume and price equally. Comparing daily volume to shares outstanding.
- Do not ignore time. Look at weekly, monthly and 1/4ly not just daily as daily can create too much noise.
- Gann used to quote Ecclesiastes in the Bible, which says, "The thing that hath been, it is that which shall be; and that which is done, is that which shall be done; and there is no new thing under the sun"
General Comments
- I agree that history repeats, but... which time period will we relive now! Oct 87?, 1964, 1994?,
- How can you have a global economy without having a similar global community.
See quotes page for more like this...
"Risk! Risk anything! Care no more for the opinions of others, for those voices. Do the hardest thing on earth for you. Act for yourself. Face the truth." Katherine Mansfield
The obvious is illusive-be careful
Stock are like your children: You never know for sure what they are up to but you have a pretty good idea -Martin Blain
12/31/2006