Stocks for the Rest of Us
Trading Tips
Trade School; Popular Trading Techniques
How To Use Moving Averages
Dec 4th
Moving averages are a useful tool for analyzing trends in a stock, commodity, or ETF. They simply smooth out the day to day fluctuations in prices and give the analyst a cleaner view of the trend. The number of days used in the moving average will determine the scope of the trend you are trying to identify. Use shorter 10, 20, or 50 day moving averages for short term trend identification and longer 200 day moving averages for longer term trend identification. You’ll notice in my basic chart setups I almost always have the 50 and 200 day moving averages displayed. There are several different ways to use moving averages. I’ve listed the most common below and I’ll make additions in time so be sure to check back often.
Trend Identification
The most common use for a moving average is simply to see which way the trend is. If the moving average is sloping upwards the stock is in an uptrend. When the moving average starts to roll over that means a new downtrend could be emerging. A sideways moving average would indicate a stock that is currently stuck in a trading range. In the example below you can clearly see the transition from the upward sloping 50 day moving average to the downward slop.
Trend Identification
Resistance and Support
Another common use of moving averages is as a point of reference for resistance or support. In a downtrending stock the moving average can act as resistance to any short pop that will naturally occur. This is almost one of those things that becomes a self-fulfilling prophecy as so many people use the indicator in this way. Take a look at the example below. You can clearly see that each time the price moved up towards the 50 day moving average it was met with selling. Similarly, the same type of action can be seen in an uptrend only you’ll have the stock bouncing up off of the moving average rather then below it.
Resistance and Support
Stop Losses
Another way I like to use moving average is to determine entry points for my stop losses. The use of stop losses is controversial but for me it is a way to inject discipline into my trades and keeps me from losing more money then I’d like. Take a look at the example below. Towards the end of 2007 the S&P 500 made a decisive break of the 50 week moving average which had acted as support for several other corrections including the two corrections that took place in 2007. At that point I liqiudated a large majority of my holdings and it proved to be a good decision. Consequently, confirmation of this trend reversal came in may when the 50 week moving average which had once been support was now resistance and the market then proceeded to crash.
Stop Losses
How To Use The MACD Indicator
Dec 3rd
MACD is another useful trend following indicator in which two moving averages are layed over each other with the buy or sell coming from the signal line crossing over the MACD. The signal line crossing symbolizes a change in momentun. The standard calculation for the MACD line is the 12 day EMA – 26 day EMA. The standard calculation for the signal line is simply a 9 day EMA of the MACD.
While the MACD indicator is ok I actually prefer to use the Histogram associated with MACD instead. When the Histogram starts to roll over, that’s the signal to buy or sell. As with any indicator, it is best used in addition to other indicators as confirmation.
How To Use MACD
Is Now The Time To Buy Stocks? Why Is It Always “A Great Time To Buy Stocks”? Don’t Listen To The Media
Nov 26th
Maybe it’s just me but I’m getting tired of the pundits on TV telling me that “It’s a great time to buy stocks”. They’ve been saying this for the past year and they’ve all been completely 100% wrong. Why are these people still allowed on TV? I understand that buy and hold is the traditional method of dealing with the stock market and that’s how wall street makes money but it’s clearly not necessarily the best method. I have yet to see a single person come on tv and say “hey you should be in cash until this volatility subsides”. I think CNBC should start putting little YTD performance meters More >
How To Handle The Bear Market Volatility
Sep 16th
Simple, don’t do anything. Now by that I dont mean bury your head in the sand and pretend like nothing’s happening. If you’re trapped long wait for the inevitable bounce and make a respectful exit. There have been at least 2 chances to do this since the market turned south. Unless you’re a daytrader there’s no reason to try to be hero down here and call a bottom. Why is it that everyone always has to try and call a bottom? Why do we feel so compelled to be in the market and catch the absolute bottom that we risk our precious capital? There’s nothing wrong with admitting that this market is simply too volatile to try and time. I subscribe to the notion that as individual investors we don’t need to call the bottom. In fact, we’re much better off waiting for a new uptrend to emerge rather then attempt bottom-fishing the stock market. How many bottoms have we had this year? Everyone thought the Bear Stearns bailout was the bottom. Nope. Then we had another bottom in July. Still wrong. How many more bottoms do we have to have before people give up? That’s probably the magic question because when that happens we’ll truely have a bottom.
Having said that I have to admit that today felt a little bottom-ish to me as panic and uncertainty were everywhere and we had a huge reveral today with a strong close. I wouldn’t be surprised if we rally off the lows but I say sell into it. There’s no reason to think that the worst is over and that we can’t head lower. How many more institutions can we nationalize? How much worse can it get? No one really knows so until the market starts acting better, decrease your positions and trade small if you must trade.
Fannie Freddie Takeover Rally Was Short Lived
Sep 9th
The fannie/freddie takeover rally was short lived and is causing some serious pain in numerous sectors. Most notably the commodities are still getting slammed. I tried to bottom fish FCX in a previous post but got stopped out almost immediately. This type of environment empahsizes the need for discipline and objectiveness. No matter how bullish you are or how cheap you think something is, IT CAN ALWAYS GET CHEAPER. Using stops, trendlines, and support lines will inject discipline into every trade and keep you from losing tons of money. For now, I’m still sitting with extremely high levels of cash waiting for an uptrend to appear. Until then, I’m sticking with smaller trades and tight stops.
Patience Is KING. Wait For Stocks To Pullback To Support Before Initiating A Trade
Sep 5th
Patience is KING!! Why? Because forcing a trade is a sure fire way to lose money. Let the trades come to you and focus more on minimizing the amount of money you could possibly lose on any given trade. Worry about how much money you could lose, not how much you can make on any given trade. For example, today I recommended a long side trade on FCX.
FCX
By defining your stop loss up front you’ll know exactly how much money you might lose. In this case, I recommended going long the stock here with a stop just below today’s close. The downside risk in this case is approximately $1, that’s the most you’re going to lose.
Here’s another example. A few weeks ago I recommended a short trade on CSCO on the basis that the stock had run a long way and was coming up on resistance. My recommendation was to short csco that day with a stop at 26, again, risking only $1. As you can see from my update, that trade worked out well.
CSCO short trade
Buy Stocks That Go UP!
Aug 8th
This may sound ridiculous but I’ve found the best method for me is to simply buy stocks that are going up. Of course you need to make sure they’re going up for a good fundamentally sound reason but as long as everything checks out, why not just stick with what’s working. Here’s an example of a stock I currently own and have owned for some time.
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PBR is like the XOM of Brazil. This stock has had some momentum behind it for awhile. It showed up on my personal stock scan I use within Worden Telechart. I purchased PBR back in early October and held it up until the middle of January. I had decided upfront that this stock would be sold as soon as it breached it’s 50 day moving average, a sign that momentum may be waning. I was stopped out at 105 and happily took my 31% gain.
Since then the stock has rebounded pretty hard and I decided to repurchase the stock at 106 after it cleared it’s 50 day moving average to the upside. It’s currently trading at 114 but again I won’t hesitate to sell it the second it breaches that moving average. You could argue that I shouldn’t have sold it at 105 back in January but I had no idea the stock was going to rebound so hard. For all I knew it could have tanked all the way back down to $80 and stayed there for months. I figure the $10 I spent in commission fees was cheap insurance. In the near future I’m going to try and add a page with momentum “stocks that go up”. These will be stocks that show up on my chart scans.
Welcome to the Marketgrind
Aug 7th
As small individual investors we are generally at a disadvantage to the big whales that dominate wall street. However, being small does have one very big advantage that is often forgotten and that is the ability to move our money around quickly. Most of the advice I see on TV is from hedge fund and mutual fund managers who are managing billions of dollars and don’t have this luxury. They tell us to buy stocks when they’re down and out of favor and look for hidden value. That’s great and all but I don’t really have the time to sit around and wait for a stock that I know is good to eventually be recognized by the rest of Wall Street. It could take months, years, or even decades for that to happen while my money is sitting around doing nothing.
Having said that, I believe the easiest way for small individual investors to trade is by following the trend. Rather then buy something that is down and out (which I do sometimes) I prefer to buy stocks that are actually going up and have some momentum behind them and sell them at the slightest hint of the impending downward spiral that is so often associated with a high momentum stock. The worst thing that can happen in that case is that the stock will recover quickly and resume it’s uptrend in which case you can simply buy it back for $5-$10 in commissions. You can think of it as an insurance premium against further downside.