Turn Off CNBC

If you want to stay focused on the task hand, and make money in the stock market, one of the best decisions you can make is to turn off CNBC and other financial news channels. Why? It is easy to get caught up in all the noise, and you can lose focus on your trading. The best way to become profitable in the market is to do your own thing and develop your own methods. All these financial news channels will do is clutter your mind with nonsense. Every day, a couple times each day, CNBC will strut out a bull and a bear to make an argument on the direction of the market. These are often people who have decades of experience, yet they really have no clue where the market is heading because NO ONE DOES! While it IS important to stay on the right side of the market, just let the action of the market itself tip you off as to which way it wants to go. Keep it simple though. If the market is breaking out to new highs, it will likely go higher. If it is selling off to new lows, it will likely go lower. Don't try to pick market tops and bottoms. Let the action of your individual stocks tell you when to get out of them. If you have a sound strategy for trading stocks, that strategy should tell you what to buy, when to buy, and when to sell. That's all you need! www.whentobuyandsellstocks.com

When To Buy and Sell Stocks - Part 1

When to buy and sell stocks is a question that has been asked by traders and investors since stock markets were invented. There are literally thousands of ways to trade stocks and make a profit. The problem is that most investors do not have the technical skills or knowledge to obtain historical stock market data and then back test all of these strategies to find out which one will work best. Another problem is that in certain conditions, some strategies will perform better than others. With this in mind, keeping your trading strategy as simple as possible, and then following it with strict discipline, is the way to go. One of the best general models for trading stocks that will produce significant long term profits (if applied to the correct stocks) is a trend following strategy. Trend following strategies essentially buy a stock when it breaks out to a new high price of some level, and then exits the position at a low price. This actually sounds like “buy high and sell low” but the goal is actually to buy high and sell higher. This is counter to what most investors want to do, since they typically want to go bargain hunting and buy a stock when it is cheap. The problem with buying a stock when it is perceived to be cheap is that usually this means it’s price is trading in a down trend. Investors may perceive the stock to be cheap based upon its valuation. Unfortunately, it is virtually impossible to forecast what a company’s earnings will be. In reality, it is just a guessing game. At the start of the bear market in late 2007, early 2008, Crocs had been on a roll, more than tripling in price from the beginning of 2007. Then the stock price started to break down. In early 2008, one of the analysts on CNBC’s Fast Money said the stock, trading in the twenties at the time after peaking over $70, was undervalued and it was time to buy. By the time of the bear market bottom in 2009, the stock was trading down to about $1. People had stopped buying its products. This kind of situation occurs over and over again. When you are just guessing, you have a recipe for disaster. A sound trend following strategy will get you out of a position before the roof caves in. This type of strategy will not get you in at the absolute low price of a stock, and will not get you out at the high. The goal is to capture the “meat in the middle” so to speak. Trend following strategies have made some high profile traders hundreds of millions, and even billions of dollars. William O’Neil, who created Investor’s Business Daily, described a sort of trend following strategy in his book “How to Make Money in Stocks.” However, his exit strategies were not very well defined. John W. Henry, owner of the Boston Red Sox, made his fortune by applying trend following strategies in the futures and currency markets. Many of the top performing commodity trading funds over the last several decades have all applied trend following models to generate their performance. How does a trend following strategy actually work? One of the more famous strategies applied in the commodity arena is the Turtle Strategy. It was created by traders Richard Dennis and William Eckhardt, and was a variation on Richard Donchian’s 20 day channel breakout rule. The very basic idea of the strategy was to buy a commodity if it made a new 20 day high in price and exit the position if it made a new 10 day low in price. Short traders would be the opposite. They then applied some stop loss rules and risk management. They taught this system to a group of individuals that Dennis referred to as the Turtles, a name he created based upon a trip to Asia where he noted turtles being grown. He bet Eckhardt that traders could be taught to trade and that they would be successful. There were two groups totaling 21 individuals who were taught the system, and many went on to future success in managing money after generating millions in profits for Dennis and Eckhardt over a five year period. This type of strategy can also be applied to individual stocks, even if just trading from the long side. Since even George Soros has said he has lost more money by shorting stocks than in any other strategy, it is best for the individual investor to just trade from the long side. As Jim Cramer always says, there is always a bull market going on somewhere. In a universe of thousands of stocks to choose from in the U.S. market alone, what are the best stocks to trade? Trend following strategies do poorly when markets are not trending. So, it would make virtually no sense applying the strategy to a stock such as Intel, or Microsoft, which have gone nowhere for years. With that in mind, it is best to apply the strategy to a stock that has demonstrated a tendency to trend in relatively recent history. Therefore, the individual investor should essentially screen for stocks that have been shown significant relative strength compared to the overall stock market over the latest year, and look for an opportunity to enter a position on a breakout. All stocks undergo some sort of a correction now and then, and that is the opportunity to look for, as long as it’s longer term trend remains intact. The investor will look for that breakout opportunity, have a stop loss plan in place, and then simply let the other exit stops, such as the 10 day low exit strategy, trail the stock price. The difficulty in following this strategy is that there will be false breakouts for one reason or another, and as a result, it requires significant discipline to continue with the strategy in the same stock when there has been a string of losing trades. No matter what strategy you use, you need to adhere to it with strict discipline, assuming it has a long term history of performing well. Your plan should be to at least monitor the market on a weekly basis, identify a group of stocks that you will want to trade, and then apply your trading model at the appropriate instance. Do not focus on short term results. Simply execute your plan with discipline and you will come out way ahead in the long run. www.whentobuyandsellstocks.com