Monday, December 31, 2007

Personal Year-End Review

After spending the weekend looking over the trades I made this past year, I came to several conclusions and I hope these conclusions will help me become a better trader in the upcoming year. Overall, I had a decent year - my overall return was good, but at several point this year I was up much higher than where I ended up at. Some of that is just the general difficulties of being a trader - you are always going to have fluctuations in your portfolio value - but there are some things that I definitely need to improve on. These include:

#1) Become more selective and demanding before entering a trade, and not overtrading

My overall win percentage for trades in the past year is not near where I would like it to be, and looking back, I think the main cause is that I took too many questionable trades. The market was very choppy overall this year, and I think I often tried to force trades when I should have just sat back and waited for a better opportunity to present itself. I bought stocks even though I knew they weren't perfect(especially with fundamentals) and then just hoped for the best. This is not a smart nor a disciplined way to trade and make money consistently.

For those of you that follow poker, I think it is kind of like the type of hands you choose to play. I could play hands like queen-jack unsuited or pocket fours, and I may still win some pots by playing those type of hands. More often than not though, those type of hands can bring you more pots lost than won. If you have the patience to wait for pocket kings or pocket aces, and then play those hands, your chance of winning the pot becomes much better. It is very hard to do this however, sitting for hours at a time waiting for the perfect hand, and takes an extreme discipline. I think this is analogous to trading - if I don't see great opportunities presenting themselves, then I need to sit on my hands and simply wait for the perfect opportunity to come. I may make some money taking riskier trades, but I am just as likely (and probably more likely) to lose money on those questionable opportunities.

Following other blogs, I have read many traders write about this being a very difficult market and a challenging year to trade in. I hope my experiences this year will help me realize that choppy, difficult markets are easier to lose money in than make money in, and often it is best just to wait for better times.

#2) Don't be scared to take great opportunities

This in some way may seem to contradict what I just discussed - reducing the amount of trades taken - but I can think of several situations this year where I had a particular stock on my quote screen for several days, watching it, aware of it, and then just sitting there and doing nothing while it did exactly what I thought it might do. This is frustrating because those stocks went on to make big moves. One stock that stands out in my mind is YGE, and two more recently were RICK and SDTH. Now I am sure some of this is the fact that it is always easier to look at thing in hindsight and tell yourself that you would have traded that particular stock just perfectly if you would have just gone for it. Most likely, you would not have and still made mistakes. However, I just don't know why I didn't take these trades when I had them as possibilities at the time of their breakouts. I saw the patterns they were making, I saw their fundamentals, and did nothing. Something stopped me for doing so, and I need to find out what that something is so I can fix it. I do believe learning how to use Telechart this past year will help me in next year confirm some of the things I see and maybe give me the confidence to take these opportunities when they present themselves.

#3) Develop more patience and let good stocks make their moves

I was in several big-time winners this year at some point this year (CROX, JASO, DSX, SIGM); however, the most I made on any of these was around 65% and the rest were only around 10 to 20%, which is extremely disappointing when I look at the moves they made after I sold out. Jesse Livermore said that "sitting" made him the big money - not the buying or selling. Having rules that I can use to sell out of positions gradually will help a little, and I continue to develop those rules, but I must also develop the patience to sit through the inevitable pullbacks that strong stocks are going to have and not get scared out of good stocks. I must do this if I am going to be the trader I want to be. Which leads me to my last area to improve upon...

#4) Avoid the temptation to watch the market throughout the day except at the open and close

This is something that is very easy to get drawn into doing because, to be honest, it can be somewhat fun and exciting. However, I need to decide why I am really trading - is it to have fun or is it to be successful. I have learned this year that watching the market throughout the day, even if it is just checking on things every half hour or so, negatively affects my performance. The main way I noticed it affected me as I looked back this weekend was that when I watch the market, I have a tendency to not use hard stop-losses and use mental ones instead. As of now, I do not have the discipline to use always follow a mental stop without question. I will watch the stock hit my stop loss, and then start rationalizing that it will hold there and I should wait. As you can guess, this just leads me to a point where I finally do use my mental stop and sell, except that the new mental stop is several percentage points lower than where I originally had it. Not good.

Looking at my losses this year, about 75% were under 5%, which is acceptable. I kept approximately 96% of them under 10%. However, I saw many situations where I lost more than I should have because I did not act correctly when using my mental stops. I think this would apply to the other side as well - I can remember several times where I sold out of a strong stock because I saw something intraday that I acted upon hastily instead of thinking through it. This cost me a lot of profit potential as well.

I need to do a better job of staying away from my computer during the day, and also setting hard stops - if they get hit, there is a reason and I need to accept that.

I know there are other things I need to work on as well, and any trader that doesn't think they need improvement is kidding themselves. Trading is too difficult a task to not try and continually improve yourself. I am going to focus on these specific areas the most in the upcoming year, and go in with a positive attitude ready to have a better performance than the past year. I will continue to learn, I will surely continue to make mistakes, but hopefully there will be less mistakes and more improvements throughout 2008. And hopefully this market won't be as crazy and spastic too. Good luck and happy new year to all!

Sunday, December 30, 2007

Other Top Stocks of 2007

After checking Telechart today, here are a few more of the top movers from some point in 2007 that I did not mention before. Check these out as well.


Top Stocks of 2007 - TRCR, GHM, CRNT

In the final post of this series, I looked at three small-cap stocks that all made moves of over 200% in a few months time. These stocks started with low-prices and thin volumes, but prove that it pays to pay attention to earnings releases and breakout each day of the year. If you did, these stocks may have popped up early enough on your radar screen to get in for most of these moves. What I noticed when looking at these was some of the same things I saw with FSLR, DRYS, and BIDU. These moves started with huge breakout days, from which they immediately followed-through and continued to move up. When they pulled back, they usually got support at either the 9 or 20 day moving averages. After the stock ran for a while, a more severe pullback to the 50 day moving average was likely. Huge volume and massive down days proved to be the tops of these stocks. If you were able to buy correctly and showed patience, it was possible to make huge gains in any of these stocks. Another common characteristic is that although these were smaller stocks, they still demonstrated tremendous fundamentals. I know that both GHM and CRNT were members of the IBD 100 list, and TRCR was highly rated as well by IBD.



Charts from Telechart2007, courtesy of Worden Brothers

So when looking for the big winners of next year, we need to focus on stocks making big, one-day moves, with tremendous fundamentals. If we can find one and get in early, look for early follow-through. If the stock doesn't give back much if any of its big, one-day gain, then you probably have a stock that has a chance to be a real winner. Look for it to get support around the 9 and 20 day moving averages, and later on, when it has made a big move, use the 50 day for support. If it closes below the 50 day, but immediately shows strength and gets above it, don't be scared to get back in. Continue to look at the fundamentals as the move progresses - if they continue to be strong, that should give you some emotional support if you sit through one of the stock's pullbacks.

As for selling, that is always the hard part. By looking at these charts, I noticed that if a stock breaks below 2 or more levels of support (moving averages), then often that was a clue to sell if it was accompained by large volume. Volume near the top usually becomes extremely large, and often the trading at the top gets extremely volatile. There are a few others things to look for as well - how is the market doing in relation to the stock, how far over the 200 day moving average is the stock. As you study these and other stocks, you will begin to develop the skills necessary to recognize tops in these types of stocks. There is also nothing wrong with taking some of your profits on the way up during the move. This is a skill I am getting better at, but I know I still need a more disciplined system to do this.

If you are a Telechart user, one good exercise is to use the slider at the bottom of the chart to move backwards to the start of some of these big moves, and then by clicking on the right arrow of the slider, it will take you forward one day at a time. As you do this, ask yourself what you think will happen next. How would you react at the different points of the move you see? I have found this exercise to be helpful to me.

This past year, I only caught the move of one of these types of stock - CROX - and I did not get as much out of the move as I could have. I had TRCR on my screen early in the move but never jumped in - I don't know why. I was also in several of the other big-move stocks for short periods of time, only to get stopped out due to poor entry or impatience. One of my goals for the upcoming year is to develop the skills to enter one of these big movers properly AND to have the patience to sit through the entire move and reap the rewards of doing so. It is not an easy thing to do, but if I am going to be the trader I want to be, I must learn this skill.

Top Stocks of 2007 - BIDU

Next up to look at is the Chinese Google, BIDU. By my calculations, this stock made a move of over 200% in about eight months - from $125 in May to $400 in December. This move started off the way many big moves do - with an earnings related gap-up. A lot of investors find this type of gap hard to buy - they feel it is risky. However, I have found that these type of big gaps that are caused by blowout earnings usually lead to continued momentum for the particular stocks, sometimes for months, sometimes for years. I will write more about this idea in the coming weeks, and the Stockbee blog has written extensively about this earnings-related phenomenon as well. In my final post about top stocks of 2007, I will look at three small-cap stocks that made big moves, all starting in some manner with a earnings-related gap.

First Chart - The Breakout and First Base

Second Chart - The Big Move and Current Base

Charts from Telechart2007, courtesy of Worden Brothers

Saturday, December 29, 2007

Top Stocks of 2007 - FSLR

Next up is FSLR, which I mentioned has had almost a 1000% move in 2007, going from around $25 to $275. (I hope my math is correct here.) After looking at this chart in detail, I think this would be extremely difficult to hold through the entire move based simply on technical aspects. I saw many sell signals throughout, but the stock just kept motoring along after some weakness. Someone else might look at these signals and think nothing of them - patience is something I definitely to need to develop and work on as a trader. Again, the fundamentals of this stock were superb through the entire year - this was not some fad stock that had no earnings or growth. It had and has both, and is the leader of what has become the hottest sector I can remember in a while. Will that sector strength last after such a huge run? I don't know - that's why trading is hard. We already looked at what happened to DRYS when it was done. However, I think there was a clearer top in that stock than I am seeing in the solars. It should be interesting to watch where they go from here.

First Chart - The First Base and Run-Up

Second Chart - First Sell Test

Third Chart - A Major Run and a Major Sell Point (Maybe)

Fourth Chart - Another Major Gap Up - Is it a Climax?

Fifth Chart - Overall and Current Look

Charts from Telechart 2007, Courtesy of Worden Brothers, Inc.

Tomorrow, I am going to try and look at BIDU (up about 220% since May) and a few others. If you want to study some of the top stock of 2007 on your own, and you have Telechart, it is quite easy to do. Simply click on the "All Stocks" list and then sort it by "Price Growth Rate 1 Year". You will see a list of the top performing stocks for the past year. Some that I am going to look at if time allows include CROX, GHM, LPHI, FTK, MOS, MTL, TRCR, CRNT, and ACH. If you are looking for bigger stocks, checkout the ones everyone seems to know - AAPL, RIMM, and ISRG.

Top Stocks of 2007 - DRYS

This is the first in what I plan on being a series of studies of the best stocks of 2007. By studying these major moves, I hope to learn what to look for in these types of stocks and also how to handle the run up and not get stopped out early before reaping the rewards of juciest part of the move.

The first stock I looked at was DRYS, which by my accounts made a move of around 500% this year if sold properly when it was topping. It went from around $20 in January all the way to the $120 area in October. Over the last two months it has lost almost half its value. Looking at this stock in detail, it was quite a wild ride, and I don't know if it would be possible realistically to sit through it perfectly. I know I would have had much difficulty at certain points not being stopped out, which I mention on the charts. But it is worth looking at and studying this type of move if you ever plan on catching them in the future.

First Chart - The Base and First Run-Up

Second Chart - Some Pullbacks, Another Base, Another Run-Up

Third Chart - Final Run-Up, Top, Decline

Charts from Telechart 2007, Courtesy of Worden Brothers, Inc.

Unfortunately, I did not own DRYS at any point this year, although I do remember watching it break out around $20 and thinking that it wouldn't go much further. Great call by me! I don't think I really looked at the fundamentals of this stock, which were superb, as well as the strength of the entire group. Perhaps focusing just as much time on the fundamental outlook of big stocks like this can help reduce the anxiety on some of these major pullbacks that would have likely scared me out of my position. I also should remember to never be surprised at how high a stock will go price-wise. You just never know when it will stop, and I can see several points on this chart where I would likely think, "it has run so much, it can't go any further." Let the chart tell you when to buy and sell and not your personal feelings.

Next up I will try to look at FSLR, which by my calculations has made almost a 1000% move this past year, from around $25 to its current area of around $275. Wow!

Friday, December 28, 2007

Stock Market Predictions for 2008

My predictions for the stock market for 2008 are as ... you know what? Who really cares? What good do predictions do? Will predictions help you make more money in the stock market during the upcoming year? I doubt it. But over the next few days, you will hear many so-called "experts" on CNBC telling you exactly how much the market will be up or down in the next year, and what stock to buy or sell, or see magazines and newspaper articles doing the same thing. I don't know how many of those experts come back on TV around this time to discuss those same predictions they made a year ago, especially if they didn't quite work out the way they thought.

Anyone can make a prediction, and I'm sure in our minds we all do in our own ways. Right now, I have a feeling of what is going to happen when we begin the new year. Do I know for sure that I will be right? Heck no. That is why I try to keep an open mind and be alert for all possibilities. I can predict in confidence that next year, the stock market will have several tradeable rallies, and that it will also have some tradeable corrections. That's about it. I don't know how many there will be, how long they will last, or when they will occur. Instead of predicting, I am going to focus on reacting to what the market actually does, and what it is telling me through its actions. Reacting correctly will make a trader much more successful compared to making predictions that may or may not come true.

What I am going to try and do this weekend, as the year comes to an end, is look at all of my trades from the past year and analyze what I did well and what I really need to work on and improve. In a book about the great trader Jesse Livermore, the process that Livermore went through at the end of the year is described, and he did something similar. He locked himself in a bank vault for a weekend and dissected every single trade he made from the previous year, presumably to learn from his mistakes and not make the same ones again. If that undertaking is good enough for one of the best traders of all-time to perform on a yearly basis, it is certainly good enough for me to do the same. I would suggest that most traders do likewise. If you keep up a trading diary, it should not be that hard of a task. It may take a little time, but the time put in will surely pay off in the future.

One last note....this weekend's edition of Investor's Business Daily will be one that I will hold onto for a long time. Instead of making predictions that may or may not come true, they focus on the important trends of 2007, the important stocks of 2007, and what we can learn from those trends and stocks. They will also investigate some of the current trends that may continue to be important going into the new year, so we can prepare ourselves to react correctly if they do turn out to be important. Studying stock market history is a great way to improve as a trader, and this issue is one of my favorites in terms of studying and learning from the past year. If you don't subscribe, I would encourage you to pick up a copy at your local store. I believe you will benefit from it.

***Correction - I am assuming it will be Tuesday's IBD that will have the year in review, because I did not see it in this weekend's edition.

Determining Market Trend

The trend is your friend, right? I am sure everyone has heard this adage and it is certainly true when it comes to trading. Trading from the correct side of the market is a very important factor in terms of the success rate of trades, whether short or long. I try to stick with the trend whenever possible - go long when the market is clearly in an uptrend, and short when the market is in a downtrend. It isn't always that easy, however - the market sometimes doesn't seem to know what it wants to do. Whatever you want to call it - market timing, market direction, market outlook - there is not a perfect system that I am aware of that can with 100% accuracy assess what the market is going to do next. The stock market is much too complex of an environment for one technique to be perfect all the time. Therefore, I use several strategies that I try to combine to give me an idea of what is going on currently and how I should trade based on that assessment.

#1 - Investor's Business Daily - The Big Picture

If you do not currently subscribe to this great resource, I would recommend it. If you haven't read any of William O'Neil's books on trading, (he is the founder of Investor's Business Daily) I would also recommend it. His system of assessing the market direction involves counting distribution days to look for tops and looking for follow-through days to signify a new rally beginning. In the "Big Picture" section of the paper, there are basically three conditions listed everyday - market in confirmed rally, market in correction, or market rally under pressure. By following this everyday, I get a good idea of the current state of the market. I don't always agree with the assessment, and the system is not 100% perfect, because there are sometimes failed follow-through days, but overall it is normally very accurate. In fact, I would like to do some backtesting at some point of how a very simple system of going long an ultra Proshares ETF when the market is in a confirmed rally and going long an inverse ultra Proshares ETF when the market is in a correction would do over a long period of time. There would be a few whipsaws, but I would bet that this type of system would be successful without a lot of work. Again, Investor's Business Daily is a great resource for market direction.

#2 - Stockbee Market Monitor

Another great resource useful for market direction is from the blog of Pradeep Bonde, Stockbee. I found this blog a year or so ago and it is a tremendous resource for traders. Using Telechart, he has developed a series of scans that keeps track of four or five ratios that help traders determine the underlying trend and anticipate near-term moves. Out of respect to him, I will not comment much more on these scans, but I encourage you to check out his website and learn for yourself. He also offers a subscription site for traders interested in learning more strategies including his Market Monitor. I keep track of theses ratios through Telechart on a daily basis and make many decisions based on the numbers I get. One gives a broad, overall indicator of the market, while others give shorter-term signals when the market is extended and due to pullback, or when the market has possibly put in a short-term bottom.

#3 - Investors Intelligence Survey

This survey is listed every Tuesday and charts the percentage of bulls in the market compared to the percentage of bears in the market on a weekly basis. This sentiment indicator is usually a contrary indicator, meaning that if there are a high percentage of bulls, that shows the possibility that most of the buyers of stock could already be in the market, and if that is true, how will the market continue to go up. A high percentage of bulls is therefore bearish, and vice versa if there is a high percentage of bears - that is bullish. This is a secondary indicator for me - I simply use it to confirm or contradict what I may be seeing in IBD or the Market Monitor.

#4 - Charts of the Indexes

The last method I use to keep track of market direction is to study the charts of the major indexes on a daily basis. By using Telechart, I also use a few of their customary indicators that
help me in this regard. As this blog progresses, I will attempt to post charts of the indexes several times a week to show what I see. By observing the price and volume action on a daily basis just like you would with an individual stock, you can learn a lot about what is going on in terms of market direction.

I know there are many other ways to determine market direction, and there is no doubt that traders have been successful with strategies much different than the ones I just described. For me, I have been using these four strategies and will continue to do so - they are not super complicated or cumbersome, and using them together, I believe they work pretty well. They are by no means perfect, and I still have to overcome some personal biases at times and trust what I see in these indicators, but I will continue to work and develop this system and hopefully improve it as time goes on. I believe successful traders always try to improve their methods, and I will do the same.

Thursday, December 27, 2007

Trading Psychology

For the last month or so, I have been reading two books about trading psychology written by Mark Douglas, "The Disciplined Trader" and "Trading in the Zone". I actually read "The Disciplined Trader" a few years ago but it didn't make much sense to me then, maybe because I was just starting to trade. I think I learned a lot more this time through. Although Douglas wrote "Disciplined" first, I would suggest reading "Trading in the Zone" first, then follow it up with "Disciplined".

One thing he said really stood out to me. It was that when you take a trade, you really need to be open to absolutely anything happening in that trade. Don't expect anything. Unless you are a huge hedge or mutual fund and have enough capital to move the market, you cannot do anything to make a trade move one way or another. You can't do anything to make the trade go the way you expect it to. But that thinking goes against our nature, because if we didn't expect a trade to go one way, why would we take the trade? One of the reasons traders have trouble cutting losses is because they had an expectation when they entered the trade, and because they only had one expectation about that trade, when something else happens that they did not anticipate, they have no idea of what to do.

This made me think about the biggest lost I ever took and the worst trading mistake I ever made. I went into a trade that I thought could not miss. This was such a great opportunity (in my mind) that I loaded up and took a large position, sure that this was the trade that could really grow my account. When the trade started out doing what I expected, it just added to my already strong feelings. Well, you can guess what happened - the trade reversed, I could not believe what started to happen because I was so sure of what I expected to happen, and I was frozen because I had no idea how to react.

That trade was a lesson and I am better about cutting losses now - not perfect, but better. I now try to really anticipate any possibility when I put a trade on, and this helps. I ask myself what I will do if the stocks does this, or if it does that. This is what I base my stop losses on - what possibilities could occur and what I would do in those cases. I have also begun to use hard stop losses more than before, instead of mental ones. This type of open-minded thinking before taking a trade helps control losses. No one likes taking a loss, but if you truly accept it as a possibility before each trade, you can avoid yourself a lot of headaches.

This type of thinking can be extended to the overall market direction as well. I find myself getting too committed to the bullish or bearish viewpoint of the market, and that limits some of the possibilities available to me. Right now, I do have an opinion of what direction the market is going, but I am trying hard not to "marry" myself to that position, even though a lot of evidence that I see seems to point that way. This way, with an open mind, I hopefully won't be caught if the market doesn't do what I think it should or will do. However, this type of thinking is easier said than done and takes time to develop. Hopefully, I become better at being open to all possibilities, in both stocks and the markets overall.

I would recommend both books for aspiring or experienced traders. Douglas presents a lot of interesting ideas that can help traders develop themselves and avoid some of the most common psychological mistakes made by all traders. Both books are good reads.


Hello, and welcome to my blog. I am starting this blog as a way to share my thoughts about the stock market and discuss those thoughts with readers. I will hopefully be able to post several times a week, and I will comment on the general market as well as specific stocks that may be potential longs or shorts, depending on the market direction. I will also be sharing some of the strategies I use for finding both longs and shorts and some of the rules I try and follow in my trading.

I do feel I am getting better and making progress as a trader, and I hope this blog will help to continue my development. I have read many times that it takes four, five, or six years of struggles before truly understanding the market and how to consistently pull money from it. I do agree that trading is an extremely difficult undertaking, and it does take a lot of hard work, time, and mistakes before becoming good. I hope I am on my way - I know that I still make way too many mistakes and have a lot to learn. By sharing my thoughts, I hope I can improve my techniques, my abilities, and most importantly my weaknesses as a trader.

As the new year begins, I look forward to this undertaking and hope that my thoughts will not only help myself, but other traders as well.