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Top Articles for the New Year

December 31, 2008 By 1 Comment

Happy New Year!

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Filed Under: Education, Fundamental Analysis, General Market, Misc., Psychology, Technical Analysis, Wall Street

10 Steps to Profitable Trading

July 9, 2008 By 23 Comments

The secret to winning big in the market is not to be right all the time but to lose the least amount of money possible when you are wrong. As long as you win larger than you lose, you will be a profitable trader at the end of each year. Pride, ego and stubbornness prevents a trader from reaching the levels that very few can master.

To become a profitable trader, you must:

  • 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
  • 2. Understand Position Sizing: All traders must learn to know “how much” to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
  • 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
  • 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
  • 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
  • 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
  • 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
  • 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
  • 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
  • 10. Control Emotions: Enough said – You must control your emotions or the game is over! Understand you!
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Filed Under: Education, Fundamental Analysis, Position Sizing, Psychology, Selling, Stocks, Technical Analysis

Start Here: Top 20 Posts

March 7, 2008 By 3 Comments

I went back and tried to pick out the best 20 posts that new readers can start with when coming to this website. I will be permanently placing them at the top right sidebar.

Top 20 chrisperruna.com Posts

Let me know if I am missed an article that you believe should be on this list.

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Filed Under: Education, Expectancy, Fundamental Analysis, General Market, Links, Point and Figure, Position Sizing, Psychology, Technical Analysis, Wall Street

Disregard Conventional P-E Ratio Theory

October 9, 2007 By 8 Comments

Don’t base your portfolio buys on P-E Ratio alone; you will most likely miss the biggest winners of each cycle!

I use the Price Earnings (P-E or P/E) Ratio as a secondary indicator for buying and selling stocks but I don’t use the ratio in the same a manner as many value investors teach. I will explain the difference in my methodology for using the P/E ratio to your advantage.

100907_aapl_peratio.png

Many value investors will pass on a growth stock that has a P-E ratio higher than a predetermined level. For example, they may discard all stocks that have a ratio of 20 or higher, regardless of the industry group they come from. Some investors will discard any stocks that have P-E ratios above the industry group averages, concluding that they are grossly overvalued. I am not saying that this method doesn’t work, because it does but it will not work when you focus on buying young innovative small cap stocks that are growing at tremendous rates, rates that “big caps” can no longer sustain. Growth stocks cost more because they GROW!

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Filed Under: Education, Fundamental Analysis, Technical Analysis, Wall Street

Inside the Fundamentals

August 23, 2007 By 2 Comments

A reader, Steven Mac, asked me if I could highlight the key fundamental points in the case studies I post on this blog. I will list his questions (in blue) below and then answer them using the numbers of actual case studies in 2007 (MA, BIDU and EDU will be my focus). Read any of these books to understand in depth what I am looking for with fundamental analysis:

Questions:

1) What is the min number of institutions you want to see holding a stock? What is the max?
2) Shares Held/Previous Period
3) Shares Bought and Sold – total interest of all participants? increasing buy demonstrating demand on expected results? sold indicating institutions are aware of some internal number or news of future performance problems?

Question #1 Answer:
I don’t have a minimum number of institutions that I would like to see holding a stock. I also don’t like to set a maximum threshold. However, I prefer to see a young growth stock have between 50 and 300 institutional investors. This tells me that it has room to grow and more “smart money’ can pour in without saturating the stock’s market.

2/6/07: EDU: 97, 8/23/07: EDU: 159 – 64% increase
4/2/07: MA: 393, 8/23/07: MA: 513 – 30% increase
4/25/07: BIDU: 255, 8/23/07: MA: 238 – a decrease (+18 sellers last period)

*EDU had a 1900% increase in institutional buyers during the case study in february. As you know, the stock moved from $36 to $60 after the case study and sponsorship increased another 64%.

*BIDU moved from $100 to $200 after the case study as institutional investors jumped in but they have been bailing as of late.

Think about this: RIMM has 841 current holders, AAPL has 2,436 and MSFT has 3,746.

Question #2 Answer:
I pinpoint stocks that have had substantial increases in shares held versus shares held previous period. This statistic will directly correlate to the value of shares bought and the value of shares sold. As long as more money is pouring into the stocks, I will keep it on my watch list for a potential buy. The contrary is true if I am looking for reason to sell. Anything above 25% is solid and anything above 100% is substantial (PRXI was my latest case study and the shares held went from 2.8M to 11.7M for a 318% gain).

Question #3 Answer:
Shares bought is very important because it is the true number behind the increase in institutional sponsorship. For example, institutional buyers may increase by 60% but the number of new shares bought may only increase by 10% (not a good sign). But, if the number of new shares bought is a lot stronger than shares sold, we have accumulation.
EDU had 6.3M shares bought and only 22k sold – ACCUMULATION! (286:1 ratio)
MA had 36.2M shares bought and 25.3M shares sold – ACCUMULATION (3:2 ratio)
BIDU has 8.63M shares bought and 4.58M shares sold – ACCUMULATION (2:1 ratio)

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Filed Under: Education, Fundamental Analysis
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