Monday, January 5, 2009

Fundamental Analysis?

Fundamental Analysis is the traditional way of looking at the stock market. It consists of looking at a company’s financial statements, P/E ratios and so on.

This method is based on one simple idea that strong companies will tend to make a profit and grow, in turn that profit and growth will make money for the shareholders of the business. In other words by investing in strength your portfolio will grow faster.

What most fundamental investors try to do is wait for the market to crash. When it does they sweep in and buy strong companies that will not go out of business. Companies like McDonalds, Microsoft, Coke a Cola, are all big companies that are very big and the odds of them failing are very small.

Fundamental analysis assumes that the market is inherently bullish. By buying strong companies at a low price you are pretty much guaranteeing that over a long period of time you will make money in the market.

There are two types of investment styles, growth and value.

Value investing is buying companies that as of today are very strong, have a solid cash flow, and a solid business plans. An example of this would be if Coke drops to $30. The stock would be well off its highs and we all know it is not going to run out of customers anytime soon.

Growth stocks are stocks that need a little help, but they have a strong promise to get it. An example of this is US steel. The recent market crash and lack of demand for steel has brought this stock from its highs in the $190s to around $40. However President Obama’s plain to build roads will increase the need for steel and therefore increase the profit of US steel.

In general Value investing seems to outperform growth investing.

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Saturday, January 3, 2009

Poker is really a miniature stock market on so many levels. You can apply much of what you learn from one to the other.

One of the biggest similarities is how little your profits matter. If you make $1,000 in anything it is a big deal, but if you make $1,000 in the stock market or in a single pot it doesn’t matter. That money can come and go, anyone can make money in the markets or playing poker.

That is why I don’t look at it the same way, one great trade or one good hand can help you out, but it is about the long term. One big win does not make you the king, but rather it is about making consistent money over a longer term time frame.

Paying too much attention to 1 good trade can make you arrogant and paying too much attention to 1 bad trade can make you feel like you can’t make money. Kenny Rogers was right on the money when he said “You never count your money when you’re sitting at the table.”

Poker also teaches you a good lesson about risk management. The best poker players in the world are the ones that manage their risk; you’ll see them folding two pair if they think their beat. In fact if blinds didn’t raise so fast at the world series of poker, the game would last a lot longer because no one wants to get rid of their chips.

It is the same in the stock market, you want to go after big profits, but at the same time your capital is the lifeblood of your business. “You need money to make money”, so manage your capital very carefully. Never risk more than 2% of your portfolio on any 1 trade.

Everyone who plays poker tries to milk out as much money as they can when they know they will win. They check, trying to get other players to try to bluff them out, or they try to act like they are bluffing. They do this out of necessity. A poker player may lose 5, 10, or more hands in a row so they need to win big when they finally do win.

The same rule applies to the stock market; a stock trader may lose several trades in a row. You need to let your winners ride, so they can not only make up for your losses, but also put you in positive territory. The more you make when you are right the less often you need to be right to make a profit.

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Friday, January 2, 2009

Technical analysis is a non-traditional way of picking stocks to buy and sell. It is based off of human emotions and patterns in those emotions.

A technical trader realizes that stocks do not move up and down because a company is making or losing money. A stock goes up and down based off of supply and demand.

If there are more buyers than sellers a stock will normally go up until it reaches a point where sellers start to come in.

This can be flipped around. If a stock has more sellers than buyers it can push the stock down until the stock gets to a low enough point and buyers start to come back in.

Technical analysis tries to play off of this. They notice human emotions create patterns and trends that occur over and over again. So playing off of these trends and patterns rather than looking at a company’s financials can be a smart way to approach the market.

This simplified approach to the market disregards all fundamental factors such as dividends, cash flow statements, P/E rations, and so on.

There are a variety of instruments a technical trader can use to determine if a stock is a good buy or a good sell. Oscillators, chart patterns, stock trend, and candlestick patterns are all used to determine if a company makes a good trade or not.

So does it work? Technical analysis has proven to be a great way to approach the stock market. Combing Technical analysis with risk management may be the best way to approach the stock market for a short term trader.

Technical Analysis is built for short term trading. If you have a time frame longer than a couple months it may not be for you. Instead fundamental analysis can be used for longer term time frames.

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Tuesday, December 30, 2008

Losing a trade or a row of trades is never fun. It can make you frustrated and unhappy. And who can blame you for feeling that way. A loss of capital can cripple your account making it harder to get to where you want to go.

That is definitely why you want to lose as little capital as possible when you are wrong. It is all about risk management.

But so many people forget that you trade more than just money when you trade. You are affected mentally every time you place a trade. Your confidence grows when you are on a winning streak. You feel like you can do no wrong.

However the flip side is also true. When you are on a losing streak you can feel terrible. You can feel like you never want to trade ever again. It can be hard.
The market come with surprises and can definitely get the better of you at times, no matter how good of a trader you are. They just can’t be controlled.

But even though we can’t control how the markets will move what we can control is how we react to them. If we have just been beat up we can choose to do one of two things. We can say we never should have traded in the first place and walk away or we can learn from our mistakes and use it to become a better trader.

Trading is a game that you are constantly learning how to improve on. I am confident that every year I become a better and better trader. When I make a mistake I quickly learn from it and apply what I have learned in my future trading.

If you want to be successful in trading you have to do the same. There is no way around it. Concentrating on learning from your mistakes and building your confidence are the two most important parts of mental trade management.

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Monday, December 29, 2008

Low volume stocks

Low volume stocks can make it much more difficult to trade profitable. For that reason it is better to stay out of these stocks regardless of how the set up looks.

Volume should be looked at every time you place a trade. What volume does is tell you exactly how much of a given stock was traded during the day. Every number counts as 2 trade’s one buy and one sell. So if volume is 10 million it means 10 million people sold and 10 million people bought that day.

It is very important to look at volume because if volume is too low it could pose problems if you plan to make money trading it.

The first problem low volume stocks give you involves getting in and out. If there are only 40,000 trades on a given day you might find it very hard to get in especially at a price that you want to.

The second problem is similar, if a stock turns against you it could be hard to get out. Falling price on a low volume stock could make a crowd of sellers with no buyers around. By the time you get out you could have a loss so far under your original stops that, you would be hurting.

The last way low volume stocks work against you is the mere fact that you can’t use the volume to help you. Normally you can use volume to help determine the strength of a price action. High volume on an up day means that the stock is likely to keep going up in the short term.

If volume is low to begin with however, it makes it harder to tell where high volume and low volume are. No one is trading the stock anyway.

So what is good volume? Every trader has a different opinion, but I believe you should be able to find a stock that is trading at least 1 million shares per day. That should allow you to move in and out pretty easily.

As your account gets bigger however you may want to move the bar up. Only trade stocks with more and more volume. Just remember to keep volume in mind the next time you make a stock trade.

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Saturday, December 27, 2008

Stock Market Trading and Poker

I am a huge stock market geek and a huge poker geek as well. I remember seeing not too long ago a world poker series; they were interviewing a guy from the semi finals who said he was an option trader.

That made me think, trading which is one of my biggest hobbies is very similar to one of my other favorite hobbies poker. Now I know most people out there are not willing to believe that poker and trading are similar.

Most people associate poker with slot machines and gamblers, and the stock market with a way to invest your money and grow. The truth is people do make a living by both being poker players and by being stock market traders. Once more it takes the same qualities to be a good poker player as it does to be a good stock market trader.

In order to be a profitable poker player you must.

1. Have a strategy that wins in the long term

2. Manage your risk, don’t make stupid calls

3. Win big when you win, all in, raising

In order to be a profitable trader you must

1. Have a strategy that wins in the long term

2. Manage your risk

3. Win big when you win

I’m not saying that the stock market only works when you get lucky. But I am saying that the stock market is not something to be taken lightely. Most people believe they can just buy a stock today and sell it sometime later for a profit.

The stock market should be treated more as a poker game then a savings account, were you put it in and forget it. You cannot put all your money in one stock and hope for the best in the same way you would not go All in with a jack high and hope for the best. If you want to ultimately win you need a strategy that makes you money in the long run. A strategy thar lets you manage your risk and grow your winnings.

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Tuesday, December 23, 2008

Weeding out Market Noise

If you pay attention to the stock market at all you will get bombarded with tons of useless facts about what is going on with the country, how the economy is improving/ getting worse, how inflation rates are changing, what the unemployment rate is.

It is difficult to find out which information is useful and which information is not useful. Easy, remember 90% of all information talked about in the stock market is completely useless, at least when it comes to making money. You cannot decide what to buy and what to sell based purely on inflation rates, or what the media says.

Your success as a trader will partly be decided by your ability of weeding out market noise. In fact ignoring all irrelevant facts about what is happening in the market will help you in the long run.

So what do you rely on? Simple your system, everyone who ever has, is, or will make consistent money in the stock market has done so by following their own system of trading or investing, that’s a fact.

It’s a shame that most traders will allow all of the market noise to get the best of them and break there rules. It happens to everyone who has just started trading, you will buy a stock because it looks like a good buy according to your rules, but then bad news comes out and you start thinking, “Oh no, that sounds really, really bad I better sell everything I own cause the markets going to crash”. Only to see your stock rally after you sell it. Following your rules would have helped you here.

There are 3 things you need to do in order to be successful in the market.

1. Develop your goal for the stock market. Investing without goals is like buying a lottery ticket, you don’t know what will happen but you hope everything will turn out for the best.

2. Develop a system and follow it, everyone who makes money in the market follows this step.

3. Weed out market noise, who cares what some random guy with a degree in economics on CNN says about the stock market. There is no college degree that will turn you into a stock market trader.

Follow these goals and you are on your way to making money in the markets.

I encourage you to share your stock market goals with the rest of us at

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