Wednesday, July 6, 2011

Trend Trading Update

I mentioned a few weeks back that my daily blogging might suffer a bit due to my interest in and time required to read through/learn from 2 books on Trend Trading in the stock market.  Unfortunately for the blog, it has suffered a bit, but I've tried to not neglect things too much.  I have been diligently learning/reading a bit each day and so far so good.  It's made a huge difference in the way I research and approach a stock trade and I'm pretty excited about it!

Rather than get real deep into specifics, I just want to make you aware of another whole side of the stock market called Technical Analysis.  Maybe one day this info will make you a whole bunch of $ and you can thank me by buying me a cheeseburger, or better yet an oceanfront mansion!  Or if not, I hope to be able to at least explain this in such a way that my wifey will understand and give me less of a blank stare when I try and explain something new that I'm excited about and have no one else to share it with!  :o) 

Most all of what you're probably used to is buy and hold type trading.  You might like a particular company's products, like Apple for instance and decide to buy the stock (if you happen to have $335 for one share) and hang onto it for the long term.  If it goes up and down over time, you just hang on and hope for the best.  You might buy more if the price goes down to average down, but overall you're not doing much with it after you decide to buy. 

401k's are pretty similar, you keep putting in regular amounts of $ into specific funds on a regular basis and if the overall market goes down, your strategy doesn't change.  You just keep putting in the same amount and when the price of your mutual funds drop, you're able to buy more and you're averaging in over time.  That's a perfectly fine way to manage your 401k and in most cases your options are quite limited, so that's pretty much all that may be available.

Most of that is called Fundamental Analysis or no analysis at all.  However, there is a whole other side to the market called Technical Analysis.  Technical trading involves checking stock charts for patterns and using other tools called indicators, which are free and readily available from places like Yahoo Finance

Just be aware that much of the reason why a stock or the overall market goes up or down has to do at least in part to chart patterns or technical levels.  There are lots of reasons a stock might go up or down, Apple may announce a completely new product called the iShoe, which will revolutionize footwear as we know it and the stock goes up $20 in one day.  Or Apple might have it's quarterly earnings announcement come out and find out they sold 2 million less iShoes than everyone thought they would and it drops $20 in a day.  These situations are unavoidable and can't be predicted, without illegal insider information, but luckily these types of situations are rare. 

A great majority of the time stocks or the overall market trades either in a range or gives signals that the current pattern may be about to change.  Additionally, certain indicators give you good information on when is a good time to get into a stock and when would be a good time to take profits or cut your losses.  For example, if a stock has been consistently going up over a period of months on strong volume and then it starts to pull back maybe 5-10% or so on lower volume, chances are it's going to go back up on increased volume in the near term.  All this information is out there for free, you just need to know how to decipher it.  And it's not an exact science obviously, or everyone would be rich, but it can help put the odds in your favor for a successful trade.

It's more about recognizing a pattern and using indicators to figure out when to get in and out.  In addition, the most important thing I've learned so far is the importance of proper record keeping/documentation for every single trade to lay out the exact reasons why you're entering the trade.  And MOST importantly, you need to know exactly where you will sell the stock if the trade starts to go in the opposite direction.  Your goal is to cut your losses quickly without emotion and let the winners run.  This is not a buy and hold strategy.

Let's say Starbucks is currently trading at $20 per share.  You run one of your free stock scans and Starbucks is one of the ones in the list, you check the chart and see it's in a long term uptrend, but it has recently pulled back from $25 to $20 a share and some of the other indicators indicate that the stock is in an 'oversold' condition and the selling is losing momentum.  Everything is lining up and you want to enter right around this spot.  You put in an order to buy 100 shares of Starbucks at a price of $20 a share.  As soon as your order is filled, you immediately put in your order to sell at your upper price target, but MOST importantly, you put in an order to sell if the price goes down.  For example, if you think the price will go back to $25 you would put in an order to sell if it hits $25 on the upside but you would also put in an order to sell if it instead goes to $19 on the downside.  In that way, the maximum amount you lose is $1 per share with an upside potential of $5 per share.  That is absolutely key to technical trading.

Not all of your trades will work exactly as planned, so you need to cut your losses quickly and move onto the next trade.  Limiting your losses allows you to keep the vast majority of your account ready for the next trade.  If you just hang onto losing trades or keep averaging down in hopes that it might come back, you could end up wiping out your account completely, game over.  In addition to protecting you from big losses, it will also help you sleep at night knowing any losses are very limited.

There are a bunch of other useful items I've learned, but I've already spent way too long on this post and taken up enough of your time for today.  Hopefully some of your out there are interested enough to take the next step and read more about Technical Analysis for yourself.  It's a great tool to add to your trading toolkit.

I'm really enjoying it way more than I even thought I would and I also signed up for where I can see technical trades from about 50 other members and get daily analysis of the markets from the author of the book Come Into My Trading Room.  As part of the site, once you are comfortable, you submit your own pick every week and submit your charts to backup why you're making the pick and what price you want to buy at, sell at and where your price is on the downside to prevent loss.  There are about 10 people called Spikers that have been with the site for years and earned free membership to the site based on solid consistent winning picks over time.  You compete with the others on the site and if your pick does better than the 3rd place Spiker, you win $20 that week towards your membership fee.  If you do well, they could actually end up owing you $ at the end of the month.  It also makes you step up your game and do your homework, because your trade will be out there for everyone to see.  I just submitted my first pick this week and am pretty excited to see how it does. 

If you're at all interested, I'd recommend starting with the book that I recently finished, which is Trend Trading For a Living.  It will present some of the main indicators and a real good explanation of chart patterns and is a bit quicker of a read.  Additionally they give you specific scans that you can plug right into Yahoo Finance or other sites to return a list of stocks that have a high probability of going one way or the other based on their price pattern.

I haven't quite finished the other main book yet, but already know that one will have a more profound difference in my trading over the long term.  That one is Come Into My Trading Room.  That one has already gotten me to completely document every aspect of every trade and give myself a grade on your entry price, sell price and an overall letter grade based on specific criteria. 

For anyone REALLY interested, I'd be glad to send you an email with the trade that I submitted today which was for the stock AHT, complete with my analysis and charts to give you a visual example of what I'm speaking of.   Thanks for reading and definitely let me know if you need any pointers or explanation or just leave me a note to let me know you made it down this far!  That's impressive enough right there!


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