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Last Chance for Summer Reading

August 7, 2008 by 11 Comments

My final summer trip is coming up (the big one to Europe) so I will be bringing along two books (I hope the dog and his house sitter get along; by the way, Continental quoted us $1,800 one way to fly our 100lb lab to Europe):

The first has to do with real estate, something I have been focusing on over the past several months; the Nickerson book is a RE classic from the 1950’s & 60’s (don’t even think “get-rich-quick – can’t stand those). The second is a fiction classic that I have never read and have always wanted to. Or, you could always stick to the stock market books listed below; I have read them all!

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Learning about Stocks (Fundamental and Technical Principles):

System Development and Market Psychology:

Great All-around Reads:

All Others:

Filed Under: Uncategorized

Technical Analysis Using Multiple Timeframes

July 25, 2008 by 16 Comments

I’ve been meaning to post up my review of Brian Shannon’s new book, Technical Analysis Using Multiple Timeframes, for quite some time but as I have already mentioned, my schedule has been crazy. Well, I was able to sit down and write a brief but hopefully a helpful review.

The book starts with a chapter on technical analysis which I recently listed as one of the 10 steps to profitable trading. I agree with Brian 100% that any person that wishes to become a successful trader must learn and start to master some aspect of technical analysis. He clearly identifies that technical analysis is not about memorizing chart patterns or funky images but about understanding the motivations of participants which may help in anticipating future moves. This is a game of anticipation more so than speculation if you play by a set of rules and attempt to do it professionally. Overall, Brain nails the point that technical analysis allows a trader to view the market with some type of clarity (this may differ from one person to another – especially in multiple time frames).

He says: “price is the only thing that pays”. Very simple but true. All the tools and gadgets in the world can’t and won’t help you trade more efficiently than using simple price action which can be monitored through charts or technical analysis. He says, in other words of course, that technical analysis is not an exact science and will not predict every move but it should allow an experienced trader make sense of the movement(s) they are viewing.

I loved the first chapter because I felt I was reading my own thoughts (almost word for word).

The next four chapters focus on the four stages of a stock’s cycle or movement (in Brian’s opinion and I don’t disagree):
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Filed Under: Blogs, Books

Coach Yourself as a Trader

July 22, 2008 by 5 Comments

I was recently asked a question by one of the most respected trader development psychologists/ mentors that I know of in the business. Brett Steenbarger, working on a new project, asked if I could elaborate on what strategies and/ or courses of action I take to mentor/ coach myself as a trader. Brett’s excellent blog can be found at Traderfeed. He specifically asked:

What are the three things (i.e. courses of action, strategies, resources) that you’ve found most helpful in mentoring/coaching yourself as a trader?

And here is how I answered:

  • 1. Understand me. The most powerful tool I have found in life and in this specific case, the market, is what I, as a person, am capable of doing as a trader. I finally understand that personal characteristics that are engrained in my DNA will only allow me to trade successfully under specific circumstances. For example, I am much more consistent and profitable as a medium term and longer term trend trader than as a day trader (even more so on the long side). I don’t need to be everything, all the time as long as I continue to focus on the areas that bring me the greatest success. Understanding “me” has been my holy grail of understanding how to trade the market with some type of consistency and profitability.
  • 2. Learning to cut losses. It’s almost cliché but not many people can do it (in any aspect of life). I have learned to cut losses in my trading, my career, my hobby of competitive poker and everything else in life where the rule applies. Without this rule, there wouldn’t be a third rule.
  • 3. Study and work hard. Sounds so simple but we live in a very lazy society. It is extremely important to my success for me to continuously study the markets on a fundamental and technical level and learn from my successes and mistakes. If you think about it, we would all start at square one on every trade if we didn’t learn from past situations where we succeeded or failed. Applying the knowledge gained from past experiences allows me to properly analyze similar situations in the future with slightly greater odds of success (or at least I would like to think). Never stop learning is a phrase that I will never stop saying as it proves to be truer the older I get.

P.S. – Sorry for the lack of posts over the past few weeks as I have been in and out of town without much focus on the market. It’s better for me to be mostly in cash at this point in time due to the lack of opportunities crossing my screens. Regular posting will resume as soon as my schedule allows me to focus 110% on the market. I will look to post occasionally as long as I have something of value to add.

Filed Under: Education, Psychology, Subconscious

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!
Filed Under: Education, Fundamental Analysis, Position Sizing, Psychology, Selling, Stocks, Technical Analysis

How to Trend Trade Shorts

July 8, 2008 by 4 Comments

To short means that you borrow stock from your broker to sell to a third party. The idea is to buy back the stock at a lower price, returning the shares to your broker while leaving the remaining cash in your account as a profit. A short seller does not own the stock before they sell it as they borrow it from another investor who already owns it. At a later date, the short seller buys back the stock they shorted and returns the stock to close out the loan. If the stock has fallen in price since they sold short, they can buy the stock back for less than they received for selling it. The difference is your profit. Please note that short selling is a transaction made on margin.

Characteristics of Trend-trading Shorts

Most ideal longer term trend shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.

  • Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.
  • Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.
  • A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on the KNOT chart
  • The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.
  • Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.
  • A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.
  • Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

CROX Example:

To initiate a short sale, you must place the order with your broker or online brokerage by determining the size and price at which the trade will occur. Your broker or brokerage company will check to see if shares are available in the specific stock selected or if they can borrow the shares. Once they are available or can be borrowed, they will be sold in the open market on the first plus tick or continuation of an up-tick also known as zero-plus tick (the stock must move up for the transaction to complete). To close the short position, the broker will purchase the shares using the original proceeds and return the shares to the third party.

As a short seller, you believe that the price of a particular stock will fall in value over time. For example: by establishing a short position for 100 shares in XYZ at $50, the broker will place $5,000 into your margin account. If the stock falls over the next few weeks and you decide to cover the short at $40, you will initiate a buy for 100 shares in XYZ using the money placed in your account when you sold short. The cost to buy back the shares in this example will be $4,000 or $1,000 less than the original short sale amount. This difference in price will result in $1000 cash that will now become your profit.

On the flip side, if the stock was to jump to $60, you would most likely cover your short or have your stop loss triggered, buying back the shares at this price. The cost would be $6000 or $1000 more than the original short sale, resulting in a 20% loss. The broker would take the additional $1000 from your cash account to cover the loss in the short sale. This is how you can lose money when shorting stocks. The higher the stocks rises, the more money you can lose, theoretically resulting with an infinite loss (excluding stop losses and broker margin calls).

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Filed Under: Selling, Shorting
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