Well, I know I can't touch Dave for a clear well written post. But here is an oldie, there might be something for a beginner to think about.
Random thoughts on Market
Emotions
We buy sometimes due to news, tips, volume. when will you sell? on bad news, tipster sells, or volume goes down? We fail to sell and our capital is at risk, we "wish" stock up. nothing works, we sell, stock goes up. We say " I should have held, I shouldn't take a loss". Stock goes down, we say " this is a good stock how can "they" sell it?". "There was a upside down head and shoulders off a descending triangle that came off a double top; it can't go down!". We need help. Something has to stop us from holding or buying at wrong times based more on emotions rather than TA system. Yes, system, a set of indicators that tell us when to buy and when to sell. we must have a entry point and exit point before we take action. failure to establish that before trade can leave you as a victim of emotions.
How do you get a system to follow? Pick a bunch of charts, a varied bunch with winners, losers, slow and fast movers, low and high prices; about 15 with 5 years available data. Now I hope you have a good program that allows you to set up templates i.e. Metastock, WOW, TC2000, etc. Set one up for MAs, put about 5 or 6 different ones. Set one up for volume indicators. set one up for Overbought/oversold. set one up for bands, Bollinger or %. set one up for regression lines. You get the idea. Now spend an evening looking at these charts, seeing what the indicators say at turning points, always noting volume and price patterns. It might be good to use a candlestick chart, they are very visual. Did the Ind. work with the $100 stock as well as the $5 one? Are some good for entry but not exit? Or vice versa?
On the indicators change the time periods, from the canned version. change the time compression on chart from daily to weekly to monthly. Get in your mind, decide what risk you are willing to take; want to use a 9 day MA or a 200? Would you hold a stock through a 30% loss or would you cut out at 7-10%? How close can you watch stocks? by the minute, hourly, at end of day or weekends? What is return you must have? 6%, 10%, 20%, 30% or higher? Which indicators seem to give it to you on the most stocks?
If you have metastock or WOW PRO you can backtest and see what you chosen system would have done in the different stocks over the years. Be sure and include past purchases to see what the indicators, I hope some new ones from this board, says. This a good Sunday afternoon project. Take notes, build templates from the best.
Pick a good stock, EPS>70, RS>80 is rec. start point. Now wait till system says buy, and sell when system says sell or 7-10% decline occurs. Will you make money 100% of time? NO! will you make money? yes if you tested and picked right system. Will emotions play a role? YES. But you are helped by system to keep them at minimum.
Why 7-10%?
You have to cut the loss somewhere:
price stop
5.00 4.50
10.00 9.00 it is easy to figure.
20.00 18.00 if you had less than 20% capital in
30.00 27.00 stock, it is 2% of capital loss.
40.00 36.00
I have 10,000 to invest, put 2000 into 5 stocks costing 10.00, sell if they go to 9.00. you think they are all going to 12.00 but only 1/2 do. the other 1/2 goes below 9.00. you gain 10%. Somebody might say but my stock will come back THEY are a good company. Well while the stock languishes at say 7.00, you capital is tied up in a stock that is not moving. Lets say it moves up to 10 within 4 months. Do you think you might have found a place for your money that would have increased in 4 months rather than standing still?
Some might say but system didn't keep me in long enough, it was wrong on 1/2 of them. remember you picked system, you had chance to look at a lot of results and see what they could do, and choose a system that you have faith in. We never know with certainty what is going to show up on the right hand part of the charts. we have to depend on what we saw in the past (systems). If they are wrong, we must preserve capital to trade another day.
MY stock can't go lower! Look at charts, how many did go lower? Well it will come back! When? Soon! How long can you wait? When will you punch out? 50%, 70%, 90%?
Don't average down? this won't be a player, if you apply 7-10% but if you are 60% -90% down it sure is inviting. remember you are getting into a martingale .
Where have I seen this before?
Why have more than a year available for charts? to see reactions at early points or history. You think institutions and pension funds aren't holding stocks bought in 1990? I bet there might be someone that have a stock bought 3 years ago. All these can be a player in reaction to next resistance or support area.
Buying NEWS stories
company x has a new net software. if you buy because of this, when do you sell? 2 years from now they will have the software. What if stock goes down after buy? you bought on news, will you stay until news says the opposite? To a degree, the same goes for earnings, if you buy because earnings are announced going up, above some wimp's guess; will you sell before next earning report? you bought on earnings! They haven't gone down.
But if you buy on an indicator, you have a entry and exit based on price. PRICE AND VOLUME IS KEY, THE REST DOESN'T AFFECT YOUR PROFIT OR LOSS.
Where do you stand?
We just finished one of the best bull years in a long long time. How did you do? Print out a chart for each of your stocks, you bought last year. Mark entry and exit. Put notes on back or blank area. Why did you enter? why did you exit? what should you have done? See any patterns? Do it this weekend. Put them in notebook.
Failed Systems:
I often hear "system stopped working", "all systems fail after time". Well when we read this in books, it refers mainly to futures market. you have only a few markets and a bunch of people chasing it with big dollars. IT IS A DIFFERENT BALLGAME. stocks offer 8000+ markets and you have a different set of players. systems don't die out, if they worked in first place. got a favorite system, buddy says "it keeping buying in a downtrend" yes but I don't. Did system fail? no, used in wrong place. This stuff isn't easy; you have to work at it. a lot is common sense, a rare commodity.
%% make the world go around
CNBC airheads say things like market is retreating because of gold. 2.50 points out of 5400! they need a course in %s. Many traders do. We hear them say GM is down 3/8 due to possible buy of Amer. Express. Do we stop and say .07% isn't much more response than noise. I heard someone say you can make money in high priced stocks short term. said if IBM is 90 and it goes up 3 points in a day you can turn some money on daytrade. 1.11% move! but if you bought a 1000 shares that is $3000. you put up 90,000 plus commissions to get 1.11%. What about it going down?
Well lets go to options, won't have to tie up as much. yes, and percentage moves are better or WORSE. I suppose the bottom line is I wished CNBC would show percentages moves on their boards and reports, it might make people put things in perspective. And it might change some account balances.
% mean something
Every so often, someone relates the price of a stock to its supposed value. A stock selling for $50 is sounder than a stock selling for $5. I don't see the logic there. But here is the real key to why you aren't going to make fast money in some old stogies. SUPPLY AND DEMAND. It is the float, stupid. The float is the % of stock not held by company management. It takes a lot to move the old sluggish dinosaurs. But a 3-25 million float can and does move. The more stock out there, the more demand required to move it. Watch your float, no matter what the price. What about institutional buying? good and bad. you want some but not too much and you want the institutions to have outstanding growth records. A number of mutual funds can't beat the Dow-30, you want them buying your stock? Nice to have 3 good ones buying than 30 bad ones.
Stock Market Truths
The strong get stronger, the weak get weaker. Never put more than 10% of your capital in any one stock. Never lose more than 10% on a stock. Never average down. Buy on low volume, sell on high volume. The only good stock is a stock that is going up. Price and volume, supply and demand rule the market. Don't buy any stock until you have seen a 2 year chart.
Tools to use
Advanced GET Metastock for Windows Windows on Wall Street TC2000 |
