Rebel Traders – Analysis Without The Hype

I’ve written before about the importance of understanding your time frame when choosing a trade.  You don’t pick a momo stock for a long term investment, and you don’t pick a very slow mover to daytrade.  When choosing a stock for investment purposes, you take a long look at their balance sheet and their growth prospects, taking into account the economic and sector outlook.  For swing trades, you want to be aware of the economy and sector strength, picking your entry and exit based on technical analysis.  With daytrades, knowing what sectors are moving and having real-time news feeds are important.  These trades are quickly affected by news, rumors, press conferences, etc.  Of course, technical analysis and proper money management apply to all time frames.

 I’m bringing up this topic again, because the volatility, the uncertainty, in the markets makes trading more difficult.  Being more clear on your time frames when trading a particular stock can ease the pain a little bit.

The financial problems affecting the market have been brewing for some time.  The volatility we’ve seen lately is only the beginning of the consequences of massive credit expansion, not the end.  What may be ending is the ability to continue to patch the hull of a sinking ship.  This may indeed be the time that quite a few will have to suffer the financial consequences of their decisions.  It is only then that we can rebuild a stronger ship.  What does this mean to you, the trader/investor?  It may mean you will want to change the time frame for your stock trades.  It may not be the best time to buy a particular stock for long term investing, but it could be a good swing or daytrade.  Or vice versa.  There is no way to tell how long this volatility will last, but it will eventually calm down.  That doesn’t mean everything will be fine in the financial world, but it may make trading a bit less manic. 

Our reason for writing this blog and starting our service was to help people hang on to their money.  Yes, we want to help people, through education, increase their profits.  But, Chuck and I have seen traders who chase stocks all over the street, only to end up right back where they started.  Or worse, they have eaten into their capital.  Emotions are always a part of trading, and right now those emotions are running very high.  We had no idea that only two months after the inception of this blog, that the credit market would seize up.  For us, that meant helping people make sense of what was happening even more important, as this is no ordinary event.   To ignore what is happening, to try to put a positive spin on it, is a disservice to any thinking, rational human being.  We do not believe the world is coming to an end, even though the financial upheaval will make trading more difficult, it is not impossible. It may seem to some that we are “missing the run-ups” by being so bearish.  I actively trade every day, but we do not have an interactive site yet, and I will not make daytrading recommendations until then.  As for swing trades, some active traders have been a bit critical that we have not been taking more positions.  Some traders are willing to accept more risk than others.  We won’t criticize those traders for taking the risks, that’s their choice.  We have chosen to be more prudent, as preservation of capital is paramount, and we don’t take money management lightly.  We take our business seriously and do not assume (as some other sites seem to) that our readers simply have money to burn.  I always bristle when I hear someone say that a trader should never invest more than they can afford to lose.  If you are gambling at a casino, then that saying may be true. Whether one can lose some money and still survive is not the question.  But we’re not gambling here. The question, for me, is WHO in the world would go into trading with the idea of possibly losing all of your capital???  Lose your capital? Why would you do that?  This is why money management is so important. 

I know what it’s like to live under various financial conditions.  I know what it feels like to wonder where your next meal is coming from, as well as the comfortable security of earning a living and being able to pay my own way in life.  That’s what money is all about, isn’t it?  Having enough to be able to pay for your needs, anything more than that is gravy, right?  I know very few people who don’t have at least a little worry about having enough money in the future to take care of their needs.  I’ve also come to learn that those who don’t need to worry, NEVER had a cavalier attitude about money, either.

Now if you used the charts to tell you when to get in and when to get out that very same $5,000 would today be $29,166.22! See how some very simple trading discipline and technical analysis turns a “losing your shirt” into making good money. And you did not have to be an active day trader to accomplish this. Using the technical analysis criteria for this test resulted in only 24 trades since 1995 when you first started.

1. Control your losses. Keep risk to a minimum. Only after you learn to practice this step can you move to step 2.
2. Make profitable trades.

The charts of the financial sectors have been signalling trouble for weeks. I have said a month ago that the financial crisis was going to spread. I stopped actively entering into new swing trades back then. I said that trading in this kind of environment is too risky. Now we see that it is getting worse. Many stocks of banks, brokerages, and other financial related companies have lost huge amounts of their value. IF your a “buy and hold” person you are feeling the loss hard. If you had used the simplest of technical analysis tools you would have known when to sell. You would have sold, taken your profits, and left your money sitting in your brokerage account (most of them pay a very small interest on money that is just sitting in your account and not in a stock) while you watch from a safe distance the market get worse. Then later when the storms are over you take your money and buy the stock again if you still like it. Now you are able to buy more shares because the price is less and then using technical analysis again you stay with the stock until you get another signal to get out. That is how you make money consistently. Take a look at the books I have listed on the right side of this web site. They are there for a reason. Every one of them I have read, every one of them is the best in my view, and they are worth every penny. If you are just starting out get the book written by John Murphy “Technical analysis of the financial markets“. John is an excellent writer and his books are easy to read. Then get the book “Trading for a Living” by Dr. Alexander Elder, and then the book “Trading in the Zone” by Mark Douglas. If you start with those 3 books alone you will learn how to make good trades, learn how to get out of a trade to protect your capital, learn the art of technical analysis, and learn how to be a disciplined trader.

I will close out tonight’s message with a quote from one of the best.. Jesse Livermore:

“A loss never bothers me after I take it. I forget it overnight. But being
wrong – not taking a loss – that is what does damage to the pocketbook and to
the soul”

Today I posted that I liked an entry in ONT on the pullback, and subsequent signs of a bounce from support. I took an entry on ONT today at $2.65 with 1/3 of a normal swing trade position. The chart analysis of ONT has good support at the 2.55 to 2.60 range. And today I observed a good bit of volume working on keeping the price from falling below that level. I wanted to get my toes wet at the bottom and took the entry at $2.65.

The reason for the 1/3 is money management. I want to get a bite of the stock at the cheap price but I don’t want to risk a whole 10% swing trade position just yet. So I scale into the trade. The more the trade works in my favor the more I add until I have the entire 10% of my trading capital in the trade. By scaling into the position the risk to my total capital is less as I wait for further signs of buying pressure before adding more. This way if I am in only with 1/3 and the stock takes a dive for some unknown reason before more buying comes in then my risk is limited because a stop loss on only 1/3 of a 10% swing trade is minimal.

My stop loss for ONT is a 10 cent window from the break point I suggested to buy in at. Stop loss is $2.54.

Will advise on the next level to add to this trade as the market makes its next move.

Late in the day I took an entry on JSDA @ $17.85 (1/2 position). Remember to always check the watch list items in the right side column of this web site to see what the recommended entry points are for the stocks on the watch list. The trading on JSDA was healthy most of the day even in spite of the overall market. Stop loss is $16.90. The CEO was a guest on CNBC Fast Money tonight. We will see tomorrow if the market likes what he said or if they feel there is no fiz left.

Note: If JSDA exhibits signs tomorrow of any high volume selling I will not wait for the stop loss to be hit and will sell before that. A sign of any high volume selling early may be an indication that traders and investors did not hear anything they liked from the CEO and may want to exit. In which case I will also. And come back another time.