Stock Picks 101 - The Evolution of a Trader

[Thierry Martin]

Stock Picks 101 - The Evolution of a Trader
By Douglas Newberry

If you take a look at just about any profession, you’ll find that people evolve through three stages: novice, competent and expert. Let’s take a look at how this works in the trading profession.

A novice trader is a one trick pony. They have one trading style they cling to for dear life. When they perceive that it no longer works, they’ll find a new system and believe with all their might that THIS is the way… until it too shows itself to be flawed. They are also inflexible and easily become confused when the unexpected happens. And, sooner or later, the unexpected will happen. They have lots of misconceptions, such as “shorting is bad.”

After the novice has been bloodied and bruised enough, he has a decision to make. Perhaps “trading is not for him.” If he sticks with it long enough, he eventually develops the experience to become competent.

A competent trader has “enough tricks in his bag” that he can adapt to a range of situations. However, he knows he needs to keep learning, and that there is always more to know. The overconfidence of the novice is replaced by the experience to know that uncertainty is a permanent fixture in his relationship with his chosen market.

As a trader matures, it gradually dawns on him that there is no “Holy Grail” of trading. There is no perfect indicator, system or money management approach that will GUARANTEE success. Usually, about the time the thankless search for the Holy Grail ends, a trader is competent enough to find his way without needing such an unrealistic psychological crutch.

A competent trader focuses on acquiring the right facts and making disciplined decisions based on these facts. He feels “safe” if he believes he “understands” the situation. For example, he may have a number of ways of picking stocks and a number of ways of playing his stock picks.

Eventually, a competent trader notices that he understands a situation even if the facts are not all in. This is because he can relate it to similar situations he has experienced in the past. He is then ready to graduate to expert.

An expert trader has enough tools, stock trading software and tactics under his belt that he can confidently take advantage of a trading situation without having to rely on detailed systems. In a sense, this is the opposite of the novice approach, because the expert knows what he is doing on an intuitive level. Getting to this point takes lots of hard work, and, as the saying goes, “many are called but few are chosen.”

However, the financial rewards for being an expert trader are greater than in most professions. Being able to pull money out of the market almost at will means you will make a very nice living. However, there is one last hurdle to overcome. It’s a battle that will last a lifetime: always be humble. No matter how good you are, the market is willing to take it all back if you ever forget that it will always be much bigger than you are.

Trade well, with earned confidence, and you will prosper.

Doug Newberry is the Director and Founder of Investing Systems Network (http://affiliates.investingsystems.com/id/21_1_tlid_12). He builds very reliable stock trading software (http://affiliates.investingsystems.com/id/21_2) so tens of thousands of all kinds of investors can trade with confidence. Investors in more than 25 countries enjoy his newsletter and his weekly online radio show.

[Thierry Martin]

Stock Picks 101 - Support and Resistance
By Douglas Newberry

How good are you at profiting from the humble horizontal line in your trading? Sometimes the simple things get undervalued in favor of the more complex and intricate.

So, let’s take a look at how useful horizontal lines are on your stock charts. These lines come in two types: support and resistance. Support lines form when a price repeatedly moves down to a certain level and then bounces back up. Resistance lines form when a price moves up to a certain level and then bounces back down.

To find support and resistance lines (we’ll call them S/R lines for short) take a look at a daily chart. You’ll notice that for many stocks, the price will “respect” specific levels.

Support and resistance lines form around levels that market participants consider significant. The supply or demand may be pegged because of a great interest in a stock at a certain price in the past. Alternatively, a large fund may be trying to get in or out at a certain price over a long period of time.

Sometimes, if the S/R line starts to become too obvious, it may “blur” and become a support or resistance zone. Also, S/R levels may be breached briefly and then the price returns. This can be confusing if you’re looking for a breakout from an S/R zone.

It’s important to keep in mind that sometimes it’s necessary to use “reverse psychology” if an S/R line becomes too obvious. There are traders who “lie in wait” for a novice trader to play a breakout or breakdown that turns out NOT really to be a breakout or breakdown. Beware of the S/R “wolf” waiting to snag a naïve sheep at the S/R line!

Speaking of breakouts, S/R lines are meant to be broken. Going long after a resistance breakout and going short from a support breakdown are time honored trading strategies. This can significantly enhance the return of your best stock picks.

Another thing to notice on price charts is that past support can become future resistance and visa versa.

Finally, S/R lines can form in pairs. The price will bounce repeatedly between a support and resistance area. This creates price channels that can also be traded.

As you can see, being aware of support and resistance can give you insight into the future trading direction of a stock. Just be careful not to be too simpleminded.

Doug Newberry enjoys his position as host of the "Market Toolbox On Demand (http://affiliates.investingsystems.com/id/21_1)" online radio show and editor of the "Market Toolbox Newsletter (http://affiliates.investingsystems.com/id/21_1)." His company, Investing Systems Network (http://affiliates.investingsystems.com/id/21_1), helps investors find the best stock picks by providing specialized investing tools (http://affiliates.investingsystems.com/id/21_3) and portfolio management software. It serves customers in more than 70 countries.

[Thierry Martin]

Stock Picks 101 - Market Watching Is Like Watching the Weather
By Douglas Newberry

Do you watch the stock market during the day? Would you like to hear a perspective you that can give you insight into how you can better “understand” what’s going on in the market?

Perhaps you’re one of those people with a good sense of what the weather will be like on any given day. Some people don’t need the local weatherman. They look at the sky, feel the temperature, smell the air, listen to the wind, take into account the time of year, and do a fine job of predicting the weather for the day.

Let’s take this example a bit further. If it’s a partly cloudy day, you can look up at the sky and “predict” when you’ll be in a sunny patch or a cloudy spot. Today’s cloud patterns also might help you predict tomorrow’s weather.

All this is done in a quick, casual, relaxed, intuitive manner. It doesn’t take a high powered computer and a formula intricate enough to please a rocket scientist to pull this off. It just takes some experience and the willingness to observe accurately. Then your brain naturally does the rest at a subconscious level and comes up with a weather prediction.

This is where it gets interesting: You can use the same kind of mindset to predict the stock market as the day progresses. Like the weather, the market behaves differently at different times of day. Like the weather, yesterday’s market has an effect on today’s behavior. The premise of swing trading stock, for example, is that there is observable price movement follow-through from one day to the next.

With a little practice, you can see the up and down wiggles of price during the day just as you can see cloud patterns play across a distant hillside. Some market days are “gusty” and others are “calm.” Some market days crackle with thunderstorms and others operate under a steady rain. Some days are humid and sunny and others have a bright, even light.

I’m making analogies in the previous paragraph. You’ll find yourself developing your own perceptual framework. Because we all have unique experiences, we all have unique perspectives. You’ll need to experiment with the “market-like weather” perspective to see what kinds of patterns you perceive.

Just like with the weather, this predictive technique breaks down if you get overly analytical. This method of “prediction” works best if done casually, without any emotional baggage.

You can take your observations to the next level by logging your impressions and then going back later to check their accuracy. As you get better at this, you can even factor it into your market trading process. Just don’t force it!

Enjoy watching the market as you’d enjoy the weather and you’ll be surprised at the subtle patterns you start to pick up on.

As one of the Directors of Investing Systems Network (http://affiliates.investingsystems.com/id/21_1), Doug Newberry consults on the development and usability of software (http://affiliates.investingsystems.com/id/21_2) for swing trading stock and portfolio management for investors in more than 70 countries.

[Thierry Martin]

Stock Picks 101- Learning the Easy Way
By Douglas Newberry

Learning to trade takes much longer than most of us would like. How would you like to take a shortcut and graduate early from the school of hard knocks?

When I ask the question that way, almost everyone is ready to learn to do that. The problem is that when I tell you what’s required, you’ll find a reason why it won’t work for you.

Here’s my tip. The easy way to save yourself AND your trading account a lot of pain is to learn from other’s mistakes.

Let me pause for a moment and wait for our virtual discussion room here to empty out a bit as all the people with really big egos head for the exit.

Still with me?

Great.

Here are some very common mistakes people make when learning to trade which you should watch out for.

First is the belief that trading financial picks is easy and quick to learn. I wish it were so. If it was really that easy, everyone would be doing it. Right? And if everyone were doing it and making money, who would be on the other side losing money? Not you? You never lose money?

Of course, you couldn’t possibly be the beginner the professionals depend on to make their living from. I mean, you’ve paid thousands to learn the systems and techniques that you’re now hoping will let you earn your living online. All that money spent on learning has GOT to make you a success, right? Take a deep breath here, because I’m about to tell you that regardless of what you’ve been promised, there is no guarantee that you will ever make money trading.

Next mistake is not to have clear trading objectives and realistic plans to get you to your objective. The word “realistic” in the previous sentence is worth quite a few books itself. It’s not easy to come up with a realistic trading plan because the market tends to be unpredictable. It will test your trading plan at the worst possible time.

A flawed or incomplete trading plan leads to the next mistake. Beginning traders tend to be fickle, trying one market or system after another. They don’t stick with any one thing long enough to get good at it.

Such traders are searching for the “holy grail” of trading, searching for a quick, easy, and immensely profitably system. While you may find a system that has two of those three traits, you won’t find the “holy grail” of trading.

A final common mistake it to go it alone. Trading can be a lonely profession. It’s just you and the market. You need to have fellow traders to bounce ideas off. But more importantly, you need a coach, trainer or guide to show you how to succeed and help you overcome your weaknesses.

This brings us full circle, because I started out by saying that you can avoid a lot of trading mistakes by learning from others. By having a successful trader as a mentor who you can learn from, you’ll save yourself untold misery.

Doug Newberry is the Director and Founder of Investing Systems Network (http://affiliates.investingsystems.com/id/21_1). He builds very reliable financial picks software (http://affiliates.investingsystems.com/id/21_2) for tens of thousands of all kinds of investors. Investors in more than 25 countries enjoy his weekly online radio (http://affiliates.investingsystems.com/id/21_1) show and his newsletter (http://affiliates.investingsystems.com/id/21_1).

[Thierry Martin]

Stock Picks 101- How to Maintain a Trading Diary
By Douglas Newberry

“Those that don’t know history are destined to repeat it.” – Edmund Burke

Trading is a business. Like any business, it has items of value. In your trading business, your “inventory” of cash is the most important asset. You must preserve it and increase it at all costs.

You also have financial tools. One of your business’ more subtle items of value is your decision making process. You must constantly be striving to improve it.

This is where a trading diary comes in. A diary lets you log and then analyze your decision making process. Such an “at-a-glance” is invaluable for doing the kind of self analysis you need to make sure your decision process continuously improves.

Every trade you make should be entered in your trade diary. Enter the date, time of entry, symbol, company name, number of shares, price per share, setup, trigger, expected trade duration and your subjective state. These entries should be made at the time of the trade. They decrease in value in proportion to how delayed you are in making the entry. In other words, make them right away!

Trade exits should be noted with similar items to the entry including the profit or loss. Of course, you’ll find that you’ll develop your own list of items to include. Whatever you do, be consistent.

Here’s a neat tip: also log trades you did NOT take but you seriously considered taking. Make a note of why you decided against the trade. Then you can go back later and see what might have happened if you had taken the trade. This will give you additional insights into your decision making process.

In addition to keeping a trade diary, you should also maintain a spreadsheet that shows you all your positions at a glance and how they’re doing. To get you started, here are some ideas for columns you can include in this spread sheet:


• Symbol
• Sector
• Description
• Quantity
• Purchase Price
• Purchase Date & Time
• Comm. Cost
• Latest Price
• Market Value
• Percentage of Assets
• Gain or (Loss)
• Percent Gain or (Loss)
• YTD Return
• Dividend Yield
• P/E Ratio
• Projected Growth Rate
• Average Daily Volume
• PEG Ratio
• Market Cap
• Beta
Depending on your trading style, you can add or remove columns. For example if you primarily day trade, you probably aren’t interested in dividends or PEG ratio. But these and other fundamental attributes are quite useful if you have a long term trading style.

The big difference between the list above and that which is maintained by your brokerage is that you continue to maintain the entries after the position is closed. Brokerages usually remove closed items from your list.

You’ll be surprised at all the things you discover once you start to develop a trade diary with a significant history. How often you review your trade diary will depend on the frequency of your trading. A day trader will want to do a review once a week. A long term trader can review his stocks picks quarterly.

Live long, document well and prosper.

With customers in more than 70 countries Doug Newberry enjoys his position as host of the "Market Toolbox On Demand (http://affiliates.investingsystems.com/id/21_1)" online radio show. He is also the editor of the "Market Toolbox Newsletter (http://affiliates.investingsystems.com/id/21_1)." His company, Investing Systems Network (http://affiliates.investingsystems.com/id/21_1) specializes in providing financial tools (http://affiliates.investingsystems.com/id/21_3) and portfolio management software (http://affiliates.investingsystems.com/id/21_3) for its customers.

[Thierry Martin]

Stock Picks 101: The Best Trading Decision May Be Not To Trade
By Douglas Newberry

Trading can get into your blood. You like the challenge of it. You like the reward. However, sometimes the best decision you can make is to do nothing or at most, just maintain the positions you already have. Let’s take a look when this might be so.

There are some predictable and recognizable times when the trading volume in the market is low. Low volume can lead to erratic, unpredictable price movements. These moves can be a challenge to trade, and often have a low risk-to-reward ratio. In other words: “Stay away.”

Summer is the longest and most obvious stretch of such unrewarding times. “Sell in May and come back again on St Ledger's Day (that’s in September),“ as the saying goes. This quote may approach the banality of a platitude, but it’s still good advice. Why not take a vacation along with everyone else? You’ll need it once September comes along.

Side comment: not all summers have low activity. For example the summer of 2004 provided some good market moves. However, late spring is still a good time to give your portfolio a “spring cleaning” and get rid of positions that just aren’t going any place and probably never will. As an example, sometimes your stocks picks looked good when you entered, but the conditions at that time no longer exist, and you just might not have taken the time to notice.

But summer is not the only time. Trading around holidays can also be slow and erratic. For example, many professional traders take off between Christmas and New Year’s.

There are also some less obvious times when not much is happening in the market. Lately, if the market is anticipating an important announcement from the Fed, it tends to hold its breath. Unless you like to watch paint dry, don’t bother trying to suck a profit out of a market like that.

Don’t let these suggestions lull you into thinking that these are the only times to avoid trading. The market may not behave rationally much of the time, but it does learn from its past. For example, was there any significance to September 11 before 2001? Always be mindful that new patterns are forming all the time, and old patterns lose their hold.

Finally, the market alone should not dictate the best trading times for you. You also have rhythms and timing all your own. There may be certain times of the day, or certain seasons, where you simply do not perform well. Studying your trading diary should give you some hint about when and to what extent these periods exist.

In summary, the market and your personal psyche have “moods” that affect the level of risk you’re taking when entering a trade. Keep that in mind as you contemplate trading. After all “cash” is also a position. And, if your money is not earning superior gains for you in a good position, you might as well have it in cash.

As a Director of Investing Systems Network (http://affiliates.investingsystems.com/id/21_1), Doug Newberry is the consultant for the conceptual development and usability of stock picking tools (http://affiliates.investingsystems.com/id/21_2) and portfolio management software. These trading tools are offered to investors from more than 70 countries.