How To Trade Stock By The Hour And Win: 9/20/09

Friday, September 25, 2009

Sell Strategies - Setting Your Exit Target

There is an old rule in the market, often repeated by Jim Cramer on his "Mad Money" program on CNBC: "Bears win, bulls win, pigs get slaughtered." This means that those who hold on to their stock to long end up losing money.

So, when you should sell your stock? Sell strategies are just as important as your buy strategy. It seems everyone has their preferred way to buy. Every investment newsletter lists stocks to buy now; your broker has her favorite "strong buy" list; your friend at work has his "can't miss" stock to buy now; heck, even the taxi driver has their favorite stock idea. Let's assume they are each right with their picks. You followed their recommendations and the stock has gone up. What do you do now? Do you keep holding, hoping it will continue to go up? Do you sell it all, or maybe sell some of it?

Well, these are all good questions, since you do not make any money until you sell what you bought. To bad none of these people told you when to sell. Up until now any gains you have are unrealized and exist on paper. Only when you sell do you actually realize any profits from your investments and trades. Now, if you only knew what to sell and when to sell it. Actually, there are five reasons to sell stocks that have unrealized gains:

The price has reached the predetermined target you established when doing your homework before you made your purchase;

The price drops back down to your trailing stop order that you have set according to your stop rules;

You need the money for some other purpose (to buy another more promising stock, to invest in some other asset or for some other good reason;

As a part of good capital management you wish to realize some of the gains and reduce your holdings of this stock; and

You have reached the end of the time you gave for this stock to perform and you believe there are better opportunities.

Today, let’s focus on setting your exit target. If you did your homework before buying your stock then you should have a good idea of the potential it has to grow. This means you went through a rationale process to set a target exit price. This target can be based on analysis of the financial statements and then project performance over a set period of time. You can also use one of several technical methods.

Fundamental Approaches

There are several ways to calculate the expected price per share of the stock including Discounted Cash Flow (DCF), a stock's P/E ratio (Price Earnings ratio) or Earnings Yield, among others. Stephen Penman's book Financial Statement Analysis and Security Valuation is an excellent source on understanding financial statements and then using them to develop stock valuations both present and future. It is a text book in many MBA programs. To his credit Dr. Penman does not focus on the accounting used to develop financial statements, but rather how to use them in your investment analysis and valuation.

Let's look at a simple example. XYZ Corp's revenue and earnings were growing at 20% per year, with current Earnings Per Share (EPS) of $1.50 and a PE ratio of 25 (stock is selling at $37.50). Based on your careful analysis, you believe the company will continue to grow revenues and earnings at the same or possibly higher rate for the next year. Multiplying EPS by the 20% growth rates gives us the forecast EPS in one year of $1.80, assuming no dilution in shares outstanding. You also assume that the PE ratio will not change over this year. As a result the value of the stock of XYZ is forecast to be $1.80 x 25 = $45. This is an 20% increase in the value of the stock, not surprisingly since the only variable that changes was the growth in earnings at 20%. Now, if your analysis showed that XYZ grew their revenues faster than costs, earnings would have grown faster than 20%, say, for the purposes of this example, 25%. You might have also decided that since earnings were growing faster the PE ratio would increase from 25 to 30. As a result, the value of XYZ in one year is forecast to be ($1.50 * 1.25) * 30 = $56.25, a 50% increase in value per share. A very nice one year return.

With these two forecasts for the value of XYZ Corp, you have bracketed the growth potential of the stock. This gives you a range to set your target exit price. You also can use the assumptions you made to help monitor the performance of the company, the sector and the economy. It is important to stay current on the company you own on a regular basis. I encourage you each week to spend 1/2 hour per week per stock reviewing recent press releases from the company and their competitors, the sector and the economy in general. You will become a more successful investor for it.

There are several things to keep in mind regarding these forecasts for the price on XYZ Corp. First, these are forecasts and they do not necessarily work out all the time. It is best to monitor the assumptions you made as time goes by to assess if your forecast is working as expected. Second, this projection in the value of XYZ stock is based on analysis of the company’s financial statements. Business conditions can and do change, sometimes for the worse. If you perceive a change for the worse, then it is best to close out your position. With today's low cost brokers, you can always reestablish your position if the situation changes for the better. Third, while this type of analysis isn't difficult, it does take some homework and time. It is best to try to keep your analysis simple, so you understand the key drivers of the business.

Technical Approaches

Your exit target can also be determined by using technical analysis. Some technicians use what they call the Measure Rule as a way to forecast their target exit price and as a result how much profit they can expect from a trade. The Measure Rule computes the difference between the highest high and the lowest low in the formation they are analyzing to give you the formation height. Then they add the formation height value to the highest high to get the target price for upside breakouts and subtract the formation height value from the lowest low to determine the downside target.

I know of no rationale explanation why the Measure Rule should work. However, since many technicians use this rule it is helpful to understand it and be prepared for some selling to occur at the measured target. I am aware of an article by Thomas N. Bulkowski that modifies the Measure rule by multiplying the result by the percentage that meet the price target based on his statistical analysis as presented in his book "Encyclopedia of Chart Patterns (Wiley Trading) ". This approach employs uses actual results to statistically set targets based on the past performance of the formation that is observed. Since it is based on the statistical performance of each formation in the past, this approach seems to work as predicted using the probability in the formula.

For more on applying statistical results please see Thomas Bulkowski's web site here.

Other technicians set their target based on the next level of resistance they see in the chart pattern. Resistance is where the price reaches an area of new and increased selling that halts the rise in the stock. Often this is where some investors who have been in the stock for a long time will sell to either recoup their losses or to breakeven. It is also an area that traders may use to close out their positions after buying at lower support levels. All this selling causes the price of the stock to pull back. When setting your exit target, this resistance should not be considered a specific price, but rather a range. Often the price will not hit the exact former high, so it is best to use a range for your resistance area.

For example, using your favorite charting software, examine the chart for Earthlink, Inc. Assume you knew to buy ELNK at 6.5 in April 2003. Using the chart and your technical analysis skills you set your exit target at 11.3. We also set this price as the target in our sample portfolios, so you can verify your ideas with ours. In the middle of January 2004 ELNK reached your exit target and your position was closed out for a nice $4.80 per share profit or 74% gain over 8 months. Not bad.

There are two problems with using resistance as your target exit price. First, if the stock is reaching all time highs, then there will not be any resistance levels to use. As a result you will have to use another way to set your target. Second, resistance levels are also points of entry for many technicians if there is strong buying volume associated with the penetration of the resistance area. These breakouts can cause the price to continue its upward movement. When analyzing whether to keep your exit target, it is a good idea to monitor the volume the stock is experiencing as it reaches resistance. If the volume is strong, indicating good demand for the company's stock, then you may want to move your exit target up to another level. Examine the chart of ENLK again, noting that the volume started to increase as the price neared resistance. Then it pulled back as it hit 11.3. This indicated that there was insufficient buying demand to push the price through this resistance level. Generally, I look for volume building and substantially greater (130% or more) than the 50 day moving average for volume as an indicator that the price has the strength to penetrate resistance. Otherwise it wise to sell at your target. You can also sell part of your position 1/2 or 3/4 to capture some profits and then let your trailing stop protect the rest of your profits.

Historical Point Move

Another way to set an exit target is to calculate the point move a stock has made over a recent time period, say the last year, and then use that number to calculate your target. Let's say you are interested in Company ABC as a value play that is currently selling at 20. This price was at 30 one year ago. This 10 point difference becomes the number you add to your purchase price to set your target exit price. Assuming you decided to buy at 20 then your target price would be 30 (20+10=30). Since the time frame used to determine the gain value (10) was one year, you should assume that this trade will take that long to realize its potential.

Using the historical point move strategy is actually similar to the technicians’ use of resistance levels. The point move over a set time period, say one year, does not necessarily mean the historical price is a resistance level. However, this historical price does act as a sell point when investors use this approach.

Another consideration, is when tax consequences from taking profits becomes important. Assume you have a gain and you are approaching the one year anniversary of when you purchased the stock. Currently, short term capital gains are taxed at your normal tax rate, while long term capital tax rates are 15%. If you are in a tax bracket higher than 15%, then it may benefit you to sell your stock after the one year anniversary. Your specific tax situation can also influence when you should sell. Please consult your tax advisor to help assess your current situation.

My Preference

For all of my trades I look at the results of the fundamental and the technical approaches. Knowing the value investors place on a company's stock to determine potential the potential sell price provides a disciplined process assess your own position. Using technical resistance as shown on the charts also provides a good indicator of what traders are considering as their sell targets. Blending of these two techniques provides the best way to create a target exit with confidence.

Hans Wagner
http://www.tradingonlinemarkets.com
An education and portfolio management site for investing and trading stocks. Our portfolios substantially beat the major indicies and include buy and sell suggestions.

Article Source: http://EzineArticles.com/?expert=Hans_Wagner

The Magic Bullet Method of Investing

Sadly, too many people believe that the successful in our society got that way through luck. So their financial plan is based not on earning and investing money, but waiting for their fairy godmother to show up.

Some “miracle” roads to riches:

The Lottery

What better way to get rich, but to play the lottery. Even though the odds are 200 million to one, somebody’s got to win – right? Why not you?

The ancillary to this is gambling. Go to Vegas or Atlantic City and blow the paycheck at the blackjack table or, even better, the roulette wheel.

Or go to the track and try to hit the trifecta.

Most gamblers will blow their winnings away sooner or later. They really aren’t in it for the money.

But lottery winners, those who get checks for millions of dollars, apparently have the same problem. I have read that the majority of lottery winners blow all that money away with five years or so.

Get Rich Quick Schemes

You get a letter in the mail or you see an ad on the internet. Just send in a few bucks or a few hundred bucks or a few thousand bucks and you too will be raking in $35,000 a week while you lounge on the beach.

Other variations are: $100 an hour stuffing envelopes; $500 an hour for filing out forms on your computer; or buying a pre-made website and sitting back while watching your bank account fill up.

Don’t forget to check out those government grants for paying off your debts.

In this case, the ones making the money are truly lucky – for finding another sucker to fall for their schemes.

Why not go down to Mexico and pick up a kilo of cocaine to sell on the streets. The markup - and your legal fees – will be tremendous.

Or give all your savings to the guy you met in the bar whose paying out a “guaranteed” 50% a month interest. You brother-in-law is in on this deal, so you know it really works.

Anybody ever heard of a guy named Ponzi?

The Government Will Take Care of Everything

There’s no such thing as a free lunch and, even though the government hands them out to anyone who asks, someone has to pay, in this case the taxpayers.

Did you know that the percentage of people not paying income taxes in the US is approaching 50%? If nobody’s paying, where does the free lunch come from? There are only so many “wealthy” taxpayers left to soak.

In New York City, the low income clients of the Housing Authority are being asked for “givebacks” in the form of higher fees. Social Security is on the ropes. The golden goose is beginning to run dry.

All government handouts come with strings attached. If the government gives you something, it will then want to tell you how to live. Are you ready for the trade-off?

Great Expectations

The long term average return of the stock market is 10% a year. However, if you do a little calculating, you see that you will never reach your goals at that rate. So you figure a 15% return.

There are many people who successfully beat that the stock market year after year. It takes a lot of work to do so. Even the pros have a hard time.

If you have acquired the learning and are willing to put in the effort, you may be able to safely make that assumption.

But don’t base your financial affairs on a simple assumption, hoping your dreams will come true through, just because you’ve been lucky all your life.

You can steal money or inherit it. Most people have to work for it and they have to work even harder to make it grow.

For information on real financial planning, visit http://www.credit-yourself.com/financial-planning.html

Chris Cooper a retired attorney, and his wife Aileen, who has a MBA in Finance, provide personal finance and financial planning advice at Credit Yourself – http://www.credit-yourself.com

Article Source: http://EzineArticles.com/?expert=Christopher_Cooper

Optionetics, Investools and Bettertrades - Why They Want to Teach You to Trade

It's late, you can't sleep, you are zapping around looking for something to watch, thinking about the bills, the boss, maybe having a drink or two trying to get sleepy and you land on an infomercial about how to make a living trading. The music is upbeat, attractive presenters, and best of all, it's free. You just have to call and reserve you place at the free two hour seminar on options, forex, commodities or equities trading.

It sounds too good to be true, but we would really like it to be true. Live the lifestyle; it's always sunny, drinking coffee by your pool, playing with your computer. Something tells us it can't be, but the two drinks and the horrors about tomorrow convince you to call and reserve you spot at the free seminar, because seating is limited and there are only a few places left. Do you think anyone ever called one of those numbers and was told there were no places left?

One law of life that has few exceptions is that the bait for all cons is greed. So why do Investools, Optionetics, Bettertrades, among others, tour the country, year round, giving free seminars on how to get rich on the stock market? You guessed it. The two hour seminar is a free two hour sales pitch for another seminar, which costs between $3,500 and $4,000. But that seminar will really teach you how to get rich on the stock market. Come on, what is another 4 grand to you, when you will be living in Florida, sitting at the pool all day playing with your computer?

And then, once you pay the 4K, you can certainly cough up another few grand for software, newsletters, and advanced training, right? For that lifestyle, you should be willing to pay much more. Because the $4,000 weekend is also a bit of a sales pitch.

Now, is anyone really surprised? I don't think so, but we all, at some point or another, have fallen or almost fallen for the too good to be true. That girl, so sweet, but who set off all the alarms in your head. Or that guy, so smooth, so handsome, but you knew he was no more than a two day gig.

So for the math. These folks are all very accomplished direct marketers, very metrics driven. They go to a city, do 6 or 8 two hours events in 3 or 4 venues. They run direct response TV campaigns about a month before the events. These DR spots are sold very cheap, anywhere from $100 to $400 per thirty minute slot. The cost of getting someone in the room is on the low end $150 in advertising spend, on the high end $450. They also do direct mail and of course internet, though these guys are pretty old school, not as comfortable on the web as they are with good old DR TV and Direct Mail.

So the big question, if it costs on average $300 dollars in ad spend to get a butt in the room, how many butts buy? A 15% close is about average. So here goes the math. $300/15%=$2,000. And let's say the average price is $3,500. Now you can answer that other difficult question, if it is so easy to make money on the stock market, why do they run around the country teaching people how trade instead just trading. Yes, that is a nice 75% return on investment. And they are in and out 2 months, from the first TV spots to last day of the paid seminar. Of course, that is gross margin, they have costs, crews, venues, commissions, travel expenses etc. But by the time they are done, they will milk another $1,500 out of the guy (majority are men) in the next 12 months. So we can safely say that operating margin is pretty close to 50%. What trader can do that consistently? None. That is why they teach.

And the biggest player, Investtools, went and bought themselves a brokerage house, and that is really where the money is. The brokerage margins are even better then the education margins. I don't know if the other education firms are getting kicked back something from the brokerages houses, but if they aren't, they should be, because they are teaching people to trade options, forex etc., a gold mine for online brokerages.

What is the difference between an options brokerage and a casino? Any jackass can walk into a casino and lose his shirt, but not many people will go to OptionsXpress.com, open a six-pick, and burn through 10 grand in a few hours. Options and forex are intimidating; people need to learn how to trade before they wipe out a nice piece of savings with a trading account.

Of course, some will say that it works, if you follow all the rules etc. you can make some money trading. I am sure you can. But how many do? I would bet important private parts that if the brokerage houses that feed off these education firms opened their books and we could peak in and see how many accounts from funding to going dormant win and how many lose, it would be shocking how much people lost.

I will end with the old joke about the difference between brand marketing and direct marketing. A sexy woman walks into a party and eyes and attractive man, she unbuttons her shirt a bit, gives him the big look, and than approaches. 'Hi, I'm really good in bed, want to come home with me?' That is direct marketing.

An attractive man stands with a drink in his hand, calm, collected, waiting. A very attractive woman approaches, she says "Hi, I heard you're great in bed, can I go home with you?' That is branding.

Beware of direct marketers; they might give you the clap.

Robert Bonomo is a novelist, journalist and blogger. He has lived and worked in Madrid, San Francisco, Miami, Buenos Aires, Kamchatka and New York.

He has recently published his first novel, Cactus Land, available on Amazon. Purchase Cactus Land on Amazon

And he writes a blog Cactus Land Cactus Land Blog

Robert has worked for ad-networks, affiliate networks, and as online marketing manager and consultant for several companies. To contact him regarding consulting jobs and see a detailed resume, please see the Professional Services link on his blog.

Article Source: http://EzineArticles.com/?expert=Robert_Bonomo

10 Most Common Stock Trading Mistakes

In today's stock market, you have to be flexible and move fast, or you won't be trading very long.

I've made more than my share of mistakes while trading for 30 years and have witnessed these from amateur investors much too often, more so than good strategies.

The most common 10 mistakes amateur investors make:

1. Buy and Hold - this simply does not work any more, even if you're going to hold a decade or longer. Some stocks have returned to 1930 levels recently, while others have gone bankrupt.

2. Holding Losers Too Long - even pros have losing trades; the best attitude is that the "first loss is the smallest" and to go ahead and take a loss when you're getting uncomfortable with it, say 5-10%. This can be done automatically with a stop loss order placed as soon as you buy a stock that will cause it to be sold if it falls a certain amount. Through experience I like a 5% stop, but 10% for some of the new ETFs.

3. Buying Too Many Stocks - most people hear that they need to diversify, then proceed to buy 10-25 stocks hoping to be safer. The best way to diversify is to buy an exchange traded fund (ETF) that represents a basket of stocks and you have instant diversification. I've found the best amount of stocks to own is 3-10, only a few in bear or difficult markets, and only 10 in raging bull markets. As long as some of these are ETFs, you're diversified.

4. Buying with Market Orders - learn how to use and buy with limit orders, or a top limit that you will pay for a stock. Otherwise, you may be the chump that bought at the high of the day just after the market opens when a market-maker takes advantage of your order. I've seen prices jump from 15 to 18 for one order, then come back down to 15 again!

5. Buying Stocks at the Open - the first half-hour to hour of market trading is the worst time in the day to buy stocks. Orders pile up overnight from people who trader after work, from Asians, then Europeans. So when the market is in a rally, these are usually buy orders and the market often opens higher, then dips after these initial orders are processed. It's best to buy after the first hour or during the lunch hour. It's said that "amateurs trade the open, pros trade the close."

6. Buying Hot Tips - rarely will you hear the proverbial hot tip that turns into one. What you'll hear more often is unsubstantiated rumors, bogus stories, and sometimes downright fraudulent attempts to move a stock. Always fully research these stocks before buying them, and get opinions from numerous sources. There have even been scams online where people faked valid news agency articles about a stock, causing rapid price movement and prison!

7. Buying Companies You Like - most people like stock because they like a gadget, their movies, toys, or they like sellers of cheap products. Recently, all would have lost money for investors, some over a whole decade. Often by the time the public buys a stock, the easy money has been made by the pros and insiders, and the public is left "holding the bag." It's better to buy less-known companies that market pros like.

8. Buying Stocks That Analysts Like - this is also often bogus information you're hearing. Analysts quite often are simply "talking their book", they want the public to buy a stock so they can sell out at higher prices. They may also want to drive a price down to buy in at lower prices - you can never really ascertain their motivation, so be skeptical.

9. Averaging Down if a Stock Falls - this is buying more of a stock as it falls, and averaging down your cost per share. It's awfully tempting if it's a good company; the price will come back, won't it? So you double up and now have twice as much money at risk in a falling stock. After the stock falls 50-90% you have multiplied your original loss, and pros call this "throwing good money after bad". It's the equivalent of doubling up your bets in Vegas until you finally win! Average up, but never down, as a stock that falls 50% from 100 to 50 now has to go up 100% to get back to even.

10. Buying Cheap Stocks - many think they can buy a penny stock that goes to a dollar and they make several thousand percent on this trade, which will pay for many losers. This is their confidence game, the lure of lottery winners, but it's a losers' game. Over a decade, 80% of all public stocks will go bankrupt, and guess where the majority are in price? Yes, under a dollar, which is where they have to fall before going to zero.

There are probably hundreds of other valid tips for both investors or traders, but the important factor for all is preservation of capital, or you won't have anything to invest, so keep your losses minimal and you're on the way to stock market profits.

William Jose Sinclair
Find more stock trading wisdom from 30 year traders at Pro Stock Traders http://prostocktraders.blogspot.com
Find any ETF you may need at http://etfguide.blogspot.com