Ray's version of how to time stock buys, sells, shorts and covers
OK, you asked for it...
As I mentioned, I used to work for a commodities trading firm that used technology to "predict" many things about their position.
First some basics, just to make sure we're all on the same page:
Rule #1 - You can't make money unless you take a position. This is analogous to an airline or a shipping company, they make money when their assets are in motion, not when they're sitting idle. Cash is an idle asset.
Rule #2 - Long or Short, it doesn't matter, it's still a position, and you're in play. Let go of any bias you have against shorting a stock, it needs to come as naturally as going long.
Rule #3 - If you like a stock, go long. If you don't like it, go short. Anything in between, WAIT and WATCH.
Rule #4 - Lightening always strikes. NEVER risk more than 20% of your portfolio on 1 position.
Rule #5 - MANAGE YOUR RISK. Diversification isn't the only key. Balance is also important. Balance is long and short in equal amounts.
Rule #6 - When you're taking a bath, get out of the water ASAP. Regroup when you're dry.
Rule #7 - Don't look for big moves, though they are nice and fun when they go your way. Aim for a modest 10% to 25% gain ON EACH POSITION.
Rule #8 - Ignore past losses and gains. Evaluate your position each day ON IT'S OWN MERITS. Get your emotion out of the trade, and trade when the indicators say to.
Rule #9 - Have fun. It is gambling you know.
All that having been said, some of the big lessons I learned was in watching the firm as they started to take on the role as the primary market maker in selected stocks.
The MM has the power of unlimited shorting (yes, no daily margin calls for them). They also Mark-to-Market and take their profits or losses EACH AND EVERY DAY. They also HATE to take a loss, ON ANY DAY. Now a MM also provides a valuable service, that of providing liquidity to the market. LIQUIDITY IS EXTREMELY IMPORTANT. Other wise we'd be trading Real Estate or Stock Options with their high fees and low liquidity and high chance for manipulation.
MM CAN (and do) MANIPULATE the price of a stock. Duh! That is the price we pay for the liquidity they bring to the market. There are 2 types of manipulation I want to focus on - short term (happens in 1 day) and medium term (happens over time, days to weeks). Short term manipulation is the mark of a bad MM. It's like showing your cards to your opponent, it's so obvious. As a general rule I don't play these, but there are some that I see as bullish and bearish signs (like when they run the stops). An experienced MM doesn't try to move an asteroid away from it's target when it's close; they could do it, but it takes soooo much energy. It's far easier to move an asteroid when it is far away. A gentle nudge by an unseen hand... far more cool and requires much less energy. Also, it's far easier to push something IN THE DIRECTION IT IS ALREADY GOING.
RAY'S THEORY #1 in trade timing... Maybe I can predict the medium term manipulation that a MM is doing and piggyback. OK, sounds a lot like momentum trading, this is just how I arrived at it.
Being a technology freak and a data guy, I looked hard for something visual (i.e. charting) that had a strong correlation to price movements. I found it in the MACD as calculated by certain tools. Under certain circumstances it can give me a lot of confidence to trade.
For example:
I went short OMC today at 59.
Look at the MACD curve vs. price over time.
I feel like I'm surfing a wave, or rolling down a hill in a sopbox on rollerskates.
To me this is a perfect short right now, today.
Look at this chart:
139.142.147.218
Now look at the DIA and the QQQ
139.142.147.218
139.142.147.218
BTW: given the waveform in both of these indices, my whole position is 100% short right now. I know, I'm out of balance, but these type of alignments between indices rarely occurs.
REMEMBER, I do use other tools. Dale's recommendations is one of them. But the MACD really helps give me a sense of direction.
Now look at Dale's suggestion of HTHR:
139.142.147.218
According to this ONE indicator, it's a better short than a long right now, but I don't like to short "below the line", the MACD zero line that is.
Play around and look at the MACD of your own favorite stocks.
Look at the historical relationship of MACD to price.
For me, being a visual person, there are about 6 waveforms that have meaning to me. In this post I've only talked about ONE, my "time to short this puppy" indicator.
You all be careful out there
Ray |
