Understanding Market Price Movement.

The IRREFUTABLE LAWS of the MARKET

SIX STEPS that every trader needs to know to succeed in the markets.

Step 1: A move begins with the sponsors (smart traders) who have insider knowledge as it relates to a particular stock or market. This information will move a market up or down depending on the insiders’ information. These buyers are smart, very smart, and recognize trading/investment opportunities very early in the markup cycle.

Step 2: Days, weeks, or sometimes months after a move has started, there is a brief mention in the electronic media (radio, cable, TV) or on one of the internet chat boards that a market has moved. The public hears for the first time and begins to get interested, but does not buy.

Step 3: A blurb of information appears in print media. The move also begins getting more exposure on blogs and internet message boards. The public starts paying a little more attention, and will buy a little bit.

Step 4: Wall Street and LaSalle Street brokers go into full hype mode and hawk the market to their customers. The public begins buying in greater volume.

Step 5: A full-blown front-page article appears about the particular stock or market in one of the major financial newspapers, magazines, or financial websites. This is often six months after the fact and after a market has shown its greatest appreciation. There is often heavy public buying, even a possible frenzy, as all media, brokers, and so-called “gurus” start to tout the market.

Step 6: As step 5 gets underway, the sponsors or smart traders begin to move out of the market and take their profits off the table.

The Final Step: The move ends, the market falls, and investors lose money.

Link: Six Insider Steps that every trader needs to know, Adam Hewison.

The 5 Rules I follow to Successfully Trade Stocks

Everyone has their own set of rules. The ones outlined here just happen to apply to me and my penchant for swing trading.

1) Must have a Game Plan. There is a business saying, If you fail to plan, you plan to fail. I will not go into all of the planning theories here, but understand that planning is important. Before entering a single trade, I have to come up with and write down five important numbers for the ticker symbol: 

The first number is my i) Targeted Return On Investment (ROI). At minimum, I seek 10% and at most, 30%. Though it depends on the market condition, it is necessary to have a clear goal to drive towards. To get my return, I digest news headlines, study charts, and stare at technical indicators (<add link to post>) to identify suitable ii) Entry Prices and iii) Exit Price Ranges.

Not all trades will be successful. No one wins them all. If they say they do, they’re lying to you, and you should tell them they’re a dumbass. As such, it is important to not only prepare yourself to take some losses but to expect them. What iv) Percentage Loss on Investment can you endure and still sleep at night? Myself, I am comfortable with spending between 5 to 10% for the thrill of the game. To control my losses, I enter Stop Loss orders right after my intial (limit) Buy order. The v) Stop Loss Price is an ugly number, but it is necessary to calculate it when determining your entry price.

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Gambling with FAS

When it comes to triple leveraged ETFs, I tread with caution. However, one that keeps on tickling my pickle is FAS. It is an exchange traded fund (ETF) that seeks daily investment results of 300% of the price performance of the Financial Select Sector Index (“Financial Index”). The Fund seeks to create long positions by investing at least 80% of its net assets in the equity securities that comprise the Financial Index.
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Successful Swing Trade: + 22.76%

Yesterday morning, while going through my watch list, I found UYG trading below $3.00 a share. Granted, the financial sector deserved to be beaten down but not this much, especially since the U.S. government made it clear they were near a plan to save these institutions, and were not looking to nationalize banks.

Anyhow, looking at the technical indicators I performed a quick analysis. Short-term, the chart looked pretty neutral, with a faint of bullishness. After gauging the risk:reward ratio, I took a long position in UYG with a limit order for some shares at $2.90; it was trading in the $2.92-2.95 range. My plan was to exit around $3.50 for a 20% return, or cut my losses if the stock hit $2.65 (~9%).

As I watched the price fluctuate and eventually head up for a moment, it took great discipline to not modify my order to execute at market price. Eventually, after 5 minutes or so, patience paid off. Immediately after my order was filled, the stock shot up and my position ended the day  11%.

Today, on the heels of news that the government would announce plans to fix the banking system next Monday, the market experienced a short-covering rally. Consequently, my plan was coming to fruition a lot quicker than anticipated. I thought about holding the stocks over the weekend, but I already had a plan and needed to stick with it so I placed my order and exited the position at $3.56 for a 22.76% return. Not bad, huh? =) 

How John Paulson made a shit load of money in 2008

Paulson Advantage Plus, the largest of his funds, returned 37.6% net of fees on $7B in assets. For the coming year, he says…

We remain bearish on the outlook for the U.S. economy and believe the recession will extend into late 2009 and likely into 2010. The sharp contraction in the global economy, the instability of the global financial system and the ongoing credit contraction are unlikely to be resolved in the first half of 2009. While the U.S. stimulus package will likely cushion the decline we don’t think it can halt the downturn and will likely have longer term negative consequences.. … Continue Reading

Bad Bank, Bad Idea

Meredith Whitney, the Oracle of Wall Street, has spoken.

If a bank were to sell its “bad” assets into a “bad bank,” it would still be left with lower earnings power from higher losses on “good loans” and the requirement to build reserves, lower earnings power from lower assets and a higher legacy expense structure, or both…The greatest unknown regarding the “bad bank” is at what price the gov’t would pay for “toxic assets.” If the government elects to pay fair market value, the banks will likely not elect to participate as capital hits would be too dear; however, if the gov’t pays above market, the burden on an increasingly “taxed” taxpayer grows…We would be most encouraged by banks selling “crown jewel” assets to cover their own losses. We believe private capital will readily invest in businesses that make money and grow. However, the banks do not fit this description. We remain cautious on the group.

Source:
Meredith Whitney: A Bad Bank Won’t Save Banks, by John Carney, Clusterstock, 1/29/09

In a Bear market, sell the rumor, buy the news!

Yesterday, the markets advanced in anticipation that the U.S. government was near a plan to fix the crap economy. Near the peak of buying, I concluded my UYG swing trade for a nice +14% ROI.

After hours, the Democrat-controlled U.S. House of Representatives passed a pricey $819 billion stimulus plan with no Republican support. Today, the market sold off.