*** LAKEOFFICE CLASS ***
As you pick the stocks for your portfolio, remember this Shakespeare line,
"By the itching of my thumbs, something wicked this way comes."
There is always something wicked in the wings.
When you enter a position you cease being a trader or an investor
and become a RISK MANAGER. You will now be on the alert
for market trend reversals. So, as a practical matter, you should do
a market trend analysis. This should be done at least every week and every
two or three days is preferable. Of course, none of you want to become
day traders because if you did, you'd have to analyze the market 'on the fly'.
This analysis can be as complicated or as simple as you wish to make it
but should include as least four market indicator qualifiers to
determine the trend direction, duration and strength.
You can use a spreadsheet or record the information manually using a
simple form.
Start by making a five column form with the headings:
Date, Market, Total Point Value, Direction, and Action.
You will write in the date, the market (NASDAQ, S&P, Dow),
the total point value (which we'll get to in a minute), an arrow up or down
to indicate the direction of the market on that day, and finally what
action you're taking (Buy, Sell, Sell short, Cover, or sitting on your hands).
The Market Trend Analysis uses a simple point system of +1, -1, or 0.
You're going to use at least four indicators, arrive at a score for each of them
and then enter the total in the Total Point Value column.
Here's how it works with several different indicators:
Trend Line - if you have drawn an up trend line through the bottoms
and your line has touched at least three lows, then the trend is obviously
up (long) and you will score +2. If the market trend line is down and your
intention is to sell short into this trend, you will score +2. Notice that the
plus is a function of the direction of the trade that makes you money.
Let's say that your intention to to go long but the trend is down, your score
would be -2. Naturally, 0 score will be when the market is in a
consolidation phase.
A second indicator could be Moving Averages.
These can be simple MAs or Exponential MAs, it's up to you, and you
can use two or three MAs. For example, assuming a daily chart,
you could use 20, 50, 150 (or 200).
Using three MAs the price should be above each MA if your direction
is long and the score would then be +3. Reverse that if your desire is
to go short.
It's possible to have a situation where your stock price is above 150 (+1)
and above 50 (+1) but below the 20 (-1). Your score would then be +1,
arrived at by subtracting the negative number from the positive numbers.
A third indicator that could be used is the MACD. Assuming a long desire,
score +1 if the Signal line has crossed above the Zero line, -1 if it has
crossed below the Zero line and 0 is it is resting on the Zero line.
Reverse this if you're looking to go short.
Support and resistance levels can be used if the price is near either.
For example, if the price is at or very near Support and beginning to
move up, score +1. If it is beginning to break down through Support,
your score would be -1. If you are not near Support or Resistance,
your score is 0. Reverse this if you're looking to go short.
RSI can be scored where the tops usually occur around 70 and bottoms
around 30. Improving strength is a +1 and declining is -1. Naturally, reverse
this if you're considering a short sale.
Market Indicator Qualifiers
Trendlines +2, -2, 0
Moving Averages +1, -1, 0
MACD +1, -1. 0
S/R Levels +1, -1, 0
RSI (relative strength index) +1, -1, 0
Doing a quick market trend analysis provides you with a view
of the market and its strength and is well worth the effort if you want
to be trading with the current trend. And if you DON'T want to be trading
with the current trend, good luck! |
