The purpose of this post is to give you some ideas trading stocks. The first investing tips presented here are general, but useful. At the end of the post I give you some of my own stock trading habits or notes in a more specific way.
One thing that always annoyed me about talking to traders over the years , when I was in the business was, no one gave me the real secret formula, that secret sauce recipe. The reason they did not give their treasured secretes was not only their arrogance (many) and trying to make you think they were something special (again the majority), but also another reason. That is, trading is a personal neurological experience.
Like learning a computer game, you need to expose your brain to countless scenarios and patterns before you can move up a level. Each person’s brain is different and will interact with his external world in a different way and interpret signals differently. These are subtle nuances that make the difference in your brains to interpret it as a buy or sell signal.
You have to learn the market in a specific sense yourself. While other people’s advice is general is good, the important work is done by and learned as a tactical (and tactile) experience level. Hands on and ground up comes with the territory of learning to trade stocks.
Buy and hold is a lie – This post is to convey some general advice I have learned about trading stocks. One of my underlying premises is buy and hold does not work like it is touted. There are decades that go by an stocks do not recover. For me that is a long time, a lot of opportunity cost. Buy and hold is not the way to go. Better is to study market timing, trading and long-term investing.
Ideas for learning to trade in stocks
- Study endless amounts of charts – Looking at charts does not cost you anything. You can just look at them for fun, study them and track them over time. If you want to research it, you can, take screen shots of the ones you like (using the ctrl + prtsc key on your PC and pasting it into an image program). Then date it, make a note as to your ideas about the chart, and store it in folders and in go back to them and see if your predictions and ideas were valid. There are other ways to do this of course, but this is the caveman simple approach and I like it. Or just sit back and relax and look at charts.
- Look at charts from historic time periods – then formulate ideas from them charts and see where they are today. Use historical charts to predict today. See if you were right.
- Read books on trading and market timing – look at the books objectively. Research the author and see where he is now and if he is really making money or just making money on the books.
- For fun watch financial news and experts – Of much lesser importance and more for downtime is, watch CNBC when they have technical experts on . A lot of them get too complicated and do not add value. However, you can compare it to your system of technical signals. Read the Wall Street Journal online . Do this for fun and if you have time. A lot of news is sensationalized and to promote fear and panic. The WSJ is pretty grounded reporting. Nothing in there will get you rich at first glance, but it does not hurt as your brain will start to subconsciously pick up things with habitual reading.
- Understand the basic technical tools but choose one to master – Think of a technical tool this way. It means nothing. Any system or book you read on the subject is just a tool. I believe Mozart could write good music not matter which pen he used to put the notes on the sheet. Just choose your favorite and master it. This does not take long but understand the value of oscillators like RSI and MACD. Take a look at volatility envelopes like Bollinger bands. Choose your favorite tools and master them, this is better than being a jack of all trades. I believe in the simple moving average. Why? It is simple. Lagged and weighted moving averages are also interesting but I prefer the SMA and work from there. The good news is you do not have to be a genius like Mozart to master technical trading, you just need to do what all artists of the past did. They studied with patience and went over and over the techniques of master’s that preceded them.
The most important questions in trading:
- What determines a trend reversal? All money-making can be said to be about identifying the trend and when it changes. It does not matter what tools you are using, candle sticks or chaos theory of investing, it all is about trends and reversals. Of course the rate of return depends on the velocity of the trend but even that does not matter if you have a reasonable arsenal of tools to discern the trend.
- What is the historical behavior of the stock or asset you are looking at? Stocks are like people, they have a nature like a personality. Each stock is different and has a different volatility and history. Some are flashy and erratic and some are stable and domestic. Get to understand how and why an asset behaves like it does. Does it respond to the sector’s strength or is it a news driven high flier or maybe quietly makes money with no one noticing. Does the stock take time to develop a base or does it never have a time of flat and is erratic.
A metaphor for learning to trade stocks
Becoming good at trading is like being good at chess. You can just play and you will improve. Other people like to read books and learn from others, I also watch videos, but a combination of all is the best. If I were to choose one method, it would be looking at countless charts for fun. Your brain will start to understand pattern intuitively. It will be like driving. When you first start everything is complicated and new, then it becomes second nature and you develop your own style.
Why I do not use the 200 day moving average
It is simple, the Pareto principle. Since 80% (lets say) of the moving average traders consider stocks 50 day moving average (or shorter) and the 200 day moving average, I choose something else, like the 12 month moving average. I like to zig when others zag, But more importantly I think a longer time horizon gives less false break outs or break down of the trend.
Notes to myself – Things I keep in mind when looking at moving averages
- I am only play the market when the S&P is positive – I am not a maverick, and do not like to buck the trend. If the S&P is trending down in the long run, I watch NetFlix and relax.
- Choose stable stocks – I do not choose stocks on headlines but price behavior. When I use to set up the Bloomberg trading system and other news information systems on Wall Street I use to tell people, I pay little heed to the news. They were shocked, but it is true. I like to choose stocks that do not have huge swings and certainly not news makers per say. I know people say no risk no reward but I prefer stocks I can look at and have a history of working with the 12 month SMA on a 3 year time horizon. If the stock prices danced around the moving average in the past it will do this in the future.
- Learn from an economist – The Economist Alfred Marshall said ‘ nature does not take great leaps’. If you understand this you will save yourself some heart aches. Whenever a company runs to high from the moving average it is over bought or over sold. It usually pulls back after some consolidation. I like stocks that stay just above the SMA. If a stock is making great leaps either way, it is unnatural.
- Trend line not just the moving average needs to be up – I do not buy stocks that break out above the trend line if the trend line is still down. I like to see the actual line to be either flat or moving up. Again this is not a day trader’s strategy but rather a long-term investor. Ideal it would be great to see a stock with a long base that breaks out. But how many times can you find the ideal. The longer the base the higher the pyramid.
- I purchase stocks that have a quantitative buy signal – If you have read my website you know I like confirmation from fundamentals, not only technical. You need to narrow the universe.
- I like to trade the same stocks – I often buy and sell the same stocks. Why? I get to know them. They are like old friends. For example, CNI or Canadian National Rail, I got interested in for various reasons, but not that I have traded it for a few years, I understand the business better and the trends in the market. Therefore, although I do not sit on the board of directors, I feel like I understand the business better than just some random stock giving me a signal. I also know some software companies because I write software. I understand the business on a more personal level. My universe of stocks are always expanding but I can not be an expert in every stock. But I can get to know a few and their cycles and patterns, so when they come on my radar, I trade them.
- Do I use mechanical stops? – I prefer mental stops. I do not know why, I have just done it this way.
- How many stocks do I have in my portfolio? – At times I have over 20 stocks, but I find this is too hard to track for a sole trader. I would rather watch a few stocks carefully. I do not trade full-time for my profession but rather to let my capital work for me.
- I dollar cost average in – I rarely put the whole kitten kaboodle on the line at one time. I do not know if I ever have. I tend to ease in and out of potions. It makes it less risky.
- I understand reality – You are never going to buy an equity on the day the stock hits its low and sell it when it hits the high and starts its downward descent. I do not mind riding it up but selling when it has taken a dip and breaks though the moving average, even if this is not the absolute high. I am not greedy.
- Transactions cost are not a factor in trading – Since we are all using discount brokers these days, do not worry about transaction costs, they are small and come off your tax cost basis. It is better to worry about taking large percentage losses.
- I do not always sell the second a stock crosses the MA – If the trend is still intact I sometimes give it time. I know it is not a mechanical trading strategy but I do it.
- IRA trading – as long as you do not risk the farm, trading in tax differed accounts are ideal, this is so capital gain taxes do not eat into your profits.
- Two tier diversification – You can achieve diversification by holding stocks and money markets. It might not be as effective as diversifying across asset classes, but it is simpler.
- I have scores of other trading tips – But it is best to save them for other posts.
The bottom line is investing in stocks are not zero sum. If your investment strategy is stock trading 2.0 that is use the leverage of other people’s knowledge and in particular quantitative investing screens, you in theory should at least do as well as the index, and maybe even better. Why reinvent the wheel? Start your trading with a base off of other people’s empirically tested ideas and research with references, and then trader from there based on your own lessons, brain and style.