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Friday, August 29, 2008

How to Make a Stock Market Fortune

"Basic Strategies for success"

Imagine being able to make a fortune every day from the stock markets by a strategy that's unfailing. Sounds good? However, if experts are to be believed there are no short cuts to making a fortune, although you can follow certain time tested principles to ensure that you come out a winner from the stock markets.

First of all, you must realize that there is no single strategy that can be repeated every day to give you guaranteed and consistent results on the stock market. In order to maximize your returns form the stock markets, you need to develop skills to identify and play with hot stocks. Some of the things that you should be looking at are:

You can make a fortune in stock market by investing in the long term. If you want to make a fortune in the long-term look at small cap stocks today that offer the potential. How do you spot them? If you're not the expert, take the advice of one. Look at small cap stocks that offer potential. Review your portfolio frequently and hold on to the stocks as long as they are performing well.
The short-term approach is more risky but can give you greater profits within a short period of time. For this, you will need to closely attune yourself to the market sentiment. Pick on stocks that are currently on a rising trend, and invest in them. Spread your risks.
You should know when to quit. That's part of the secret of success. Set limits for your losses. For example, set yourself a limit of 10% and if your stock falls by more than 10% sell it off. Remember you can always buy it back if it reaches the price at which you sold it, and seems to be rising.
Know when to book profits. You should look for signs of a reversal of the rising trend and sell off at the peak.
Your preference should be towards lower priced stocks, as these will have a better chance of rising faster, and also reduce your risk. However, make sure that the stocks that you choose are showing a rising trend.
Remember that no one can guarantee the trends of prices. You must be prepared to make losses on individual stocks - that's where rule no. 3 comes in. What is important is that on the whole you make money - not that you should make money in each and every stock that you buy.
Take advantage of market variations. You will find that stocks that do well suddenly start losing - only to gain again later. The trick is to know when to invest in these stocks so that you make money. Ultimately, it's all about knowing when to buy and when to sell.
If you want to play it even safer, keep an eye on fundamentals. There are certain prices at which, irrespective of market performance, you are bound to make money in the long run, because the stock has the potential to earn. Invest a reasonable amount on such stocks. Don't hold on to them, you should book profits on them as you would in any other stock, but a good mix of such stocks in your portfolio will ensure that you will minimize your chances of losing any money.

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Reuters - Personal income tumbled unexpectedly in July and inflation-adjusted spending shrank at sharpest rate in four years as the lift from government stimulus checks waned, a government report on Friday showed.

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The Portfolio Assassin

The risk in any trade is a function of several factors and tonight we will cover three of the most important factors of risk in our trading. If these rules are underestimated or ignored, they become what we call "the Portfolio Assassin".

1.) Position size

Placing large bets on trades leads to significant volatility in a portfolio and this contributes to emotional volatility. The bigger the position size, the bigger the swing in our portfolio balance, thus bigger our emotional swings will be. News events and the block buying and selling of large institutions can move prices many points in a short period of time, creating wild swings in our overall portfolio balance, should the size of our position be too large (more than 10%). This also applies to any orders you may have that have not filled yet. For example, imagine you have a sizable bid that is well below the market price because you plan to pick up a huge lot of shares at a limit price near a support level. If some unfavorable news is released on that stock, the stock's violent reaction to the news could fill the limit order and proceed to continue moving much lower against your newly filled position.

This may happen to some traders who plan to buy a certain stock with a limit order near the 50 Simple moving average because this is sometimes a solid price point for support on the stock chart. If you place a limit order then walk away for the day, you could be surprised when returning home to find that the 50 SMA support did not hold and instead, the stock dropped through that support like a hot knife through butter and is on its way down to the 200 SMA instead. If you placed this unfortunate limit order at what you thought was support and walked away, you are going to notice a huge loss on that trade when you return to see if their order filled. The next time you think about placing a limit order, make sure you are going to be around to see the result when you get filled. If you are not careful, you could be buying a portfolio assassin.

2.) Stop Orders

It is common for traders to enter large position sizes relative to their account sizes and hope to balance the risk by entering tight stops. The problem with this strategy is that simple, random price action ensures that the stops will be hit on most occasions, leading to death by a thousand cuts. The opposite problem occurs when placing overly wide stops or not utilizing stops at all. This creates the situation in which a small number of losing trades eat up your capital. By keeping the position size at a manageable level, you decrease risk by being able to afford to use stops which are essential in trading. All trades should be of the same positions size. It is very, very difficult for traders to make money over time if their losing trades tend to be larger than their winners. If you cannot use a stop because the position is too big, you are flirting with disaster. Wide or non-existent stops ensure that large losing trades will eventually be a portfolio assassin.

3.) Holding Time

The longer one holds a trade, the greater the expectable price variation. Prices move more in a day than an hour, and they move more in a week than a day. Extending your holding period is equivalent to increasing your position size, creating more exposure to adverse price movements. When traders hold onto losing trades, they create a double risk exposure as they widen their time frames precisely at those times when they are trading their worst.

If one's trading method calls for a longer holding period, let's say measured in days rather than minutes or hours, stops will need to be wider given the expectable degree of normal, random price fluctuation. This means that position sizing becomes critical to risk management. The risks of a day trade of hundreds of shares and the risk of a long-term trade of the same amount of shares is very different. We could day trade a large position of a stock in a major downtrend because it is bouncing today and we want to capitalize on the move. We know that at the end of the day, we will be out of the stock so the risk is minimal. However, that risk is much larger if we hold the same amount of shares for a longer period of time than just a day trade. Holding time is critical. If a stock is not moving in the desired direction, there is no need to hold it. You could be holding a potential portfolio assassin.

David Colletti
Founder
StockTradersHQ.com

This article is courtesy of David Colletti, a ten year veteran stock trader and founder of StockTradershq.com. Our staff of professional technical traders analyze 1,000's of potential stocks every day to provide you with a list of stock recommendations nightly with the greatest potential for explosive gains. These stock picks are traded with our real-time portfolio. Email alerts are sent to members for every entry and exit. Our subscription service provides all the resources, stock picks and tools an investor needs to make very profitable, consistent trades while maximizing gains and minimizing losses. StockTradersHQ.com offers a 21 day free trial with full member access.

http://www.stocktradershq.com/

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Buying Company That is Down

I hope you know how to differentiate a company that is out and a company that is down. We have discussed these in the past and you are welcomed to check it out at our commentary section. Today, though, we are going to talk more about reasons to buy company that is down.

Why should we as investors buy companies that are down? Why don't we buy company that is out or company that is doing fine? Here are several reasons why:

Cheap. Company that is down usually sells at a discount. A company announces bad news and then the share price will drop as a result. If the company is solid and your long term picture has not improved, then the company that is down can be bought at a cheaper price than other similar companies.

Dividend. Company that is down normally has a long history of profitability. If the company is not in danger of going out of business, then it can continue paying its dividend to shareholders. Buying company that is down will give you higher dividend yield due to the drop in the share price. On the contrary, company that is out cannot afford to pay off dividend to shareholders.

Take Over Potentials. Companies would love to scoop up other companies at a low valuation. Company that is down normally have depressed share price while its core business remains intact. This is appealing to potential competitors. A lot of big investors and companies buy company on the cheap. For example, Carl Icahn the fame investor, bought Time Warner Inc. (TWX) cheap and he is trying to unlock values for the company.

High Potential Return. This is one reason investors should invest in companies that are down. The depressed share price will have a chance to recover once its short-term problem is sorted out. Company that is down normally have a low P/E ratio, many in the single digits.

It is crucial to know whether a company is down or out. There are a lot of companies selling at single digit P/E ratio, giving dividends and yet their survival is in question. These are companies that is out and not down. While, it might be difficult to identify, I can give you several examples of companies that are down: pharmaceutical companies, banking industry and companies selling hard drives. The demand for their business remains intact despite the short term downturn in the industry. However, each company within an industry is different as well. Please use the guidelines mentioned on the past article to differentiate company that is down and out.

Investing Idea is Free ! You can get it at our commentary section at http://www.noviceinvesting.com

Reuters - Lehman Brothers Holdings Inc is looking at cutting some 1,200 jobs in its latest round of cost cutting, a person familiar with the matter said, as weak financial markets spur layoffs across Wall Street.

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