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How You Can Simply Outperform Mutual Funds 1. If trouble is detected in a stock or the market you either take your profits and get out, or short sell. On the other hand, Mutual Funds cannot exit the market quickly since they own huge amounts of shares, and unloading them to the market can be disastrous. Consequently, unlike individual investors they either have to stick to their positions in downtrends or suffer a huge loss in market trend changes upon exiting. 2. By law, Mutual Funds can not short sell more than a certain percentage of their assets, whereas you can short sell in bear markets and grow rich in a faster pace, while big institutions are still unloading their stocks to the market. What is Contrarian Investing? When the stock market starts going up, most people are, initially, scared to step aboard. It's not until stocks have gone up a long way for a long time that most investors become interested and start buying. On the other hand, when stocks start dropping, most investors are not afraid. Their courage has been bolstered by the steadily rising tide. Only because the market has risen a long way, investors believe it will keep going up. It is almost a gold-rush mentality. Contrarian Investors buy on bad news, and sell on good news. "Buy low, sell high" is a well-worn clich? But it's well-worn for a good reason: That's how an investor must think in order to make money.
The Advantages and Disadvantages of "Trend Following"
Advantages:
The benefit of trend
following is simply this: You will never miss a major move of any market. If
the market you are watching turns from a down to an up direction, any
trend following indicator must flash a "buy" signal. It's just a question
of when to buy. If it's a major move, you will get the signal. The more long
term the
trend following indicators are, the lower the transaction costs—a
specific advantage of
trend following. Disadvantages: The drawback of trend following is that your indicator cannot detect the difference between a major money-making move and a short-lived unprofitable move. As a result, trend followers often get whipsawed as trend-following signals immediately turn against them, causing small losses to occur. Multiple whipsaws can add up, creating concern for the trend follower and tempting him or her to abandon the strategy. Most markets spend a large amount of time in non trending conditions. Trending periods could be as little as 15 to 25 percent of the time. Yet the trend follower must be willing to trade in these unfavorable markets in order not to miss the big trend. The Advantages and Disadvantages of Short-Term Trading Advantages: ? Most day traders get many opportunities each day. ? This type of trading is very exciting and motivating. ? If you have a tactic with an expectation of 50 cents or more per dollar risked, you may never have a losing month or even week. ? You don't have overnight risk in day trading, so there is little or no margin necessary even in big markets. ? High probability entry systems, which most people want, work with short term trading. ? There's always another opportunity to make money. Disadvantages: ? Transaction costs are high and can add up. ? Excitement has seldom to do with making money—it's a psychological need! ? Data costs are very high because most short term traders need real-time quotes. ? Many high-probability entries have losses that are bigger than the gains. ? Short term systems are subject to the random noise of the markets. ? The short term psychological pressures are extreme.
What’s Really Important to Trading Internal Control: Internal control is not that hard to attain, but it is difficult for most people to understand its significance. For example, most investors believe that markets are living entities that create victims. If you believe that declaration, then it is true for you. But markets do not create victims; investors turn themselves into victims. Each trader controls his or her own fate. Let's look at some details: • Most successful experts achieve success by controlling risk. Controlling risk goes against our natural tendencies. Risk control requires great internal control. • Most successful speculators have success rates of 35 to 50 percent. They are not successful because they forecast prices well. They are successful because the size of their profitable trades far exceeds the size of their losses. This needs tremendous internal control. • Most successful investors are contrarians. They do what everyone else is scared to do. They have patience and are eager to wait for the right opportunity. This also requires internal control. Investment success requires internal control more than any other aspect. This is the first step to trading success. People who dedicate themselves to developing that control are the ones who will eventually succeed. The Most Important Characteristics of All Good Traders If you follow the crowd as an investor, you might make money during long trends, but in general you’ll probably lose. Instead, investors make money by thinking independently and by being unique. For example most investors ask others for advice. However money is made by developing your own ideas and following a method that is designed to fit you. There are probably hundreds of trading systems that work. But most people, when given such a system, will not follow it. Why not? because the system doesn’t fit them. One of the secrets of successful trading is finding a trading system that fits your personality. The most important Characteristics of all good traders was that they had found a system or tactic that was right for them. So part of the secret of the Holy Grail mission is in being unique and following a trading system that fits your personality. Bookmark Us! Entry Points! Judgmental Biases: Some people get the idea that they would be better off on their own. Therefore, they become fascinated by entry signals that they perceive to be synonymous with a complete trading system. You get a sense of control with entry signals because the point at which you choose to enter the market is the point at which the market is doing just what you want it to do. As a result, you feel like you have some control, not just over your entry, but over the market. Unfortunately, once you are in a position in the market, the market is going to do whatever it wants to do, you no longer have any control over anything except your exits. Most people believe that they have a trading system if they have some sort of entry point that makes them money. There are as many as 10 mechanisms to professional trading system and the entry signal is probably the least important. However, most people just want to know about entry. Look at our stock picking strategy as an example of number of factors that must be checked before even you think of buying a stock. stock pick strategy Setups for Stalking the Market A very high probability setup is based on the observation that when a market closes in the top part of its trading day, it has a strong chance of opening higher. The opposite is also true. This is an extremely high-probability setup with 70 to 80 percent reliability for a more extreme opening in the same direction the next day. This could be used for an exit in a trading system, but it also can be used for "Gap Trading". Another observation is that even though there is a higher probability of the market opening up in the same direction, the probability that it will close in that direction is much lower. In addition, when you have a trending day yesterday, there is an even greater probability of turnaround. What is Availability Error? Suppose you were thinking of buying or shorting a particular stock or future. You have read about the exceptional performance of the company. Being a "rational" investor who likes to undertake thorough research before buying a stock, you get a second opinion from a friend who informs you that he purchased this stock/future last month, and it has already increased by 60% in value. Extremely impressed, you instantly place a large order, only to find a few days later it has reached the top, commences a turnover, and then succumbs to a fall reversal in the following weeks. The "availability" of your friend's description and success have made you forget about objective technical analysis, discipline, and the need to stand apart from tipsters when making decisions. Try to avoid it! Taming the Stress to Become a Better Trader This is the result of a survey about the most stressful experiences in trading. The results indicates that trading stress does not only result from losing. Some trading stressors identified were:
Traders who have protected themselves against the devastating effects of stress are the traders who succeed and consistently make money in the markets.
Become an expert or use their expertise because
Avoiding Financial Fakery If a CFO leaves the company for reasons that seem at all strange or inexplicable, you should be on your guard. It's normal for CFOs to move around just like other executives, but if you see a CFO leave a company that's already under suspicion for accounting issues, you should think very hard about whether there might be more going on that meets the eye. As an example take a look at Symbol Technologies "SBL", after announcing that the CFO has quit the stock plunged 11% on July 14th in after hours trading!
When to Sell Short Rule number one is to short sell only during what you believe is a developing bear market, not a bull market. Bear markets occur about once every three years, and when they do, the decline occurs at a much faster pace than previous rise. In a bear market there are only two things you can do: either sell most or all your stocks and get out, keeping your money in cash equivalent like U.S. Treasury Bills or money market funds, or short sell stocks.
It is best to time your DayTrading with the action and movement of the general market averages. After they showed definite signs of weakness, only then does it become a question of the selection and timing of the individual stocks to sell short.
Top formations in the general market indexes will occur in one of two ways. The first way is for the market averages to move up and make a short-term, new high in price on mediocre or low volume. This tells you that demand for stocks is poor at that point and that the rally will soon be overcome by selling. The second way also involves topping while the averages are still in an uptrend. What happens is that there will suddenly be one, two or three days where the daily volume on the NYSE or NASDAQ increased from the prior day, but the market averages actually make very little to no price progress or even close down in price versus the prior day's close. When three, four or five of these distribution days begin to show up in two to 4 week period, it's time to start raising cash and re-evaluating your current stock holdings.
Five Mistakes to Avoid
What is Overhead Supply? A critically important concept to learn is analyzing price movement is the principle of overhead supply. Overhead supply is when there are areas of price resistance in a stock as it moves up after experiencing a downtrend. These areas of resistance represent prior purchases of stock and serve to limit and frustrate a stock's upward movement because the investors who made these purchases are motivated to sell when the price returns to their entry point. So it is normal that a number of traders who are already in "red" will sell when they see a chance to get their money back. Good chartists know how to recognize the price areas that represent heavy areas of overhead supply.
They will never make the fatal mistake of buying a stock that has a large recent amount of overhead supply. However, a stock that's able to fight its way through its overhead supply may be safer to buy, even though the price is a little higher.
Supply areas more than two years old create less resistance.
Forget Your Cost Price! A successful sale does not necessarily mean a profit. It can, under some circumstances, equally mean a deftly timed exit that prevents a loss or a greater loss from developing. A good sale point is a time/price combination on the stock's historical chart which, when viewed in high sight, evokes the reaction, "Wow, that sure was a good exit point right there!" The successful sale point is therefore, defined only in terms of what occurs after it in time --- not at all in terms of the historical fact of the owner's related purchase price.
A Good sale is a good sale, whether it gives a small or large gain, breakeven or nets a loss.
Should You Sell Short? First rule in DayTrading: Don't sell short during a bull market. Save the DayTrading for bear markets. Your odds will be a little better. Never sell short a stock with a small number of shares outstanding. It's too easy for market makers and professionals to run up a thinly capitalized stock on you. This is called "short squeeze" meaning you could find yourself with a loss and be forced to cover your short. It does not feel very good when you are in that scenario. It is safer to short stocks with an average daily volume of over 2 million shares.
Do not short an advancing stock just because its price seems high to you.
When to be patient and hold a stock Your objective is to buy the best stock with the best earning at exactly the right time and have the patience to hold it until you have been proven right or wrong. In a few cases you may have to allow 8 weeks after your first purchase before you conclude that a stock, which hasn't moved is a dull, faulty selection. This, of course, applies only if the stock did not reach your defensive, loss-cutting sell price first. Remember, your objective is not just to be right but to make big money when you are right.
"It is never your thinking that makes big money," said Livermore. "It's the sitting." Investors who can be right and sit tight are rare. It takes time for a stock to make a large gain.
Cut Your Losses Short No matter how smart you are, how high your I.Q. or education, how good your information or how sound your analysis, you're simply just not going to be right all the time. In fact, you'll probably be right less than half the time! You positively must understand and accept that rule number one for the highly successful individual investor is: always cut short and limit every loss. To do this takes discipline and courage.
The whole secret to winning big in the stock market is not to be right all the time but to lose the least amount possible when you are wrong.
Evaluating Supply and Demand The best way to measure a stock's supply and demand is by watching its daily trading volume. When a stock pulls back in price, you want to see volume dry up indicating no significant selling pressure. When it rallies up in price, you want to see volume rise, which usually represents institutional buying. When a stock breaks out of a price consolidation area, trading volume should be at least 50% above average volume of the stock. Higher volume indicates solid buying of the stock and possibility for further increase in the price. Using daily and weekly charts helps you analyze and interpret a stock's price and volume action.
Risk/Reward Ratio This is the point where you admit you were wrong. No one can pick winning stocks 100% of the time. Accept this fact. You can only play the odds. Let’s say we buy a stock at $20 with the plan that it will go up to $24. Now we have to decide what to do if the stock does not go up, but suddenly starts to fall. Let’s decide that if the stock moves below to $19, we will accept that we were wrong about the direction of the stock, sell the position immediately, and take a small loss. By taking small losses, we preserve our trading capital, which allows us to trade again tomorrow.
Before we even get into a position, we have to measure our risk-reward ratio. In the above example, if we were correct about our stock pick, we would have made 4 points. If we were wrong in our stock pick, we would take a loss of 1 point. That is a risk-reward of 4:1. Let’s say we were only correct about our stock picks 50% of the time and we make four trades. Two were winners (2 x 4 points) equaling 8 points. Two trades were losers (2 x 1) totaling 2 points. We now have a gain of 6 points by only selecting winning stocks 50% of the time. Assuming we were the worst stock pickers in the world and were only correct 25% of the time, we would still have a gain of 1 point.
It is important to keep your risk-reward ratio 4:1. If you can only find a risk-reward ratio of 2:1, leave it alone, sit on your hands, and do nothing. If the market is behaving in a way that you can only find risk-reward ratios of 2:1, you probably have no idea as to which way the market is going to move. The market spends most of its time moving sideways. I have seen many traders lose most of their capital by making themselves trade when they should have stayed on the sidelines.
I still remember the first time I stared at the screen the entire trading day from 9:30 a.m. until 4:00 p.m. without making a single trade. I was thinking to myself, “I know the market is normally irrational, but today I have absolutely no idea what is going on.” I made some paper trades in my head, and I was glad I had left it at that. All the trades I made in my head were losers. Even though I did not make any trades that day, I felt like a winner. It was a great feeling to know when to sit it out. I was right to stay on the sidelines. You have to have the discipline to stay on the sidelines when you do not feel comfortable. Getting into low risk-reward positions because you want to be in the game is wrong. It shows a lack of discipline and the punishment is losing capital.
Realize you are never smarter than the market What exactly do we mean when we say that you are never smarter than the market? After all, you have all this experience and education, right? Yes, but the market does not care. Remember that the market is dynamic, and what works today may not work tomorrow. There is never a guarantee that a trade will be profitable no matter how well you analyzed everything beforehand. The best we can do is to put the law of averages on our side and try to profit by statistically proven methods. But you must realize that there will always be exception to every rule. Whenever you try to fight the market and think that you are smarter, you will lose. It's that simple. When the market changes, and it will, just be perceptive and change with it. You will perish if you try to fight it. Risk Management All competent traders are practical people who quickly calculate risks, results and odds.
Mistakes to Avoid Trying to Time the Market! Market timing is one of the all-time great myths of investing. There is no strategy that consistently tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you. Not a single one of thousands of funds has tracked over the past two decades has been able to consistently time the market. Sure some funds have made the occasional great call, but non have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by a quantitative model. That's pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business-if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.
Mistakes to avoid
Cash flow is the true measure of a company's financial performance, not reported earnings per share. For a host of reasons, accounting-based earnings per share can be made to say just about whatever a company's management wants them to, but cash flow is much harder to fiddle with.
When to Sell a Stock? The company-related reasons to sell are:
What if good news doesn't move the stock? This requires only brief treatment: the bottom-line answer is that it is time to sell without delay. One of the definitions of a bear market is a time when investors do not care about good news. Applying this logic to individual stocks. If good news fail to elicit positive stock-price action( in a reasonably hospitable market climate), there is no longer enough unsatisfied buying interest in the stock to push it higher. The excitement has passed its peak; volume will be unable to build to new highs, and the price must endure. A sophisticated market observer can use this insight as a signal to cash in, while others less savvy use the latest good news as reason to buy the stock. Unfortunately, they fail to realize that they are buying into distribution and are starting too late to be able to win this game. Mistakes to Avoid Loading up your portfolio with risky, all-or-nothing stocks---in other words, swinging for the fence on every pitch---is a sure route to investment disaster. For one thing, the insidious math of investing means that making up large losses is a very difficult proposition---a stock that drops 50 percent needs to double just to break even. For another, finding the next Microsoft when it's a tiny start-up is really difficult. You are much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out. resisting the temptations is the first step to reaching your financial goals. Learn to Walk Away When a stock is peaking, an investor runs the serious risk of missing the top area altogether if he tries to stretch winnings too far. Once a stock stops rising and starts declining, the difficulty of selling it becomes even greater. Giving up points that have already melted away is more painful than imagining giving up points of paper profit that have not yet been created. Trader's mental state heads south with the stock price, weakening his decision-making abilities. Keep in mind that when the price objective is reached, the best policy is to sell at market and walk away and don't look at the quotes once the stock is sold. DO NOT Micromanage Your Trades You have definitely heard of "Market Makers". They are there to make money from your mistakes and/or emotional reactions. If you are a trader who is sitting in front of your monitor all they long watching your positions you have noticed the effect of market makers in equities. Very often they just dump a big chunk of stock to drop the price in order to buy more shares for a cheaper price. If you micromanage your trades and get emotional you can too be a victim of this trick and lose great amount of money. The first solution for those of you who are watching your trades closely is NOT to use stop loss orders. You must have a stop loss but if you are there use mental stop losses since they can see your stop loss and their artificial intelligence software can simply calculate how much they can make buy dropping a stock price and buying it back. Second way to protect your capital would be following your own rules of trading by sticking to your profit taking target, and stop loss target and not moving them based on short term fluctuations in the market. When something unexpected is happening first check if there is any news about the company or general market then check the sector, (Sector's Graphs). If everything looks normal it should be the Market Maker trying to shake you out and make money off you!
When to sell a stock If a company is not producing expected results, profit disappointment sets in. Fundamental results __ an expected product announcement, a technology breakthrough, patent award, sales increase, earnings turnaround or dividend boost __ must occur to generate profits. If this does not happen, the stock loses supporters and, eventually, the price takes a deep decline. When fundamentals fail, the implication is very clear: sell the stock, do not hold it. It can always be bought back later if the fundamentals do come through. Remember if you are below your buying price, the sell actions don't make you lose money since you have already lost the money. Value Trading When the value of a stock drops substantially as a result of competition, bad management, economical slow down, etc, value investors who are looking for a fundamentally strong company with a low intrinsic value become attracted to the company. If you can notice the buying pressure coming in, that would certainly be a very good point to buy the stock since momentum traders, and other types of traders are going to come in afterwards and push the price higher. You simply might have detected a bottom for the stock. Sector Trading One of the strategies that short term traders use to pick their stocks is to follow where the smart money is flowing. Comparing price and volume changes in different sectors on a daily basis could be an important technical indicator for successful stock picks. Find out what sector is outperforming others and try to pick the leader in that sector. It can significantly increase your success rate since a big chunk of the money flows to the leader of each sector. Sector's Graphs
When to Sell There is a psychological bias against selling stocks: all buys are made in optimism, whereas not all sells conclude successful ventures. So selling is not a uniformly happy experience for investors. And virtually every sell, unless made at the historic high, at least sometimes looks like a wrong and irretrievably completed decision. Unhappy memories of such sales prompt avoidance behavior later. Sell the stocks on the way up, it is fine to leave some money on the table. In other words look at the technical and fundamental of the stock: if you wouldn't buy it at that point, it's the time to sell. Avoiding Financial Fakery If a CFO leaves the company for reasons that seem at all strange-or inexplicable- you should be on your guard. It's normal for CFOs to move around just like other executives, but if you see a CFO leave a company that's already under suspicion for accounting issues, you should think very hard about whether there might be more going on that meets the eye. As an example take a look at Symbol Technologies "SBL", after announcing that the CFO has quit the stock plunged 11% on July 14th in after hours trading! Mistakes to avoid Don't try to shoot for big gains by finding the next Microsoft. Instead, focus on finding solid companies with shares selling at low valuation.
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