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A couple of the recent winners are
experiencing some choppiness. CPNE succumbed and bounced earlier
this week. Now it's recent new idea and big win PHCHF. PhotoChannel
corrected
a bit after a 10 day, 30% run up, and arrived at a perfect 61.8%
retracement level. Read my BLOG for more information. It
was posted Thursday afternoon. On Friday the stock firmed up a bit.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
publicly displayed, you can always email me directly at editor@otcjournal.com.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG will scroll down automatically on the right side of your
screen. The most current journal entries appear in the middle of your screen.
Check back frequently for updates particularly when stocks are moving to
overbought or oversold levels in volatile markets.
It's time to get serious. The summer
doldrums are over. Large and Mega Cap stocks are gaining
ground every day. Microcaps are beginning to wake up. The three year energy
bull market is over. The FED is done raising interest rates. There were
no big hurricanes or terrorist events this Fall. The economy appears to
be headed for the perfect soft landing scenario. The real estate bubble
has burst, leaving the market as the next investment of choice for aggressive
investors. There is tons of cash on the sideline. Most technicians believe
we have just completed a four year cycle, and a new 1 to 2 year bull market
for stocks is just kicking off. Earnings for Q3 are already coming in strong.
Seasonally, we are at the best time of the year. Wow- does it get any better
than this?
Here's where we're at right now.
Mega large caps have traded beautifully since the beginning of August,
with the DOW making a new all time high. The S&P 500, home of the large
cap stock is starting to behave in kind. Small caps are just beginning
to show some signs of renewed life. Micros are lagging, but in a new bull
market are generally the last to join the party.
It's time to look at some fundamental
rules for making money in the stock market. Here's some food for thought
as we move into what should be a very strong money making environment over
the coming months in the microcap arena.
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Do You Have
A Disciplined Trading Strategy? |
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When you buy a stock, do you have
a plan? Do you have an objective, and are you disciplined?
Over the years I have talked to many
investors who don't seem to have a disciplined trading strategy. Like a
kid in a candy shop, they simply want to grab the hot story de jour without
regard for gains and losses over the longer term. It's human nature to
want to pile into whatever is moving. Typically, the stock spikes up on
high volume, you buy at the top, and watch your hard earned capital erode
when the stock comes back down.
It's in our psychological make up
to want to participate when everyone else is jumping on board. Is this
the best way to make money in the market?
After years of trading stocks, here's
what I know. I can tell you with a great deal of certainty that no single
strategy works for everyone. If there was one right way, everyone would
use it, and then it wouldn't work. You have to find a strategy that works
for you, and stick with it.
In the world of trading stocks there
are several widely accepted successful strategies. Here's an overview of
three tried and true approaches:
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The Day Trader: Day traders,
by definition, are in all cash at the end of every trading day. Day trading
is 100% technical. Day traders look to take advantage of intraday volatility
by trying to get on the right side of small moves with big money. Day traders
try to identify patterns that repeat themselves in order to forecast price
movements over very short increments of time with no regard for company
fundamentals. To be a good day trader, you must sit in front of your computer
all day long, act quickly when the market moves in your favor, and be prepared
to limit your losses when the market moves against you.
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The Swing Trader: Swing
Traders tend to be in positions anywhere from one day to several months.
Most of us probably fall into the category of a swing trader. We are looking
to take advantage swings in the market based on a combination of both technical
and fundamental analysis. Find a company you like. Take a look at their
business model, industry group, and potential for fundamental growth and
market moving news. Once you have determined you like the idea, some rudimentary
technical analysis is in order. Take a look at the chart, and make sure
your entry level gives you reasonable upside. Don't buy on the days when
there are big spiky moves, and don't buy your entire position on the first
trade. A good swing trader will decide in advance how much capital they
are willing to allocate for an idea. About 1/3 should be invested on the
first trade. From there, you can look for retracements to either the uptrend
line, to a 61.8% level, Dinapoli's 3x3 moving average, the 50 day moving
average, etc. It all depends on your style.
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The Long Term Investor:
If you are a long term investor, by definition you are going for long term
capital gains. Based on current tax law in the US, the gains you make on
any security you hold in a non-tax sheltered account are only taxed at
15% if held over one year. When going for big gains, this favored tax status
can enhance your returns significantly vs a 40% tax rate on short term
capital gains for those in the higher income brackets. I have found long
term investing to be one of the best ways for non-professional investors
to make strong returns over the long run. Sometimes it takes companies
months and years to implement their growth strategies. Long term investing
works really well for those of us with day jobs who don't have the time
to monitor moves all day long.
Each of the three trading strategies
above are sound when approached with discipline. Here's the question- when
you buy or sell a stock, do you know which trading strategy you are using?
If you are buying for a day trade, are you prepared to sit in front of
your computer until you close out the position at a gain or a loss that
day? If you are a swing trader, do you understand the company's business
model, upside, and potential catalytic event that could get the stock trading
up in future days and weeks? Do you have the time to monitor the position
on a daily basis. If you are a long term investor, do you understand the
company's market cap as compared to its peer group, and do you understand
the long term potential for growth?
I use all three strategies from time
to time. When I enter a position, I know which strategy intend for the
trade. I rarely day trade. I'm not a good enough technician or brave enough
to invest enough money to make it worth my time for an intraday trade.
However, if I enter a position as a swing trade, and it goes in my favor
during the day, I might choose to lock in the short term profit. It happens
every now and then, but it's just luck when it does.
I have one brokerage account that
I view as my "trading capital". That money is set aside for swing trades.
I have several positions that I picked up for a period of anywhere from
a few days to a few months, depending on how the security behaves. I will
also use this account to make bets on the market- either up or down depending
on whether it is overbought or oversold. I buy in the money puts or calls
on the QQQQs to bet on market moves. I use the discipline of a "stop loss"
in all trades with my trading money. When I take a position, it is generally
1/3 to 1/2 of what I am prepared to risk. If the security moves against
me, I will add another 1/3 to the position as long as it is trading above
my stop loss. I also set my mental stop loss when the first trade is done,
and simply sell if it gets down to that level. Preservation of capital
is a key component in my trading strategy.
For swing trading ideas, I like to
accumulate positions when they are quiet and no one wants them. If you
see a big streaky move on a chart, you can be sure I have sold either part
or all of my position into that move. If you see a big, streaky move down,
I am generally buying, depending on the reason for the down draft. If the
stock drops because there is a fundamental change which sabotages the original
theme, I will usually wait for a bounce and then sell. The chart shows
a historical streaky sell move recommended by the OTC Journal in
the January to March time frame. Note the sell recommendation on the spike.
There will be more of those to come.
I also have long term investments.
I have about four times as much capital in long term investments compared
to my trading money. This money is tax sheltered through my retirement
plan in a self directed program. The money is split between two hedge funds,
but it could just as easily be in mutual funds. I average about 20% annually
in these two funds. At that rate, I should double my money every four years
or so. It compounds since I don't take any money out. All I do is look
at the monthly statements.
Certain stocks lend themselves to
different strategies. For example- here's a tale of two stocks that fit
into the same category. CPNE and PHCHF both look like very
appropriate swing trade candidates right now. Those are my two favorites
of the current OTC Journal followings. One I have been covering
for years, the other just a few weeks. On the other hand, I really like
both BYTH and USEI. However, based on the way the stocks
are behaving, they are only suitable for long term investors. You should
be out of these if you were in them for a swing trade.
Today I've presented several trading
strategies you might find helpful. If you haven't already, find one or
more that will work for you. A lot depends on your circumstances. If your
job doesn't allow you time to monitor the markets, you should consider
long term investments only. If you have some time and like to trade your
own account, swing trading might work for you. Day trading is for pros
only.
Here's a certainty: you should have
a disciplined strategy going in, and stick to it. If you've bought a stock
for the long term, hold it for the long term. Sell it early only if the
fundamentals change. If you've bought a stock for a period of days or weeks,
stick with the discipline of a stop loss or sell for a profit when your
target is achieved.
Trading in the markets without a
structured game plan is like having the offense take the field in the NFL
without a game plan. Bret Farve does not draw his receiver's routes on
his hand in the huddle. It's all planned out. That's why he's #2 for yardage
in the history of the NFL. He goes into every play with a plan. You should
do the same when you trade. You can change the plan as conditions change,
but always have a plan.
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