| awellman |
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Gold User, Member, TeleChart
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| Unsure |
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| Tuesday, November 29, 2005 |
| Wednesday, December 19, 2012 11:09:36 AM |
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As a "newbie" to trading, I gotta say that this has been the hardest pill to swallow, and yet the least surprising. There is no magic to technical analysis. Anything that looks too good to be true usually is.
However, after reading "Street-Smart Chart Reading" (Vol 1 and 2) by Don Worden and "Trading Your Way to Financial Freedom" by Van Tharp, I am starting to see the bigger picture. You don't have to have any magic indicators or sure-fire signs. As Van Tharp points out more than once, even a coin flip can come up heads ten straight times. In fact, in many trading systems the buy signal is the most over-hyped part of the system because the general public is most interested when to buy as they perceive that to be the secret to success. You simply must consider other factors, such as position size, stop-loss, setups, etc... in order to be successful. Studies have shown that "random" (50% probability of success) indicators can be successful when the other elements are applied to make a logical system. In fact, a less than random indicator can be successful if you manage to win big when you are correct.
Technical analysis is just another tool and should help by providing a piece of a larger puzzle. The best you can hope for is that it increases your probability to something higher than randomness.
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I've been working with a stop based on a range (the absolute value of high and low) and adding a volatility factor. If the price moves by X times (choose your own X) the normal range of the stock then you get out. In addition to that, I always move the exit -- with the same formula -- when the price moves in my favor (so I recalculate the stop everyday). I never lower my stop.
My experience with this stop has been that I'm getting whipsawed a bit. Partly because the stocks I am choosing are increasing in volatility as they gain in price (they are small to begin with) and partly because my stops are on the books and thus I don't have a chance to react (read the chart) but instead I am just ousted. Another problem that I see with my current stops is that they don't have any real Technical Analysis context. In other words, I should probably see where a volatility stop puts me relative to the MA and/or support lines. A random volatility stop probably is not good by itself.
I think I will continue to use my strategy but make some suggestions outlined here, namely stop putting my stops on the books so I have a chance to react when a stock goes against me. (Just yesterday a stock dropped all the way down to my stop and rebounded with in minutes). I got stopped out of a position that appears to still be a good position but some year end profit taking and jitters stopped me out.
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QUOTE (diceman) I would create a few watchlists by catagory:
1. Stocks ranked high by other services:
IBD, VALUELINE, VECTORVEST,STOCKSCOUTER and so on.
2. TC screened stocks:
LARGE CAP GROWTH
LARGE CAP VALUE
MID CAP GROWTH
MID CAP VALUE
SMALL CAP GROWTH
SMALL CAP VALUE
Diceman,
Thanks for the post. I have been working in this manner thus far, although I didn't know about the TC screens (I'll have to figure that out).
I agree with Stmjd74 in that its a little of either or in terms of order, but it seems that setups are more commonly done to screen stocks and technical analysis is utilized for entry and exit. Of course it depends on your investment style...
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QUOTE (Stmjd74) My opinion is that TC should be used first to find stocks possessing the bullish/bearish characterstics that would sway you to take a position in that stock, because technicals will most always precede fundamentals.
Great point! Since fundamentals (or maybe more importantly the expecations of fundamentals) entice someone to be bullish or bearish on a stock, fundamentals should probably be viewed AFTER you have found a pool of stocks you like and are dwindling the list. At least for a trader; I think as an investor one might swap the two, yes? An investor would probably want to find good solid companies and then wait for a technical indicator to get you in. (This seems to be more the approach used by IBD).
QUOTE (Stmjd74) Have a sensible loss-cutting strategy in place incase you are wrong, and those who influenced the stock to be picked up by your radar were wrong, or were trying to fool you.
I have been very good with my stops (and am experimenting with others). I have been whipsawed pretty badly thus far (mostly as a result of getting in AFTER a move started), but I have managed to keep from losing my capital. I really started trading aggressively as the market turned sideways which probably doesn't help. I have had a harder time with good entry than loss-cutting.
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Number 5 should have been 4 (oops).
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I am curious to know what people are doing for "setups" in their systems. By a setup I mean a "screen" or some type of analysis to tell you that you should look at a stock's chart. (Unless you review all 7,000 chars everyday).
For example, are you using:
1) Only technical setups, eg. Easy Scans for certain conditions
2) Selecting stocks to review from top industries
3) Selecting stocks to review based on fundamentals
5) Selecting stocks to review based on market news
Personally, I have been trying to focus only on stocks with good fundamentals that are in high performing industries.
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QUOTE (Golfman25) QUOTE (awellman) If a gap is bad enough, even that won't really help you as you could bust right through that loss point. Which is exactly why you need to limit your total position to a small % of you total equity, say 20-25% max. That way, even on a catastrophic (sp?) loss you don't lose everything. There was a guy on TC net today going after PW because he bot a stock PW wrote a note on and put 80% of his equity into it. It's down about 40%. Ouch. Good luck.
I've been experiminting with a Volatility System which limits my total loss to about 1.5% of my portfolio based on a stop-loss which is predetermined using the volatility of that stock. Obviously in a gap scenario that stop-loss could exceed 1.5%. However the number of shares I purchase is based on the stock's volatility and thus I must buy fewer shares (in accordance with the system) of stocks that are highly volatile. I find that it usually works out to 4 - 6 stocks for my entire portfolio (if I were completely invested), so 20 - 25% total risk sounds about right if the stock were to gap down to zero.
Of course there are always things you can do, like only investing in a good market, fundamentally sound stocks, etc... to further curb your risk. But at the end of the day you have to be willing to take some risk if you expect to make any rewards.
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QUOTE (jimstacy) I'm new also, I feel takeing part in the disscussion helps to learn. I didn't read each post, I could have missed it. a stop loss could have been used. when a stock has a good run like wso I would wonder how much higher it will go.
Yeah that is a good suggestion, but depends on your system. I use stop-losses right now for peace of mind more than anything. If a gap is bad enough, even that won't really help you as you could bust right through that loss point. The trouble is that stop-losses, depending on the condidtions, can whipsaw you on a stock that is peaking or starting to move laterally. Nonetheless, any insurance you can get is helpful.
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I'm a bit of a newbie myself and I noticed one thing on the chart that has really bitten me as of late -- buying a stock that is trading with a large gap between the MA pairs (either 20 and 50 or 10 and 30). My experience has taught me that one of three things will happen: 1) you'll get lucky and the price will continue to ascend at its current pace 2) you'll have a modest pullback that puts you in a bad spot because you are 7+% down or 3) you'll be in a really bad spot if it gaps down. 2 of the 3 things are bad so I have decided not to buy into a stock that is too far beyond its MA crossover (a buy signal for me).
I have been in this situation several times recently and it hurts because I have to pull out (my system won't let me stay in a 8% loss). However, several times the stock turns around and starts ascending again in short order. Frustrating. One of my "rules" that I have added to my system is to avoid this scenario. This may be an overly simplistic version of what golfman has described, but my experience nonetheless.
As a newbie I am going to start with the basics and just focus on MA crossovers, Price action, and volume as my leading indicators for a while. I may get whipsawed a bit and learn a few lessons, but reading too many indicators overwhelms my judgement hurts my confidence. I also calculate the risk level I feel comfortable with and the stop price before I even purchase a stock. The stop price is based on volatility and only meant to keep the bottom from falling out on me. I'm mot sure that this kind of a stop-loss is popular or even the best idea, but it gives me a little bit of comfort. I normally don't utilize my stop loss unless the stock gaps against me. I try to head it off with other indicators such as MAs and overall position so I can see the patterns unfold.
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This is an awesome discussion...
I am new to trading and the idea of a system, but I would say that ultimately the idea to pv78's question is: it depends. Ultimately your exit signal and position management are a part of your own style and your particular system. For example, if you are trading on a short term basis, then you want to consider tight initial stops. If you are trading longer term, then you need to allow for more volatility to keep from getting whipsawed out of the market. Personally I would start thinking about tightening/adjusting my stop after about a 10% gain as a rule of thumb. Again that is subject to your timeframe, but why let a profit go?
The same goes for positioning. If you are looking to go long for an extended period of time (weeks or months), then averaging up is probably a good strategy. Put a little money in early and wait for confirmation of your signal. If that confirmation comes, then add more money.
In the end, it really is up to you and your system.
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