"Day Trading On Dial Up And Other Forms of Dementia."
Or, what are the pros and cons of learning Technical Analysis and Day Trading to cope with today's stock market uncertainty? I have included this topic in the time management arena because so many of us are spending a great deal of time watching or passively participating in the diminishing value of our portfolios. I.e. doing nothing but watching or making poor decisions. Because the adage 'time is money', or, at least time can be wisely utilized to make money, we need to determine how much time to spend monitoring the present and future value of of our existing cash and investments, and whether we need to add some learning to our arsenal or toolbox to deal with the current financial 'crisis' or recovery. Both these states seem to exist simultaneously depending on which 'talking head' one listens to.
The media are encouraging us to learn at least the fundamentals of technical analysis in addition to the previous 'fundamentals' of stock valuation. We are being encouraged to become, at least temporarily 'trader's rather than investors. Buy and hold is passé, buying the dips and selling the rallies is the new mantra. There are many other indications that a major shift toward encouraging investors to add some trading into their buy and hold strategies. The examples are too numerous to list here but watching any financial TV program one can see references to software, trading bank accounts, trading support services and a plethora of experts showing stock charts and patterns and their meanings. Buyer beware. As always these services and products initially make money for the vendor. The user is lulled into a false sense of security only to discover through expensive experience that one is entering a profession not a panacea. Consider the learning curve similar to learning a new profession given that one can apply the same amount of time. Example of a TV ad currently running by Invesco TriMark. "If you buy a stock and and believe in it and it drops in price from your $10 buy a price to $8 hold onto the stock." This is a classic example of bad advice. Yes, some of the stocks you buy will go up in price and the advice might be proven right, but the mathematical probability is that your stock will NOT recover it's price if it goes down. The odds are against you.
The premise of this series of articles will be to examine the practicality of the average investor pitting his or her wits against the market makers of wall street (at the various stock exchanges). Jim Cramer who appears every day on his very popular TV show, and has published a number of books on investing, has also added an evening a week to introduce his viewership to the nuances of trading stocks. Trend lines, double tops and Mac D crossovers, breakthroughs and break outs touted as clues for buying or selling stock at optimum time. To the uneducated these revelations might appear as a lifeline, buoy to cling to or the beginnings of hope for the future. (We'll deal with the term hope later - in the meantime its' an abbreviation of the words 'hopeless mindset'). The fact that above technical terms are linked to market timing, which has always been a 'no-no for serious and professional investors, now becomes rationalized, by the reality that if one does nothing one could end up a Lehman Brothers look-alike i.e.bankrupt. However, I will demonstrate that a little knowledge in this area is not only self deceiving but it is a meal ticket to the food bank. Learn yes, apply no. Reading a few books on technical analysis and making a quick trade and profiting on a stock in a sideways trading channel is akin to successfully cutting your toenails and thinking that your are now ready to perform a lobotomy -on yourself, with a bread knife. Even if you have hi speed Internet (which I will define as anything over 100 kbs - I now have 100 Mbps) trying to trade your way out of the current crisis is akin to Day trading on Dial Up. What you may have in speed of transfer is irrelevant you lack a deep and intimate knowledge of the profession of trading. You are what is know in financial parlance as 'stupid money.' Technical analysis and day trading are not synonymous. Knowing 'A' does not make you good at 'B.' However, knowing technical analysis gives one a false sense of security. "I think I could now safely trade with my new understanding of patterns and processes. Wrong. The pros are waiting for you.
They know your behaviors, your hopes, your dreams, your techniques, your foibles and your failures. They will cash in on them, relentlessly, mercilessly and with the satisfaction of getting back the money they lost when they started out in the 'game' of trading. Do I mean that you shouldn't learn technical analysis. No, I mean that you can learn but don't expect to earn unless you invest the same time and money that you would in learning a profession, i.e. a profession to which you are suited, not one that you are driven into because of a perceived opportunity or to remedy a crisis. Start by considering technical analysis as adjunct to the reading stock tables. Be familiar with the terminology so that the expert who is managing your money knows that he or she has to do their home work well before coming to you with recommendations. You will use some of your new found knowledge to test their mettle. You can no longer rely on buying expertise. You must be able to critique that expertise. Technical analysis, trading, and money management were specialized fields, however, changes in the market behavior have thrust T.A. into everymans' media. Check if your investment guru is familial with the processes involved in critiquing a stock purchase or sale using technical analysis as a final decision making tool. If you are not inclined to learn anything about this field somebody on your team should. If you are trying to or presently managing your own money, technical analysis will provide a filtering mechanism for some of your decisions. However, day trading is not an activity that any investor should consider unless they are willing to make it a lifetime career choice. It is a 'sure fire' way to diminish your portfolio even faster than the Dow has been doing of late. The reams of trading software, trading programs, and books that have flooded the market in the past few years are capitalizing on a perceived need. The companies that design and promote the seminars, the courses, the technologies are making money, not in the markets but from the masses.
The following series of articles will walk you through what can happen if you decide to apply your new found knowledge of technical analysis to day trading. It is not a pretty picture. The case presented will be representative of the majority of people who, utilizing their proven intelligence believe that they will not succumb to the pitfalls of a new trader. A few successful trades rather than proving anything will give a false misplaced confidence that will lure them into more plays, bigger plays and eventually bigger losses. It is an insidious process. The writer's objective is to dissuade his reader's from being lured into day trading - though desperation or deliberation. And, remember if you do decide to learn technical analysis, a knowledge based venture, it may be akin to smoking a joint leading to the hard stuff. Nobody knows ahead of time if they are going to become addicted. Financial security is a strong driver. Appreciate that the benefits of technical analysis are to complement an existing expertise and knowledge of investing. Technical analysis does not make you a good potential trader. If you know anyone who considering trading direct them to this article.
So assuming that after all the above caveats you still think you have the right stuff to become a trader, or you have a high risk tolerance, or a big enough bank account that you can afford to 'invest' some money into trading. Or, thinking about trading gives you a 'buzz' similar to participating in contact sports or betting on the ponies. So the first thing that you want to do is trade. You have the money ready, you have the trading account set up with the bank. You have the margin account to give you some leverage on your money. First you need to choose some stocks to trade. You have been watching a particular stock and knows that it moves about $5 a day in a range. However, you know that the bottom can drop out of any stock on news and you might get burned so perhaps you should trade a stock where there is a chance of it going up a bit in the future. So you decide to buy into a trading newsletter and use their stocks for a while till you get the 'hang of it.' At least, you believe, they have done their homework and their experience will give you a safety net. Wrong, wrong, wrong. There is no service that will give you continuous winning stocks to trade. A typical service will cost you between $500 to $1000 a year on a subscription basis. You have just made you first trade and lost a $1000 dollars. You traded your lack of knowledge for a $1000. As the man in the ING commercial says, "Save your money". Otherwise the downward spiral begins. Even if your subscription includes a live chat room and the guru, or his henchmen on everyday, during all market hours, and you are willing to sit all day, everyday waiting for the buy and sell signals you can still lose you money - and that is even if his stock picks are superb. Let's suppose that you are tuned into the chat room and the moderator says "We're selling' right now because the news just came out they XYZ is cutting their dividend and the price of the stock will drop.". And sure enough it drops like a rock. You are just a fraction behind the first wave of selling.
You cut your losses considerably. Phew. Thanks goodness you were logged on. The sure bet wasn't that sure any more. Next day the stock has rocketed back up higher than you had originally bought it at. You now have a real (small loss) and a large lost potential gain. The emotional destruction is a severe when you lose potential gains as real losses. The market decided that a dividend cut would help and not hinder the company. So much for the Guru. Sometime the Guru or newsletter will tell you to sell or the stocks in a certain sector or their analysis was flawed or the markets responded unnaturally, or the pattern looked like a head and shoulders when it was really a triple top, and so on. Gurus, newsletters and related services need more vetting than the stocks that they select.
What you need to learn is technical analysis. Focus on a couple of stocks, no more than six from various sectors, and watch how they react to the markets, to news, to cycles, to the whole panoply of the investment world. Watch technical analysis patterns till you 'know' what your stocks are going to do in response to time of day, the DOW, S&P, NASDAQ, their sectors index's, the weather, world events and so on. You don't trade. You sit on your hands. You read half a dozen books on trading. You spend hours if not the whole market open hours watching, reading, learning. And amazingly enough you do not lose any money. Why, because you haven't traded. Your first objective as a trader is to learn how not to lose money. It is not, I repeat not, how to make money. That may come in year or two. Year one is about learning and preserving your capital. During this period you are learning about position size, market makers, Level 2 NASDAQ, currency markets, commodities futures, options, the various exchanges and the relationships between all of them. You are learning the trading symbols of the the markets makers, their bid and ask spreads, pivot points that they use and volume criteria. During this period you will have imagined that bought or sold the stocks you have been watching. You will have felt the enormous sense of relief that you didn't actually buy when were going to, and the money you saved and the regret for the money that you would have made if you had had the courage to 'pull the trigger' (buy). Both these emotions will tell you that you are not ready for trading. Good trader's make decisions on well thought out strategy based on accumulated facts, on knowledge based on criteria. They have entry and exit points. They know the time during the day when to buy and sell. Their decisions are calculated. If they are wrong they are out of the trade in minutes or even seconds. They never hope, never wait to see what happens. Until you are mentally totally in control and factually prepared you don't trade. If you are using the following information to improve your investment timing remember you have to stay with your plan. You can't switch from one mode to another. You are one of the following:
An INVESTOR (buy and hold for weeks/months/years) a SWING TRADER (a few days to a few weeks), a DAY TRADER (in and out the same day with few exceptions) or a SCALPER (in and out in a few seconds to a few minutes). If you are an investor you can use the following information to improve decision making as to whether to buy a stock and when would be an optimum time. As an investor you can use patterns to pick an optimum time of day/week etc. when to buy a stock and quickly identify when it is in trouble.
March 8, 2009. This finishes the introduction to the Day Trading on Dial UP and Other Forms of Dementia. Remember 'Dial Up' can be a euphemism for lack of experience as well as a low broadband.
Next. Trading plans, a few patterns and the Journal.
Resources need: A person learning technical analysis can the numerous free resources that are available on line. Plus, I will recommend a series of books from beginner to more advanced.
Web sites with charts:
www.bigcharts.com. Use the Advanced chart selection and the following settings: 10 day, hourly, 3 exponential moving average, MacD, Williams %R, and Slow Stochastic, Candlesticks, Large charts, enter a stock symbol Save your charts settings, and hit O.K. when the pop up occurs. This charting will help you decide when to actually purchase a stock based on a trend. If you want a shorter trend time change the time settings or enter the above in a new window and then set the timing for 2 days and 15 minute intervals, or 5 minutes if you are trading. To review a stock for investing set the pattern for 5 year Weekly and check the lowest the stock has ever gone to. Remember it can always go back that low. More stocks go down than they go up. Many big names eventually disappear. Start thinking about Stops for any of the stocks in your your portfolio. If you have timed an optimum entry a stop of 8 to 10% would be advisable.
www.stockcharts.com Choose the Sharp charts. Set the charts for the Williams %R, the Mac D and the Aroon. change the default 25 on the Aroon to 3 for a short term view. For a weekly trend leave the setting at 25. If you are looking for investments rather than trades set the up top selection for weekly rather than daily. This charts will show you when not to buy a stock. It be be reviewed very quickly and waiting for the right signals can save you a lot of money. This site has a list of topics on the top and side bars. If you learn all that is offered you will be an expert. It is a great resource centre. It also provides valuable sector and industry information with either real time or a 15 minute delay.
www.finance.yahoo.com Create a portfolio and monitor as per your requirements - then set up a quote page to check individual stocks. The best value of this site is when you enter an individual stock you can get a wealth of information on the company that you are monitoring. You can also get free real time quotes. Also set up a quote page using the Basic Technical Analysis link. Set the chart up to read the: 5, 10, and 20 Exponential Moving averages, MacD, Williams %R, Fast Stochastics and Slow stochastics. Time period can be changed from Day, to Years. An excellent tool for any type of investing or trading.
http://www.freestockcharts.com/ Superb free website with real time, streaming prices. Downside a few adds and a limited scan service. When you consider that Worden, who make Telechart and this site and they charge about $100 a month for for Telechart this free site is a great value. You can also get real time currency pairs, set up you watch list of stocks and experiment with indicator setting. If you don't like the black default background go to settings and properties and enter your favorite shade.
www.trending123,com. There is a wealth of learning on this site without having to pay John Lansing a subscription. (As of 2014 access to many portions of this site have been blocked unless your subscribe). Note many of the tools below can be found on the other sites listed. I like to use his charts for a longer term perspective. Chart is a day old but will show trends for investors and traders. The PPO, AROON, CMF and Accumulation/distribution are powerful tools. Also, pivot points are provided. When doing one's home work on Sectors - go to Portfolio Performance and choose Sectors. From Ranking you can go to current daily prices and annual hi and lows. Clicking on top of the columns will provide you excellent sorting. Looking for stocks well off their annual highs gives a sense of potential gains. I have some personal views about John Lansing that I will discuss individually.
http://www.nasdaq.com/ An excellent free source of daily info. Use the pre market heat map under the Extended Hour banner. Note on daily basis the number of up, down and neutral stocks and then relate this to the action of the markets. The relationship is not infallible but is one more sources of info.
Gold Tracker. Real time. I get this service through CIBC as part of my trading account. Check if your bank provides it . You will have to request it. It will give you Level 2 action in addition to real time quotes. It is important to understand the entire Level 2 process because the Market Makers (NASDAQ) and Specialists NYSE and AMEX, are waiting to take your money. Learn and watch how they do it on Level 2. See all the big players make their bids and asks, They play both sides of the market every day.
Books: I am recommending both fundamental analysis books in addition to day and short term trading because you are learning about an industry and all parts are interconnected.
A Beginner's Guide to Day Trading online, Toni Turner, Adams Media, 2000, 2007 $15.95 $US/$19.85 $CDN
Short Term Trading in the New Stock Market., Toni Turner, St. Martins Griffin, 2005. $15.95 $US/$17.85 $CDN www.stmartins.com
Technical Analysis Explained, Martin.J. Pring, McGraw Hill, 2002, $55.95 www.investors.com Also see Martin Pring's website as a resource for learning technical analysis
The Underground Trader.com. The Guide to Electronic Trading, Jea Yu. Mc Graw Hill, 2000. Buy used. A good introduction to techniques of the professionals at NYSE and .NASDAQ
How To Make Money in Stocks, William J. O'Nell, McGraw Hill, 2002, $12.95 $US/ $CDN 19.95. www.investors.com Great basic pattern/trend analysis.
The Successful Investor, William J. O'Nell, McGraw Hill, 2002, $10.95 $US/ $CDN 15.95. www.investors.com
Rule # 1, Phil Town. 2006, Crown Publishing. An excellent book on how to evaluate company performance. It also includes the Morningstar matrix for stock allocation for a balanced portfolio. The essence:
Morningstar style box:
|70 % Large caps|
|20% Mid cap|
|10% small cap|
Roth recommends the following criteria before buying a stock:
10 year average performance on the following-all must meet the 10% benchmark and be increasing.
1. ROIC (return on investment capital)
2. Sales growth
3. EPS (earnings per share)
4. Equity growth - BVPS (book value per share)
5. Cash (free flow growth)
6. Debt. Total long term debt/cash - 3 year max.
To get the data on the companies use MSN, YAHOO, and www.ruleoneinvestor.com
ETF's. An alternative to mutual funds. To choose ETF's you can use the following chart which I created from the Roth's Pbook:
How My Second Grader Beat Wall Street. Alan S. Roth, 2009, Wiley. An excellent book on buying Index ETFs through Vanguard (very low MERs). Please note the symbols/names of these funds may change over time.
Sample portfolio from the book.:
|Category:||Choose one from||Note product type:|
|US stock index||60%||
|Total international stock index||30% or 20%||
|Option if above is 20%||(10%)||
|Bond market index||10%||
Note: some funds are mutual funds and require minimum investment. Some are ETF and can be purchased as shares. Your investor Profile will determine which to choose. Products are from Vanguard, Fidelity and State Street Spiders.
Investment industry (get to know who you are competing with as an investor or trader. ) Wall street is set up to get your money, one way or the other. The adage the market will 'screw' the most people it can at any given time is reality. Professional traders make money in any market every day. They take your money. They compete against each other in billion $ trades. You get caught in the backwash, or you can learn their plays. Start making hand drawn charts of the stock you watch. Make the high and low prices, the time of the turns, the volume at each turn. Find which index the stock follows. If it is not a tier one stock find which tier one stock it follows. Keep your charts. When a trend repeats you have a template of how that stock behaves.
The Predictors, Bass, Read the book about this company, which was purchased by UBS and provides data feeds to all their traders. They are the forerunners for 'algo' trading You can read over half the book on Amazon for free.
http://www.traderplanet.com/newsletter_articles/view/1366/distribution:7 I like Robert W. Colby's, daily assessment of the markets with a very thorough summary of the technicals.
Robert also provides a daily scan of bullish and bearish stocks. Robert W. Colby is managing director of Colby Research in New York and the author of The Encyclopedia of Technical Market Indicators, Second Edition, which has become the standard reference work throughout the world for technical indicators and trading systems design.
Investor's Business Daily (trial version).
http://www.marthastokes.com I like Martha stokes -creditability, professionalism, level of knowledge. Plenty of free tutorials. She is a CMT and operates a training organization.
http://www.hamzeianalytics.com Fari Hamzie: If you trade anything but especially Emini future options check out Fari. He also delivers plenty of free seminars on trading and provides market updates in two hour presentations. His presentations are all archived on his site. He is on the inside track of the industry and brings a wealth of information and top notch people to you. His services are one of the least expensive for the level of professionalism you get.
2014. Chris Vermulen. I have followed Chris for the past few years and would suggest subscribing to his free services, evaluating and moving to the paid subscription services that fit your needs. Chris has dedicated himself to knowledge levels that most of us will not have the drive or opportunity to attain. You may use his experience as a short cut to your learning. His three websites and disclaimer:
Software: I use all the web sites with charts that I listed above. I open then all and move between them before making any decisions. However, for learning purposes you might try Vector Vest, trial version for 5 weeks. The free educational section is comprehensive.
Note if you are trading you need a real time data feeds and software for which there is usually a fee. However, a very good real time site which is free for the basic package is www.freestockcharts.com. An inexpensive site is www.finance.yahoo.com (real time) at $13.95 $USD a month. Regrettably their feeds do not include very many indicators but will suffice for the early stages of your learning. You can get real time quotes for watching as many portfolios as you create for free. Your bank or broker probably will have realtime feeds if you open a trading account.
Take advantage of trial services but do not purchase any yearly subscriptions (usually between $500 to $1000 year) until you have 'some' mastery of pattern recognition. It is pointless being given stocks to buy if you don't know how to control your wins and losses. Money management, position size and knowing your trading psychology are more important than having a stock recommended to you.
Your computer and the efficiency with which it operates is the most valuable tool you will have to trade. Therefore, it is imperative to defragement the hard drive at least every week and clear out the temporary Internet files every day or more than than once a day if you are using Level 2 NASDAQ or numerous page views, or real time quote services. 3 Gig RAM works well for moving onto multiple screens even if you only have two monitors.
Trading Plan for a stock. This will have three components, Strategy, Research and Execution.
Strategy: This is determined by whether you are investing, swing trading or trading. You need a written strategy, which is a contract with yourself. You may have heard the term 'rule based trading'. Make up your rules, post them on your computer. Follow them. Modify (ongoing improvement) to get better consistent results.
Research - use the free public scans on http://stockcharts.com/def/servlet/SC.scan You will learn in addition to getting good guidance.
Execution: Never buy a stock as a trader or investor until you have used the criteria which give you the highest probability of the stock doing what you expect it to do.
You must use multiple sources of data and information in numerous times frames to get this key point in your favor. I will provide a template on this page in late November that I use before entering a buy or sell.
Overview: although I have dedicated a short paragraph on each of the above, you can read entire books or chapters on all of the items. Become a good generalist and then drill down to the expert level as your needs dictate and your time allows.
Journal: Most of these entries refer to day trading. I will consider how to add investment strategies, plans and execution. As of Nov. 17., 2009 - I will be adding journal notes in the following week for members of the Ottawa CSTA who I had the pleasure of meeting today. I have two years of notes which I will parse down.
The following are from my journal notes. A lot of these references may not have meaning until you have experience in managing your own stocks. However, my experiences are typical of 95 % new traders and short term investors, and may serve to at least alert you to most common mistakes made. Even when you know what to do and what not to do, your fear and greed will override your common sense. Discipline, discipline, discipline.
Keep you own journal. This will be the most valuable resource you have. The more detail the better it will serve you. It will provide answers as why, what, when of buying and selling. Every trade should be documented. In addition to the notes draw the stock chart pattern and you entry and exit points. Add in the pattern of the Dow, NASDAQ or S &P. On your chart write what you did, why you did it and what you will do in the future. Add the future component into your Trading Plan.
The first skill to master is not to make money but to learn how not to lose money. The best way to start trading or investing is to sit on your trigger hand and not trade or invest. Just watch the markets and learn the rhythms and patterns related to the moves and momentum. Watch the effect of news on the markets and the speed at which stock prices can change. Over and over you will be glad you didn't buy a stock when you thought it was safe to get in. You fallibility will begin to show up through this process. The need to be do your homework, be knowledgeable, be disciplined and be intelligently responsive. This will become evident through watching and learning. The ability to execute well comes through practice. Learn to distinguish the components of good execution. Start to develop a trading plan format. Run off copies and always stay within the guidelines. Practice discipline in not making a move until you have all the facts to make a best cost/benefit -risk/reward) decision.
The following notes are random. I will organize them when the categories become evident.
You must be in the market on any up trend or you will miss the profits needed to make up for your inevitable losses. The 'trend is your friend' mantra is the most valuable there is. However, keep in mind that because there are numerous financial products (ETF's, Ultra Short shares and other 'reverse' funds) you can make money if the trend is heading down. When the market is at confirmed turn this is a opportune time to enter the market. Or, if you are willing to spend all day on the computer you can trade a pair of Ultra long/short stocks such FAS and FAZ. Just keep switching from one to the other with the market trend.
As a rule don't hold these 3x levered ETF's overnight even if you expect gap ups or down. The gains you make on gap ups will be less frequent than the losses. However, if the market trend is firmly established as it was from March 2009 to October 2009 holding the right ETF in this case FAS would have given you a nice return, $35 to $90 (based on current prices-there was a stock consolidation during this period). However, the ride up was a real roller coaster. Every move the market made was amplified by the leverage.
If you sell you a stock on the way down you must buy it back cheaper if you still 'believe' in it, or you may miss great profits. It is possible to buy very close to the bottom of any drop. If the stock doesn't respond the way you expect after you have bought it sell it quickly. If you are good at picking bottoms, then the stock will have nowhere to go but up. Always wait for a confirmation of the up trend using candlestick patters. To get the typical candle sticks for a direction change go to the chart of your stock and make a template of the candlesticks in various time frames - week, day, hour 15 minutes and 5 minutes. You will begin to recognize the typical patterns on changes. The candlesticks are confirmed by volume. Usually an uptrend results in above average volume for the time periods. However, institutions will nibble at stock at low volumes before the break out occurs. Use BOP if it is available or CMF for institutional buying clues.
Which bring us to options (derivatives). For a web site that has a wealth of materials on options Montreal Exchange.
This fast growing and popular method of trading deserves a greater learning commitment than both fundamental and technical analysis. This is where the pros play. However, by adding the knowledge of options into your arsenal you now have a greater edge for reducing risk and making money with less capital outlay. Add this branch of the investment industry to your learning apprenticeship. CNBC TV has a Friday afternnoon show around 5PM which is a valuable resource where experts lay out their strategies and do post mortems on previous trade set ups. You will need special software e.g. Think or Swim has an options platform. If you are looking for prices www.bigcharts.com has a link.
Start by reading these two articles found on the IVolatility web site.
Putting the Edge To Work
Putting Volatility To Work
Recommeded book Get Rich With Options, Lee Lowell, Agora, 2007
Recommeded article on choosing a broker with useable software platform http://www.reviews.com/online-stock-trading/
To be continued. Last post Oct. 16, 2016