Good Stocks Stand Out in Market Declines

It is a fact of life in the market that you will experience both bull and bear markets. The good news is that the bull markets last much longer than the bear markets. Investors who keep their eyes open can typically find good opportunities when the market falls. This is because we often see good stocks act well during declines in the market.

This is not to say that the stock has to rally while the overall market is falling. The stock could move sideways while the market or the sector to which it belongs heads south. It may even fall a little bit but not as much as the market. If you own the stock, you may not be happy that it is moving down, but if the market falls 15 percent and your stock drops by only 5 percent, that is good performance relative to the market.

Step back and think about it for a minute, though. The irrefutable law of supply and demand is what moves stocks. If you see a stock moving sideways during a market decline, it suggests there is enough demand for that stock to offset all of the supply. With most stocks falling during a decline, there is selling pressure on the vast majority of stocks.

Yet here is a stock that is bucking that trend. It is not moving up, but it’s not moving down, either, and that is because of the demand for the stock. Once the selling pressure from the market decline is finished, demand usually remains strong. Not only that, but the investors who were buying the stock during the decline are not likely to sell soon, since they just purchased the stock and are expecting it to move higher. That means there is less supply of the stock to put on the market, and this, too, is good. The point is you can use market declines to try to find stocks that are holding up well.

Relative strength is a good tool to use to help you in this process. You will also want to note that stocks that hold up well are often market leaders once the market turns back up. We should mention one caveat here, however. When the market does decline sharply, you will often see a flight to higher yielding stocks. The thinking is that the yield will offer the stock some support, since investors will pay for the dividend. So be careful that any list you keep of stocks holding up well in a falling market are not all high-yielding stocks.

Know About Stock Market Trading

Stock market is an inquisitive place for many and a stock exchange is the place where stock trading or trading of shares is carried out. Stock market trading has given birth to many billionaires and is also responsible for turning billionaires to locals. Individuals and companies purchase and sell stock on a large scale. A particular company does stock market trading only in one specific stock market and is said to be on the list of that particular stock exchange.

However, big multinational companies can be listed on many stock exchanges. This is called inter-listed shares. The financial backers and owners felt the need to raise money for investment in the new projects of the same company so they started the method of stock and shares.

When we are in a strong stock market, it seems like the stock market will not go down no matter what, you can get a great stock market trading tip just from throwing a dart at the list of stocks in Investors Business Daily and come out with a winner. The aura of the place is such that it is swarming with people any hour of the day and any season of the year. But only few know that how the stock market trading came into existence or what actually are its origins.

Investors (who invest in stock market trading) got the monetary support, they were looking for and at the same time solved ownership issues in case the company was sold (by granting shares to the people). They sold a part to people and still retained control over the company. Thus, the owner had some portion of the assets, some power to make decision conditionally. In return, they shared a part of the profit with the stock owner as dividend.

Many stock market traders lose simply out of ignorance in stock market trading. They base their trades on news and tips from friends, and do not define specific risk and profit objectives before placing trades. Others have the merit of educating themselves but fall victims of their emotions. They hold on to losing positions hoping they will turn into winners and sell winners by fear of losing a small gain. They over trade to fulfill a need for action or by fear of missing out.

Money Management For Stock Market Trading

By avoiding risks, money management in stock market trading is to ensure your survival that could take you out of business. Your money management rules should include maximum amount at risk for all your opened positions, different between your entry price and your initial stop loss is your risk per share. Your maximum amount at risk for each trade determines the share size. Maximum daily and weekly amount lost before you stop trading, avoid trying to trade your way out of a hole after a loosing streaks.

Learning about stock market trading is not difficult, but it does take time. Take the time to learn about stock market from books that will get you going in the right direction. Read them, study the market, practice trading on paper. Take the time to learn to invest, you will not regret it. The stock market is not going anywhere, its been here for a long time, and will continue to be here for a long time to come.

Momentum To Aid In Our Interpretation Of A Stock

We use measures of momentum and overbought/oversold readings to aid in our interpretation of a stock. The measures are computed by our database and can be accessed by clients.

We have three different momentum calculations:

1. Daily momentums.
2. Weekly momentums.
3. Monthly momentums.

Daily momentum is a very short-term trading tool. Following weekly momentum is very helpful when timing trades as well, but it gives a slightly longer horizon. It is an intermediate tool, since changes to positive or negative weekly momentum last seven weeks on average. The monthly momentum is used more to highlight or signify a longer-term turnaround.

We’ll use weekly momentum as an example, but the same principles apply to daily and monthly momentums. Weekly momentum is basically a one week moving average compared to a five-week moving average. The moving average is also exponentially weighted and smoothed. The exact calculation is proprietary. When the one week moving average crosses above the five week, we say the weekly momentum is positive. This would suggest a bounce in the stock. When the one week moving average crosses below the fiveweek, we say the weekly momentum is negative. This would suggest a pullback in the stock.

The weekly momentum calculation was created well before computer graphics became as sophisticated as they are today. At that time, it was difficult to draw two lines and see where they crossed one another. Therefore, we turned to the actual calculation and created two columns. One column is labeled top, which is the positive column, and the other column is labeled bot, which is the negative column.

As a visual, think of the line between the top and bot columns as the five week moving average. When the calculation (or the numbers) moves from the bot column to the top column, the one week has crossed above the five-week. Likewise, when the top column prints zeros and the bot column has a negative calculation, the one-week has crossed below the five-week moving average. The same premise applies to the daily and monthly calculations. It is simply a different time frame.

Momentum calculations are used as a supplement, not a substitution for, the point and figure chart. When we get down to evaluating the individual stock chart, the three most important parts are the relative strength, trend, and the individual patterns. Once we have determined that those three things are positive, then we look at the short-term timing tools like weekly momentum. Let’s say, for example, that we have a stock that is bullish on everything, but the weekly momentum has flipped negative. That suggests we put in our order for new positions on a pullback. Again, the momentum doesn’t change our opinion of the stock, but rather it helps us time the trade.

The charting and database system on our Web site allows you to actually pull up the table for weekly momentum, and it also tells you where the momentum would change (the cross point). For example, a stock trading at $73 may have negative weekly momentum and a cross point of $75. That would tell us the stock would have to rise to $75 to turn to positive weekly momentum. If the stock didn’t rise to $75 at the end of that week, then a new calculation is done and that cross point may have changed. Remember, you are looking at a one-week versus five-week moving average, so each week you are dropping off a week and picking up a new one in your calculation.

We look for weekly momentum that has been negative for twelve weeks or more for two reasons.

First, if momentum has been negative for twelve weeks or more, the stock is likely to be on a pullback, thus giving us a stock in an overall positive trend that is on a pullback.

Second, we choose twelve weeks or more because the average time momentum stays on the positive or negative side is six to eight weeks. At twelve weeks on the negative side, that is getting “long in the tooth,” and a change to positive momentum is likely just at hand. Therefore, we are getting a long-term positive stock, which has pulled back short-term, but is getting ready to start moving again.

Essentials Of Stock Selections

We recommend a top-down approach to stock investing. In light of that, we designed a four-step process that you should go through when initiating new positions.

STEP 1: Market

What to do: Use the NYSE Bullish Percent, Option Stock Bullish Percent, OTC Bullish Percent, High-Low Index, Ten Week, and other indicators to determine if you play offense or defense.

STEP 2: Sector

What to do: Determine which sectors suggest offense (and what their respective field position is)—those in a column of Xs on their sector bullish percent chart. It is best to stay with sectors that are bullish and below 50 percent. Determine how a sector is doing relative to the S&P 500. Ideally, you want to invest in sectors that are outperforming the SPX (those that are in a column of Xs on their RS chart).

STEP 3: Fundamentals

What to do: Create and maintain an inventory of stocks to work from. Use any number of sources available to determine which stocks are fundamentally sound. In this step you are pinpointing which specific stock to buy.

STEP 4: Technicals

What to do: Review fundamentally sound stocks on a technical basis to cull those controlled by demand, those that demonstrate the best technical picture. This will narrow your fundamental inventory down to those issues with the best probability of moving higher. In this step you are determining when to buy a specific stock.

In summary, try to follow this four-step checklist when initiating new positions. By paying attention to the market and the sector risks (opportunities), and then coupling the fundamentals with the technicals, your odds of success should increase. Not every trade will work out, but this gives you a definable game plan, something most investors don’t have. Stick to the plan, make your decision, then manage the outcome.

Why do stock prices change??

Some believe that it isn’t possible to predict how stocks will change in price while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know as a certainty is that stocks are volatile and can change in price extremely rapidly.

Here are the important things to grasp about this subject:

1.
At the most fundamental level, supply and demand in the market determine stock price.

2.
Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.

3.
Theoretically earnings are what affect investors’ valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors’ sentiments, attitudes, and expectations that ultimately affect stock prices.

4.
There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.
Buying Stocks

You’ve now learned what a stock is and a little bit about the principles behind the stock market, but how do you actually go about buying stocks? Thankfully you don’t have to go down into the trading pit yelling and screaming your order.

There are two main ways to purchase stock:

1.
Using a Brokerage The most common method to buy stocks is to use a brokerage.

Brokerages come in two different flavors.

Full-service brokerages offer you (supposedly) expert advice and can manage your account but also charge a lot.

Discount brokerages offer little in the way of personal attention but are much cheaper.

At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the Internet came the explosion of online discount brokers. Because of them nearly anybody can now afford to invest in the market. We’ve actually got a whole separate tutorial on brokers and online trading, and you can check it out here.

2.
DRIPs & DIPs Dividend Reinvestment Plans (DRIPs) and Direct Investment Plans (DIPs) are plans with which individual companies, for a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small amounts of money at regular intervals.

Steps To Profitable Stock Picking

Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments. This article will outline these basic steps for picking high performance stocks.

Step 1 -

Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy.

Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages along with stable growth. The key for finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.

If you decide to be a short term investor, you would like to adhere to one of the following strategies:

a. Momentum Trading. This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this trading strategy. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks.

b. Contrarian Strategy. This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stocks fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the businesss brand and product, you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities.

Step 2 -

Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs.

Step 3 -

Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is conduct a Markowitz analysis for your portfolio. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world.

These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a sense of confidence that helps you to make better trading decisions.

Aspect Related To Online Stock Trading

If you want to start with stock market trading, you must know some of the aspect related to stock market. With no knowledge of stock market and the careful planning, there is very little success for stock traders. To find success in the stock market, a person needs to know the attributes and have a stock trading system. They are crucial to your stock market trading business and making a profit could be extremely easy.

Try to develop an edge and base your trade on technical reasoning rather than on hunches and long shots, using tools available. You will be successful, if you can develop an edge (however small). Unsuccessful traders emphasize on the -

first part of a trade – part accumulating information to decide what to do in the stock market and leave the last part of a trade – part involves getting out of a trade

Strategies

Swing trading Strategy

The reward/ risk profile of the stock trade is no longer the same. It may be best to pass on the trade, if a stock gaps over 3 percent. Enter one fourth of the intended position size, if a stock gaps 2-3 percent and if a stock gaps half percent, monitor the stock’s behavior and enter half of the intended position size.

Day trading strategy

When people use the term “day trading”, they mean the act of buying and selling a stock within the same day. Most of the people incorrectly conclude that a day trading is a loser’s game when they hear statistics that claim that over 75% - day traders lose money. Exit the position, if a stock hits a new low or new high for the day if you are short. There is no purpose in widening stops to accommodate a stock moving in the wrong direction because it is intended for initial moves. Get out if the stock breaks a low as you can reenter the trade if it triggers again.

Other reasons people left their jobs to go into full time trading on the internet because they think that they can do better at it than at their real job and it will be more fun to boot. There is a certain romantic idea that people have about sitting in their beautiful home sipping gourmet coffee and checking in on their online stock trading portfolios a few times a day while making hundreds of thousands of dollars. This is a dangerous move for lots of people because they have no idea what they are getting into.

In order to be successful you have to have knowledge of the worlds economies and how that can be affected by the current events of the day. You also have to be good at evaluation of companies as far as potential for profit and so on. The third thing that you must have is nerves of steel and a loose grip on the money that you are trading with. Many day traders (or former thereof) will tell you of the hits they have taken totaling many thousands of dollars in a few hours for a wrong move.

Online Stock Trading

Entering the stock trading industry can be described as entering a war zone. Without the proper tools, scouting devices, ammunition and strategy, your chances of success are small.

Lot of people finds it difficult to survive in the stock market. In fact 90% of the traders FAIL to make money from the stock market.

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How To Start With Stock Investing

Remove the loser and keep the winner

For many it is worse than having a tooth pulled to sell a stock for a price lower than what they paid for it. If you buy a stock for $20 and it drops to $10, so long as you don’t sell, then it can be referred to as an unrealized loss. In this case you can say to your spouse, Don’t worry, dear. It’s going to come back. Similarly, many can’t wait to sell as soon as they can see daylight between the purchase price and the current price. If the price has gone up be a few dollars, they want to sell and lock in the profit.

We referred to this as watering the weeds and pulling up the flowers. They are examples of what I call investor diseases. The disease of holding on to your losers I call get-evenitis. The disease of selling winners I call consolidatus profitus. We found that people tended to trade out of winners into stocks that performed less well. In the opposite direction, the study showed that the losers in their portfolio tended to continue to under perform. It was really the case that once a loser, always a loser.

We found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their
winners.

Suppose two simple changes were made: the investors sold their losers and held on to their winners. On average, the study showed that their average annual performance would have gone up by almost five percent per year.

The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.

This gives us confirmation of secret number eight: Remove the looser and keep the winner not the other way around. Of course, this is an oversimplification. There are times when it is better to keep a stock when the price has gone down. In fact, it may well make sense to buy more. At other times, it is better to sell a stock after it has gone up. Each case has to be treated on its own merits.

This leads to the question. Just when should you sell? A large survey carried out by the Australian Stock Exchange showed that investors found it much harder to know when to sell than when to buy. Similar results were found in a survey of nearly 300 investors that I carried out. Almost 50 percent said that they either regularly worry or constantly worry about when to sell their stocks.

The general rule which is full of common sense is - Sell only when you can be very confident that you can do significantly better with your money in another stock. The problem is to be able to determine when this is the case.

True Stock Recommedations