Trading Systems | Stock Trading Systems

Trading System Vs The Best Stocks To Buy Now

2009-10-17T17:49:00.000-07:00

How do trading systems identify the best stocks to buy now? In short, it doesn't. The trading system isn't about finding the best stocks, it's about producing the best overall results. Everyone's after explosive stocks and many people look for the best stocks to buy now.

I have to say that some of the best stocks out there will be passed up on in most good trading systems. However, the idea is to produce solid gains. If you are looking for the best stocks to buy now, I suggest you start looking at a long term time perspective and you are looking at it from a investment perspective more so than a trading perspective. If you are a system trader, you don't care what sector is hot right now and what is not. A trading system can only give you information on what has been tested and proven in the past. You are looking for measurable data that can be backtested and proven. You can try to find large edges, but once you have your system down the idea is to make sure you have an edge, and leverage that edge.

Almost anyone can search for penny stocks and find a stock that is going to have a lot of upside. However, 95% of them will fail. So if you must try to seek the best stocks out there, you don't want to just pick a stock because it's cheap. Find a stock that has recent momentum that not only is trending up in pice, but who's company matches the run up so you know the run up is not because of some fluke. There should be buying behind it and such.

As Eric Nance says at his best stocks to buy now blog post,

Fundimental analysis will also help you find the best stocks, but this means you look inside the company for indication that it's cashflow will increase, that it's earnings will gain, that it's sales will increase, and that it's balance sheet will improve. As this trend continues, more and more people will be willing to buy more and more shares of the stock as soon as possible.

Finding the best stocks to buy now is more art than science and cannot be done very easily. However, the best information that you can get is to learn lots of fundimental analysis, and learn lots of technical analysis. Then study some of the great stock pickers of all time and see what they do, and especially focus on those that are currently successful on a consistent basis. If you are able to locate sstocks that have a high price target in a short amount of time based on the technicals and high volume indicating a strong support of recent buyers along with solid improving fundimentals you will have a stock that has high potential for high gains in a short amount of time. If you are able to master the skills of these arts, you will be on your way towards finding the best stocks to buy now.

Eric then procedes later in his post the best stocks to buy right now to...

Check out the fundementals of the company, and always understand that there are risks for even some of the better stocks out there. Please do your own research, check the S&P reports, check moody's reports, research the companies balance sheets, check out the recent charts of the stock, and understand that no one will really come to the same conclusion on which stock is best. Some people have different goals and objectives and targets, and different risk tolerances and time perspectives, and different money management strategies. Please consider all of these factors and talk to your stock broker before determining what you think is the best stocks to buy right now.

These are certainly words to live by. I prefer to simplify things and just follow a system, but for people who are not active, you may follow his methods in researching the best stocks to buy right now. A trading system works if you have done the research in finding a system that is proven. But finding the best stocks to buy now require that you look behind the results at a company that has shown excellent management and that has proven itself to be a good stock to buy.

Trading System Part 3

2009-07-09T12:42:00.000-07:00

Trading System Part 3 Money Management

Money Management

Lets start this by talking position sizing. Now the more volatile the stock, the smaller your position should be. However, there is a formula for position sizing that you should be familiar with it's known as the Kelly Criterion. according to investopedia(links) it is (formula).

We wil not use this because it's more work than most will do, but I highly recommend you learn it. Instead we will keep things standard and say no position should be purchased that is over 5% of capital. Well,

I think that if you own 5 stocks it's fine, you should have each position be 15% each stop loss be 7% (which is about 1% loss if you lose). And a cash position of 25.

I am not going to reinvent the wheel and describe all of this so I instead will quote this
http://www.investopedia.com/articles/trading/04/091504.asp

Kelly % = W – [(1 – W) / R]

W is your probability of a winning trade
where as R is instead your average win loss ratio. For example, if on average your winners gain 21% while your losers lose 7% this is a win/loss ratio of 3

0.4 - [(1 – 0.4) / 3]
=.2=20%
The system does require some common sense, however. One rule to keep in mind, regardless of what the Kelly percentage may tell you, is to never commit more than 20-25% of your capital to one equity. Allocating any more than this is carries far more risk than most people should be taking.

This is the basis of the money management strategy. However, money management is managing all of the factors in all parts of the trading system. Eventually you will have some core numbers. You will be able to determine how much a given strategy earns. However, this only tells you part of the story.

A risky strategy that gains 100% of your money but in order to manage properly requires you to invest 1% of your capital, is the exact same as a system where you invest 100% of your capital in a CD, gaining 1% plus whatever interest rate your money on the side would have been earning. The important thing is not always your return on invested capital, but your overall dollar return when using the equivlent money management. This means that you should take the maximum amount of money you invest and multiply it by your return in a system. Then compare it to your other system's potential maximum and compare. Of course, there are flaws in this as well, and you actually may have to use some critical though. Determine which method has liquid cash, what requires more costs for trades, what strategy is more suited for you, how important is consistent income vs inconsistent income but income that comes in large amounts when it comes, and what works best with your risk profile. This is only the ti8p of the iceberg of money management.

Trading System Part 4

2009-08-20T13:15:00.000-07:00

Trading System 4 - Leverage

Leverage is a dangerous thing to do if you do not know what you are doing. Leverage cannot be done without having sound money management, and is the engine of a trading system.

Not many people know about the story of the Wright Brothers Competitor. He immediately built the biggest engine he could find, then stuck it on aa poorly designed airplane expecting it to fly. The engine was too heavy, had no balance and failed.

The Wright Brothers on the other hand did the opposite. They spent years perfecting the perfect aircraft that could glide on it's own without an engine. Then, they simply put the lightest engine they could find on it.

Why is this story relevent to trading systems? Because many people intuitively think if they had more money on when they won, that they would be better off. The truth is, if they had more money at risk, they would just crash faster and harder. It isn't until after you develop the other systems that leverage can be added.

Now there are several forms of leverage. The most common in stock trading is buying options. Options can be sold to trade in your capital gain potential for cashflow, or they can be bought to hedge a position in casee of a large move against your bet. They also can be used as speculative instruments to spend a little, and potentially make a lot.The reason options can be a powerful form of leverage, is that if you have a trading system that is already successful, and you understand everything you need to know about options, its actually possible that every point your stock moves up while owning a call option, your option will move up CLOSE to $1 per share (an option gives you the right to own 100 shares above a certain strike price so 1 share is 1/100th of the option price) while if your stock goes down 1 point, you don't neccesarily lose near a full point, and in fact may lose only .50 on a dollar.
Obviously if you can gain .92 cents on the dollar, but only lose .50 it's a good use of leverage provided you can pull it off and manage it right.

However, why wouldn't everyone do this? The reason is that options can expire worthless, and time is guarenteed to move forward, while the price of the option may move up and down, but not neccesarily by a certain time. This is why it's very important that you really really understand options before you use them.
This is just one post on the system, as an options trading system is an entirely different animal. You have to select stocks that don't lose much theta, that have a high delta, and that are managed correctly according to the Kelly Criterion.
However, if you can understand this, leverage can be a great thing. You may also set price targets and SELL some of your leverage back. In otherwords, a stock potentially goes to infinity, but you might set a price targe at $50. Now you can bet on the stock going above the $30 per share it's at, but it doesn't make sense to get the full leverage above 50 if it's not going to move that high. So you would buy the call option at a strike price such as $20, and sell a call option with the srike price of $50.

Another form of leverage is business leverage. There are several ways to do this, you can form a buiness that has positive cashflow through owning and renting real estate, or perhaps you build several blogs that have positive cashflow and that way you have no debt. You can leverage your business and either just directly use the cashflow from a business, take out an equity loine of credit on a peice of real estate, or value your business and get business credit, or perhaps even own some kind of trust fund or holding company. Or you can do what Buffet did and convince someone to loan you money, buy out a private equity company, use your controlling interest in the company to take it public, leverage even more by raising lots of money, and reinvest your companies cash into your trading system or stock investment philosophy. You can raise the money of other and have them take on liabilities, and you may be able to limit your personal liability through propper use of business structure. You may be able to leverage your earnings by investing pretaxible income, and raise money and use business partners to do the same.

All of this requires expert knowledge in these areas, and you absolutely will need to hire experts and talk with them before attempting something like this.
This topic is one that I have not tackled for awhile, because it's so in depth and it can be so dangerous. Please find highe r education in these areas and practice studying this information, and make sure you have years of experience in a successful trading system before even attempting this.

Of course you can go to a bank directly for a personal loan as well, or you could even use credit cards for leverage... but in my opinion in 99.5% of all cases, that's a very bad idea. Generally you should have enough cash to cover your leverage if need be, your leverage should generally be used to acquire cashflow producing assets, and THEN you can reinvest your income from those assets into capital gains, Using leverage directly for capital gains without having cashflow that can cover you, is not financially intelligent and should not be a part of your trading system.

However, if you must have a form of leverage that I can almost reccomend, it's to build an online business, pay some money towards outsourcing it (to elance.com) from your cash on hand, then if you are able to be successful, then form the propper business entity, pay for lawyers and accountants, bookkeepers and so on to make sure you do it right, and then you can raise capital, leverage a lot of money provided that your income is greater than your costs, and your margins and cash on hand are high enough to cover fluctuations in income. Then you can generate a lot of income, more so than you would usually be able to generate, and in a fixed amount of time, maybe 1 year, you will get all of your money back that you invested, your cashflow will continue, and from that point on, you will be able to continue to invest more and more money every month from your cashflow. Of course, that will require a lot of time aqcuiring knowledge and trial and error, however, you should use the trading system for a year, and in the time you save where you would normally be researching stock, spend onn researching a business, then when a year is up, you may have figured out an online passive income system of wealth building that you can start to leverage, and soon you can take your trading system money, get it all back, and put it to work as you continue to gain passive income.

All I can say is if you really want the complete trading system, you don't need leverage, but if you want to maximize your return, leverage can be very useful.

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2009-08-03T08:02:00.000-07:00

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8 ways to boost your profits

2009-07-15T07:06:00.000-07:00

In 8 ways to boost your profits the article focused on the 8 different steps to placing better trades. I felt it was very much in line with system trading, so I thought system traders could bennefit.

the 8 ways were
1. Focus -- You can't trade everything; how gaining focus will help make you money.
2. Position Sizing -- How much should you place in any single trade?
3. Mitigating Risk: Exchange-Traded Funds vs. Individual Stocks -- What is the risk/reward difference between stocks and ETFs?
4. Stop-loss Points -- Where should you place your stop-loss?
5. Entering Positions -- Where should you place your buy order or short sale order? What type of orders can you use?
6. Exiting Positions -- How to lock in as much of your profits as possible. How to use option strategies to exit your positions
7. Shorting -- What does it mean to "short" and why should you be doing it?
8. Leverage -- The ins and outs of why, how and when to use leverage.

The first part covered "focus"

The next part of the series on how to boost your profit which I believe will offer just a slightly different perspective and help reinforce some of my ideas is in position sizing, which in my trading system was referred to as "money management".
This isn't quite the same as my outlook, but it's still a very good one that works under most circumstances.
Note that when using money management, I prefer using the Kelly Criterion as more volitile investment requires stricter requirements, and you can adjust your position size to best fit your system.

Rule No. 2: Position Sizing

The classic mistake I see many investors, both new and seasoned alike, consistently make is over-concentrating their capital into a single position.

In the early days of my investing career, I made this mistake as well. In fact, there isn't much information out there to tell us how big our positions should be, so we must figure it out through trial-and-error ... probably with a lot of emphasis on "error."

Today, I'm going to show you the best way to size your positions to save you a lot of the pain (and money) that other investors are encountering.

What I've learned from my own investing journey is that our position size must be determined not by how much money we hope to make but instead by how much money we are willing to lose if we are wrong!

That's a subtle but important distinction.

My 3% Rule

Being wrong is just a part of ultimately being right. The key is to make sure that, when you are wrong, you don't lose too much of your equity while you are on the road to being right. My general rule of thumb is to risk no more than 3% of my starting equity on any individual trade.

Let's assume that you have a $40,000 account. Does this mean that you only put 3% of $40,000 into your trade?

No!

The 3% is the amount you are willing to lose if your stock position gets stopped out. In order for this technique to work, it means that you must attach a stop-loss to each of your trades. A stop-loss is an order you put in with your broker that will get you out of the trade when the stock hits a certain point.

We use stop-loss points to manage our risk.

Here's How it Works

Let's work through the above example, 3% of $40,000 is $1,200. That means if our position hits our stop-loss point, our position size is such that we will lose no more than $1,200. To take this a step further, let's assume that we want to buy a $20 stock and we want to figure out how much to put into this new position.

The first thing we have to do, before we buy a single share of stock, is figure out our stop-loss point. (This is such a critical part of managing your own portfolio that I plan to do an entire article on this subject as part of this series.)

Let's assume that we have looked at the stock and we've chosen a stop-loss point of $17 per share.

Once we know where our stop-loss point is ($17), we can begin to work out how many shares we can buy. To do this, we simply divide the amount we are willing to risk ($1,200, which is 3% of $40,000) by the amount of points of our stop-loss is (3 points) from our entry price.

The entry price is $20 and the stop-loss point is 3 points below our entry price, so $1,200 divided by 3 equals 400. So, this tells us that we can buy 400 shares of the stock at $20 with a $17 stop-loss point.

If we get stopped out at $17, our loss on 400 shares (assuming we paid $20 for them) would be $1,200, or 3% of our total starting equity of $40,000.

Keep Your Powder Dry Till Your Guns Start Blazing

By using this approach, we prevent ourselves from over-leveraging our positions and creating unnecessary stress. It also allows us to make several attempts to get into a position without risking too much money.

How many times have you been in a trade, got stopped out and then watched the shares skyrocket higher? This used to happen to me a lot, but when I started using the "3% rule" approach, it enabled me to keep enough powder dry that I could make several attempts to get into a position until I got the trade to "stick" without murdering my capital.

At market bottoms and at market tops, this is a very savvy way of "probing" the market in an attempt to catch big, deep-trending moves without "betting the ranch."

As the position becomes profitable, I start adding to it so I can catch as much of the move as possible while always moving my stop-loss along with the stock price to protect my principal and accumulated profits.

Now that we've talked about how to zero in on the strategies and securities you want to have in your portfolio, and how much money to put into each position, next week we'll move on to how to mitigate risk -- specifically when looking at Exchange-Traded Funds vs. individual stocks.

In the comments section, be sure to tell me how you are applying these strategies and any questions that arise during your journey. I look forward to hearing from you!

=

System Trading Conclusion

2009-07-12T12:43:00.000-07:00

Conclusion to trading system
Before I leave you to go off and start trading your system, you should understand the mindset of an investor. The investor/trader should be looking at past results and figuring out what's the best guess expectation, what's the maximum down swing in that test, what's the sample size, worst case scenario, best case scenario and how do I adapt to that? The trading system is enough on it's own, but if you want to improve you need to test this stuff because things will change. Test previous results, and test the results as you do it. What you want to do is go through all the test of various methods and estimate the potential results several times over, tweak the exit strategy within that system and go back and test again.. Whether you have a stock screening software that tracks the results, or a trading station that allows advanced backtesting the point is you need to see how minor changes in your entire strategy effect the estimated results, the estimated downswings, etc.
If you do this, you should be able to be a winning investor with an excellent trading system.

8 Easy Ways to Boost Your Profits

2009-07-08T14:21:00.000-07:00

Hey guys, got this from a newsletter put out by Tycoon report. Normally I don't feel the need to post others materials, and normally I think the focus isn't on wha'ts important (that which can enhance a trader or investors ability to profit regardless of when they read the advice).
But with that being said, as I read this, it reminded me a lot of the advice I have been suggesting recently, about forming a trading system as it contains a lot of the core elements such as position sizing, limiting downside and protecting yourself from catestrophic losses, exit points, hedging, leverage, etc. In fact, if I didn't know btter, I'd say he's been reading this blog :-)
It's always nice to hear someone echo your sentiments, and I hope that it provides some validation to what I've been saying. So this may not be a "trading system" and instead is how to boost your profits, but since you can use those elements to form a trading system, it is relevent to what I have this blog focused on.

Teeka Tiwari
8 Easy Ways to Boost Your Profits, Part 1
During the next several weeks, be sure to tune into this space every Wednesday to learn eight tips aimed at making you a stronger, more-confident and -- most importantly -- a more-profitable investor. We plan to cover the following topics, and much more.* (Check out my list of "My 6 Favorite Sectors RIGHT NOW" toward the end of this article.):
1. Focus -- You can't trade everything; how gaining focus will help make you money.
2. Position Sizing -- How much should you place in any single trade?
3. Mitigating Risk: Exchange-Traded Funds vs. Individual Stocks -- What is the risk/reward difference between stocks and ETFs?
4. Stop-loss Points -- Where should you place your stop-loss?
5. Entering Positions -- Where should you place your buy order or short sale order? What type of orders can you use?
6. Exiting Positions -- How to lock in as much of your profits as possible. How to use option strategies to exit your positions
7. Shorting -- What does it mean to "short" and why should you be doing it?
8. Leverage -- The ins and outs of why, how and when to use leverage.*Note: As we go through this journey together, I may add to, or consolidate, some of these topics. Rule No. 1: Focus, Focus, Focus ... and Focus Some MoreSo, let us tackle the first subject: focusing, as it is the very foundation upon which the other tenets are built.In my early investing, before I found my own "groove," I'd flit from strategy to strategy -- embracing each new approach like a long-lost loved one. I'd throw myself into each approach with reckless abandon, risking all I had.Sometimes I'd win but, most times, I lost. Even when I found a strategy that worked, I'd dilute it by spreading myself (and my capital) too thin, trying to trade every single stock I could find that fit the strategy. I frittered away a small fortune using this disjointed approach.Conserve Your Emotional, Financial CapitalJust like those who practice medicine, I learned that the most successful investors choose a specialty and they stick with it. I had to find one approach and then totally own it. I realized that I could not learn all there was to learn about trading stocks. There are just too many different approaches that one can use. And, certainly, you can master a new technique and add it to your arsenal. But even if you can get a handle on many or even most of them, you simply can't use too many strategies concurrently, successfully.As for me, I had to choose one method and then commit myself to it. The method that ended up making the most sense to me -- and, more importantly, generating regular returns -- was Point-and-Figure charting. Maybe You Can Have it All, But Don't Try to DO it AllThe other thing I learned was that I could not trade everything. I just couldn't keep track of 100 open positions. I had to limit the amount of trades that I had on the table at any one time.For me, that number is typically six. That is, I typically will only have six trades on at a time. (Note that I'm talking about trades, or short-term investments, which require more diligence to manage than your longer-term holdings.)Are there times when I have more than six open trades? Sure, but the idea is to keep not only the amount of strategies manageable, but also the number of positions because of how easy it is to lose focus when you have too much going on.Now, depending on your style, having six active trades at a time can seem like a lot or maybe that's how many trades you make in an average morning. Either way, I'm going to show you how I make those six trades generate portfolio-sized returns.What Makes Stocks Move? The Secret's Out...When I discovered that more than 68% of what makes a stock go higher is sector-related, I knew that I had to start thinking in terms of sectors rather than stocks. This was yet another filter that served to hone my focus. Instead of looking at a vast sea of 12,000 stocks to choose from, I was able to narrow that down to 46 sectors.This one move alone saved me hundreds of research hours a year. What I started to learn was that some sectors would have long-term bull-market runs that were often punctuated by extreme bouts of downward volatility. I knew that these were the groups that I wanted to be in.Nothing builds wealth faster than timing volatility correctly. The "hottest" sectors are also the most volatile, so I knew that these were the sectors I had to focus on. Over time, I formalized my research process into the system that many of you now know as Sector Hunter, my automated trading service.In the old days, I did all of this by hand; now Sector Hunter saves me hours of tedious research. What I would do then (and what I still do now) is focus on a handful of sectors that I want to be intimately familiar with. Even though I have developed the wherewithal to do so, I would never attempt to trade every alert in every sector put out by the system. Long ago, I made the mistake of trading everything that looked good to me, and I paid dearly for it. These days, I use my sector-hunting system to time my trades into those industries that I believe will be the most volatile. Why?Because volatility is the haven for big money, and big money creates big moves! My 6 Favorite Sectors RIGHT NOWWhen a sector starts to trend, either up or down, the move tends to get exaggerated in "hot" sectors. Back in the 1990s, those hot sectors were biotech, drugs, computers and the Internet. I traded those sectors because that's where the money was -- that's where the action was.And if you're looking for where to place your bets next, taking a cue from the traders with the biggest coffers of cash to invest can be a pretty good starting place.At the time, I was still perfecting my Sector Hunter approach, but I knew the big money was to be made by catching the volatility correctly. Fast-forward to today, and the hot sectors for this decade (and probably the next) are oil, oil services, metals, China, Latin America and commodities.These are the sectors sucking in and spitting out the big cash. Fortunes are being made in these sectors on both the long and short side. So instead of playing all 46 sectors, I've narrowed down my focus to just five equity sectors plus commodities. In each of these sectors, I've become extremely familiar with the trading patterns of the winners and losers in each group.Now That You're Focused, it's Time to NARROW That FocusTo narrow my focus even further, I chose just one ETF from each group and have become an expert in how each representative ETF trades. Within my five favorite ETFs in the equity sector, I've further narrowed my focus to two to three stocks in each group. So from a global list of 12,000 stocks, I have now gone down to a very manageable list of five ETFs and 10 to 15 of their component stocks.The moves in these stocks and ETFs are amazing. I mean, it's really incredible -- just in the China sector alone, we've seen 100% moves in some of the ETFs! So, it pays to specialize -- in fact, it pays very well. Because just as quickly as the markets take them up, they tear them down.When you start specializing by sector, you gain massive clarity and focus. This clarity provides tremendous confidence as you catch these securities on the way up and short them on the way down.So, my message this week is to narrow your focus. Get clear about where you want to "spend" your mental focus and energy. Refine your approach to just a few sectors and a few big, liquid, volatile stocks in each of those sectors and begin to get a feel for how they trade. Do the same for the ETFs that cover those sectors as well.Start to simplify your investment and trading choices. Due to space constraints I can't go into the absolute detail of how why and when we pick sectors and their attendant stocks and ETFs. If my approach interests you, then you may want to take a look at the education course I created called "ETF Master Trader." In it, I break down every facet of our sector approach and show you exactly how to select the best sectors, stocks and ETFs.Next week, I plan to cover one of the biggest areas of confusion for new investors: how much money to place in a trade! Have a great trading week and I'll see you on Wednesday with the second installment in this series. Stay tuned!Teeka TiwariChief Investment OfficerETF Master Trader

Trading System Part 2

2009-07-04T12:39:00.000-07:00

Trading System Part 2
How to protect from large losses
Now we covered a large form of protection in the exit strategy. In other investments, there is usually not as much overlap. However you probably want to learn a lot about forming a business entity. Talk to your accountant, bookkeeper, and attorney, and any other needed professionals to determine what is right for you.
Forming a business entity for investment can be a great form of protection and potentially provide the medium for leverage. You can form any sort of business and then invest the available capital into your business and investment expenditures. For example, if you form a C Corp, your gains from your business can be reinvested as pretax income. This means you do not pay taxes on this income. While IRAs and 401ks have some tax benefits, you can not only have the income from your business, but you can also take your investment gains and roll them over into other investments. If you continuously roll these over, and eventually potentially roll that account into a charitable trust, you may not ever have to pay taxes.
The main form of protection that a cooperation has is that if you borrow a ton of money, mess up really bad, and your company becomes insolvent and you have to declare bankruptcy, you personally will not have yourself be effected by it. Same thing goes for major lawsuits that could potentially arise against you depending on your business.
Warren buffet got rich because he borrowed money so he could become a controlling shareholder of Berkshire, a private equity company at the time, he then took it public, raising even more money from the buyers, and then he used all of that money to invest in other companies.. So he could start with 10,000 use it as collateral to borrow 200,000, use that to take his company public, and use the money he raises from taking the company public to invest millions into stock. Earn 20% on thos stocks, and that 1 million becomes 1.2million. Since he owns 20%, that 1.2 million is .24 or 240,000 of his. After 1 year, he can pay back Charles Munger with the 100k, and still have 40,000, a 400% gain from his initial 10,000. That si just an example of how it might work, and the magic of leveraging he was able to do because he had the right protections in place.

He maintained the 20% ownership this entire time, as the companies he invested in did great, the companies balance sheet has always been good, and he uses the companies income to pay himself a salary, taxable at 15%, while using the remaining companies profit to reinvest and defer the taxes.
I am not 100% sure of the accuracy of these claims as I am not a lawyer, or a certified accountant, but to my knowledge that is essentially how it works.

A more advanced form of protection is the buying of puts in place of, or in addition to the exit stops. If you ave a $50 stock, a 10%loss would be $5. So if you wanted to hedge against any greater losses, you would simply buy a put with a $45 strike price. This way, if overnight the company was exposed of accounting fraud, or a huge scandal, or an FBI raid, and they opened at $5, you would be protected. If you owned 100 shares at $50, and had a $45 put that you bought a contract for $200 and the stock opened at $5, you would have paid $5000 for the stock which is now worth $500, but because you bought the put, you would not have a $4500 loss... Instead, you would lose the $4500, BUT your option at a strike price of $45, would be worth $40 per share, or 4000 for 1 contract. In addition, there may be some of that $200 that you paid for that option left, and since we're saying this happened overnight, we'll just say all of it.
So instead your loss is only $500, or 10%.

The trick is to buy long term options, as they maintain some of their time value. An option that costs $200 in time value for an option that expires in 1 month would NOT cost $400 to buy an option at the same price that expires in 2 months. It would be more like $300 or something. The further out you go, the greater this effect, and the slower the decay of the time value per day. Thus, it is usually worth using additional capital towards buying a put that doesn't expire for awhile. At a minimum, you should give your option a 4 month expiration. This way you can at least own it for your full investment time period. Otherwise you have to roll the options over. Paying for options month by month can be very expensive. In many ways, buying puts isn't necessary at all

Warren Buffet did not get rich by being in the business of buying insurance, but instead selling it. You could be the one collecting $200 for people that want to hedge against that kind of loss, but it would require much more sophistication. In addition, the formula for the pricing of options is based on being able to borrow money at the fed funds rate, something that most individuals cannot do. In otherwords, when you sell the option for $200, normally a guy like Warren buffet could use that cash before the option expires to reinvest, or he would take a "50% paper loss" and deduct that amount from taxes, and use the capital through some accounting magic to reinvest. However, as a big business, you may be able to have access to do that, if you learn how.
But because Warren Buffet invests as a long term investor, and is an insider, and not a shorter term system trader, I suggest you consider using forms of protection and insurance.
If you want to get sophisticated however, you could sell calls. Now in this case, rather then lose if your stock goes up to $100, you would just give up a part of your gain.

You can get really advanced and buy a put, and sell a call. The problem is, if you are selling calls, you should be trading a different system, because this is more of a momentum system that looks to lock in winners that can potentially be monster winners. You would hate to see your stock rocket up 200% only to allow you to collect a 20% gain.
So the system trading vehicle we use here has your primary form of protection as a cooperation. It can cost maybe $250 to form an LLC, or even less if you know how. In an LLC you cannot issue public shares and eventually take your company public. A C corp you can, however you have double taxation from being taxed on your earnings and dividends.
This might be too advanced and is not required, however you should be aware of it. Just manage your money well and use the exit strategy and you already have a better protection system then most people.

Trading System Part 1

2009-07-02T12:37:00.000-07:00

Trading system
1 Exit Strategy

This current trading system uses multiple exit strategies. In normal trading system, you need to know when to exit from a gain, and when to exit from a loss. Generally you want to be cutting your profits short, and letting your profits run. At a minimum, you generally want nearly a 3:1 gain to loss. This means you should take profits at 3 times the percentage amount as you cut your losses short. We will use this system and do the following

1) Exit stop at a 7% loss. This stop-loss should sell ALL of your shares. The simple method is to just set the stop and leave it. There are dangers of this because people may be able to see someone make the stop order on the floor, and if they have enough money, they can take advantage of that, selling lots of shares of the stock, pushing the stock price down below the stop, then forcing you and others who may have stops out, and then buying the stock below your price, so the stock will stop out, and then quickly rebound. The more advanced mode is to just watch it, and if it is going to CLOSE below your stop, only then will you exit 10 minutes or so before the markets close. The sophisticated way is to just not use stops, and instead buy puts. this increases the cost of the investment and thus limits your win, but you give up a fixed amount for protection against large losses.. This would insure that the stock doesn't drop overnight.

A failed breakout is signaled if a stock drops 7% below breakout point. If you are buying stocks on the pullbacks, a 7% drop should signify a breaking of support.

2) Set a profit target at 20%. You can use a limit sell order to sell here if you would like, particularly for those who don't have the time to watch the stock. You should be willing to wait a full 4 months for it to hit it's target. If it hits the target, you should sell 1/2 to 2/3rds of your shares, and let the rest ride. Also, if your stock hits the price target within 8 weeks (2 months), this signals that your stock is a good one, and you want to hold onto your winners. There is a simple strategy and a sophisticated strategy. The simple strategy is to hold onto your stock until the entire 8 weeks is up. The sophisticated strategy is to sell most or all of your shares, and convert them to an option that you should own aat strike price, or very close to it. You should ensure that this transaction is such that in a worst case scenario, you still will have a 5% gain. Generally, you will own say 100shares, sell 100, and buy 1 call contract at the same strike price the stock is at, and secure a profit, while still maintaining the same upside leverage minus the cost of the option and the transaction.

3) Set a trailing stop of 25%. This should serve as a function primarily to exit the remaining 1/3rd to 1/2 of shares that you let ride after you hit your price target of 20%. It is possible that the stock goes up near your target, which will raise this stop to 5% below where you bought it, or if you aren't using a limit sell, it could spike way up to up 35% from where you buy it, and then quickly come down, and sell out a small portion of your shares for a small gain. This is fine. In this case, either the stock will then proceed to drop below your buy point and go and hit the 7% stop-loss, or it will then bounce and gain until it hits your 20% target. In either case, you will sell the rest of your shares. Of course, if this all happens in a short amount of time, you may attempt a swap as a sophisticated strategy, but generally you should be done with it.

4)You should always keep records. Record how many you bought at what price and which exit(s) were triggered. You want to check all these stocks in a year, or so, and see if you could have made more by adjusting your stops, or adjusting the size of which you sell.

5)Enjoy the profits.

Financial Planning Your Investments with money management

2009-07-02T12:23:00.000-07:00

Money management starts with the basic ideas that you will hear about in any Financial Planning Carnival. Pay yourself first, Pay off your debt, save money, and allocate your capital properly into some investment vehical. While this is very basic, simply by doing this well, you can outperform many others in the long run. However, once you have done all this, and chosen an investment vehical, within each investment system, you still need money management.
As you most likely will see by browsing the various articles around the internet about financial planning, there's certainly no shortage of investment vehicles that can get you where you want to go. As with any vehicle, you won't get anywhere if you can't handle the ups and downs of the roads, and if you can't protect yourself from crashes. In other words, if you don't have a money management system that can deal with the volitility, and limit the large losses from resulting in a large loss in your overall portfolio and if you don't manage your money well, some minor turbulance could turn into a crash and wipe out everything, making it nearly impossible for you to acheive your investment goals. Unfortunately, this is the mistake that many people make, and have made, as you can see by looking at the devastating result of the banking and housing collapse, as so many people are left upside down on their mortgage, and the various 401K plans and their equivilents around the world are in so much trouble. Might things get worse, or might things get better? If you can prepare yourself to manage such events it may not matter.
Managing your money is not only about protecting your losses, but making sure your system is set to earn money. In addition, making sure you have a position size that can afford you to incur larger than usual losses, without limiting your ability to earn. There are many systems that may earn money, however because people do not understand financial education, they may make the mistake of putting everything they have into that system. This is not financially intelligent, because you have nothing left to add if your investment system starts out with a loss. The investment fact remains, if you incur a 20% loss, you need a 25% gain to get back to even. So if a system has equal wins and losses going first up 20% then down 20%, your expected result might be no change, but the long term effect of that system is that you will instead lose money, if you do not manage your money well. Now take that same up 20%, down 20%If you put a 100 investment in one month, then 100 in the next month and then take it out, your result will be that you break even, which is what it should be. That's why so many people reccomend dollar cost averaging. Of course, that has limitations as well, as if you continue to be fully invested, the crashes can still hurt.
It's understandable that not everyone invests with the same trading system, (if they invest with one at all) or if they all invest for the same specific reasons. Some people invest for income, others invest for capital gains. However, there are still basic principals that still apply.
The 5 rules to a trading system actually apply towards any investment vehicle, but the main thing is, it requires money management to bring it together.
1 Exit strategy. Dollar cost averaging may work better than buy once and hold for reasons mentioned earlier. However, dollar cost averaging does not protect you from large losses.To do this, you'll need to exit if things turn against you. A good exit strategy is based on exiting when things get rough, as well as taking profits if things go well. You should aim to exit earlier, ride your winners longer, and give your stocks room to continue to gain.
2) Protection from losses/hedging - What happens if credit drys up tommorrow, and there's a run on the banks, are you protected? What happens if instead, there's a run on credit, and rather than running to hoard their money, people are running to borrow money? Are you hedged from this as well? What happens if the stock market crashes tommorrow, does that concern you? what about the real estate market? It should not be as scary as it is for most people, and doesn't have to be if you learn to protect yourself. Do you have insurance on your house? do you have insurance on your investment? Do you have protection against lawsuits?
3) Money management -
The Kelly Criterion should almost always be used as a rule of thumb for money management. Money Management encompasses how each of the 5 strategies are used and is the core of a good trading system.
4)Leverage, the bennefit from having a very good ystem, is that leverage is possible, and it is possible to do less with more. This does require greater care when managing money, but will result in ultimately risking less and protecting more if you really learn how to use leverage. If you could generally get a 3:1 win/loss ratio, and your wins occured more than 50% of the time, wouldn't it make sense to have more money into this investment provided you don't violate sound money management? Borrowing at 3% to earn at 6% is only one form of leverage. Borrowing from potential to pay for a sure thing, or giving up some security in order to create greater potential rewards in the right situation are other forms of leverage.Many people advise get out of debt. While this can work, if you could borrow at 5% and earn at 10%, and have the income to pay for the debt, you would want to get into debt. If you had$100 a month income after paying for all expenses and for the monthly payment, you would want to multiply that situation as best as possible.
5)Your vehicle - If you use 1 through 4 properly, the vehicle is of little concrn. A good driver can still get from point A to point B whether they're in a go-kart, or off-road All-Terrain Vehicle, or a speed racer. However, once you learn to become a good driver of your personal finances, then you can upgrade your financial vehicle. Compare the amount of gains and losses, and see how it fits into your money management plan. Then based on the amount of capital and leverage you will use, you want to determine which will end up with more cash on the end of the month. You also will need to learn which has the best cashflow. You can learn about profits, vs cashflow. It's possible for someone to have a profit but lose money. Lets say you buy 100 bags of rice at $1. You then sell them at $1.10. The problem is although this is 10% profit, you forgot to factor in your $100 monthly payment for maintanance. So instead you after operating in the red for awhile, you up the order without upping the loan. You order 2,000 bags of rice. Now the problem is, although you will eventually net $200 after both your costs to buy the rice, but also your costs of maintance, leverage etc... you have another problem. Now it might take 10 months for you to completly sell out. Even if the maintance costs were $100 once, you still would be in the hole and if you couldn't come up with that cash, you would either have to borrow money, or you would go under. In addition, there's other problems. If you would sell out 2,000 bags of rice instantly at $1.10, but the next month they cost $1.50 because of inflation, Your company will shrink, not grow, because you didn't make enough money to buy the same amount of inventory, and the following month, even if you can sell the rice for $1.60, it's not enough to make up for the miscellaneous costs.
But lets say costs remain the same. There's another potential problem. Lets ignore fees of credit card processing, and potential theft, and potentialdamage to your products or refunds and so on. What happens if you can't convert your payment to cash? Many people make a mistake of offering easy financing, and will let people make "easy payments of a fraction of the price several tiems. Now that wouldn't be an issue with the example, but say someone buys in bulk and wants to buy 100 bags of rice and only pay $1 per month for 100 months? Another problem could be perhaps you have to wait months until you get your shipment. You'd have to have enough to order months ahead of time, and your cashflow would not show up, even though your business examed from a quick outside perspective seems profitable.Cashflow is about much more than profit, it's about having the inventory to manage inflation without buying too much infventory that you can't pay for it while stillanticipating other issues, and in addition turning your cash over quickly to inventory.
As you can seethe investments and system may change, but the theme remains the same. Understand these 5 aspects, manage your money well, and you may be able to plan for a retirement that can occur much sooner than you thought.

Update:
*I've decided to particpate in a "blog carnival" for financial planning. Here is a link to the previous "carnival" Basically several bloggers get together and they post on a topic. Then one person hosts the topic, providing links to all to the posts on the topic. This unites all bloggers while still allowing independence of their own blog. Hopefully it will help grow this community, and allow you, the reader the ability to have instant access to potentially lots of great information. It will also be an interesting way to gain a new perspective.
This post will be a part of the next blog carnival.

Trading System Intro

2009-06-25T12:34:00.000-07:00

Trading System Intro
A good trading system is about much more than just selecting stocks. Certainly that is important as well. However, a good trading system will provide the ability for you to protect against losses, manage your money, add proper leverage when necessary, and also select a stock selection maximizing your reward and minimizing your risk.
The guess work is taken out of the way for you. The stock is purchased when criteria is met, the amount of stock purchased is also based on certain criteria. The stock is sold when criteria met, and there are protective measures against a stock's demise, and where possible and appropriate leverage is created to maximize the returns without taking on more risk than you can handle.
This trading system will be talked about in 5 additional parts in addition to this intro. This post is designed to explain the trading system, it's functions and how it operates

1) Exit strategy Every good system trader will first know the exit strategy. It doesn't matter what vehicle selection you use, if you have no exit strategy,you're stuck.

The trick is to understand that unless you want to get trapped in an investment you have to know when you're getting out.

A good exit strategy has both loss protection, and profit taking, and sometimes even a 3rd stop. The first 2 might be a maximum loss, and a maximum gain before taking profits, while the 3rd one will be a trailing stop that rides the gains up, and will sell the remaining shares.
There are other exit strategies such as hold forever and write covered calls against it to collect income, or protective puts in place of a stop-loss.

2) Protection
Although #1 covers most of the protection, there are several other ways to protect yourself.
Protection is vital to allow you to stay in the game. Many people know that if you lose 20% you need a 25% gain to make up for it. Losses not only can result in a series of losses that wipe you out, but they also hinder your ability to gain in the future. a 95% loss for example requires a 2000% nearly impossible goal to make up for this loss. So even if you flip a coin and have a 50% chance of gaining 200% or 50% chance of losing 95% of it, you should probably not take it if all your money is at risk, because it doesn't have the downside protection A series of wins followed by 1 loss would prevent your ability to stay in the game. Even though those odds SEEM fair, they are not without proper protection. Protection ensures that you won't have that 95% loss, and it absolutely restricts that loss to a fixed amount, rather than take 100% risk.

Such forms of protections are writing calls, in this situation you are given a premium so if the stock tanks to zero in a worst case scenario you'd still end up with the premium, this is minimal protection, and only protects a marginal amount of decline before the losses continue. The other form of protection would be buying a protective put. This actually in fact does protect against catastrophic losses. The lower your stock goes if/when it crashes, the more you make from your put or puts. You are the one paying a small amount in order to protect against any sort of decline below the designated price. The lower this price, the cheaper the option. If a stock is at $50 and you buy a protective put at a strike price of 40, you will NOT be protected against losses from 50 to 40, but beyond that you will be protected to the downside.

These are somewhat more sophisticated forms of protection. Basic forms of protection are diversifying, and perhaps being short. If you buy a stock at $100, and you short one in the same sector at $100, if the whole sector goes up, you are betting not that the market will go up, not that the sector will go up, but that stock A that you are long will outperform stock B in a bull market, and stock B will under perform stock A in a down market. This offers protection although it may limit the gains as well, Plus, you actually have to be right in your thesis.
In addition, if you are short, and the stock market booms, you may get a margin call and be forced to sell. Also, if you do not use money management, you are at risk of a short term swing requiring you to sell all of your shares of the stock that went up, in order to pay for those that you were short that went up, and if you can't cover your short, your entire account is in jeopardy of being wiped out.

So rather than being short, I recommend replacing it with buying put options, although this has lots of risks involving time decay as well that you must understand before investing.
Using a business entity such as a C Corp or a LLC is another form of protection that can protect you potentially against higher taxes, and personal financial trouble such as a bankruptcy on your record if you intend on using forms of leverage such as loans.

3) Money Management and Control-
A good trading system will have a form of control. it will allow you to not give up that control when things go bad. In other words, it allows you to manage your money. Money management is very important. Perhaps one of the most important things is position sizing. If you buy $10,00 of stock for one stock when you only have $10,000 in your account this is very poor money management. Continue to do this, and eventually you will suffer a large loss which will be great, and it will be very difficult to gain enough to make up for it. In addition, if the price goes lower depending on your system, you may want to give yourself flexibility. Extra cash on the sides is another form of money management. It doesn't have to be cash per say, but some form of safety. Various forms of currency, sometimes some gold, bonds, and money market accounts that are all fairly liquid would be a few examples.

4) Leverage
Leverage is about using your abilities to gain, the strength of your trading system and various tools to minimize risk, and increase gain. When you take on leverage, you should be able to reduce your position size in comparison to your capital, and still have a similar reward or gain.
Forms of leverage include options, the further out of money option you purchase, the more leverage you have if that stock does make a strong move. You can also sell options to raise capital to invest in some cases.
Another from of leverage is a loan. Whether it's a credit card, a home equity loan, going on margin, or a business loan for an asset holding company, or even taking a company public and using the capital to invest, the idea is to gain money at x% and to invest it and make a greater return than x%. if you can do this, and manage money well, and protect yourself, Your gain is only limited to the amount of capital you can borrow at the maximum of slightly less than what you expect to gain. Generally however, if you use a loan, you should have a form of cash flow or income that will cover the costs of the loan just in case your investment goes wrong. That's another form of money management while using leverage. Money management should be treated much differently under different forms of leverage.

5) Finally The stock selection vehicle. You need some method to select your vehicle, based on this and your other factors you will determine time horizon and a methodology of trading. The system will help you choose your trading stocks, and exactly what to do with them. You can play around with different trading systems, but generally you should first attempt a good exit strategy and make sure your controls on parts 1-4 of your trading system are sound, and try tweaking them

Pyschology of Channeling Stocks

2008-02-28T10:52:00.000-08:00

Many have heard of channeling stock as, and those that do, certainly know that if a channeling stock goes lower than it's support it goes much lower, and if it goest above it's resistance that it goes much higher.
There are many people who understand this, and use it, and make a lot of money on it, but not many people understand why this occurs.
The reason is this...
When a stock starts to go up, some people say it's too high, and they start to take profits, and when it gets to a certain point, they sell all their shares or close to it, and others say it's too high and they really short the stock. But then it comes back down again, and some people might add to their position as it goes down, but when it really goes down either the same people averaging down load up on it, or value investors step in and say the stock is cheap, time to buy. Meanwhile, those who shorted the stock cover their short and take profits.
This type of behavior causes the stock to channel back and forth, but what happenss when it breaksout say to the up side?
For whatever reason the market might turn up, or the company might release good news, or the outlook might raise, or their might even be no known thing that happens. But perhaps the bears give up on the stock, and those buying the stock have decided to hang on or add more on the way up. Perhaps those that bought finally have liquidated other funds and they need to load up on this. For whatever reason the stock breaks out. When this happens it attracts growth breakout investors that notice it clearing the base, the shorts who just tried to short might continue to try for awhile, but eventually they'll realize that its gone too high, or their stop will force them to cover. When thss happens they get squeezed, and the bulls win. Now at some point the bulls will take profits, and perhaps the stock will have a correction or a pullback, but it could very well return to climb. Another scenario is the bears reconsolidate, find other investments, but now that the stock has climbed they REALLY think it's overvalued, or something still is going to happen, and maybe they short and the people long in the stock need to sell. But regardless, the stock still will have gone on a pretty big run after that breakout point.

On the short side when the stock goes below the channeling stock's support, people say "OH CRAP!" and maybe the stock even had a false breakout before returning to channel again, and now you have a head and shoulders pattern. People freak the heck out and sell everything, and other investors see an opportunity to short and buy puts. the stock gets beaten down until those short cover, and those that sold look to re enter, and value investors really step in and enter a big time position.

A channeling stock can be seen as a fight between a bear and a bull, even though there's a lot more people involved. When a stock breaks through the resistance, the bear gives up, and the bull wins. When the stock goes below, the bull gives up and the bear wins. Of course, there's a little bit more too it, like the suppply and demand, the markets inaability to find the true value of a stock. But for the general part, that's the case of a channeling stock.

Stocks and shares of companies are much more than just stock prices randomly moving in directions. There are people behind those stocks owning the company changing fundimentals, and there are people owning those shares with different beliefs, and emotions which effects the prices. If you can understand the psychology behind the stocks, you should have an easier time understanding how to profit.
Up next: When channeling patterns are disguised, but the pyschology is the same:

Gains to Cashflow: Use the houses money!

2008-03-17T13:13:00.000-07:00

Although capital gains (profits from selling stock at a higher price than you bought it) can be very rewarding, and one of the best things about stocks... At some point, you will probably want to convert your gains into a more passive form of income. It's very nice to not have to watch stocks all the time, You can certainly achieve this by investing in value stocks, but in order to receive the money, you actually have to sell the stock...
So an obvious solution is to buy dividend paying stocks. Now I actually do like to be diversified in a wide range of high paying dividend stocks, but the problem is, I don't want to use my own money.
So by keeping with the theme of "playing with the houses money" One of the best ways to do that is to not only constantly be finding stocks that are about to make a quick gain, but to find high yielding stocks that are about to make a nice gain.
The idea behind this is, you get your money in, you get a quick gain, and you take your money out, but you leave the "houses money" in, or you leave the profits in.
You can do this with stock options as well. If you buy 300 shares of a stock trading for $10 and it doubles to $20, and you still think it's going to go up, but you want to take some profits without limiting your upside potential, you can simply "swap" 300 shares, for 3 call options. You only lose the cost of the option premium, but you get to take a huge chunk off the table while still being able to gain for the upside.

With this concept in mind, here's a large list of dividend payers to watch for channeling patterns, consolidation patterns, breakouts, and oversold positions in oversold sectors during an oversold market, or any other indications that you might watch for to anticipate a gain.
The idea is to get in and get out quickly, so you can put your money back to work and aquire another dividend stock, or more shares of the same one by using this same method. I know that if you're not in an IRA you get taxed on your gains, but that's why it's best to use this method very quickly since you/'ll be taxed anyways. If you want to look for stocks that pay dividends that you plan on owning for a year or more before you take out your money that's fine, but that's money that you could put to work in acquiring more shares of more dividend paying stocks.

Each dividend paying stock that you get is a cashflow paying asset, that you don't ever have to sell, the asset might depriciate in value (the stock might go down), but typically there are a lot of companies that will increase their dividend when there stock goes lower to restore investor confidence, and you will still continue to gain your dividend. These dividend paying stocks tend to attract a lot of investors as they only get taxed 15% on their income. They are especially useful, and a good idea to look for when the market comes down, as people turn to them when capital gains dont seem to be working, and companies raise their dividend to restore confidence, and that causes a higher yield and a higher price of the stock.

When you do this method with dividend stocks rather than regular stocks, not only do you get a chance to play with the houses money by taking your gain and leaving the profits in, but you constantly are "fed" the houses money as the dividend is paid, allowing you to play with more of the houses money.
If you've read about the professional gamblers that use strategies to gain a slight edge, and use money management strategies to protect their capital, you can equate this method to sitting down with your own money, after a win or two taking your money off the table, and as you continue to win, putting more and more chips in your pocket, and never ever using that money to gamble. While I don't want to avocate gambling, and many people won't like me associating investing with gambling, the fact that pro gamblers in a games where the odds are against the average person, or when played optimally only give them a slight edge or even odds can actually not only maintain their bankroll but profit with propper money management skills, tells me that there's something to be learned from that.

Anyways, here's a list of dividend paying stocks
pbt bpt sbr crt mtr aav cne ent hte pds ztr bif rma rmh rsf rhy eoe jla jsn pht phk dvf hyb jpz chi vvr eft hyi igd lbc jro fro pgh pwi pvx pwe bte erf nro bfk pfl bdj btz hix gdv glu pai o aod fhi fhy ead ncv phf dsu cwf sjt rit btr ABR AFN ARCC AHMIQ AINV BRBMF BRT BGF CT CTC DSX ETP GKK GNI KFN IWA JRT MMP MSB MMLP NRF NRGY NRT MWE NCT PSEC RSO RVI SFL STON TICC TNH SPPR SXL TELOZ USS TSI ZF

You can run your own screens to find these. One of the screens I ran was dividend paying stocks with current 6% yield or higher, that have a 5 yr average of 6% or higher, that have a 5 yr dividend average growth rate of 12% or higher.
I came up with the following list, all of which are mentioned above:

ABR AFN ARCC AHMIQ AINV BRBMF BRT BGF BPT CT CTC DSX CRT ETP ERF HTE GKK GNI KFN IWA JRT MMP MSB MMLP NRF NRGY NRT MWE NCT PBT PSEC RSO RVI SFL STON TICC TNH SPPR SXL TELOZ USS TSI ZF.

Now you could plug these in to another screener and find breakouts, consolidation patterns, breakouts on increased volume, channeling patterns, high volitility,etc
or if you're just looking to hold onto them for more than a year, best 5 year gainers, or high EPS growth rate and/or EPS growth acceleration. I like to have a few very strict screens that don't usually yield more than 2 results that may constantly only reveal 1 result, but that have an extremely high win rate and are very undervalued, and have high saftey ratings and have momentum. This allows me to load up more shares than usual as it has a lower varience, and that way I can end up with a larger position in the stock. I also like looking for channeling stocks that pay dividends... This allows me to start at the lower half of the channeling cycle and average down adding more and more shares and the most at the bottom, and start selling at the upper half and sell more and more, but leaving maybe 10% of the shares, and repeating on the next channeling cycle. If it breaks outof the channel, I'll load up all the shares I would have bought from the midpoint down, and again take about 90% off the table. I won't always get every bit of my own money off the table, but with dividend stocks I don't need to, as usually the dividend will soon take care of the rest.

Using this strategy will really allow you to build up a base of dividend paying stocks in your portfolio that will protect you from the downside, and allow you to have a real good idea of what kind of monthly gains you can expect in any market environment. If you can eventually get your dividends up to a large enough amount that your monthly income from dividends minus taxes (or 85% of your dividend income) exceeds your expenses, you can retire and maintain the same life style without having to worry about selling stock or running out of money.
I think starting out with capital gains and eventually using those gains to allow you to acquire dividend payers is the best strategy.
Consistant acquisition of dividend stocks will allow you to gradually move towards a more protected better suited for retirement portfolio, without requiring you to change your investment strategy. Sometimes on top of the nice yield, dividend paying stocks are the best performers. For example, PCU has for a long time been one of my best performers, and allows me to speculate a little more with the rest of my portfolio.
I also have a feeling that when the 65 million baby boomers turn 65 around 2020 that many of them will still want to invest, but they will still wish to cashout evey month to live off of it, and that monthly dividends will be a good option for them, so I think also looking to acquire monthly dividend payers is a good strategy as well.
The bottom line, when you are investing online, you want to get your cash back quickly so you can put it to work, and that way you can use the houses's money.

Update:6/20/2009

In hindsight I realize that I have a weakness in this strategy. This strategy is still good for anyone that does any type of system trading, or who does short term trading and can't evalue companies for long term strength, but the error is that this method relys too heavily on finding explosive dividend paying stocks and timing, when the whole purpose is to eventually not have to rely on timing. In addition, unless you're in your 20s, this method is probably not preferred, because what good is getting small positions of only a handful of dividend paying companies, if they're not around in 20 years, or if they cut the dividendor worse, no longer pay it in 20 years.
There are a few solutions one is to start very early and trade enough of them that you eventually build up a huge portfolio of dividend payers so even if well over 50% of them aren't yielding a dividend, there still is plenty of income from the rest of them.
Another is to focus on more investments longer term in solid dividend paying companies with good focus on the fundimentals and value, and less on growth and speculation.
There's a third, forth, and 5th method, and that's the one I will talk about in the future and introduce here.
The first one is a covered call strategy. You want a stock that will stay relatively neutral over a long period of time, or gain only slightly, it is possible to profit from this strategy as a contrarian investor, and use this as a tool to lower your investment costs as wel.
The 2nd is a sophisticated strategy involving both buying and selling calls.
The 3rd is a method that doesn't involve income, but still uses the concept of using the houses money by converting a stock that has appreciated in value, and replacing every 100 shares with a call option, reducing your expense and getting your entire initial investment out or more while still being leveraged to profit from most or nearly all of the upside for a limited time.

Finding Super Stocks in super sectors - Playing the trend

2007-06-22T17:52:00.000-07:00

This post was actually posted 6/18/2009 but I felt it's more of a rant and not relevent to a trading system, or towards a system trader, and I want to adjust my focus.

The banks are "raising capital" we've been hearing, while they borrow money like crazy. But they're still not really lending all that much. They're raising cash so they can prepare to lend. So there's all this cash ready to get dumped out somewhere, but if banks are raising capital gold should outperform real estate...
The interesting thing is banks are selectively lending to the big businesses that has friends in washington, because they know that there is more saftey with them since the politicians won't let them fail.

There is a bubble in commercial real estate that has to come down it seems. What's more, there is a foreclosure mania set to peak around 2012-2013. The tendency is for commercial real estate to lag behind residential. The reason is simple, the average person is less financially intelligent and more prone, so when the banks start hiking rates it doesn't effect commercial real estate until the cycle really ramps up and the rates really get hiked, and then those who know about the feds shenannigans and have created enough saftey around it, buy up all the properties from the other businesses, or eventually the contraction of money supply becomes so feirce that it starts cutting into big businesses... Eventually the foreclosures in mainstreem also get so big that people might even start moving out of apartments and start buying foreclosures or at least enough so that the demand for a place to pay rent goes down enough that the price of rent is lowered, and the smart businessmen buy properties based on their cashflow it can produce. So the effect is that eventually commercial rel estate gets hit.

The system could very well collapse around or even before then, or that could be the time when everything is seized. Shortly after in 2016, the first of the babyboomers will be forced to sell all of their 401k stock and the stockmarkets will likely crash.... however, during that time, the shadow boomers will start reaching the average home buyer age.

I'm starting to think the banks will start to get rich now as a result of all of the alt-a and subprime foreclosures they've been dumping, and between the 8,000 tax credit for new home buyers, and the foreclosures being promoted and the "economic recovery " propaganda, enough people will buy real estate to get it off of the banks books at least until before the other forclosures start piling up. Can't say owning banks would be a good thing though, as we are merely in the "eye" of this hurricane of foreclosures.

Here's a mortgage reset chart
http://mortgage.freedomblogging.com/files/2007/10/imf-arm-chart.jpg

I might have these two numbers switched around... however when mortgages reset, over 75% of them end up in a neegative equity position. Of those, over 90% (90% in negative equity position) end up in foreclosure within 1 year.

Now a trend is putting an interesting situation... people are being forced into early retirement. The government is going to have to fork out unfathonable amounts of money every month to pay for social security and pensions. The interesting thing is that as baby boomers retire, they will not have to drive to work everyday. So although there will be all this extra money in the system, where does it go? Not as much oil will be used. But will they spend it? Baby boomers have always seen real estate as a good investment, but not many of them have the money.
So as the baby boomers continue retire, houses are put into foreclosures as banks raise capital...

I tend to think that solar energy is big propaganda that has been running. "save the earth" type of fnord that has been being pushed for a long time. Government is about to pump 200 billion if obama continues his promises to spend on it, which doesn't seem out of line.

bottomline is I think that short commercial real estate, long commodities, and long solar is a good idea. Banking is something that should also start to fail, but perhaps will lag commercial real estate as it isn't until the entire house of cards comes down so viciously that the banks can no longer pay the federal reserver and either the US government picks up the tab, or the federal reserve "forecloses" on the bank.

System Trading: Do you have a Trading System?

2009-05-27T18:48:00.000-07:00

Trading System

A trading system is a methodology of trading. An investor who uses one system and follows a specific set of guidelines when making a decision, follows system trading, and will usually never deviate. A trading system is only one method of trading, and usual requires no thinking. It is possible to have one system that is governed by multiple system. For example, to have 10 different systems, and select only one stock from each system every month according to the main system's qualifications.
Someone that uses several Trading Systems is a multiple system trader. They have to either have an overall system that encompasses all of them, or make their own decision on which to follow. Doing so can be dangerous, as the purpose of system is to prevent human error. It is advised to be a system trader who trades one system at a time, or trade multiple systems within a larger core system, and avoid being a multiple systems trader.

Trading System - Trading can be awfully hectic without some kind of trading system. You can't expect to take on the best traders in the world who have teams and resources at their disposal just by throwing around money at will hoping that it works. You need an actually defined system in order to be able to trade effectively.
Stockbee, whom I refer to a lot, shows the systems he uses. Most of them are based on earnings and high potential for growth. Stockbee's trading system often swings for the fences. As a result, it requires a solid degree of protection. Obviously you shouldn't limit yourself to someone else's system, you need to find one that is right for you.

There are two kinds of traders, technical traders, and fundamental traders, each has their own system. Of course there are some who use both.

Technical traders
Some system traders, are day traders. Others are swing traders. Still other people are more of a trend trader. Each will have it's unique system. The system will be based on the technicals. Is it volume that triggers the buy? Is it price movement? A combination of both? Or perhaps it's pattern trading. Some people even have trading machines or robots that do the work for them. Others rely on pattern recognition done by a system. The method is to sign up for email alerts, or some form of alerts, then make a purchase based on the software's recommendation.
There are some people that screen down a stock based on strong fundamentals, and only trade those stocks, but trade them based on the technical chart patterns and volume.
They will sell based on a trend break, or rules on when to take gains such as 20% gain according to their system. They will set a stop loss based on their system as well. It might be 4%, or 8%, or it may be a trailing stop.

Fundamental traders
Fundamental traders might do things a little differently. They are looking for improving fundamentals, or stocks that pass through a certain screener. Zacks.com is a great resource if you want to rely on fundamentals. Earnings is always a big part of a system, and the Zacks' ranking uses earnings revision to get in early when the earnings and company internals appear to be improving. Zacks has several screens, and their software allows you to screen stocks according to many different options.

Regardless of your trading system, one thing remains important in every single system. Money Management and loss protection.
It doesn't matter what the upside is or win rate is, if you can't protect yourself from major declines, you shouldn't be trading. I don't care if your system is 90% effective (no system is and if they say they are, they're lying), and if the gain is 1,000%. If you put all your money on it repeatedly 1/10 times you will suffer a loss so catastrophic you will never be able to recover without borrowing money. By taking one loss, you hinder your ability to make money. That is more costly then the potential for greater gains.

Just to illustrate if your system causes you to take a 95% loss, you need a 2000% return just to make up for that loss. You cannot trade a system like this.

No system is better then it's weakest link. That weak link unfortunately for many people is the ability to manage money.

I recommend that you either have a trailing stop or a hard stop. You can also buy a protective put if you are afraid of a stock bottoming out overnight and plummeting through the stop. Protective puts are like owning insurance. Unfortunately, you have to continue to buy the insurance as it eventually expires if you don't use it. Don't trade options without learning everything about them. Some puts are not good for some strategies. Longer term trades and Investments will require long-term equity anticipation securities, or LEAPs, where as you may not need to risk as much capital for short term protective puts. A trailing stop should be usually 20%, where a hard stop should be more like 7%. Different systems will require different stops so take this with a grain of salt.

A good investor or trader actually will rarely need to ever be fully invested. There are people that trade on complete margin for a few times the entire year, and the rest of the year they're on the sideline, but generally the best traders that have a career that lasts have lots of money on the side, even more so if they use options and are unhedged. If you are unhedged, that is only playing one side of the market, (all buys, or only playing one theme such as only playing inflation or only playing deflation), you need to have even more cash on the side.

The lower the win rate, the more money on the side you need, and the smaller your positions should be.
Any good system won't require you to analyze. Having to do a lot of the thinking can cause you to panic and make incorrect decisions. Most people aren't cut out for that, and that's why system trading works.

Resources for system trading:
As before I mentioned stockbee, and you'll see I have an rss feed in the top right hand corner. But here are a couple others
woodshedder's blog
IBD index blog - this is a very systematic, numbers based, tested blog with some good systems. Before getting in a system, you need to know all of the components that are important. severity of a downswing, average losing trade, largest losing trade downswing, and so on. When to exit is one of the most important things, so I recommend you check out http://ibdindex.blogspot.com/2008/03/case-for-multiple-exits.html to start with.

If you trade within a system, you have a much better chance at placing winning trades. A trading system will have a solid record of success, evidence that it works and has been working, an understanding of the decline and proper money management planning. If you trade within a system, you can estimate your results, and by doing so attain measurable success consistently with a trading system.

Bet against MER

2008-03-20T10:32:00.000-07:00

You can often follow high volume activity, and unusual volume activity to spot a move before it happens. Now I don't know about you, but insider trading has gone on before, and it tells me that it's probably happening more often then people realize. So I use these signals as a guide.

Why fight the tide, when you can go with the flow?

Optionaddict saw the signs of the bear sterns meltdown

http://www.optionaddict.net/blog/2008/3/14/something-smells-fishy.html

and now he sees signs of MER meltdown

http://www.optionaddict.net/blog/2008/3/19/something-smells-fishy-part-ii.html

THIS was brought to my attention through the note at

http://www.ibankcoin.com/king_of_the_pg/index.php/2008/03/19/expiration-dayweek-strategies/

Interestingly enough, BSC meltdown came shortly after a 400 point gain day, and we just witnessed another one.

Now the same signs are in place, the difference is, many of the banks rallied recently, due to information about LEH... But don't think that LEH is a sign that things are well everywhere, and that the fed saved the day permenently. All they did was to add more liquidity, to make it easier for banks to ad more liabilities and bad loans. It's like stopping a leak with ducktape, or with some, a bandaide. It probably won't hold for everyone. Bernanke hopes to do enough to help out the banks without rewarding the ones that are in serious trouble or hurting the good lenders. He might have done that...

silver and gold are ticking me off right now, but my SMN (ultra short material) helped my loss not become a slaughtering. I tend to think that if another bank is in trouble, and the fed might act again, there might be some more boost in gold, as the banks sell off again one last time, but I'm not willing to bet that much on it, as the fed seems to indicate they're going to slow down finally. I stopped out on gold, but I'm haning on to my small position in silver, and will add to it if it plummets much more or trades sidways for awhile.

But anyways, if MER is going to fail, there's a few ways to play it

1) short the thing

2) buy a put on the thing

3) short various banks hoping for "guilt by association"

4) puts on various banks

5) go long an inverse ETF to short the banks via going long SKF, however, judging by the reaction by the other banks, this might not be the best way to play it, however there could certainly be declines by other banks, and until there's some sort of "takeunder" the other banks will probably decline. I like SKF at these levels.
(you could also buy puts on UYG or calls on SKF

I could certainly be wrong, but it's kind of weird how the puts on MER are out of the money, and how there's so many of them, and how BSC showed the same signs... Just my take.

DBS

2008-03-20T13:31:00.000-07:00

Recently, Silver and Gold showed EXACTLY why you MUST be hedged... Although it was just a paper trade, and I had already took both my real profits on SLV, my paper trade on DBS options shows you why straddles can be so important. For my paper trade, I'm going to close out the puts, and show you, that even with a 5 to 2 bias to the upside, and even if I didn't take the profits from the paper trade when my calls were up, I still ended up a big winner.

Here's a strangle trade on DBSCALL: DBSJL (strike price $38, expiration 3rd frday of October) $3.5
PUT: DBSVH (strike price $34, expiration 3rd friday of October) $2.45
Lets say something like 5 calls for every 3 puts.
I said 5 calls for every 3 puts, so lets just make it simple and say I bought 10 calls 6 puts10 calls $3500, 6 Puts $1470Total cost $4970

update: Put is now worth $4.1, while Call is staying pretty relatively steady at about $3.2 (the price I took is the average between the bid and the ask)I would definately take some profits on the put.I'll say take 2 puts off the table for sure, but I'll go with 3. That gives me $1230, leaving me with only $240 needed until I have the initial investment on the puts back.Technically If I were to sell everything right now it would be10 calls $3200 -$3006 puts -$2460 +990Total Profit $690 on $4970 investment or a 14% return... Not bad considering I played a bias to the upside, and still came out 14%... But I think Silver is just pulling back for awhile, and could go higher. Of course it could go lower too, but that just means more profit for our remaining 3 puts, and if it falls after that, we can buy closer to the money calls. Since we bought an October straddle, we still have a lot of time left to profit off of the ups and downs.

UPDATE Total Cost was 4970
CASH from first gain $1230
3 puts: DBSVH $4.8
SELL ALL = $1440 more cash
Total Cash $2670
10 calls: DBSJL $2.125
Sell all= $2125 Cash
Total Cash=$4795
a loss of only 175 or 3.5%
Now lets compare this to a loss if we had only bought the stock at $36...
36*138=4968, about the same
current value 30.9*138=4264.2
Loss of $703.8 or -14.15%
Not to mention that by buying a straddle, with 10 calls and 4 puts, we effectively had 600 shares leveraged to the upside, for the price of 138 shares, and we were still protected against the downside. Now, if you want that same leverage to the upside, without the downside protection, you would be buying 6 calls only $3500...
Your downside would be $2100 - 1275= -825... a much greater loss.

Of course, you could still replace your calls with closer to the money calls, or just hang onto them and wait for the bounce, and maybe end up up, or sell them and hang onto the puts if you think it's going down... but in this situation, I'd be more than hapy to walk away from the silver selloff with only a 3.5% loss.

Silver Option Update

2008-03-19T10:31:00.000-07:00

It is my primary belief that silver's going much higher. It could very well climax as well, and plummet. With that being said I want to own silver, and I want to protect myself from the downside. I believe that silver will probably trade sideways for a couple weeks, but then it will breakout to either side. ALl this volume on the way up indicates a big move. Either people will get rustrated and just unload on the stock and sell everything, or they will load up on the stock, and continue to buy. It looks to me like they are betting on a fed cut, and the stock should move a lot to the upside. But with that being said, I would not be suprized if it moved to the downside as well. However, in situations like this, you don't need a chrystal ball to make money.
We know the dollar is falling, but we know that silver is in demand, we also know that the supply of silver may run out at some point, and some predict within 10 years. However, we also know that silver has moved up over 50% in a year, and that it's starting to move parbolically, which means at some point, it will retreat to it's old support line, and likely will do so pretty rapidly.

So howdo we profit in a situation like this?
Straddle or strangle options.

I urge you to learn a lot about options first, which is why I'm talling you now, even though I think it will be another week or twwo before it resumes it's move again. But owning both a put and a call is a great way to play silver. I would own more calls than puts, betting more on the upside than the downside, however, I would be betting on a big move either way.

How do you do this, when SLV doesn't trade options?
Well, although I would prefer options on SLV, DBS (powershares silver) does trade options.

You certainly could find individual mining stocks, or a basket of mining stocks, however, just owning DBS I believe is a simpler, safer bet.

For the record, I have not yet traded options, and this is more of a paper trade for me.
Paper trade
Here's a strangle trade on DBS
CALL: DBSJL (strike price $38, expiration 3rd frday of October) $3.5
PUT: DBSVH (strike price $34, expiration 3rd friday of October) $2.45

Lets say something like 5 calls for every 3 puts.
I said 5 calls for every 3 puts, so lets just make it simple and say I bought 10 calls 6 puts
10 calls $3500, 6 Puts $1470
Total cost $4970

update: Put is now worth $4.1, while Call is staying pretty relatively steady at about $3.2 (the price I took is the average between the bid and the ask)
I would definately take some profits on the put.
I'll say take 2 puts off the table for sure, but I'll go with 3. That gives me $1230, leaving me with only $240 needed until I have the initial investment on the puts back.
Technically If I were to sell everything right now it would be
10 calls $3200 -$300
6 puts -$2460 +990
Total Profit $690 on $4970 investment or a 14% return... Not bad considering I played a bias to the upside, and still came out 14%... But I think Silver is just pulling back for awhile, and could go higher. Of course it could go lower too, but that just means more profit for our remaining 3 puts, and if it falls after that, we can buy closer to the money calls. Since we bought an October straddle, we still have a lot of time left to profit off of the ups and downs.

.25 Sunday Cut PLUS .75 cut

2008-03-18T13:06:00.000-07:00

Similar to Jan fed cuts on sunday "emergency" style, and then follows through with another cut.. The difference being the emergency cut was .25 this time, rather than .5, and on sunday... However, with the interest rates lower, the combination represents a larger change in rate, percentage wize.

You can try to buy banks and retail now, but it's a little speculative and doesn't need to be. Instead I would wait it out, and see how things go. Buying straddle options on banks would probably be a better and safer move. Staying in cash would be good as well. Notice gold go lower, or it could be providing an opportunity. Right now I'm just going to hang onto what I got, and not jump in to anything right now. I'm willing to pay for more certainty right now.

11 most Common chart patterns

2008-03-17T13:06:00.000-07:00

From Dan Zanger via Chartpattern.com
11 Most Common Stock Chart Patterns
1.
Cup & Handle
2.
Flat Base
3.
Ascending Triangle
4.
Parabolic Curve
5.
Wedge Formation
6.
Channel Formation
7.
Symmetrical Triangle
8.
Descending Triangle
9.
Flags & Pennants
10.
Head & Shoulders
11.
Inverted Head & Shoulders

QLDs end of the day rally shows potential bear flag fake

2008-03-04T13:41:00.000-08:00

QLD Shows a bear flag. It appears as if we are going much lower. However, the fact that if has now returned towards the trend line, and not away from it, shows a potential fake. This means that it's possible that the breakout was a false one.

Times like this show why being patient and waiting for it to follow through on strong volume is worth it. If you bet on the downside, and all of a sudden the breakout reverses, and rather than breaking through support, it smashess through resistance, you're going to be in a lot of trouble.

Now I don't meanto suggest that we're once again in a bull market based on this, but that stocks have not shown conviction either way, but the market has moved horizontal for long enough that a breakout in one direction or another is bound to happen within a couple weeks, maybe even by the end of the week after all the economic reports are out (Friday will be a big one).

Hedge yourself, or be patient, we are in an oversold position, and could have very well hit bottom today. Even if the market should retreat downward, and if the news is bad, I think another rate cut is coming, which will prevent the stocks from going too much lower. Hopefully they'll take it easy on the ratecuts, as the January rate cuts won't even be reflected in the market until June, and my biggest fear is not that the market will continue to drop, but all the emergency rapid rate cuts will luanch stocks out of reccession too quickly, inflation will be bad, and after people load up on stocks and they go vertical, people will sell off, and go short, and panic well below where we are now. Not only would that hurt businesses, and cause companies major pain, but individuals would suffer from inflation as the dollar loses value, and the fed would act, only coiling the spring back further, making healing inflation without serious consequences, even less and less possible.

wating for a firesale

2008-03-16T22:28:00.000-07:00

I will be looking for a firesale in everything commodity based. Jim Rogers might not have even been exaggerating when he talked about commodities soaring to crazy ammounts for the next 20 yearsand gold eventually hitting $3500

Update: unfortunately I was not able to get a firesale in USBank, which I was hoping would happen out of fear and that people would avoid all financials. I guess they're still holding out for the hundreds of million that they'll raise from the Visa IPO

remember January?

2008-03-17T11:10:00.001-07:00

emergency cut, followed by another cut... Volitility index at a high spiking up... Very negative sentiment, and even some hysteria and panic? That's what I see happening right now. The banks are freaking out, those who own Bear Sterns aare freaking out, and the "common folk" are about to give up on the market. I hope you got your buy list ready. Like I said in "forget the fear",
out of confusion, hysteria and chaos, comes order.

Soon the market will resume it's climb, although it may not last, it would not suprize me if we hit a panic bottom today. I wouldn't reccomend jumping in head first, but be prepared to recognize the opportunity as history could very easily repeat itself again, and consider dipping your feet in the water so to speak.
SSO looks like a great long term play here as today could very well be a good initial buy point around maybe $61. If you own some hedges like SMN and SKF, now is a great time to sell. Your position should be fairly neutral at the end of the day.

You go, I'll wait here

2008-03-17T08:58:00.000-07:00

http://www.ibankcoin.com/flyblog/index.php/2008/03/17/you-go-ill-wait-here/
an excellent post by a blogger and trader known as "the fly".. he claims to be up 100%+ this year, mainly from short positions like skf, smn, etc.
But even if you're a bull, the lesson remains the same... when people are saying the sky is falling, I'm gettin gthe hell out of this market, or "we're at bottom, time to load it up" the concept remains the same. Buy panic, sell hype, but don't get over eager on either end.

Today’s trading reminds of my childhood, growing up in Brooklyn. As a youngster, little Fly had many friends who knew no boundaries. Every day, they’d think up new ways to get into trouble. Whether it was lighting a bag of shit on fire, leaving it on someone’s front door, then ringing the home owners bell or simply sneaking into a backyard to steal a sour apple, from a stupid Brooklyn apple tree, young Fly would always decline to participate (remember my IQ was higher than theirs).
My typical response to overzealous activities was “you go, I’ll wait here.”
That’s exactly what I’m saying to my new Wall Street friends today, who are out in the backyard of mystery, picking a sour apple from the tree of (MER: 39.97 -8.14%), (MS: 36.03 -8.90%) or (WM: 9.25 -12.65%)—trying to pick a bottom.
It’s a fairy tale to believe we walk away from the (BSC: 4.07 -86.43%) debacle unscathed. It is foolishness, at its highest level, to fathom the market will bottom here today, because (JPM: 40.01 +9.50%) ripped off 14,000 employees from Bear.
With my money, I will continue to buy gold, via (DGP: 27.81 +2.51%), short commercial real estate, via (SRS: 116.31 +2.97%) and short basic resource stocks, via (SMN: 41.39 +5.64%).
In addition, I will continuously sell short the shares of (FED: 27.00 -5.73%) and (DSL: 18.12 -5.33%), until they hit zero.
Take a look at (NCC: 8.92 -32.17%) today and tell me if you have faith in our financial system.
While it’s true, dumber people than me may temporarily prop the market higher, via erroneous buy orders. However, “The Fly” is here to tell his loyal readers, when your broker calls you up to suggest purchase of stock, declaring “this is the bottom,” just know, it’s a flaming bag of shit he is attempting to leave on your front door.
Don’t you dare step on it.

Find the opportunity

2008-03-16T21:27:00.000-07:00

So the fed cuts on sunday, bear sterns gets bought out for $2, and gold soars $25 an ounce...
There are a few mutual funds that have way too much exposure to bear sterns that are going to get killed tommorrow. My guess is they'll be selling shares of their other stocks, and my guess is some people will panic and dump those funds.
Mutual funds with big exposure according to barons through stockpickr. I went ahead and listed there top 10 holdings as well as their current cash available. If you own these stocks, sell early and sell often, and be ready to buy after the drop off. If you don't, look for stocks in sectors that you think are going to be in trouble and short them early and often, and look for stocks in sectors that look to be strong, and patiently wait for a "firesale" much like the one JP Morgan got. Another theory could be that they'll be selling BSC while they can, and have a lot of cash to use on their other shares, but my guess is even if that's the case, they won't be rushing in to load up on shares of other stocks just yet.
PINDX top holdings: BSC HES C AAPL INTC TEVA BMY ORCL HPQ UTX
PINDX has .47% cash available
VWNFX top holdings: OXY, ITY, MO T COP BAC VZ JPM C BMY
VWNFX has 3% cash
LMVFX: AMZN, AES, UNH, AET, JPM, Q, S, EBAY, YHOO, GOOG
LMVFX has .08% cash
ACEIX top holdings: Bayer, WMT, JPM, VZ, SGP, ABT, SI, ETR, TWX, Viacom
ACEIX has 6.39% cash, and unlike the others has 37% in bonds, and "other"
PGRWX top holdings: VZ, BAC, PFE, AIG, COP, XOM, PG, MRO, CLX, BP

Now the opportunity is buying puts, buying inverse etfs or shorting early on if you can, when I say early, I mean premarket... otherwize wait until the market opens and the confusion sorts itself out. You will have a while where you still have time to short both the funds and some of their holdings, and you better believe the rest of the banks are going to plummet pretty low too. But it would not suprize me if they dumped down too low. Eventually this will spell opportunity for buying, but right now it's probably going to be a slaughtering followed by a little more fear. a company worth $60 a share only a couple trading days ago is getting bought out at $2... now that's just letting everyone know coupled with the fact that the fed made a move to pump 200 billion into the banks that things are a hell of a lot worse than the market has shown. I expect a full fledge panic, but I could be wrong.
I have some SMN (ultrashort materials) which should do well as those high flying ag stocks and material stocks can't keep going up forever, and it's a long way down if there is a market freakout.
If you plan on shorting, set a quick stop and be ready to reverse the trade. Maybe get in premarket off the people that don't realize what kind of effect this is going to have.

Then when there's "blood on the streets" then you can go long.
But stay short the dollar via UDN, and long gold and silver
I think the market will probably allow visa a pretty good opportunity on Thursday.
Where the heck is my ultra long silver when I need it?
If you're a very observant nimble trader who has the time to watch stocks every minute, you might just watch the minute by minute LIVE ticker, wait until the volume starts increasing and jump in and go with the flow. For example, If shares of AAPL start getting sold like crazy, PINDX may very well be selling their shares, and others will probably also bail, fearing that they will sell. A huge spike in volume means you can quick jump in and make your move and go short.
You can go by sector too, and just pick another financial stock like MS and short it till it meets it's financial buddy BCS at the ground where it belongs.
Personally I prefer puts to shorts, but shorts with propper stops are okay, and usually better suited for shorter term situations.