Sunday, November 30, 2008

Buying long term stocks when the markets are down

History has proven time and time again that buying long term stocks when the markets are down has been a wonderful strategy. In fact the best times to buy have always been close to the market bottoms.

That is because when the markets crash they tend to take all stocks with them. This includes the stocks that really should have good long term value. This creates buying opportunities on almost every stock in the markets.

The problem is not all of these stocks are great buys. Some may actually be value traps, where they look like they have lots of room to go up only to fall down even lower. There are two types of value traps to watch out for.

The first kind of value trap occurs when a seemingly strong company gets beat up by the market and is trading at a cheaper price they it has been. Several companies such as Lehman Brothers and Countrywide became value traps this way and caused many
bottom pickers to lose their shirt.

The second kind of value trap is when a company has been trading below the price it should be trading at for several years, with little or no attempt to move up. These stocks should generally be avoided due to lack of interest in the company.

There are 3 different things you can use to determine if a stock is likely to go up or if it giving you a false signal.

1. Is the company growing or have a new product coming out? If the company is not growing there may be little interest for investors to buy it despite it being undervalued.

2. Does the company have a strong cash flow? If it has a strong cash flow it is unlikely to go bankrupt and will probably be a better all around investment.

3. Has the stock stayed undervalued for a long time? If it has it is better to assume there is something wrong with it or there is lack of interest in owning it.
In general buying long term stocks when the markets are down has long term benefits as you try not to get caught in a value trap.

For more information about buying stocks when the market is down visit

For more information on how to value a stock visit

Saturday, November 29, 2008

When to Sell a Stock

Everyone believes that the most important part of trading is determining when to buy a stock, it isn’t. The most important part of trading is determining when to sell a stock.

You can buy a stock at the absolute best possible time, but if you sell it at the wrong time it can make a potentially great trade a breakeven or losing trade. You do not make money until you sell a position.

It can be very hard to remember that. Ever trader will have those days when they buy a stock and it goes up 20% in 1 day. It makes it hard not to walk around saying I made so many thousands of dollars today in the stock market, but until you sell you haven’t made a cent.

So, how do you determine when to sell, when should you say you have a big enough profit, or a big enough loss and you should exit? The better question is when do you decide that. You should always decide when you are going to exit a trade before you even enter.

You must decide how much of a loss you are willing to take or how much of a profit you are willing to let stack up before you sell and pull your money out. This should be done prior to each trade.

If you find yourself in a position where you are trying to figure out whether you should close your position or let it ride remember your rules. What would your basic rules and guidelines tell you to do in a situation like that? If you didn’t make an exit strategy before you entered the trade close out of your position immediately. Always develop an exit strategy first.

There are a variety of methods out there that can help you to find the best time to exit a position. My personal favorite way is by using chart patterns, but you can also use fundamental indicators to help you develop an exit strategy.

For more information about chart patterns visit

For more information about fundamental indicators visit

Tuesday, November 25, 2008

The Big secret of trading

In the trading world you have two options, learn fast or go broke. There is one big secret of trading that anyone who has ever been successful has mastered.

This secret is keeping your losses as small as possible and your wins as large as possible. Think about it as a business, because that is what trading is. You can only make money if you have supplies. Well in the stock market this supplies is cash.

“You need money to make money,” This phrase has been said over and over again but has been widely misinterpreted by the general public. Most people believe this means you have to be a millionaire in order for you to invest and make good money in the market.

Actually what they are saying is that in order for you to make money in the stock market you must have something in there. Even if you only have $1000 you can still invest in the markets and start pulling out money.

Because it takes money to make money you should take only small losses when you are wrong. You do not want one bad trade to completely destroy your account. Never overextending your account so you will lose half of your money on one trade is the key. Keeping your positions small and keeping stops tight can help you to maintain your account.

At the same time you are in the markets to make money not just to preserve your capitol. In addition to keeping your losses small, you should try to keep your wins large. Finding a good balance between these two works and is the key to trading successfully.

What I have found is keeping a target and a stop on a trade allows you to only take trades that offer you a large profit if you are right with a small loss if you are wrong. This way you can weed out trades that will not at least give you a chance to make $2 for every $1 you risk.

For more information about the stock market visit

Monday, November 24, 2008

Researching stock trades

There is an abundance of information you can get on any company or mutual fund you want. You can search for it on the web or you can request information from your broker. But how much of this stock market information is actually valid, and how much is just useless?

Yes it is true you can get piles and piles of information on any company you choose. You can get balance sheets, income statements, analysis reports and much more. There is an abundance of information out there that can be easily obtained by the common investor.

But think about it for a second. If you can receive all of this valuable information about any company you want can’t anyone. Any financial document you read about a company will have been read by a million people before you. How valuable can it be in telling you whether a stock is going to go up or going to go down? Remember the markets are forward looking vehicles. All relevant financials have already been analyzed and factored into a company.

Yet the majority of people seem to believe this is the best way to make money in the market. It is not, for many reasons, everyone has access to this information, a company’s financials can lie, a strong company does not necessarily mean a strong stock, and the more you research a stock the more you fall in love with it, whether or not it is the best possible buy.

A much more scientific approach is to use chart patterns and price action to determine if a stock is a good buy or a good sell. The benefit to using price patterns is that price patterns already have all of the fundamental data factored into it, along with everything else that moves price. Another benefit is that price patterns occur over and over again and again. This provides predictable targets and stops which will allow you have some consistency in the market which is the first step to making consistent money.

For more information about the stock market visit

Saturday, November 22, 2008

Why The Majority of People Lose Money in the Stock Market

The large profit potential of the stock market brings new investors looking to strike it big on a continued bases. The problem is the majority of people lose money in the stock market.

Why is this? It is because too many people do not take the stock market seriously. Everything in life takes work, you work to create an income, you work to become good at a sport, If you want something to work for you, you have to work for it first. Somewhere along the line people forgot that the stock market follows that basic rule.
The majority of people believe the market can just make them the fast money. It can make them the quick bucks without worrying because the market goes up, on average. The theory that the market goes up on average actually works against the general public.

I have heard people say that they have money they do not need to touch for 6 months so they were going to put it in the SPY for 6 months. Because the SPY goes up an average of 10% a year they figure they can make 5% in 6 months. There are times when false assumptions like this can work and there are times when this thinking can cut your account in half, or worse.

Now that we know why people fail in the stock market let us look at why people succeed. There are many theories out there but there are two things that all stock market professionals worthy of that title will agree on that you need.

1. You need buy and sell signals. You need to have something that you can look at to determine if a stock is a good buy, a good short, or whatever you plan on doing with it. Without some set rules or at least an idea of your rules you are planning on guess work to help you. Having specific rules also allow you to track your performance in the market along with make attempts to improve your success. Remember you cannot track guesswork and you cannot improve it.

2. You need a way to manage your risk. Never under any circumstances should you bet all, the majority, or even half of your account in any one stock, ETF, or Mutual Fund. This is a huge armature mistake and can often lead to large unnecessary losses.

The major reason that you want to not take a loss is to preserve your capitol. To make money you must think of the stock market as a business. In order for you to make money you need money to spend. If you lose all your money on some foolish bet you will not have any capitol left to pull yourself out of the mess you have made.

These two things are absolutely critical to making consistent money in the stock market. All successful strategies need to follow these two rules to be successful. Any so called “Professional trader” who disagrees with them is not a professional trader at all.

For more information about the stock market visit

Friday, November 21, 2008

Paying Dividends when shorting

One of the drawbacks of shorting stocks is that you inherit the obligation of paying the dividend. This can work against you in some ways but you can be prepared for it.

You heard me, everyone who did not know that you must pay the dividends when you short a stock now you do. But let’s look at why that is first. When you short a stock you borrow the stock from your broker who wants to keep it as a long term play and sell it to another investor on the open market.

The investor now owns the stock, but you owe the stock rights to your broker. This includes the dividends. When a company pays the dividends you have to pay the same amount to your broker.

Now I know many people are thinking, why would anyone want to take a position that will give them negative cash flow? Well in certain times it makes sense. This year the SPY has gone from $150 to $75 in a year, the $2.77 you would have got in dividends during that time would have done little to offset that. Likewise the $2.77 would have been a price any short seller would have been happy to pay.

Another thing you should remember, dividends are not extra money, and they come out of the stock price. If your stock is trading at $40 and you get a dividend of $1 your stock is now trading at $39. The change in price will often compensate the dividends you will have to pay as a short seller.

So do you even need to worry about dividends when shorting stocks? That depends on the trader, I do. Just to be safe, I prefer to look at how long I plan on holding the short position and how much it will cost in dividends. If a dividend is too much I will not short it.

To find out how I decide if a dividend is too much visit

For more information on the stock market visit

Tuesday, November 18, 2008

Your Trading Hour

Setting up a trading hour is easy and is a necessity. You do not want to be involved in the market 24/7 so setting up an hour where you review your trades is a must.

There are a number of reasons why having a trading hour is a must.

1. Your body gets used to it. If you are always reviewing your trades during the same scheduled time your body will get accustomed to it. Your mind will get used to think about trading during that time and hopefully it will do a better job than if you check your stocks every 10 minutes.

2. It will cause you to worry less and make fewer mistakes. If you are constantly worried about your stock trades it can work against you in two ways. First if you worry too much it is not fun and could be harmful to your health. Second if you are constantly worrying about your trades chances are you will make more mistakes and start making trading decisions based on emotions.

3. You can’t be a trader all the time. You need to give it a rest now and then and go live your life. Go out with your family and friends do what it is you like to do. Forget about what is happening in the markets now and then. Remember it will not make any difference in your trading results if you check your account 1 or 30 times a day but it will make a difference in your quality of life.

You never need to devote more than an hour to trading a day. That should be plenty of time to do what you have to do. In fact most of the time you will not even need to use the whole hour. But scheduling an hour a day to trading can drastically improve your results and quality of life.

For more information about the stock market visit

Monday, November 17, 2008

Why Price is King

Price is king when it comes to the market. Sure there are many different ways to evaluate a company and the different methods all have their advantages but the price patterns of a company still gives you the most accurate buy and sell signals.

More than any oscillator, any fundamental ratio, or any probability graph price is still the king of the stock market world. An up trending stock will still continue to trend upward until people panic and start to sell. A down trending stock will continue to trend downward until something happens.

In addition to that patterns that have historically occurred in the price of companies, such as chart patterns and candlestick patterns will continue to occur over and over again. People act in a predictable way after all. They have acted in the same predictable way since there has been such a thing as the stock market.

Trading patterns in the price allows you to take advantage of this.
It also allows you to cut your losses short. Looking at price you are able to find key levels of support and resistance that if broken can mean a large move. That makes it very easy to figure out where to place stops and targets.

Now I am not saying price is the only thing you should look at when trading a stock. There are a lot of other indicators that are worth looking at as well. Volume tells you how many people traded during the day. A strong uptrend with low volume may indicate the trend is not that strong after all.

Other indicators such as oscillators and financial ratios may be good secondary indicators. Looking at a few different things about a given security normally works best. But at the end of the day price is what matters. You do not make money based on how much debt a company has or what the oscillator does; you make money based on where you sold the stock and where you bought it. The market is that simple using price patterns is simple, it’s a perfect combination.

For more information about chart patterns visit

For more information about the stock market visit

Sunday, November 16, 2008

Being positive and denial when trading

Being positive is always a good thing in any aspect of life. In the trading world it is almost impossible to make money without having positive thinking.

Without a positive attitude it becomes harder to pull the trigger. You are unable to place the trade because you are unsure if it is going to work out or not.

Having confidence means you have done your homework, found the perfect set up in the perfect market environment and are ready to pull the trigger. You are also willing to let the trade ride until your rules give you a sell signal. You are willing to do this because you are confident in your rules and trading strategy. That is being confident in your trading.

Having just plan denial is different. Denial occurs when the stock falls past your stops and continues to fall. In this case you ignore your rules and do not exit because you believe your stock is still a good investment. You hopelessly hold onto the stock with the idea that it might come back someday,

Denial often leads to hope, it can make you start hoping your stock will get back to where it originally was eventually. Hopefully you will break even or make a profit.

Denial and hope can be dangerous in two ways. You can hold onto the stock and eventually make a profit after many years. This may seem like a good idea at first glance, but holding onto a stock throughout the down times and riding it back up can often times produce very small returns in the stock market. In such a case your capitol would have been better off following your rules.

It could also lead to a point where the security never comes back and you are forced to just accept the loss. Most people do not see this as an option in the stock market but it does occur.

For more information about the stock market visit

Tuesday, November 11, 2008

Keeping long and short term trades

Keeping both long and short term trades can benefit you in many ways. It can give you all the benefits of short term trading with some of the safety from long term trading.

Many experienced traders will keep both long term investments and short term trades out at the same time. This allows them to play it safe with the longer term trades and buy strong long term companies while at the same time it allows a trader to attempt to make huge returns by trading the short term moves in the market.

Diversifying between long and short term trades can become even more important when you are just starting out. This way it makes it harder to make a few bad mistakes and lose all of your money.

The amount of money you put into long term vs. short term plays can vary widely. If you are very conservative you might want to have 80-90% of your account in the long term while having only 10-20% in short term plays.

If you are more aggressive you could decide to flip that and put 80-90% into short term trades. Or split it right down the middle half long term, half short term. Every trader is different.

What is important however is making sure that you keep these trades separate. Do not try to turn a long term trade into a short term trade or a short term trade into a long term trade. You may even want to open up separate accounts.

It is not a necessity to have both long term and short term trades but it can help you to have the best of both worlds. Almost any stock that is worth buying will be trading for more 10 years from now then it is trading now, and going after short term gains can often make higher returns then holding for the long term.

For more information about the stock market visit

Sunday, November 9, 2008

The Magical Trading system

There is no such thing as the magical trading system. All trading systems have their strengths and weaknesses.

Many Gurus’ out there will talk about a secret trading system that cannot fail. It supposable is the insider trading system that only a few people know about, and the professionals don’t want you to know. Actually what these systems are, are just different versions of the same trading ideas that you can find all over the internet.

There is no secret out there that only a few people know. And if there was it wouldn’t work. It takes a large number of traders to move the market. One or two traders that have stumbled upon this amazing secret will not be able to move the markets by themselves.

Are there systems out there that work? Of course there are, but no trading system is the absolute best. One trader might do well trading one system but do terrible trading another. Another trader might have completely different results.

In fact every trader will get a different result in the market, even if they copy someone else’s approach. It all comes down to your own personality. Trading requires you to use less emotion and act more like a computer, but everyone is still different.

Some people might prefer to stay out of the market when times are volatile in order to have less stress trading. Others may decide that if their system works in the long run they might as well stay in it and keep following their trading rules during volatile times.

Small changes like this can lead to enormous differences in the returns you will receive as a trader. Your best bet is to not go after the Magical trading systems for sell and start to work at developing your own system, one that fits your personality and trading type.

For more information about the stock market visit

Saturday, November 8, 2008

What all successful trading systems need

Successful trading systems provide the best way to make money in the stock market. In order for a trading system to work it needs a few things.

The first thing you need in a trading system is specific buy signals, when X happens you do Y. This seems pretty obvious and most new traders stop there. They believe that the point in which you buy is the most important part of trading.

Actually it is not. The most important part is when sell your stock. You could probably make money in the stock market by just concentrating on your exit strategy. That is because every good exit strategy must have two things.

A way to let your winners ride, and a way to cut your losses short. Letting winners grow bigger and bigger can be easy at times. However cutting your losses short can be very hard for new traders. Novice traders have a tendency to want to hold onto a trade that has turned against them in hopes that it will eventually come back.

This could lead to dangerous waters as the stock falls more and more due to mass panic. The only way to be a successful trader is by cutting your losses short and letting your winners ride. You want to make much more money when you are right then you lose when you are wrong.

The final thing a successful trading system needs is someone to carry it out unemotionally. It is amazing how two traders can follow the exact same system during the exact same period and get completely different results.

The key is trading unemotionally. Don’t skip a buy signal just because the last three buy signals you bought at you lost money. Trading is all about probability and averages. You want to have a system that works well on average and believe in that system enough to trade it.

For more information about the stock market visit

Friday, November 7, 2008

Things to look at When Trading

When trading, especially short term trading, there are a number of things that are important to look at. Each individual chart should have these things before you decide to trade them.

1. Do they follow your trading rules? You should have a set trading system in place every time you place a trade. Obvious the first thing you should look at before placing a trade is, is the stock giving me a buy, or sell signal based on my rules.

2. Do they have earnings coming up? Earnings are announced every 3 months. These reports can move the stock huge in one direction or another. Trying to predict them correctly can be like trying to guess the next number the roulette wheel will spin. Needless to say you want to avoid getting into stocks that will be giving off an important announcement in the near future.

3. Does the stock historically do well with your trading rules? I’ll be the first to say some stocks hate me. They constantly give me losses every time I enter them for a swing trade. Other stocks will show me a profit 60 or 70% of the time. It is important to always look at the history of the stock you are trying to trade. Back test your system on that stock to make sure it is working there first.

4. Look at the company’s fundamentals. I realize fundamentals work well for long term plays but they are not necessarily accurate in the short term. But they do still offer buying and selling pressure.

5. Take a quick look at the afterhour’s price. This part is arguable but I always like to look at the afterhour’s price of a stock before placing a trade. If a stock is trading at $55 by closing but is only trading at $43 after hours there may be something fishy going on and you probably want to avoid it.

For more information about the stock market visit

Tuesday, November 4, 2008

Trading your Time Frame

When you first enter a trade you must determine which time frame you want to use. Trading your time frame is very important. You cannot enter a trade based on one time frame and exit it based on another time frame.

Many people will buy long term stocks. These are companies they are bullish on and confident about their ability to head up. But when the stocks start to take a turn for the worst they will exit to save money.

That simply doesn’t work. If you enter a trade for a long term play it should remain a long term play. Likewise if you enter a trade with a short term perspective you should trade it with that same short term perspective.
Changing your rules and time frames once you enter a trade can have dire consequences. Only by staying consistent in your trading can you have consistent profits.

So, what is your time frame in the markets? This is a question all new traders should ask themselves before entering the market. The time frame you pick has to fit your personality as well as your ability.

Do you have the time to devote 10 to 20 minutes a day to the stock market? If so you might do well as a short term trader. Do you want to spend a couple hours a day trading while the market is open? In that case you may fit better as a day trader.

If you can’t devote a lot of time to the markets a longer term perspective would fit best. It all depends on you. You may even choose to have some long term trades and some short term trades open at the same time.

But once you decide what your time frame is on a given trade you cannot go back and change it later on.

For more information about the stock market visit

Monday, November 3, 2008

trading away from the Crowd

Trading apart from the crowd is the only way to consistently profit in the stock market. History has shown that the majority of people are wrong, the majority of the time.

Even so, it is human nature to follow the crowd. That has helped us to survive when we were hunters and gatherers. It was either eat or be eaten and if you are in a big group you aren’t going to get eaten. There is something to the strength in numbers after all. But in the world of the stock market following others only leads to disaster.

Finding good stock market picks should be done with research and logic. You should develop rules in which to trade. Yet so many people will decide what to buy based off of what the news says, or what the bloggers are saying.

This could lead to good returns during a bulls market but can also completely destroy your account when the markets are heading down. Following the crowd and buying the “Hot” picks can sometimes lead to good results in the short term, but will not make you money in the long term.

The only way to make consistent money in the market as a short term trader is to develop your own strategy. By developing a system that you trade you can make a profit in the long term.

Your system doesn’t have to be perfect all systems fail now and then. The only thing it needs to be successful is it needs to work in the long term. If after 100 trades you make $10,000 then you have a working system that can generate money for you in the long term.

By refusing to take the extra mile to develop a strategy that works you will be unable to make it in the stock market. And you will probably fall back to trading with the crowd.

For more information about the stock market visit

Sunday, November 2, 2008

Trading With the Market

Trading with the market and not against it can be the quickest way to profiting in the stock market. This one thing can give you success in the market even if you are terrible at everything else.

It is no secret that people can make money when we are in a bulls market. In fact “In a bulls market everyone is a genius”. It is easy to make money in a fast moving bulls market, just close your eyes and pick a stock.

Is it the best way to make money? No, but it does work in a market that everything runs up. This is the strategy most people seem to adopt. They just buy as much stock as they can and hope it goes up. In a bulls market this works because they are trading with the market. Everything has buying pressure.

Most people are Okay with being bullish and buying stocks hoping it will go up, but when a bears market comes along it is a disaster. All the bulls get pounded, and everyone seems to believe it is the end of the world.

In reality it is just as easy to make money in a bears market as it is to make money in a bulls market. You just need to be trading with the markets. If the markets are heading down and you are buying stocks of course you will lose money. It only makes sense.

But if you are shorting, buying puts, or using some other method to take advantage of falling stocks you can actually make money as the markets crash. Everyone assumes you have to be bullish when you are trading, that if you hear about a hot stock it has to be a stock that will go from $30 to $100 not from $30 to $5.

The unwillingness to make money on the downside is what gives bear market a bad name. Jessie Livermore has a point when he says, "They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side." If you are trading with the market you will most likely make money. If you are trading against it you will most likely lose money.

For more information about the stock market visit