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TRADING UPTRENDS WITH CHARTS
General Appearance of the Chart
It is possible to trade a trending stock using purely the general appearance of the chart.
The strategy is to buy stocks whose chart is sloping upwards and to sell if the slope ever turns downwards.
The trend you buy into must be observable within your favored trading timeframe.
Concrete Buy and Sell Signals A common failing in beginning traders is a reluctance to sell stocks at a loss. If we allow beginning traders the luxury of exercizing discretion - as in trading the general appearance of the chart - it often leads to disaster.
As an beginning trader, you must set hard, objective buy and sell signals before you embark on any trade. If you want to trade using charts, the best way to do this is with trendlines.
Trend Lines
A trend line can be drawn when three peaks or troughs on a stock's chart all lie on the same straight line.
For uptrends, trendlines are drawn by connecting troughs - as shown above.
The trendline above was first drawn when points 1, 2 and 3 could be connected with a straight line. The stock's price graph has subsequently respected the trendline by touching it but not falling below it at points 4 and 5.
Most charts do not provide us with the opportunity of drawing perfect or near-perfect trendlines of the type shown here. It's advisable for beginning traders to restrict themselves to trading stocks for which they can draw perfect or near-perfect trendlines.
If you buy a stock that's trending upwards, the sell signal is obvious. You sell when the trend breaks - in other words when the stock's price closes below the trendline.
The Battle of the Exit Strategies
Scaling Out vs. All or None
Simple concepts usually work best in trading - especially when it comes to Exits. However, keeping it simple doesn't exclude Exit plans with several features - so long as each aspect is designed to accomplish a goal.
For example, every Exit Strategy should do three things - minimize losses, maximize profits, and limit the amount of profit you give back. You can minimize losses with an initial "sell-all" stop that protects you if the trade moves in the wrong direction, maximize profits with a "sell-all" trailing stop that allows for normal price fluctuations, and avoid giving back too much profit by tightening the trailing stop when you reach a certain profit target.
While this three-pronged approach specifically addresses each objective, one widespread strategy used by many traders does just the opposite. The basic idea is to exit your position in several planned increments as opposed to exiting the entire position at one time. This strategy is sometimes referred to as "Scaling Out." Like the first example it uses multiple features. However, instead of meeting the three objectives of any good Exit plan, it works against them. Here's how.
Lets say you open a position with 600 shares. Under the Scale Out plan you might sell 1/3 of them when you reached the break-even point for the trade. Then you would sell another third when you made a specific profit such as $1000. Then you might hold on to the remaining shares until you have a $2000 profit, or keep the position even longer and let the price run way up.
Although the Scale Out method is commonly thought to reduce losses and increase profits, it has the unfortunate quality of producing big losses and little profits. This is due to a not-so-obvious characteristic - Reverse Position Sizing.
Position Sizing protects you by limiting the amount of shares held when you are the most vulnerable. This reduces the total amount of loss. On the other hand, the Scaling Out exit plan guarantees that you will have the most shares in your position when your risk of loss is highest. This trait will quickly increase your losses.
Not only does Scaling Out increase your losses, it insures that you have the fewest shares in your position when your point gains are the highest. Instead of "locking in profits" as it first appears, scaling out locks in larger losses than if you exited your entire position at one time.
Bottom Line: Though Scaling Out is popular among traders, the defects in this Exit Strategy cause hidden damage to trading accounts. Intuitively it seems to be a clever thing to do, yet when you take a closer look you can see that it is quite destructive.
By the way - don't feel bad if you use the Scale Out method - at least you have an Exit Strategy. That fact alone puts you in the top 20% of all traders. I confess that I believed in this method for a long time because it seemed to make sense.
Oh well, live and learn!
Here are nine simple rules for online trading success.
1) Trade With The Trend. You can't change the weather, but you can set your sails to take advantage of whichever direction the market wind is blowing. Trade what you see, regardless of what you'd like to see.
2) Buy Strength, Sell Weakness. Stocks trading at 52-week highs usually go higher. Stocks trading at 52-week lows usually go lower.
3) Base Your Trading Decisions On Logic And Reason. Respect the power of your feelings to influence your behavior. Keep your emotions under control while trading.
4) Plan Every Trade. Trading blind is senseless. Know exactly what you will do if a stock goes up or down BEFORE you put money on the table.
5) Stick With An Online Trading Method You Have Confidence In. Realize that you don't have to be "right" on every trade. A few losers do not mean your trading system is defective.
6) Manage Online Trading Risk. Take small trading losses rather than let them become large losses. Never add to a losing position.
7) Keep A Trading Log. Even if you never use it for analyzing your trades, a journal provide a written reminder of your ability to stick with your trading plan. To boot, it's in your own handwriting, which can be pretty persuasive if self-doubt starts to creep in while you're in a trade.
8) Measure Your Results. You're trading online to make a profit. If your figures don't add up, stop putting money at risk until you know why your stock trading method isn't working.
9) Invest in your online trading education. The victory goes to the prepared, so prepare for success. Get good training and instruction. As the saying goes, "If you think education is expensive, try ignorance . . ."
Split Announcements
A split announcement can be worded in various ways, and for the novice it may appear at first glance that the interpretation should be different. Let's take a look at the wording of two different announcements:
1. ABC, Inc. today declared a stock dividend of one share of Common Stock for each issued and outstanding share of Common Stock held by shareholders of record as of June 14, 2003. The stock dividend will increase the number of issued and outstanding shares of common stock of the Company from approximately 200 million to approximately 400 million. Certificates reflecting the stock dividend will be issued on or about June 30, 2003.
2. WYZ Company announced today that its directors have approved a two- for-one stock split. The company stated that on June 30, 2003, stockholders will receive two additional shares for every share they own on the record date of June 14, 2003.
Note first that ABC, Inc. announced a "dividend" vs. WYX Company's "split" announcement. Is there a difference? Absolutely not. Looking up the definition of a "dividend," we find that it is; 1) A number that is divided; or 2) A sum of money to be divided among shareholders. In ABC's announcement they are merely communicating that they will issue one share of outstanding stock for each that is held by a shareholder. The key is that there is no cash outlay compared to a "normal" cash dividend that is declared and paid.
Once you get past the terminology of "dividend" vs. "split," most announcements are relatively easy to interpret and these common elements are found:
Split Ratios
The majority of stock splits are 2-for-1 meaning that for every one share of stock owned, one additional share will be received with the result being that the shareholder will own two shares for every one share currently held. 2-for-1, 3-for-1, 3-for-2, and 5-for-4 are all popular split ratios; however, there is no limitation on the ratio. If a company wanted to execute a 50-for-1 ratio, they could. In the past, of all split ratios the 3-for-2 performed the best.
** A note on Reverse Stock Splits Although rare, every now and then you will see or hear of a reverse stock split. Investors generally view this negatively, as it is often a ploy to prop up the share price. Only on occasion is it done for a positive reason. In other words....avoid them!
Key Dates For Splitting Stocks
Split Record Date - This is probably the most confusing term within a split announcement. The reason for this is that many investors are used to associating this date with a "cash" dividend. To receive a "cash" dividend you must own the stock on the record date. In the case of a stock split, the record date is meaningless. This in itself can make the record date key since those that don't understand this may be scrambling to go out purchase the stock in hopes of taking part in the split.
Split Pay Date - This is the date that the stock dividend or split will be paid.
Split Execution Date - This date is not often found in a split announcement, but it will always be the first trading day following the "split pay date." For example, if the pay date is on a Friday, then you can expect to see the affect of the split when the market opens on the following Monday. On this date the stock price will be adjusted and you should see the additional shares in your brokerage account. Brokerages can vary as to when they will reflect additional split shares in your account. Some will reflect it immediately on the execution date and others will wait several days until the actual certificates are received.
QSII
11/07/2011 Closed down today 1.76% to end at $39.11
How To Draft A Perfect Trading Plan
This 8-step approach to planning paves the way to profitable stock trading.
When it comes to trading stocks, it's not about how hard you work. It's about knowing the right things to do, and putting that knowledge to work. Making money in the stock market isn't so hard when you apply a simple skill essential to converting the power of knowledge into profits ... planning!
"Plan Your Trade and Trade Your Plan" is a mantra you should print out and frame for your wall. Why? Because stock traders who carefully plan have a much better chance of making money than those who don't. In fact, the simple act of drafting a plan can significantly increase the odds that your trade will be profitable.
A successful trading plan doesn't have to be complicated. Many traders draft their trading plans in a notebook or on index cards, while others use word processors and spreadsheets. Regardless of the method you choose, every trading plan must include certain components to be effective.
1. Choose Your Style
Before drafting a plan of action, traders will want to decide what style of trading they prefer. A broad generalization of "buy and sell stocks" doesn't work - the criteria needs to be specific. Successful traders make money in different ways, but each has a well-defined method. On the other hand, a losing trader's plan is always vague and ambiguous. In trading, it pays to be precise, so decide what you like to do and build your plan around that style.
2. Commit To Your Trading Rules
The best plans always include a set of solid rules that never get broken. These same rules should also address how real-time decisions will be made when managing your stock positions. Your judgment will improve as you gain experience, so it's good to allow some flexibility in less critical areas of your plan. At the same time, maintain strict rules in the more sensitive parts of your plan - such as Risk Control.
3. Determine Your Time Frame
The type of trading you prefer usually defines the time frame. Short term traders who enjoy a fast paced style won't find much action in weekly or monthly time frames, while less active traders generally find that the extremely short time horizons require too much time at the computer. Decide which style best suits your personality, and then select the corresponding time frame. It's usually a good idea to start by spending a few minutes each day. Begin by managing the trades using daily charts, then see if you want to shorten or lengthen the time frame. The RightLine Report offers a variety of stocks in different time frames. Due to the way these stocks are selected and the type of exit strategy used, most of the picks will work for traders who plan to hold positions anywhere from a few hours to a few weeks.
4. Locate The Best Stocks to Trade
Choose a method to determine which stocks to trade. If you are experienced in the markets you probably already have a number of ideas and sources. They are based on an assortment of trading strategies and tactics that take advantage of predictable market behaviors.
You may also want to develop your own new methods for locating stocks. The RightLine educational section on our website at www.RightLine.net presents numerous market concepts to help traders understand the nature of price movement, identify trends in every time frame, and choose the tools needed to capture profits.
5. Determine Entry Points
This can be a challenge, for there are almost as many different ways to determine entries, as there are stocks. Again, in an effort to make it easier for our subscribers, the Right Line Report presents specific entry points for every stock in each issue. The exact level to buy or sell short is based on a wide range of technical factors used by our analysts to reduce risk and optimize the potential gain. If you choose to select your own entry points, we provide a large assortment of articles to assist you in developing your own personal methods.
6. Use An Intelligent Method to Select the Number of Shares to Trade
Very few traders and investors realize the importance of balanced "Position Sizing." Most make the mistake of ignoring the size of their trading account when taking on new positions. As a result, many unknowingly join the ranks of high-risk over-traders, and soon find themselves in big trouble. Don't worry, it's easy to avoid when you have the RightLine Risk Manager to help! This simple tool is free to subscribers, but if you prefer to do the math yourself, here are the basics:
"Never risk more than 2% of your trading capital in a single trade or more than 6% of your capital at a time. For example, if you have $100,000 in your trading account, the most you should be willing to risk is $2,000. Before buying a stock, review the chart to locate the best place to put a stop loss order. If you determine that the stock requires 5-points to keep you in the trade while it is trending up, the maximum number of shares that you can afford is 400. ($2,000 maximum risk divided by 5-points = 400 shares.)"
You can see that although doing the calculation isn't terribly hard, the Risk Manager makes the job a whole lot easier!
7. Determine Your Exit Strategy
After you've entered a position in a stock and it starts moving, then what? Traders have a lot of different choices when it comes to exiting trades, and the method used can make a world of difference. Some traders routinely use "trailing" stops as their exit strategy of choice, while others choose to exit when the stock hits a certain price, or breaks through a support level, or approaches a resistance level. Other traders will choose to exit based on intra-day swings or expected news releases. When choosing an exit strategy, remember to plan not only for the upside, but the downside too. The exit strategy is one of the most important parts of any trading plan, and it is fundamental for traders to select an exit plan before entering a trade.
8. Manage Risk With Stops
You may already know, but a "stop" is an order to buy at a price above or sell at a price below the current market price. Stops, or stop orders, are used to protect our capital and lock in profits. Placing stops is easy, but locating the best place to put them can be quite challenging. To assist traders with stop placement, every stock entry in the RightLine Report includes a suggested stop level. And of course, we offer plenty of help on our website for anyone who wants to learn more about managing risk with stops.
Understanding why Company's Split Their Shares
Usually, companies authorize stock splits in the hope that cheaper shares will lead to increased investor interest. A company may also authorize a split in a move to increase liquidity, reduce volatility and broaden its shareholder base, thereby diminishing the chances of a hostile takeover.
A stock split increases the amount of shares that exist, but does not change the value of an investor's holdings or the market value of the company. For instance, one share worth $100 becomes two shares worth $50 each in a 2-for-1 stock split. Splits can occur in any combination: 2-for-1, 3-for-2, 5-for-3, etc.
Because stock splits have no impact on the fundamentals of a company, the interest garnered by stock splits is generally considered strictly psychological. A stock split technically doesn't mean a thing, but investors prefer to buy a stock at $30, rather than $60.
Years ago, that reason was more substantive. Brokers were once fined for purchasing "odd lots" -- less than 100 shares -- of a certain stock and splits enabled smaller investors to buy "round lots" they previously may have been unable to afford. Now, those penalties have long been eliminated.
Meanwhile, some research does seem to indicate a positive correlation between stock splits and stock prices.
A study of the performance of 2,750 companies from 1975 to 1990 conducted by Rice University professor David Ikenberry found that shares climbed, on average, about 3.4 percent in the days immediately following a stock split.
More significantly, the study found that over a three year period, shares that were split outperformed comparable issues by about 8 percentage points the following year, almost 9 percentage points the second year, and 12 percentage points the third year.
Those figures indicate some long-term investment significance can be gleaned from stock splits. Stock splits in and of themselves have no redeeming economic value, but they do contain information. That is, companies don't just randomly split their shares. They tend to do it when they are optimistic about where the company is headed.
In addition, the strong performance of the stocks that split could be related to the fact that companies which split tend to be among the fastest growing firms to begin with.
So what is an investor to do? The key is to see a stock split as a tip-off and then seek out additional clues. For one, make sure the company that is splitting has "honorable" intentions. Companies that have major stock incentive plans, for example, may use stock splits to bolster their management's compensation packages. Others may be trying to raise funds to pay off debt.
In addition, if a stock price has been fairly flat in the month preceding the split or is just generally low -- below $45 -- proceed with caution. Stagnant or low earnings and growth rates are other warning signs.
Most traders view stock splits as high potential trading opportunities. They consider splits a positive progression in value and goodwill for companies and their investors. Corporate executives use stock splits as marketing and investor relation tools. They know that stock splits make shareholders feel better and engender a sense of greater wealth.
Critics would argue that a stock split is a non-event. They're convinced that a split is simply an accounting function with no relationship to stock performance. In fact, they think investors are "foolish" to believe there is any money to made from something as unimportant as a stock split. So who's right?
A 1996 study by David Ikenberry of Rice University measured the short and long-term performance of stock splits. His research included all the 1,275 companies whose stock split 2-for-1 between 1975 and 1990. Mr. Ikenberry compared the split stocks to a control group of stocks for similar-sized companies in similar sectors that had not split. His results were startling. The split stock group performed 8% better than the control group after one year, and 16% better after three years.
In August 2003 Mr.Ikenberry - now Chairman of the Finance Department at the University of Illinois at Urbana-Champaign - updated the stock split study. This time he looked at companies from 1990 to 1997. Using a similar methodology that included 2-for-1, 3-for-1 and 4-for-1 stock splits, he found the results were essentially the same. Shares of split stocks on average outperformed the market by 8% the following year and 12% over the next three years.
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Why trade a splitting stock, you ask? There is a very simple answer: stocks that continually make new
highs typically continue to make new highs! A power trend if you will.
Lets look at the break down of a stock split.
Stages Of A Stock Split
Pre-Announcement - Stocks tend to climb faster than usual during the 60-day period prior to a split announcement, and even that rate of increase will normally accelerate during the final 30 days before the announcement. Many traders play this phase by taking positions in split candidates at specific entry levels recommended in the RightLine Report. Others will scan the list of RightLine split candidates, and choose entry points based on their own individual criteria. The key to profiting from this stage is being able to determine which stocks are the most likely to split and when.
Announcement - Stocks often jump sharply on the split announcement, and may continue to increase in value during the following few days. RightLine email split alerts can give short-term traders who have yet to enter the stock a quick head start on a potential two or three day hold. The emails also serve as notice to those already playing the Pre-Announcement phase to check their positions and move stops higher to lock in profits.
Dormancy - A few days after the announcement, stocks will usually begin to drift into a "dormancy phase." This is when the stock will level off and consolidate its recent gains. However, exceptionally strong stocks in a leading sector may not go through a dormant phase as they continue to power higher. The shorter the time frame between the announcement and the execution date, the shorter the dormant phase. It can be a very bullish force when a stock announces a split just a short time before the execution date.
Pre-Split Run - When a stock nears its split execution date, it tends to pull out of the dormancy stage, and accelerate as it heads into the split. This transition will start anywhere from 5-15 trading days before the execution of the split and includes the stock split record date. This five to fifteen-day window is an approximate period. The actual time depends upon the individual stock, the overall market condition and sector performance. This typical price acceleration is why we include a list of upcoming split execution dates in the weekend issue of the RightLine Report. However, we don't necessarily wait for the weekend to introduce specific entry levels for stocks that are beginning their Pre-split Runs. When the stock is ready to go, so are we!
Split Execution - Stocks generally move higher quickly as they begin trading at the post-split price. The day of the stock split provides the final announcement to the public that the stock has split. Many investors who watched the stock rise at the announcement and again during the pre-split run will now buy shares at the lower split prices. These final buyers often push prices even higher.
Post-Split Depression - Once the initial excitement of the split fades away, the stock typically declines on lower volume for a period of time. This period will often provide short-sellers with a low-risk opportunity to profit from a brief pullback.
DISCLAIMER:
Opinions expressed on this board are just that. Opinions. We are not a licensed brokers. Trading strategies discussed on this board are often high risk and not suitable everyone. If you are losing money in the market, you may wish to seek the advice of a licensed securities professional.
No one is responsible for your gains or losses in the market except you. If you follow stocks, strategies discussed on this board, you may lose all your money. Please weigh the strategies discussed here carefully against what you are willing to risk.
Please do your own due diligence before buying or selling any security in the open market, there are no guarantees.
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