Other Stock Trading Methods

By Mark Crisp

The Stress Free Stock Trader

http://www.stressfreetrading.com (c)

20th August 2003

There are hundreds if not thousands of methods, systems, theories, in which you can "trade" the stock market. But what really works and what doesn't can end up costing you a lot of money, time and effort. Here is my lowdown on some of the more popular methods being touted by system vendors.

Elliot Wave:

What is it?

Elliot Wave is a way of defining the market action in a five wave formation. A very simple explanation. It basically says mass psychology is predictable in a liquid market by a five wave cycle. An accumulation wave. A correction. A much bigger wave. A correction again. Then the final "speculative" wave. Where the public jumps in. This is the final wave and the the next correction is not correction as such but the end of the market cycle.

A picture is worth a thousand words. See the chart of the NASDAQ during the great "bear" of 2001 to 2003

So, looking at the above chart Elliot Wave does seem to hold some credibility. It's is clear the great market crash of 2001 to 2003 did move in an almost perfectly formed five wave cycle. Three waves down. Leg three being the biggest and leg five being the final one. All seems well.

This is what I want to say about Elliot Wave. In a "nutshell" it does seem to have some substance. Look at some monthly bar charts of a liquid market (where there is massive public participation) and you will be able to see some great five wave formations. Great. That's about all the interest I have in Elliot Wave. There is absolutely nothing you can trade off. It's not quantifiable. Sometimes you will see Elliot Wave formations, most of the time you will not. And then it gets worse.

Ask twenty Elliot Wave enthusiasts what they see in the same chart and I'll guarantee you will get twenty different answers. How can you trade of something so subjective? Why should a market move up in three waves? where's the common sense about this method? I do not see it.

And when an E.W. formation goes wrong do they say "oh sorry I am wrong. cut your losses and get out"? No. They they bring in extra rules about a correction wave within the formation and pile more and more B*S already onto a sea of B*S and non-sense.

I used to subscribe to an E.W newsletter. It was really interesting to listen to. this market was in this wave and would go here.. blah,blah,blah.... I didn't make any money from their recommendations. Lost a lot.

Verdict:

Something that might hold some academic interest if this is what "bakes your potatoes" but beyond the definition about liquid markets moving in five waves... I wouldn't delve any deeper into this. I honestly do not believe you can trade from this "theory"

Rating

2 / 10

W.D Gann:

What is it?

This isn't a what but a who. WD Gann was a famous trader who made millions, billions way back at the turn of the century by predicting future stock market trends by using the superb Gann Angle System. Just think for a few hundred dollars many vendors are willing to let you find the "Gann Secrets" and help you make millions in the stock market. Drop everything.. we have found the Holy Grail of stock trading.

Back to reality. Gann ..... do your-self a favor and do not even waste your time in this area. For one it is a method that tries to "predict" the future. ANY method that does this, in my eyes, should not even be considered. But here are some shocking facts about the so called brillaint WD Gann and his amazing method.

The Gann method is about measuring slope of trends to predict reversals in those trends. It's fancy. It can look great on "cherry picked" past charts. But predict the future.... it can not do!

You must read William Gallacher's book: "Winner Takes All", It is some time since I read it and do not have a copy here right now but I always remember the section on the Gann Method. His son was interviewed for a position at a bank and the conversation of his father (the Great W.D. Gann) came up. It went something like this:

Interviewer: So what happened to all those millions your father made in the stock market?"

Son of Gann: "He never left us millions. He left us $50,000 ( do not quote me on this.. it was a low figure). My father was a failure trading the stock market. Although he did o.k. selling his trading materials."

There was a bit more to it than that but read the book for your-self and have a laugh at all those so called "Gann" experts selling trading methods based on a method whose originator never made any money from.

Here is another fact about Gann... I read in the Market Wizards II book the Interview with William Eckhardt (p.110 / p.111) , and believe me if the top, professional traders talk about Gann trading methods in this way, you do not want to be wasting your time on it.

Eckhardt: "If you wanted your computer system to be cognizant of slope, you would have to program this feature into it. At that point, it would become abundantly clear that the slope value depends directly on the choice of units and scales for the time and price axes"

My comment: Basically he is saying in non mathematical language.. Gann angles for trading are too subjective.

Jack Schwager: I have always been amazed by how many people are oblivious to the time scale-dependent nature of chart angles or unconcerned about its ramifications. My realization of the Inherent arbitrariness of slope of line methods is precisely I've never been willing to spend five minutes even five minutes on Gann angles or the works by the proponents of his methodology.

There you have it.

Verdict:

I wouldn't even look at it for an academic interest point. Never mind from a trading method. A complete waste of your time, money and effort.

How to Invest in Stocks For Maximum Profits a short Trading

Investing is stocks is something everyone should be doing. Not only that, investing in stocks is something everyone SHOULD be profiting from but for some strange reason many investors in stocks lose money. Why?

Why do so many who invest in stocks lose money when there are hundreds of thousands of web sites, gurus, newsletters, system vendors telling you investing in stocks for massive profits is oh so easy?

Investing in stocks, in my opinion, is not a mystery. There are no Holy Grail investing systems out there where profits will automatically fall into pockets. There is no one stock investing method that is the BEST way to invest in stocks. Just like there is no one best way to run a business, get fit, be happy, be successful, acquire wealth. There are simply methods that work and methods that do not.

Many people who attempt to invest in stocks and fail at it seem to commit the same cardinal sins. I have listed the ten most common reasons many investors in stocks fail to make a profit when there really is no reason not to:

1) You do not plan. When you get into a stock you must have reasons why. Where will you get out? What happens if the stock flies up 200% in the next 3 months? Will you add to your position. "Trade you plan and plan your trade."

2) Over diversify. You own too many stocks. Like a child in a sweet shop you can't resist buying this and that stock. Focus is the key to large profits.

3) You do not have a system/method. You trade from opinion, tips, outside advice. I don't know anyone who has made money consistently from third party advice.

4) Money management is more important than where to enter. Money management is a vital subject when investing in stocks. How much to buy? How much to risk. This is where you success lies.

5) You actually trade/invest too often. You want to trade all the time. You want action. You are not patient waiting for those ALMOST certain trading/investing opportunities where big profits will be GIVEN to you. You are drawn into short-term gambling methods or even highly stressful day trading techniques. Not realizing the big money is in the big moves. Be patient and the money flows in.

6) You will not pay for specialized advice. For a fraction of the money you can make investing in stocks you can accumulate fantastic information and tools that will help you in your lifetime career of making money from stocks. But being too cheap you prefer to go it on your own. Losing your precious $10,000 account tin the process.

7) You fail to take your time and build your stock empire slowly but surely. Get rich quick schemes sell so well simply because 90% of the population are stuck in this "get rich quick" attitude. It takes time, effort and determination to build the knowledge and experience necessary to make big money in the stock market. It's the same as any other business.

8) Instead of becoming the very best at one style of trading/investing you jump from one hot trading/investing method to the other. To make more money than you could ever dream about in the stock market vow to become the VERY best at one style of trading. Sure the market goes through cycles. The big money is made from a specialized investing method. Not a "jack of all" investing approach. Take a look at millionaires from all industries. They specialize. You don't see Bill Gates learning about the stock market. you don't see Warren Buffet going into software design. they are the leaders of their own specialized niche markets.

9) You will not cut those losses. As strange as it seems many investor/traders of stocks will NOT cut those losses early. This is a lack of planning, fear of losses and arrogance. cut your losses early and watch your portfolio grow.

10) You really didn't want to invest in stocks. I see many people who are desperate in their current situation. They dislike their day job and read there is money to be made in the stock market. Having never read a stock book, or shown the slightest interest in the past, they buy a trading course and expect to make big money from it. There is no interest in investing in stocks. They have no passion about learning about the stock market. If you do not enjoy investing in stocks and learning about the stock market then make your money from something you really enjoy.

Stocks Basics: Conclusion

Let's recap what we've learned in this tutorial:

• Stock means ownership. As an owner, you have a claim on the assets and earnings of a company as well as voting rights with your shares.
• Stock is equity, bonds are debt. Bondholders are guaranteed a return on their investment and have a higher claim than shareholders. This is generally why stocks are considered riskier investments and require a higher rate of return.
• You can lose all of your investment with stocks. The flip-side of this is you can make a lot of money if you invest in the right company.
• The two main types of stock are common and preferred. It is also possible for a company to create different classes of stock.
• Stock markets are places where buyers and sellers of stock meet to trade. The NYSE and the Nasdaq are the most important exchanges in the United States.
• Stock prices change according to supply and demand. There are many factors influencing prices, the most important of which is earnings.
• There is no consensus as to why stock prices move the way they do.
• To buy stocks you can either use a brokerage or a dividend reinvestment plan (DRIP).
• Stock tables/quotes actually aren't that hard to read once you know what everything stands for!
• Bulls make money, bears make money, but pigs get slaughtered!

Stocks Basics: The Bulls, The Bears And The Farm

On Wall Street, the bulls and bears are in a constant struggle. If you haven't heard of these terms already, you undoubtedly will as you begin to invest.

The Bulls
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook".

The Bears
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".

The Other Animals on the Farm - Chickens and Pigs
Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets entirely. While it's true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk,

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Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.

What Type of Investor Will You Be?
There are plenty of different investment styles and strategies out there. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig.

Make sure you don't get into the market before you are ready. Be conservative and never invest in anything you do not understand. Before you jump in without the right knowledge, think about this old stock market saying:

"Bulls make money, bears make money, but pigs just get slaughtered!"

Stocks Basics: How to Read A Stock Table/Quote

Any financial paper has stock quotes that will look something like the image below:


Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.

Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock.

Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it at: http://finance.yahoo.com/l.

Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.

Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.

Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.
Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.

Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.

Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.

Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.

Quotes on the Internet
Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because most sites update throughout the day and give you more information, news, charting, research, etc.

To get quotes, simply enter the ticker symbol into the quote box of any major financial site like Yahoo! Finance, CBS Marketwatch, or MSN Moneycentral. The example below shows a quote for Microsoft (MSFT) from Yahoo Finance. Interpreting the data is exactly the same as with the newspaper.

Stocks Basics: Buying Stocks

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

1. Using a Brokerage
The most common method to buy stocks is to use a brokerage. Brokerages come in two different flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount brokerages offer little in the way of personal attention but are much cheaper.

At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the internet came the explosion of online discount brokers. Thanks to them nearly anybody can now afford to invest in the market.

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

Stocks Basics: What Causes Stock Prices To Change?

Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1 million shares outstanding has a lesser value than a company that trades at $50 that has 5 million shares outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further complicate things, the price of a stock doesn't only reflect a company's current value, it also reflects the growth that investors expect in the future.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It would be a rather simple world if this were the case! During the dotcom bubble, for example, dozens of internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the price/earnings ratio, while others are extremely complicated and obscure with names like Chaikin oscillator or moving average convergence divergence.

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So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price extremely rapidly.

The important things to grasp about this subject are the following:

1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.