Newstockreports

INTRODUCTION

Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs.

I have seen paupers become millionaires overnight

And

I have seen millionaires become paupers overnight

One story told to me by my mentor is still etched in my mind:

Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US10,000 for their opinions. One trader was so curious to know their views that he spent all of his 20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock markets direction. When they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He said, One said BULLISH and the other said BEARISH!

The point of this illustration is that it was the trader who was wrong. In todays stock and option market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategy and in the mental attitude and discipline one uses in implementing that strategy.

I share here the basic stock and option trading principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you are doing right and what you may be doing wrong.

You may have read ideas similar to these before. I and others use them because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your stock and options trading.

PRINCIPLE 1

SIMPLICITY IS MASTERY

When you feel that the stock and options trading method that you are following is too complex even for simple understanding, it is probably not the best.

In all aspects of successful stock and options trading, the simplest approaches often emerge victorious. In the heat of a trade, it is easy for our brains to become emotionally overloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.

PRINCIPLE 2

NOBODY IS OBJECTIVE ENOUGH

If you feel that you have absolute control over your emotions and can be objective in the heat of a stock or options trade, you are either a dangerous species or you are an inexperienced trader.

No trader can be absolutely objective, especially when market action is unusual or wildly erratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors, the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as many critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.

PRINCIPLE 3

HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES

This is the most important principle.

Most stock and options traders do the opposite

They hold on to their losses way too long and watch their equity sink and sink and sink, or they get out of their gains too soon only to see the price go up and up and up. Over time, their gains never cover their losses.

This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have been undisciplined, you will see its truth.

PRINCIPLE 4

BE AFRAID TO LOSE MONEY

Are you like most beginners who cant wait to jump right into the stock and options market with your money hoping to trade as soon as possible?

On this point, I have found that most unprincipled traders are more afraid of missing out on the next big trade than they are afraid of losing money! The key here is STICK TO YOUR STRATEGY! Take stock and options trades when your strategy signals to do so and avoid taking trades when the conditions are not met. Exit trades when your strategy says to do so and leave them alone when the exit conditions are not in place.

The point here is to be afraid to throw away your money because you traded needlessly and without following your stock and options strategy.

PRINCIPLE 5

YOUR NEXT TRADE COULD BE A LOSING TRADE

Do you absolutely believe that your next stock or options trade is going to be such a big winner that you break your own money management rules and put in everything you have? Do you remember what usually happens after that? It isnt pretty, is it?

No matter how confident you may be when entering a trade, the stock and options market has a way of doing the unexpected. Therefore, always stick to your portfolio management system. Do not compound your anticipated wins because you may end up compounding your very real losses.

PRINCIPLE 6

GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY

You know by now how different paper trading and real stock and options trading is, dont you?

In the very same way, after you get used to trading real money consistently, you find it extremely different when you increase your capital by ten fold, dont you?

What, then, is the difference? The difference is in the emotional burden that comes with the possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after some successes.

After a while, most traders realize their maximum capacity in both pounds and emotion. Are you comfortable trading up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.

PRINCIPLE 7

YOU ARE A NOVICE AT EVERY TRADE

Ever felt like an expert after a few wins and then lose a lot on the next stock or options trade?

Overconfidence and the false sense of invincibility based on past wins is a recipe for disaster. All professionals respect their next trade and go through all the proper steps of their stock or options strategy before entry. Treat every trade as the first trade you have ever made in your life. Never deviate from your stock or options strategy. Never.

PRINCIPLE 8

YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE

Ever followed a successful stock or options strategy only to fail badly?

You are the one who determines whether a strategy succeeds or fails. Your personality and your discipline make or break the strategy that you use not vice versa. Like Robert Kiyosaki says, The investor is the asset or the liability, not the investment.

Understanding yourself first will lead to eventual success.

PRINCIPLE 9

CONSISTENCY

Have you ever changed your mind about how to implement a strategy? When you make changes day after day, you end up catching nothing but the wind.

Stock market fluctuations have more variables than can be mathematically formulated. By following a proven strategy, we are assured that someone successful has stacked the odds in our favour. When you review both winning and losing trades, determine whether the entry, management, and exit met every criteria in the strategy and whether you have followed it precisely before changing anything.

In conclusion

I hope these simple guidelines that have led my ship out of the harshest of seas and into the best harvests of my life will guide you too. Good Luck.

Unless you are able to develop a considerable trading edge over the other traders, you will end up losing your money, even if you are disciplined and organized. In this article, I discuss some elements that I use in my trading edge.

Fundamental Analysis

Fundamental analysis is the process of evaluating the financial condition of a company using financial reports, priceearning ratios, revenues, market share, sales and growth, etc. This type of analysis can be time consuming so instead of going through pages of financial reports, I simply look at IBD ratings.

I like to use Investors Business Daily (IBD found at investors.com) to get a quick overview of a stock. The IBD rating covers:

1 – Earnings Per Share (EPS) rating: tells me a stocks average short term (recent quarters) and long term (last three years) earning growth rate. The number I see is how the company compares to all other companies. The scale runs from 1 to 99, 99 being the best.

2 – Relative Price Strength (RS) Rating: Measures a stocks relative price change in the last 12 months in comparison to all other equities. The scale runs from 1 to 99, 99 being the best.

3 – Industry Relative Price Rating: Compares a stocks industry price action in the last 6 months to the other 196 industries in IBDs industry list. The scale is from A to E, A being the best.

4 – Sales + Profit Margins + ROE (Return on Equity) Rating: Crunches a firms sales growth rate during the last 3 quarters, before and after profit margins and return on equity into one letter. The scale is from A to E, A being the best.

5 – AccumulationDistribution rating: Applies a formula of price and volume changes in the last 13 weeks to determine if it is being accumulated or distributed. A = heavy buying, C = Neutral, E = heavy selling.

If you like the idea of including fundamental analysis into your trading plan, consider trading only stocks that meet some minimum requirements – for example A or B, > 70, etc.

I like to use fundamental ratings for longer term trades such as the ones I plan on weekly charts. It is not really useful if you trade intraday.

Technical Analysis

Fundamental analysis is great to build a list of strong stocks, or as a way to filter out weak stocks, but thats about it. It does not provide you with an objective method to enter and exit trades. All my trading decisions (entry, exit, and stops) are based on technical analysis.

Technical analysis is the study of prices. The price action draws patterns on charts and because human behavior can be repetitive, the price patterns can also be repetitive.

You can choose from a variety of chart types. The Japanese candlestick charts are by far the best and it is the only form you need. There are entire books dedicated to the study of candlestick patterns – if you are serious about studying candlestick charts, look at books written by Steve Nison and and Gregory L. Morris.

- Support and Resistance: The most important concept in technical analysis is Support and Resistance. It forms the foundation for every trading decision and could cover many pages but I will limit myself to simplified definitions and a couple examples:

Support level: A price level that a declining market or stock failed to penetrate
Example: the low of the previous day forms an area of support and is often used as a stop loss.

Resistance level: A price level that a rising market or stock failed to break through
Example: a prior high in an uptrend forms an area of resistance and can be used as a minimum objective to take some profits.

Some technical indicators may also provide some support and resistance, for example moving averages, in part maybe because so many traders expect it.

- Oscillators

An oscillator is a technical indicator that tells you at a glance whether a market or a stock currently trades in an “overbought” or “oversold” condition. Some traders use oscillators to forecast a change of direction. Some examples include the RSI, Stochastic Oscillator, and MACD.

There are hundreds of oscillators and technical indicators. I personally look at them to filter out some stocks if I have too many good ones to choose from. I never use them as a signal to open or close a trade.

- Public Sentiment

I look for support and resistance on the VIX (Volatility Index) daily chart to anticipate reversals.

I look at the PutCall Ratio (5 MA and 10 MA) on the daily chart to see if traders are too bearish (MAs > 0.8) or too bullish (MAs < 0.5).

(MA = Moving Average)

- Market internals to see if the market is overbought or oversold

I look at the TRIN (5 MA and 10 MA) on the daily chart - overbought (MAs < 0.8) or oversold (MAs > 1.2).

I look at the McClellan Oscillator the market is overbought if it rises above +70 and oversold if drops below -70. A buy signal is generated if it falls into the oversold area (-70 to -100) and then turns up – a sell signal is generated if it rises into the overbought area (+70 to +100) and then turns down. If it goes beyond the -100+100 levels then it may be a sign of continuation of the current trend.

- Market and Industries

I like to buy stocks from industries in a strong uptrend and short stocks from industries in a downtrend. I also consider the direction of the industry for the day (positive or negative).

Putting it all together

This article is not about teaching you how to develop an edge but hopefully it shows you that there are many different tools that can be used to improve your odds. It takes time to find a combination that fits your personality. It takes time to find what works for you.

Trading stocks on the internet is a relatively new thing for most people but it wont be for long. The only reason that it is new in the first place is that the internet is new relatively speaking. In 1999 a little under 3 million people traded over the internet, now online stock trading has ballooned with more than 10 times that number of people trading daily.

So why have people begun to do this? Why is it so popular? Well there are several reasons and some are good and some are not as sound when you think critically. The most popular reason cited for online stock trading is that they no longer have to forfeit some of their earnings to brokers in fees charged per trade. This doesnt get them out of being charged fees per trade but it does cost a lot less to do it yourself with one of the dozens of day trading companies that there are available on the internet.

People are often trying to get away from brokers all together for more than just the fees they charged. Many people are fed up with brokers who did poorly in the recent downturn in the market. Their performances were sub par and people lost a lot of money so you cant blame them. However the word of caution is to not lump all brokers into the overpaid and under skilled group. There are many brokers who are well worth their weight in gold because they know the market so well and have such good instinctsthis shouldnt be your only draw to online stock trading.

Other reasons people left their jobs to go into full time trading on the internet because they think that they can do better at it than at their real job and it will be more fun to boot. There is a certain romantic idea that people have about sitting in their beautiful home sipping gourmet coffee and checking in on their online stock trading portfolios a few times a day while making hundreds of thousands of pounds. This is a dangerous move for lots of people because they have no idea what they are getting into.

In order to be successful you have to have knowledge of the worlds economies and how that can be affected by the current events of the day. You also have to be good at evaluation of companies as far as potential for profit and so on. The third thing that you must have is nerves of steel and a loose grip on the money that you are trading with. Many day traders (or former thereof) will tell you of the hits they have taken totaling many thousands of pounds in a few hours for a wrong move.

If you want be a successful penny stock trader, youll need to be an intelligent trader. There are very few requirements to start trading in penny stocks. It can be broken down into three main things.

1.Money:

The money we are talking about is not just the money that is sitting in your bank account. It is not the money that you use to pay for your rent, your car or your food. Penny stocks can be extremely unpredictable and although you might make a great deal of money it is also true that may lose everything, so it is important especially when you are starting out with penny stocks that you only use money that you can afford to lose. After you have built up a nice profit, you can re-invest your profits from past trades which will snowball your earnings.

2.Knowledge:

This is without a doubt the single most important factor in determining whether your budding career as a penny stocks investor will be a spectacular triumph or a dismal failure. If you are a newcomer to investing of any kind there are various guides you can buy and it is a good idea to read several of these before spending any money.

Penny Stocks: The Next American Gold Rush by Dan Holtzclaw
Stock Investing for Dummies by Paul Mladjenovic
The Guide for Penny Stock Investing by Donny Lowy

These are all good and although they will not help you with specific decisions such as whether to buy a particular penny stock, or when to sell, they give you a good background on how it all works and are invaluable in building a good knowledge base.

3.Make A Plan:

Before you investing any money, make an investment plan and stick to it at all times. This will help you become disciplined and will also help you organise your time and investments. Keeping things simple will result in less stress. Your plan should consist of the investments you are going to make and why and how much you are investing in them. It should also include your exit point (the price which you will sell your investment at to take profit) and also the time you want to allocate for your investments each day (i.e. The time it takes to monitor and research them).

Now you have got all the major elements in place you are set for the roller coaster ride that is the world of investing in penny stocks But remember that knowledge is the most powerful tool you have to make your penny stocks successful so start learning today.