Learn To Invest

Secrets of Investing (Part1)

2008-06-13T13:22:00.000-07:00

Secret #1: Invest in quality businesses, not stock symbols

For most people investing in a stock is little more than watching the trail left by the stock symbol as its price wanders along some drunken path. They know that the symbol is associated with a company while not being too sure what is expected of this company to ensure that its share price will rise. It is a case of let’s sit back and hope for the best.
Then there are others who deliberately do not want to know anything about the activities of the company. They want to study the “pure” movement of the stock price with the belief that they can use this information to make forecasts about the future movements of the price. This is like trying to play bridge without looking at the cards.
It just makes no sense to ignore the fact that the stock symbol is attached to a company. And it makes no sense not to apply sound business principles to analyze these companies. The more we know about the company, then the more confident we can be about the price of the stock. Not on a day to day basis, but over time.
So before buying a stock, think of it in terms of buying a whole company, just as if you were buying a store down the street. If you were buying a store you would want to know all about it. What were its products? How consistent are the sales? Do they keep trying new products or do their products stay fairly constant? What competitors does the store have and what distinguishes it from them? What would be the most worrying thing about owning such a store?
This leads to the idea of looking for companies that have a strong and durable economic moat. Just as castles have moats to protect them from invaders, so companies can have economic moats to protect them from challenges of competitors and changes in consumer preferences. The moat can be made up of attributes such as brand name, geographical position or patents and licenses.
All these principles about purchasing businesses are equally applicable to purchasing shares. It becomes one of the most enjoyable parts of investing to look into the “business” aspects of any company that you are considering adding to your portfolio.
Secret #2: Don’t invest for ten minutes if you’re not prepared to invest for ten years
When we look at the share price of a company we usually see a wildly fluctuating graph with mighty hills and plunging chasms.
For example, on the right is the graph of the daily closing prices of a company over ten years. It would be a brave person who could look at this graph and say what was going to happen in the next 24 hours, let alone the next 5 to 10 years. Yet this is a typical graph of the prices of a listed company.

But what about this graph? Because it is growing so consistently we would have a lot more confidence in making forecasts of what was going to take place in the future.

This graph is of the earnings per share of a company. If you were buying a company, this is just what you would want — a company whose earnings and sales go up like clockwork by 15 or 20 percent or more each year. It is no different when you invest in companies via the stock market.
In fact, the above two graphs of the same company, ARB Corporation. This is an Australian company that manufactures and supplies equipment for off-road and four-wheel drive vehicles around the world. The first chart depicts the closing prices while the second chart displays the earnings per share over the same period.
When we put the two charts together, we see how they track each other. Sometimes the price moves ahead of the earnings per share and sometimes it is the other way around. But over time they move together
Clearly it is an advantage to be able to find companies with such steady and strong growth in earnings.

When we locate such companies, we are well on the way to finding quality investments.
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

Put together a portfolio of companies whose aggregate earnings march upwards over the years, and so will the portfolio’s market value.
In other words, as investors we focus on the medium to long term business characteristics of companies. It is these that drive the share price.
Focusing on the short-term aspects of a company including both business and price fluctuations is foolish Even though we focus on the long-term, the investment is even more profitable if we purchase the stock during one of its drops.
Secret #3: Scan thousands of stocks looking for screaming bargains
There are always companies, which are not the leaders today but have the potential to be in the future. So scan the possible number of stocks and find out some screaming bargains, which are available cheaply.

Secret #4: Calculate how well management is using the money they have
Home buyers understand about equity. It is the value of the home less the amount owed to the bank. The same is true of a business. Its equity is the total assets minus all the liabilities. You can think of this as the money locked up in the business. It is a measure of how much money management has to run the business.
Another measure of the money available to management is the capital of the business. This is its equity plus the long-term debt of the company.
Clearly the success of any business is going to depend on how well management uses its equity and its capital. This is commonly measured by two ratios called return on equity and return on capital. Putting it simply, these are defined as the earnings of the company divided by equity and by capital. Their abbreviations are ROE and ROC.
Many companies consistently lose money year after year. So they do not even have an ROE or ROC. Others have very low values for these ratios. In other words, management is struggling to make a profitable use of what it has. Clearly, these are not the sort of companies that we should think of as quality investments. If management is only making a few percent on the money that it has, then over time this is all you can expect to make if you purchase shares in the company. After all, money can’t come from nowhere. It makes sense. If you want a healthy return on any shares that you purchase, at the very least you need to select companies with management that is making a healthy return on the money that they have.

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M A C D

2008-06-08T06:20:00.000-07:00

Overview

The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel.

The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. (Appel specifies exponential moving averages as percentages. Thus, he refers to these three moving averages as 7.5%, 15%, and 20% respectively.)

Interpretation

The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: crossovers, overbought/oversold conditions, and divergences.

Crossovers

The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero.

Overbought/Oversold Conditions

The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions exist vary from security to security.

Divergences

A indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

Example

The following chart shows Whirlpool and its MACD.

I drew "buy" arrows when the MACD rose above its signal line and drew "sell" when the MACD fell below its signal line.

This chart shows that the MACD is truly a trend following indicator--sacrificing early signals in exchange for keeping you on the right side of the market. When a significant trend developed, such as in October 1993 and beginning in February 1994, the MACD was able to capture the majority of the move. When the trend was short lived, such as in January 1993, the MACD proved unprofitable.

Calculation

The MACD is calculated by subtracting the value of a 26-day exponential moving average from a 12-day exponential moving average. A 9-day dotted exponential moving average of the MACD (the "signal" line) is then plotted on top of the MACD.

RELATIVE STRENGTH INDEX

2008-06-04T22:51:00.000-07:00

Overview
The Relative Strength Index ("RSI") is a popular oscillator. It was first introduced by Welles Wilder in an article in Commodities (now known as Futures) Magazine in June, 1978. Step-by-step instructions on calculating and interpreting the RSI are also provided in Mr. Wilder's book, New Concepts in Technical Trading Systems. The name "Relative Strength Index" is slightly misleading as the RSI does not compare the relative strength of two securities, but rather the internal strength of a single security. A more appropriate name might be "Internal Strength Index." Relative strength charts that compare two market indices, which are often referred to as Comparative Relative Strength.

Interpretation
When Wilder introduced the RSI, he recommended using a 14-day RSI. Since then, the 9-day and 25-day RSIs have also gained popularity. Because you can vary the number of time periods in the RSI calculation, I suggest that you experiment to find the period that works best for you. (The fewer days used to calculate the RSI, the more volatile the indicator.)
The RSI is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal.

MOVING AVERAGES

2008-06-04T22:40:00.000-07:00

Overview

A Moving Average is an indicator that shows the average value of a security's price over a period of time. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes, its average price moves up or down.

There are five popular types of moving averages: simple (also referred to as arithmetic), exponential, triangular, variable, and weighted. Moving averages can be calculated on any data series including a security's open, high, low, close, volume, or another indicator. A moving average of another moving average is also common. The only significant difference between the various types of moving averages is the weight assigned to the most recent data. Simple moving averages apply equal weight to the prices. Exponential and weighted averages apply more weight to recent prices. Triangular averages apply more weight to prices in the middle of the time period. And variable moving averages change the weighting based on the volatility of prices.

Interpretation
The most popular method of interpreting a moving average is to compare the relationship between a moving average of the security's price with the security's price itself. A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average.
The critical element in a moving average is the number of time periods used in calculating the average. When using hindsight, you can always find a moving average that would have been profitable (using a computer, I found that the optimum number of months in the preceding chart would have been 43). The key is to find a moving average that will be consistently profitable. The most popular moving average is the 39-week (or 200-day) moving average. This moving average has an excellent track record in timing the major (long-term) market cycles.

Secrets of Investing (Part1)

2006-07-22T12:17:00.000-07:00

Secret #1: Invest in quality businesses, not stock symbols

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TECHNICAL TOOLS FOR DAY TRADER (PART2)

2006-07-15T12:08:00.002-07:00

PART1----------------------------------PART3

Pivot System Support and Resistance
Judgements made about likely market behavior which are based on momentum analysis can be even more productive if we have predetermined levels available which can act as "price templates" in interpreting the day's trading activity. The "Pivot System" is one such approach.

Floor traders and other professionals who do the actual buying and selling of futures contracts in the trading pits of the exchanges, generally employ very similar systems for valuing the price of these instruments in the absence of significant outside influences. This Pivot System of Support and Resistance determines relative valuation levels based on price activity of the prior day.

Pivot System price levels act as potential support and resistance zones throughout the day. They serve as focal points for floor professionals as they adjust their bids and offers, especially when trading activity is slow. The off-floor day trader is able to use these same values as an aid in determining appropriate areas for trade entry, stop placement, and exits.

The formulas for calculating Pivot System Support and Resistance Levels are as follows:

DP = (H + L + C) / 3
R1 = 2 * DP - L
S1 = 2 * DP - H
R2 = DP + (R1 - S1)
S2 = DP - (R1 - S1)

DP represents the Daily Pivot. R1 and R2 identify the resistance levels above the Daily Pivot. S1 and S2 identify the support levels beneath the Daily Pivot.

The principle level of reference is the Daily Pivot. Generally, as we enter each trading day, we regard this level as our balance point between bullish and bearish forces. A demonstration of significant price activity above the Daily Pivot is considered to have bullish implications, while activity below is bearish. Although actual trade entry and exits are initiated by a variety of other market factors, we first look at price behavior relative to the Daily Pivot level as an aid in determining the market's general directional bias.

The day's trading activity can generally be thought of as revolving around and gravitating towards the Daily Pivot level. As price moves away from this zone and approaches either the first level of resistance (R1) or the first level of support (S1), market behavior becomes increasingly important. Any rejection of these newly attained levels increases the likelihood of a return to the Daily Pivot. On the other hand, a breach of either of these initial levels is regarded as market acceptance and a perceived change in the valuation of the instrument being traded.

Additionally, should the market extend its move even further from the Daily Pivot, penetration through each successive level of support or resistance is generally regarded as having drawn in a greater degree of participation from off-floor interests. An increase in off-floor interests represents a greater likelihood that longer-term positions are being established, resulting in greater potential for the market to trend even further. Each consecutively greater level of Pivot System support or resistance breached is generally regarded as having stirred the interest of successively longer term participants.

Once the market has made a convincing breach of a particular support or resistance level, that level is considered to have reversed its support/resistance role, and, subsequently, becomes a test point for further market activity. For example, in the chart to the right, when price action develops into an upside break of the first level of resistance (R1), the retracement move back towards that level is considered a test of its integrity. A successful test occurs when the retracement move is turned away and price moves even further to the upside - which adds even greater credibility to that level as a renewed valuation point. Additionally, any further move away from that level has the potential to force the market through successive levels of support or resistance, drawing players of even longer time-frame perspectives into the market . . . and so on, continually expanding the market's range of activity.
When properly used, Pivot System Support and Resistance Levels can become a very helpful tool for the day trader. The approach is not only a quick way of gauging intraday valuation levels, but also offers an effective means of applying interpretative "templates" to market activity so as to better understand market behavior and spot opportunity. They help to determine when and where short-term intraday trends are likely to hesitate, and can also serve as "test points" in deciding whether the market may be more likely to either continue or reverse its current direction.

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TECHNICAL TOOLS FOR DAY TRADERS (PART1)

2006-07-15T12:08:00.001-07:00

PART2---------------------------------PART3

Technical analysis can be defined as the study of past price behavior in an effort to determine patterns and trends that are believed to be predictable of the future. At the core of this school of thought is the assumption that human behavior is repetitive in nature. We all recognize that, although human behavior patterns may have recurrent tendencies, they do not normally express themselves in the same exact, mechanical manner each time. Even with this qualification in mind, technical analysis is capable of providing us with the ability to make price forecasts characterized with an improved probability of outcome. It can help us achieve the "edge" required in our pursuit of long-term consistent success.

A wide array of technical approaches is available. Some are better suited to particular personalities and styles of trading than others. This article will focus on just a few that I have found to be consistently helpful in interpreting intraday market behavior and making short-term price forecasts.

My trading timeframe of choice is the intraday, primarily because it affords the greatest degree of immediate feedback. An important element for consistent success is the ability to quickly realize one's mistakes. Intraday trading offers us a way to "have our finger on the button", and ready to take quick evasive action should our market judgements prove incorrect. Technical analysis tells us what has happened on a fairly consistent basis in the past, but it makes absolutely no guarantees about the future.

Oscillator Divergence/Momentum Confirmation
The nature of day trading requires that the futures trader make a constant assessment as to whether a market is in a trending or trading-range mode. If the mode is determined to be trading-range we need a convenient means of identifying short term reversal points. On the other hand, if the mode is assumed to be trending, we require a means of identifying (1) an appropriate entry point based on the trend currently in force, and (2) an appropriate exit point based on likely trend exhaustion.

An effective means of identifying such short term intraday market turning points involves an evaluation of the momentum behind successive market swings. Price momentum is the measure of the rate, or speed, of price change. Normally, if we are to expect successive market swings to continue creating new highs or new lows, we would expect the rate of price change to increase along with the move to new highs or new lows. If successive swings do not have an increase in momentum, the validity of any new push higher or lower is called into question.

One very effective tool for measuring price momentum is the 3/10 Oscillator. It is a simple indicator constructed by subtracting the 10 period Exponential Moving Average from the 3 period Exponential Moving. As an alternative, most charting packages offer construction of the MACD indicator (Moving Average Convergence-Divergence). The 3/10 Oscillator can be simulated with the MACD by setting the short term parameter to 3, the long term parameter to 10, and the smoothing parameter to 1.

When using the 3/10 Oscillator, we are attempting to identify one of two conditions on successive market swings that move to either new highs or to new lows. The first of these conditions is referred to as "Oscillator Divergence" and the second as "Momentum Confirmation". The two terms describe opposite conditions. Typically, each successively greater swing pivot high or swing pivot low will be accompanied by one or the other.In a market trending towards lower prices, Oscillator Divergence is described as a swing to new lows in price which is accompanied by a higher low in the oscillator. In a market moving towards higher prices, it is described as a swing to new highs in price which is accompanied by a lower high in the oscillator. Examples of both conditions are presented in the charts below.

In essence, Oscillator Divergence indicates that the current market movement is losing momentum. It is at these times that a reversal is most likely. If we had been considering a trade in the direction of the expected reversal, this would be an opportune time to initiate entry. On the other hand, when Momentum Confirmation occurs, we know that the current swing direction has some "oomph" left to it, and it would be best to either stay with existing positions or look for an opportunity to climb on board.

When properly used, the 3/10 Oscillator can become a very helpful tool for the day trader. It is a quick and effective means of measuring market momentum, revealing valuable information about the market's underlying intent. Become proficient in its use, but also realize that it is not infallible.

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Secrets of Investing (Part2)

2006-07-15T12:08:00.000-07:00

Secret #5: Stay away from “glitter” stocks
There are many thousands of stocks to choose from: in the USA over 10,000 stocks, in Canada over 3000 and in Australia over 1,500. Faced with these massive numbers and the associated deluge of information, investors get drawn to what I call glitter stocks. These are stocks that have some attention grabbing activity such as high trading volume, extreme movements in the price whether up or down, or when the stocks are in the news.
Even with the best of intentions, it is hard to look at these stocks in a clear and objective manner compared to the remaining stocks. On average, individual investors tended to invest in glitter stocks more than professionals.
Secret #6: Know what is happening behind the scene and what to do with it
When we apply this to investing the message is clear. Wait until everything is in your favor. Nothing makes you buy any particular stock at any particular time. As investors we have the luxury of waiting for the “fat pitch.”
But there are problems. To be able to do this effectively we need to master three steps. The first step to master is to be able to recognize a home-run stock. As we have seen, they are not glitter stocks that have appeared on the front cover of an investment magazine or recommended by a popular share market commentator. Nor are they stocks that have a trader price pattern of breakouts, double bottoms, or candle-stick trend reversals.
The second is to know what to do when a home-run stock comes along. When everything meets your criteria of it being a great business at a fair price, then buy a “meaningful amount of the stock.” Of course, this means that you can only hold a small number of companies in your portfolio.
The more stocks you hold, the more likely your returns will be average and the more time you will have to spend keeping track of the stocks in your portfolio. You also add considerable risk because you can’t study them properly.
The third step concerns knowledge and confidence. You need the knowledge to know approximately how often a home run stock comes along. You won’t make the investors Hall of Fame if your criteria are set so high that you only get to swing every other decade. On the other hand, if they are set too low then, well, they are unlikely to give you the outcome that you desire. You also need to have the confidence to wait.
Secret #7: Calculate how much money you will make, not whether the stock is undervalued or overvalued according to some academic model.
As an investor what is the right question to ask? Most ask whether the stock is undervalued or overvalued. The problem with this is that there is no way of properly determining whether a stock is, in fact, undervalued or overvalued.
There are various academic models for calculating what is called the intrinsic value of a stock. From my extensive experience as a research mathematician all these models, referred to as discount cash flow models, are fatally flawed. There are four areas that bring them down. They are theoretical, contradictory, unstable and untestable.
These problems are a rather technical to explain fully so I will only give the general ideas behind them. Just because some theoretical formula labels a stock as undervalued does not mean that you are going to make money from it. For example, perhaps the price will stay at that level. The models are contradictory since different values are obtained depending on which of the many variations of the models that you use.
They are unstable since insignificantly small changes in the input variables lead to changes of 100 percent or more in the intrinsic value. This means that in instead of the models being objective, they can lead to almost any output that is desired. And finally the models are impractical because they are untestable. Some of the input variables require verification over an infinite number of years. For example, forecasts of growth rates have to be made over not just five or ten years, but extending out forever.
Secret #8: Remove the looser and keep the winner — not the other way around
For many it is worse than having a tooth pulled to sell a stock for a price lower than what they paid for it. If you buy a stock for $20 and it drops to $10, so long as you don’t sell, then it can be referred to as an unrealized loss. In this case you can say to your spouse, “Don’t worry, dear. It’s going to come back.”
Similarly, many can’t wait to sell as soon as they can see daylight between the purchase price and the current price. If the price has gone up be a few dollars, they want to sell and “lock in the profit”.
We referred to this as watering the weeds and pulling up the flowers. They are examples of what I call investor diseases. The disease of holding on to your losers I call get-evenitis. The disease of selling winners I call consolidatus profitus.
We found that people tended to trade out of winners into stocks that performed less well. In the opposite direction, the study showed that the losers in their portfolio tended to continue to underperform. It was really the case that once a loser, always a loser.
We found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners.
Suppose two simple changes were made: the investors sold their losers and held on to their winners. On average, the study showed that their average annual performance would have gone up by almost five percent per year.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
This gives us confirmation of secret number eight: Remove the looser and keep the winner — not the other way around
Of course, this is an oversimplification. There are times when it is better to keep a stock when the price has gone down. In fact, it may well make sense to buy more. At other times, it is better to sell a stock after it has gone up. Each case has to be treated on its own merits.
This leads to the question. Just when should you sell? A large survey carried out by the Australian Stock Exchange showed that investors found it much harder to know when to sell than when to buy.
Similar results were found in a survey of nearly 300 investors that I carried out. Almost 50 percent said that they either regularly worry or constantly worry about when to sell their stocks.
The general rule which is full of common sense is: Sell only when you can be very confident that you can do significantly better with your money in another stock. The problem is to be able to determine when this is the case.

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RULES FOR SUCCESSFUL TRADING (PART1)

2006-07-15T12:07:00.000-07:00

PART2 -------------PART3 -------------PART4

If you cannot follow a rule, do not begin speculating or investing, as you are sure to lose. Learn to adhere strictly to a rule or do not follow it at all. The following rules should be carefully studied and applied in your trading:

CAPITAL REQUIRED
You would not try to run an automobile and start out to travel several hundred miles unless you knew how much gasoline it required to run a given number of miles. Yet, you go into speculation without knowing one of the most important things, -- the amount of capital required to succeed and make speculation a business. Do not try to get rich in a few months or a year. A man certainly should be satisfied if he can acquire a competent fortune over a period of ten to twenty years. Often we have one year when a man with nerve and knowledge and a small amount of capital can make a fortune. I have been able to pile up enormous profits in a short time by pyramiding, but this can not be done continuously and I do not claim to be able to do it. What I am trying to teach you is a safe, sure way, which will yield more profits than any other business on earth if you will only be conservative and not make speculation a wild gamble. A man may go into business and lose all of his money and then years pass before he has another opportunity to make a large amount of money in that or any other business. Yet, in the speculative markets opportunities return every year, provided a man has studied enough to see them when they appear. The chances for gain are so unusual and so many great opportunities do come in Wall Street that the average man gets greedy, gambles and does not wait between times for the real opportunity.
LIMIT YOUR RISK
A strong will power is just as essential as plenty of capital. If you have not the firmness, will power, and determination to protect every trade with a stop loss order, do not start trading, for you will fail. I have often heard traders say “If I place a stop loss order at a certain point the market is sure to catch it.” Yet they realize afterward that the stop loss order being caught was the best thing that could happen to them. There is nothing better than getting out quickly when you are wrong. The man who refuses to get out when he is wrong usually stays until his money is gone and the margin clerk sells him out. A lot of people do not know how to place a stop loss order on a trade when they make it. A stop loss order is an order given to the broker that becomes a market order when the stock reaches the price at which it is placed.
OVERTRADING -- THE GREATEST EVIL
Overtrading is the cause of more losses than anything else in Wall Street. The average man does not know how much capital is required to make a success and he buys or sells more than he should. Therefore he is forced to get out of the market when his capital is nearly exhausted and probably misses opportunities for making profits. Make up your mind how much loss you can afford before you make a trade and not afterward. Stick to small quantities. Be conservative. Do not overtrade, especially at the bottom or top of long moves. Fortunes are lost trying to catch the last 3 to 5 points in extreme moves. Keep cool. Avoid getting overconfident at tops and bottoms. Study your charts carefully and do not allow your judgment to be influenced by hope or fear. Many a trader has started out trading in 10 shares and made a success because he started near top or bottom; then when the market had reached extreme, he began trading in 100-share lots and lost all of his profits and capital too, because he violated the conservative principle which helped him to make a success. If you make one trade and it starts to go against you, you are wrong. Then why buy or sell more to average a loss? When things are getting worse, day by day in every way, why do your best to make them get worse in every way? Stop the loss before it is eternally too late. Every trader should remember that the weakest point of all is overtrading, and the next, failing to place a stop loss order, and the third fatal mistake of all, averaging a loss. Eliminate these three mistakes and you will make a success. Cut short your losses, let your profits run, pyramid or increase your buying or selling when the market is moving in your favor, not when it is going against you. Remember that wild, active markets are brought about by feverish manipulation, and that they increase the imagination, exaggerate your hopes, and take away all sense of reason and proportion. Therefore, in extreme markets try to keep a cool head. Remember that all things come to an end, and that a train going 6o miles an hour will cause a greater smash-up if it leaves the track than one traveling 5 miles an hour. Therefore, in a wild runaway market, jump before she bumps, for you will never be able to get out once the crash comes. When everybody wants to sell, and no one wants to buy, profits run into losses fast.

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RULES FOR SUCCESSFUL TRADING (PART4)

2006-07-15T07:23:00.002-07:00

PART1 -------------PART2 -------------PART3

WHEN STOCKS MAKE NEW HIGHS OR LOWS
When a stock advances or declines into new territory or to prices which it has not reached for months or years, it shows that the force or driving power is working in that direction. It is the same principle as any other force which has been restrained and breaks out. Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reached another dam, or some obstruction or resistance which would stop it. Therefore, it is very important to watch old levels of stocks. The longer the time that elapses between the breaking into new territory, the greater the move you can expect, because the accumulative energy over a long period naturally will produce a larger movement than if it only accumulated during a short period of time.
BUYING OR SELLING AFTER A STOCK SHOWS CHANGE IN TREND
After accumulation or distribution takes place, a stock moves into new territory, either high or low, showing that the stock has been absorbed or distributed and that a new move is starting. The big profits are made in the runs between accumulation and distribution. Therefore, you make more money by waiting until a stock plainly declares its trend than by getting in before it starts. It is just like a race. It often takes fifteen or twenty minutes to get the horses away from the post, but once “they’re off” the race is over in two minutes. It is the getting ready that takes the time, the run is soon made, once the firing line is crossed. What difference does it make whether you buy a stock 10, 20 or 30 points above the bottom so long as you make profits? The same with selling short. It makes no difference how much the price is down from the top. Wen it breaks out of the distributing zone, it is a safe short sale and you will make quick profits. Get the idea of prices out of your head. Forget about the bottoms and tops; trade to make profits, not to try and catch the bottom or top eighth. The insiders do not do it, and you can not hope to do better than the man who makes the market.
HOW TO WATCH INVESTMENTS
A lot of people handle their investments the same as they do their health. They never consult a doctor until they are seriously ill; then it may be too late, or the expense will be ten times greater than if they had consulted a doctor and protected themselves against future ailments. No matter if you hold gilt-edge bonds or preferred stocks as an investment, they should be looked over by an expert at least once
a year to see if there are any symptoms of weakness developing in the list. Investments should be sold out on the first sign of a change in conditions, and you should not wait until everybody is selling and you are forced to sell on a liquidating market. Very few people are willing to pay even $25 a year to have their investments looked over, and receive real expert scientific advice, but after they have losses of thousands of dollars, and it is too late for expert advice to help them much, then they are willing to pay hundreds of dollars for helpful information. It is the old, old story of locking the stable door after the horse is stolen.

RULES FOR SUCCESSFUL TRADING (PART2)

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PART1 -------------PART3 -------------PART4

NEVER LET A PROFIT RUN INTO A LOSS
More traders are ruined by violating this rule than any other, except overtrading. When you buy or sell a stock and it shows you a profit of 3 to 4 points, what is the sense or reason for ever risking any more of your capital on it? Place a stop loss order where you will get out even or better; then you have all to win and nothing to lose. If the trade continues to move in your favor, you can follow it up with a stop loss order. People often buy or sell a stock and it shows them a good profit, but they are “hoggish,” expect more, hold on and hope and let it run into a loss, which is very poor business, and the man who follows it will not succeed in the end. Always protect your principal in every way possible. More traders are ruined by violating this rule than any other, except overtrading. When you buy or sell a stock and it shows you a profit of 3 to 4 points, what is the sense or reason for ever risking any more of your capital on it? Place a stop loss order where you will get out even or better; then you have all to win and nothing to lose. If the trade continues to move in your favor, you can follow it up with a stop loss order. People often buy or sell a stock and it shows them a good profit, but they are “hoggish,” expect more, hold on and hope and let it run into a loss, which is very poor business, and the man who follows it will not succeed in the end. Always protect your principal in every way possible. investor or a trader to learn is to take a loss and take it quickly. When you see that you are wrong there is no use putting up more margin and holding on and hoping. If you take a small loss quickly and get out of the market, your judgment will be much better and you can see an opportunity to get in again and make profits.
WHEN IN DOUBT GET OUT
When you buy or sell a stock and it does not act right immediately or start to move in your favor within a reasonable length of time, get out of it. Your judgment gets worse the longer you hold on and hope for the market to go your way, and at extremes you always do the wrong thing. It is much better to take a quick loss of 2, 3, or 5 points than to
hold on an hope and eventually take anywhere from a 10 to a 50-point loss. Stocks are not going to stop going up or down once they start just for your benefit. Always remember what Jim Keene said: “If stocks won’t go your way, you must go their way.” Always go with the tide; never buck it. If you were on a railroad track and saw a train coming at 6o miles an hour, would you stand there and hope that the train would stop before it hit you, or would you hope that maybe you could knock it off the track? Of course you wouldn’t. You would get out of the way and do it quick. You should do the same thing in the stock market -- Get out; let them go by, or get aboard and ride with them.
TRADE IN ACTIVE STOCKS
Always confine your trading to standard, active stocks listed on the New York Stock Exchange. Outside stocks have spurts, but the active leaders yield more profits in the long run. Stocks traded in on the New York Stock Exchange always have a good market and you can get in and out when you want to. Ninety per cent of the unlisted and curb stocks disappear sooner or later. Leave the pups, cats and dogs, and mining stocks alone. The same group of stocks over a long period of time do Of course, the big money is always made in trading in stocks that fluctuate over a wide range. For this reason, you must always be on the lookout for a new leader that will give opportunities for making big profits. Be up-to-date, keep up with the new stocks as they are listed, watch their development, and you will be able to pick the new live leaders and discard the old, inactive stocks. Big money is made, not from dividends but from fluctuations, if you know how to trade quickly. That is why it pays to trade in active stocks that make a wide range. If you have to take a loss in stocks of this kind, you can make it back very quickly, because opportunities occur often.

EQUAL DISTRIBUTION OF RISK
There is an old saying, “Never put all of your eggs in one basket.” And in the stock market it is a very good rule to follow. If you are in position to do so, select as many as four or five stocks, one from each of the different groups. Buy or sell in equal amounts. If you get into the market right and with a reason, records show that it very seldom occurs that you would get the stops caught on all of your stocks. You may not always make as much profit as you would to trade in one or two of the active, fast moving stocks, but you will be safer. That is my aim: To teach you safety; help you protect yourself and cut short your losses in every possible way and let your profits run.

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RULES FOR SUCCESSFUL TRADING (PART3)

2006-07-15T07:23:00.000-07:00

PART 1 -------------PART2 -------------PART4

FIXING A PRICE OR POINT TO BUY OR SELL
The majority of people have a habit when they buy or sell a stock, of fixing in their minds a certain figure at which they expect to take profits. There is no reason or cause for this. It is simply a bad habit based on hope. When you make a trade, your object should be to make profits and there is no way that you can determine in advance how much profits you can expect on any one particular trade. The market itself determines the amount of your profit, and the thing that you must do is to be ready to get out and accept a profit whenever the trend changes and not before. Remember the market is not going to act to please you or go to certain figures just because you want to buy or sell at those figures. Many traders lose big profits by fixing the price at which they intend to sell. Stocks sometimes go within 2, 3 or 4 points of their selling price and start to decline. They hold on and hope. Just because it does not reach the point that they have fixed in their minds, they often hold on and hope until they lose all the profits and take a loss, refusing to see that the trend has changed. Hope will ruin any man who follows it in the stock market. To succeed you must face facts, and facts are often cold and stubborn and do not agree with your hope, but you must accept them for your own good. In nearly every bull or bear campaign in the market the general public gets certain fixed points in their heads where stocks are going to make tops or bottoms. The newspapers talk about certain favorite stocks going to 100, 125, 150 or 175. Everybody gets the idea that these prices are going to be made and they become “hope” prices, but are never realized. The man who tries to get the last point or the top or bottom eighth generally loses all his profits. You do not have to get in at the bottom and out at the top to make big money. All you have to do is to look over the list of the active leading stocks and you will find that they make moves of from 50 to 150 points between bottom and top every few years. Then, if you can get in after the stock has advanced 10 points from the bottom, and sell out within 10 points of the top, you certainly will be able to accumulate plenty of profits. Never get the idea in your head that you can or will hold a stock until it goes your way. This is nothing but pure stubbornness and is not based on any sound logic or reasoning. In case of doubt, get out. Do not hesitate. Delays are always dangerous. Do as the insiders do: If they can not get what they want, they take what they can get; if the market will not take what they have to offer, they offer what it will take; if the market will not go their way, they go its way. A wise man changes his mind, a fool never.

WHEN TO TAKE PROFITS
Never close a trade just because you have a profit. The time to hold on is when the tide is running in your favor. When tempted to close a trade just because you have a profit ask yourself the questions: “Do I need the money?” “Is the move over?” “Do I have to sell?” “Why should I take profits?” Look at your charts; do what they tell you. If they do not show a change in trend, wait. Protect profits with stop loss order, but do not take a profit too soon. This is just as bad as taking a loss too late. Patience to hold on when you are right and nerve to get out quickly when you are wrong will make a success.
ACCUMULATE A SURPLUS
A surplus must be accumulated before you increase your trading quantities. Margins are not to hold on with, only “lambs” do that. If big risks are required, do not make the trade. Wait for an opportunity when you can buy or sell and place a stop loss order 3 to 5 points away. It is financial suicide to take big losses when they can be prevented. You must not expand until after you have made profits. Every important business concern carefully creates a surplus and is proud to publish it. No business is run without a loss at some time and a speculator or investor must expect losses. Therefore, he must create a surplus out of which he can pay losses and still continue to trade. In very active markets, when trading in high priced stocks, as a rule it does not pay to take a loss amounting to more than two consecutive days’ fluctuations. If stocks go against you two days, they are likely to go more. Take your loss out of your surplus and leave your capital unimpaired and wait for another opportunity.

BUYING FOR DIVIDENDS
A great many people make the mistake of always wanting to buy stocks that will pay dividends. Do not buy stocks just because they pay dividends, nor sell them because they do not. Often people hold stocks because they continue to pay big dividends, only to see their capital half or more wiped out; then the dividend is cut or passed altogether. Look to the protection of your capital, not for dividend returns. Trade for points of profit, not dividends. Fluctuations yield more money than dividends and you will be able to tell when stocks are being accumulated or distributed for an advance or a decline If a stock is selling very low or out of line according to the dividend it pays, there is probably something wrong and it is a better short sale than a purchase. If a stock is selling very high and pays no dividend, there is a reason for it and you should not sell it short. Probably it is going to pay a dividend or it is in a very strong position. Otherwise it
would not be selling at a high price. Manipulation for a time will force stocks above or below their intrinsic value, but in the end Supply and Demand govern the course of prices, and values are based on these factors. I intend to teach you how to tell when Supply and Demand show the place where you should buy or sell. The word “dividend” means a division of profits or earnings, but often when you buy Curb or mining stocks the word means “divy,” or that you divide up your capital with the other fellow and later lose all.

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HOW TO TRADE

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Have a well-defined plan before you start trading, then follow that plan, as the architect does in building a house, or the engineer in constructing a bridge or driving a tunnel. The man, who hanges his ideas or his plans, which are based on something practical, for no other reason than that he hopes or fears the market will do something different, will never make a success. Don’t guess or follow tips. Very few people from the inside ever give out good information. Have a reason for every trade; don’t trade on hope. If that is the only reason or excuse you have for holding a stock, get out quickly and you will save money. Conditions change and you must learn to change your mind. First find out if a rule is practical; if it is based on sound reasoning. Go back over past records and convince yourself that it pays to use it.

ESSENTIAL QUALIFICATIONS OF A TRADER

2006-07-15T07:22:00.002-07:00

PATIENCE
Patience is a virtue, especially in the stock market. Acquire it if you can. You must have patience to wait for the right opportunity to come, and not be overanxious and get in too soon. Once you buy or sell a stock and it starts moving in your favor, you must have patience to hold it until there is a good reason or sufficient cause for closing the trade.
Never close a trade just because you have a profit; do not become impatient and get out for no real reason. Every act, either in opening or closing a trade, must have a sound basic cause behind it. Hopes and fears must be eliminated. There is no use selling a stock because you fear it is going down, nor buying it because you hope it is going up. Look at your charts and see which way the trend points and follow it. If no definite trend is shown, use your patience and wait.

NERVE
Nerve is just as essential as patience; in fact, nerve is the equal of capital. Looking backward brings nothing but regrets. I always believe in facing the future with nerve and hope. But let the nerve and the hope be based on some sound principle that will prevent costly mistakes of the past. During my career I have seen many traders who had made one mistake after another and suffered severe losses, and still had some capital to work with but when an opportunity appeared, they lacked the nerve to act. In cases of this kind, the nerve would have been more valuable than capital.

KNOWLEDGE
Experience is the only school to learn in and the burnt child is the one who knows the pain from having put his fingers in the fire. Mistakes are all right and hard to avoid. They are good for us, because if we profit by them, they prove valuable. But it is wrong to make the same mistake the second time. Therefore, use every mistake as a stepping stone to progress; analyze each mistake you make and the cause of every loss, in order to avoid repeating the same error in future. With each experience , good or bad, accumulate knowledge, and after all, knowledge is the greatest power of all, for capital will always come to knowledge.

HEALTH AND REST
Good health is essential to success in any line. It is one of the great assets for success in the speculative market. At least twice a year a man should close up all of his trades, get entirely out of the market, and go away for a vacation or stay away from the market and rest up. Let your mind rest and your judgment get clear. The man who continually sticks to any business too long without a rest or change gets his judgment warped. He gets in a rut and sees things from a one-sided point of view. When you are in the market on either side, it is but human nature for you to hope that it will go your way, and you, therefore, give greater weight to any event that seems to indicate a favorable move to your side. When you are out of the market, you are able to see things as they really are, and judge the market without a distorted view, with hope and fear eliminated. Traders, who are continually in the market day in and day out and never allow any time to elapse between trades, sooner or later lose all their money. I know one trader who follows scientific forecasting and makes a success. He never makes more than five or six trades in the year. If he buys stocks during the winter or early spring for a rise, and the advance materializes as he expected, he sells out and takes his profits. Then he leaves the market alone, sometimes for several months. In the summer, if he sees indications of a bull or a hear market starting, he gets in again, and if the market moves his way, he may follow it up and pyramid for several months. When he gets an indication that the end is near, he closes up his trades, takes his profits, and like the wild geese, wends his way to the sunny South. He makes a specialty of trading in certain favorite stocks. He studies them closely and watches for certain signs that he considers almost infallible. When these signs come, he acts. He does not hurry until the time comes, but when it does, then there is no hesitation -- he buys or sells. He keeps cool, calm and collected, and waits for the time to open or close a trade. Another thing he never does is to expect any fixed amount of profits or set any specific time for getting out. I have often seen him make a trade and it would go against him. He would get out and say, “Well, I guess I’ll go back to my office and watch them for a while.” Sometimes it would be days or weeks before he made another trade, but when he did, it was based on some good sound reason, and 90 percent of the time the second trade proved a winner. But suppose he had held the first trade he made and hoped it would move his way. His judgment, being biased, would have become more unreliable all the time. There is nothing like being out of the market and looking them over from an impartial viewpoint. When there is no definite trend, stay out, watch and wait, and your patience will be rewarded.

TRUTH OF STOCK MARKET (PART1)

2006-07-15T07:22:00.000-07:00

A man has to buy and sell to make a profit, that is, he has to get in right and get out right. Then he must watch for the proper time to start his trade and the proper time to close it. Getting in right does not help if you fail to get out right. The time to act either when buying or selling must be determined by the condition of the market at the time and by the position of the individual stocks that you intend to trade in. You might be able to buy and make profits in some stocks after a bull campaign has about finished, while others you might be able to sell short and make profits after the major swing of a bear market has finished.
Do not buy a stock of one group just because some stock in another group goes up. Neither sell a stock of the same group because some one of that group has already started down. Analyze the position of the stock you intend to trade in. Find out if it has passed out of the accumulation or
distribution zone. Stop to think before you act; look before you leap; examine before you buy and remember that it is always better to be safe than sorry. It is much better to take a small loss quickly than to hold on and hope and take a big one later.

POSITION OF GROUPS OF STOCKS
It is very important to watch the position of the different groups of stocks. To be a success you must keep up with the times and follow the leaders.

GENERAL TREND OF THE MARKET
There is always a certain group of stocks, which will follow the general trend up or down, while others for a long time will work opposite to the general trend. Therefore, it is necessary to make a close study of the individual stocks and determine their trend regardless of the trend of the general market. Always sell the weak stocks and buy the strong ones, which is really following the trend of each individual stock. By watching closely the daily high and low, weekly and monthly charts, you will be able to determine when each individual stock has changed its position from strong to weak.

HOW TO TELL THE STOCKS IN STRONGEST POSITION

If you are waiting for an indication to buy stocks, you want to select the strongest stock in a certain group, as the stock which is in the strongest position is naturally the one that will lead in a Bull market and the one in weakest position will lead in a Bear market.

BUYING AND SELLING POINTS
You follow this same rule in any group of stocks in order to locate the strongest or weakest individual stock of the group. When you have the record of a stock for a long number of years back and see where it gets its support in extreme panic years and where it meets with resistance in boom years, you can easily tell the levels where it is safe to buy or sell with a risk limited to two or three points.

HOW TO TELL WHEN STOCKS ARE IN WEAK POSITION

You always want to know the stocks that are in the weakest position, because they are the safest to sell short in a Bear market. The ones that show weakness first naturally will be leaders in a Bear market. After the trend turns down from the top and stocks have declined for quite awhile, the next thing which will show that a bigger decline will take place is the breaking of important support points.

JUDGING FINAL TOPS AND BOTTOMS
Before any stock, or group of stocks, starts on a big advance or decline, a long period of time is required for preparation, or accumulation or distribution. It requires time to prepare and lay the foundation for a building. The larger the building, the more time required to construct the foundation. It is the same with stocks. The greater the advance or the decline, the more time required in preparing for it.

PROGRESSIVE TOPS AND BOTTOMS
It always pays to keep a chart of Averages of any group of stocks, as you can then judge when they have reached a level where they are receiving support or being distributed. But, of course, you cannot trade in Averages; therefore, must keep a chart of some of the individual issues of each group in order to determine the best ones to trade in and the right time to buy or sell. On active stocks 5 to 10-point moves will help to show when tops or bottoms are being made. On stocks selling 25 to 6o per share 3-point charts will show best, but on stocks selling 100 to 300 per share 5 and 10-point moves are much better because it requires a wider range in which to buy or sell a large amount of stock. Sometimes stocks require several years to lay a foundation for a big Bull or Bear campaign.

CONTINUED............ PART2..

TECHNICAL TOOLS FOR DAY TRADERS (PART3)

2006-07-15T07:21:00.002-07:00

PART1-----------------------------------PART2

Dynamic Support & Resistance Levels for Intraday Trading
As helpful as Pivot System levels often are, a significant drawback to their use lies in the fact that they are calculated from the prior day's price action, and may not accurately reflect recent changes in market psychology. Effective intraday trading also requires a means of identifying support and resistance which can more easily adapt and more accurately represent price activity under rapidly changing market conditions. The 20 period Exponential Moving Average (20EMA) can be used to create these more "dynamic" levels of support and resistance. Unlike Pivot System S&R levels that remain constant throughout the day, the 20EMA changes in accordance with more immediate changes in price. This feature makes them a very effective tool, especially when significant shifts in market psychology occur between Pivot System levels, and after large thrusting impulse moves.

My principle intraday chart reference is the five minute timeframe with frequent note of other periods as market conditions warrant. For this reason, the 5 min. 20EMA is our most often referenced moving average. However, it is also helpful to additionally graph both the 15 min. and 30 min. 20EMAs on the same 5 minute chart. This is accomplished by plotting the following values.

5 min. 20EMA - plot a 20 period Exponential Moving Average.
15 min. 20EMA - plot a 60 period Exponential Moving Average (15/5*20)
30 min. 20EMA - plot a 120 period Exponential Moving Average (30/5*20)

It is important to recognize that the 15 and 30 minute values arrived at with this method are not exact and precise representation of the corresponding 15 and 30 minute 20EMAs, but for purposes of identifying potential support and resistance levels, you will find the technique quite useful.
The 20 period EMA is treated as we would any other potential support or resistance level. In congested, trading range market conditions, these levels can be violated rather easily. However, when price begins to trend, the 20EMA can be a valuable aid in determining appropriate areas in which to take action either by establishing new positions . . . or baling out of existing ones.

One of the more frequent uses of this indicator comes into play when we began a particular trading day expecting the trend established in the previous day to continue. A common strategy on such days is to look for an opportunity to enter on the first retracement move which takes price back towards a likely support (if in an uptrend) or resistance (if in a downtrend). The first level of support or resistance encountered is likely to be that of either the 5 minute 20EMA, the 15 minute 20EMA, or the 30 minute 20EMA (chart above right). It is important to keep an eye on these levels when we are expecting trend continuation. Once a trend has been established, it is very often the case that one of these levels (most often the 5 min. 20EMA) will contain the price action quite effectively.
The 20 period EMA can also come into play immediately following large news-driven price thrusts (chart at right). Trading conditions can often be so volatile during such periods that I generally discourage any sort of participation until the initial hysteria subsides. Typically, the strong impulse thrust that accompanies such events are the beginning statement in a new trend move. Such price behavior will usually undergo some sort of retracement activity before an advance of significance takes hold. Again, the 20 period EMA is an excellent tool for gauging the degree of retracement and likely return to the trend.
As stated earlier, the "dynamic" characteristics of the 20 period EMA is what makes the indicator such an important tool. It's ability to react in accordance to more immediate changes in the market environment make it a valuable aid in creating structure out of essentially unstructured events.

Use of Prior Day Highs and Lows
Each of the intraday trading techniques discussed so far have relied on reference levels arrived at by means of mathematical calculations. The technique discussed in this section, in contrast, will deal with a set of support and resistance levels which are much more intuitively obvious. In short, we will discuss a technique for using the prior day's price extremes as a means of determining market-based valuation levels.

If market activity is thought of as an auction process, where bidders and sellers are constantly vying for the most advantageous price, daily timeframe highs and lows represent the outer extremes of accepted value for any particular trading day. The highest price achieved during the day represents the maximum that buyers were willing to offer for the commodity, and the lowest price represents the minimum that sellers were willing to accept. For this reason, subsequent price action has a tendency to remain within the boundaries of apparent value as defined during the previous day of trading.
Under typical market conditions (news-driven price thrusts being one notable exception) a successful breach of a prior day high or low is normally preceded by several failed attempts. Once achieved, such price action often represents an important shift in market psychology with the potential to create a new trend move.

One approach for taking advantage of this market scenario is to use the actual break of the prior day high or the prior day low as the trigger into the trade - going long on a break of the high, and short on the break of the low. Using such a method for market entry is certainly viable, and, in fast market conditions may be the ONLY way of participating. However, it is considered to be a rather aggressive technique, for forays into new areas of market valuation are sometimes rejected in very quick fashion. A more conservative and risk averse approach is to delay entry until some sort of price retracement can occur. Such short-term pullbacks often take place before a new trend move can begin in earnest. Many times, a breach of the prior day high or low will retrace all the way back to the original breakout point. If not, the next most likely level of retracement will be that of the 5 min. 20EMA.

Price analysis relative to prior day highs and lows can also prove helpful when markets get caught in extended, tight-range trading conditions. This kind of market scenario is often followed by extreme range expansion and a pickup in volatility. Sometimes the increase in volatility can be very sudden and dramatic, leading to trading days well-suited for capturing large profits - but only if you've chosen the correct breakout direction.

Whenever low volatility conditions have been identified, a break of a prior day high or low can often serve as the cue that the expected range expansion move has begun and can put us on watch for reduced-risk ways to participate. But even before such a break occurs, there are a few techniques that offer an advanced assessment of likely breakout direction and allow for earlier entry. For example, we can often determine directional clues from price action relative to the prior day high, prior day low, and the current Daily Pivot. If the market first approaches the prior day low, and is then repelled upwards through the Daily Pivot, breakout direction is likely to be towards higher prices (below left chart). Similarly, if the prior day high is approached, repelled, and price then moves through the Daily Pivot from above, likely breakout direction is to the downside (below right chart). Furthermore, often directional clues can also be found in market behavior near the Daily Pivot. If price activity is unable to breach this level, the expected breakout will often develop on a path opposite that of the original approach.

Prior day highs and prior day lows represent extreme points of apparent value. As such, they contain the potential to act as support and resistance levels throughout the trading day. Price behavior near these levels can offer valuable clues as to the market's underlying intent.
Conclusion
Typically, most new traders approach the study of technical analysis with an eye towards identifying a single indicator, system, or trading methodology which, when practiced with precision and discipline, will reap rewards on each and every trade attempt (or at least very nearly so). Many traders, especially beginners, in their unending search for this one and only ultimate trading tool, tend to look at this discipline as having such potential . . . as containing the possibility of being the long sought-after magic key which unlocks the hidden secrets of future market direction. It is important that we not regard ANY technical trading tool in this light. Instead, they are better regarded merely as an aid in summarizing and simplifying certain discretionary aspects of our trading routine. Technical analysis gives an indication of what has happened on a fairly consistent basis in the past, but it make no guarantees of the future.

The techniques discussed in this article will jumpstart your understanding and interpretation of price behavior and underlying market intent, but don't expect them to become your Holy Grail. It is very likely that it may take a great deal of practice before you can comfortably integrate them into your normal trading routine. Some will be more effective under certain market conditions than others. Plan on spending considerable time with each tool before you start to fully realize its benefits as well as its shortcomings. As with all effective trading tools and techniques, nuance and idiosyncrasy become more apparent with practice.

PREV

TRUTH OF STOCK MARKET (PART2)

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THE SIGNS OF A CHANGE
When you see the clouds gather you know that it is a sign of rain, and you seek shelter, because experience has taught you that certain formations of clouds invariably indicate rain or storm. When you see the same signs in the stock market that have always meant distribution in the past, you should take it as your warning, stand from under, and protect yourself against the decline. Likewise, when you see the same kind of bottoms that have always indicated accumulation,
you should cover shorts and buy. You judge a tree by the fruit it bears; in stocks you must judge each by its own signs and signals and not by what other stocks do. When you get an indication and the time comes to buy or sell, place your order at the market; do not limit buying or selling prices. This often causes losses because you miss your market by an eighth or a quarter and thus lose big profits. When it is time to get in or out, never quibble over a fraction; do not lose points by trying to save an eighth.

NUMBER OF TIMES A STOCK FLUCTUATES OVER THE SAME RANGE
Very active stocks and those that are high priced, when they reach a level where the insiders want to unload, make rapid moves up and down for several months over a wide range, which causes traders to buy and sell because there are unusual opportunities. The stock remains around the high level long enough for them to become accustomed to the price and feel safe enough to buy.
Suppose that a stock has advanced 20 or 30 points straight up, without much reaction, and it reaches top. It can not be distributed in one day, one week, or one month, but the sure sign of accumulation or distribution is a stock moving up or down many times over the same range, especially making moves of 5 points or more without getting above its high point, and at the same time not breaking under its resistance levels on the down side. Sometimes a stock will move over the same range anywhere from 10 to 20 times, working up and down.

WHEN TO STAY OUT AND WATCH
If you have been successful and followed a bull campaign up for many months and accumulated a big line of profits, you must be on your guard for the first real indication of a change in trend and the end of the bull campaign. When you get this sign of the end, which, as I have explained, is larger volume and rapid, feverish fluctuations, then get out, watch and wait; that is, sell out your long stocks and wait for the opportunity to go short. Never be in a hurry to get in again once you are out with a good profit. Opportunities always come again in the stock market if you only have the patience to wait for them. Another time when you should get out and watch is after the first signs are shown that a bear market is culminating. It takes time to accumulate stocks and you do not want to get in too soon. If you have made big profits on the way down, you can afford to wait a few weeks or months until the signs are plain that another bull market is starting.

INSIDE INFORMATION
Wide fluctuations occur more often at high levels than at low levels, because distribution is taking place. When stocks reach very low levels after a final drive, they slow down and often work for some time in a very narrow range while accumulation is taking place. Accumulation and distribution are exactly opposite. When the insiders want to sell stocks, they make all the noise possible and do everything to attract the attention of the public and create a large public buying power. When stocks decline to low levels and they want to accumulate a large line, they work just as quietly as possible. They use every means to disguise the fact that they are buying stocks, and do everything to discourage the outsiders from buying them. There is nothing wrong in the tactics employed by manipulators. It is simply business policy, and you would pursue the same policy if you were in the same position. They must buy stocks from some one, and they want to buy them as cheap as they can. Then you cannot expect the fellow on the inside, if he is honest and working for his own interest, to tell you that he is buying. Neither can you expect, when stocks get near the top and he is selling, that he will tell you that he is selling out, because he thinks they are high enough. He would be a fool if he did, because in order to cash in and get his profits, he must sell stocks to some one. So many people believe the only way to make money in the stock market is by getting “inside information.” I can tell you, after twenty years’ experience, that inside information is impossible, and the sooner you get the idea out of your head that inside information will help you, the better off you will be. If you were playing poker with a man, would you expect him to show you his hand, and not expect to see yours? He certainly would not, and you know that he would not. If he did, you would win all his money. Then, why do you expect the man on the inside, whether he be a banker, pool manager, manipulator, investor or otherwise, to tell you what he is doing when he is trying to make a market to sell out a line of stocks or to accumulate a line?
You may be able to find out what he is doing if you can interpret the tape correctly, because it tells the story of everybody’s buying and selling, and it never lies if you know how to read it right, for neither the insiders nor the outsiders can hide or disguise the amount of buying or selling. Every share bought or sold is registered on the tape. If you know how to correctly analyze the volume of sales and space movements, you will be able to tell when to buy and sell.

PREVIOUS (PART1)

How to take profits in bull and bear markets

2006-07-15T07:21:00.000-07:00

1. Check market indicators for overall direction
2. Scan the industry groups to know which one to zero in.
3. Cut out the stocks with the most potentially profitable formation within the favourable groups
4. Concentrate majority of buying in continuation-type buy patterns that are already in Stage 2, and reverse for bear markets
5. Know where protective stop will be (ALWAYS use it) set before entering the order – if it’s too far away, look for other stock or wait to purchase when safer level forms
6. Never sell a stock in Stages 1 or (especially) 2, AND never buy a stock in Stages 3 or (especially) 4 – stage analysis can be applied to any investments that are governed by supply and demand
7. Never guess a bottom (and go long)
8. Don’t feel that one has to be 100% invested all the times. Differentiate when charts and indicators point to fully invested and when to extreme caution
9. Always be in harmony with the market – buy Stage 2 strength; sell Stage 4 weakness
10. In case of conflict between price volume action and the earnings, always go with objective message being supplied by technical approach
11. Always be consistent. Keep a diary and analyze actions

READING CHARTS
Daily for very short traders, weekly for intermediate (several months) traders. Below specifically on weekly charts:
1. Look at each high-low-close spike – forming pattern with insight into next major move
2. Look at volume plot – very important that volume is large and expanding on breakout
3. Look at 30 week MA – never long if P below declining 30-week MA; never short if P above rising 30 week MA
4. Be aware of its long-range background (yearly high-low, long-term support/resistance)
5. Look at its relative-strength line – long on up trend, short on downtrend; watch those situations where it shifts direction

Stage 1: basing area. After several months decline, start sideways trend. Volume lessens (often starts expanding towards end stage 1). 30 week MA begins to flatten out.

Stage 2: advancing phase. Ideal time to go long when stock swinging out of its base into this more dynamic stage. Breakout above resistance zone and 30-week MA should occur on impressive volume. Usually after initial rally at least one pullback (the less the pullback the stronger the stock).
30 week MA usually starts moving up shortly after breakout. Expect price to move two steps forward and one sharp step back – ok as long as above 30 week MA.
When angle of ascent of MA slows down considerably and prices closer and closer to MA, stock becomes a hold.

Stage 3: top area. Upward advance loses momentum and stock starts trending sideways. Volume usually heavy and moves sharp and choppy.Prices tiptoes below and above MA on declines and rallies. Keep emotions in check.

Stage 4: declining phase. Stock breaks below bottom of support zone.

WHEN TO BUY

Stock initially moves out of Stage 1 base and enters Stage 2. Risk extremely low (support just beneath purchase price) and excellent upside potential (entire Stage 2 advance lies ahead), but need patience (it can take time for solid Stage 2 momentum to build).

After Stage 2 is well underway, when stock drops back close to its MA and consolidates. MA should still be clearly trending higher. Then it breaks out anew on top of resistance zone – this is continuation buy.

Early in bull market plenty of stocks breaking out for the first time, later very few but still plenty of continuation variety buys.

Rule of thumb: 80% continuation buys, 20% early stage 2 variety.

Use buy stops, within set limits, good-til-cancelled (GTC):
A. Don’t have to watch market closely – frees attention
B. Better, less emotional decision (not involved in market energy)
The more mechanical the system and the less subject to judgements and emotions, the more profitable.

Buying/Selling patterns
4 Year presidential cycle: first year bear, second year bear until midway then bullish, third year most bullish, fourth year choppy – usually first half weak, then strong
Months - bullish: Nov-Jan, April. Bearish: Feb, May, June, September
Day of week: Monday worse, Friday strongest.
Day preceding holidays usually bullish.

Selecting the sector
Use same criteria than stocks, most important criteria that group be healthy (not in Stage 3 or 4), breaking into Stage 2 with a minimum of resistance overhead. One difference: if group well in Stage 2 far above support and one stock just breaking out of Stage 1 basis it’s ok to buy; same if group just moved in Stage 2 but one stock as continuation pattern, ok to buy.
For trader, ideal is a continuation breakout within a dynamic group exhibiting the very same sort of pattern.
If several sectors are well, best will be one with best individual top chart patterns.

REFINING BUYING PROCESS

Resistance
Always check where and how much overhead resistance there is on any stock, first on 2-4 years, then on 10 years chart.

Volume
Never trust a breakout that isn’t accompanied by a significant increase in volume. Either:
a. a one-week volume spike that is at least twice the average volume of the past few weeks, or
b. a volume build-up over the past 3-4 weeks that is at least twice the average volume of the past several weeks, coupled with at least some increase in the breakout week

Relative strength
Measure of how strong a stock is in relation to the overall market. Never buy a stock if its relative strength is in poor shape.

Buying checklist
Check overall direction of market
Scan the industry groups that look best technically
List stocks in favourable groups that have bullish patterns but are in trading range. Write down price they need to break out.
Narrow down the list discarding ones with overhead resistance nearby.
Narrow list further by checking relative strength
Set what stop loss level should be – discard unacceptable ones
Put in buy-stop orders for half of position on stocks that meet buying criteria
If volume is favourable on breakout and contracts on decline, but other half position on a pullback near the initial breakout
If volume pattern is not high enough on breakout, sell stock on first rally. If it fails to rally and falls back below the breakout point, immediately dump it.

Further tips on buying
Some chart patterns one needs to be familiar. Do not anticipate their completion.
1. head-and-shoulder (easier on daily than weekly charts) – most powerful and reliable of all bottom formations. Important indicators: 30 week MA not declining and crossed by prices at breakout; there must be a significant increase in volume on the breakout. Head-and-shoulder can also be indicator for a group or overall market, if several similar patterns in same time span.
2. double bottom – very profitable formation when it occurs in conjunction with impressive volume, favourable relative strength and minimal overhead resistance (frequent, so look for confirmation signals).

The bigger the base, the bigger the move.

Diversify stocks and groups.

WHEN TO SELL

Don’t average down in a negative situation
Don’t refuse to sell because the overall market trend is bullish
Don’t wait for the next rally to sell

Always have protective stop-loss. When set initial stop, pay less attention to 30 week MA and more to prior correction low. Place it below round number.
After buy on breakout, place stop-loss below lower end of base.
When trending, give it plenty of room and raise it after each substantial correction have stopped.
At stage 3, become more aggressive with stoploss. Do not wait for 30 week MA to be violated before selling.

Using trendlines
Way of locking in even more of the profits. Sell at least part position when trendline (connecting at least 3 points) violated.
Either whole position stoploss just under trendline, or half there and half under last correction low.

Swing rule
Does not appear often, but very accurate. When there is an important decline, subtract new low price from previous peak, then double it: this gives potential near term price area for upswing.

Losing
Taking a loss on some positions is just a cost of doing business.

SELLING SHORT
Stocks fall much faster than they rise, because fear causes a panic reaction while greed takes a while to simmer.
Don’t short a stock that is too thin – or covering position will raise the price.
Don’t short a stock in Stage 2 (above 30 week MA)
Don’t short a stock that is part of a strong group.
Always set a buy stop.

Sequence
1. Market. Check that market is bearish
2. Group. Isolate market sectors that are potentially vulnerable. In group chart: below its 30 week MA, relative-strength is trending lower, possible negative chart pattern, several chart from that sector are technically weak
3. Individual chart pattern. Stock should have had significant runup before top was formed. Far from significant support areas.
4. Relative strength. Indicator must be trending lower.
5. Volume. Not a major priority on the short side.

Ideal to short at breakout, but ok to short well into Stage 4. However, make sure a consolidation pattern forms beneath the declining MA and then a new breakdown occurs.

MARKET LONG TERM INDICATORS

Stage analysis
30-week MA
Advance-Decline line
As long as AD line and index are moving in gear it’s ok. When AD line starts losing upside momentum and the index charges higher, that’s a negative divergence signalling market trouble ahead – also negative divergence if the index is rallying to new high and the AD line refuses to confirm. If the divergence takes place over a short period of time (several weeks) the decline is likely to turn out to be a correction within an ongoing bull market. If the divergence continues to take shape over a long period of time (several months), then the market advance is becoming dangerously selective, with money out of the broad market and into blue chips. Sign of a problem.
When a major bottom is forming, the index will reach the ultimate low and then refuse to drop further, while the AD line continues to move lower and lower, this is a positive divergence.
Whether top or bottom, the longer a divergence lasts, the more significant the eventual reversal will be.
Graph the NYSE AD line on the same page as the DJ Industrial. Can also use point and figure on a daily basis.

Momentum index 200 day moving average of AD line. Its most important signal is the cross of the zero line (the longer it was above or below, the more significant the cross).
It’s more helpful at spotting tops than bottoms. At the bottom, it acts more as a confirming signal. In a bull market, it peaks before the DJ.

New hi – new lo On a weekly basis. It offers very early warning.
When consistently positive or negative, it’s a long term indication. When an important divergence takes shape, a reversal in the trend is starting to form.

REDUCING RISK

To increase probability of success when trading options
1. Buy a call option only on a stock that is in Stage 2 or is moving into Stage 2. Buy a put option only on a stock that is in Stage 4 or is first entering that phase
2. Buy only an option that has big potential – you are going to be wrong more often with options than with stocks. Selectivity is absolutely crucial!
3. Give a reasonable amount of time before expiration – 40/50 days to 3 months
4. Buy an option that is close to the striking price and, if possible, in the money. Or if it’s out of the money, make sure it’s very close to the striking price.
5. Use a very tight protective stop (mental) on option positions – any sign of weakness is a reason to say goodbye to a position