Published on June 21, 2019 @ 9:03am
Experience has taught us certain rules are well worth considering if you're looking to be successful in the stock market. Of course those rules can be very different depending on whether or not you're a short-term swing trader or a long-term investor, but the fact remains if you adhere to a solid set of rules and disciplines, you're likely to become far more consistently successful - now and well into the future.
First, I just wanted to mention the importance of something we've relied on for years to be accurate and effective when it comes to helping traders and investors consistently become more successful.
Although charting and technical analysis has been a big mystery for many years, the concept is really starting to become mainstream, which is good for us and good for you.
Why? Although many like to make claims of being expert technicians, the truth is most continue to focus on certain technical tools and theories that recent history has proven to be ineffective, or at the very best modestly reliable. Meaning, there's an awful lot of old and unreliable tools out there many think work well, but simply don't.
However, if you're willing to take the time to learn what actually works, the proper analysis and methodologies can give you the type of edge that will allow you to spot trend reversals before the rest of the heard, an opportunity to sell when maybe others are piling in at the wrong time, and more importantly give you a great indication of what to consider and what to ignore - no matter how fundamentally solid the idea in question is.
Charting and technical analysis can also be a fantastic way to identify and assess where big money is flowing before the actual fundamental reasons ever start to surface. Remember, stocks and the markets in general often trade well in advance of what's to come, so it's usually the smart money that's going to start to reveal what's on the horizon long before the fundamental landscape actually starts to develop.
It's been very well documented for years here we're huge fans of charting and technicals. So much so it's become more and more of our focus here, and for good reason. While fundamentals often tell us which stocks to buy, it's the charts and technicals that tell us when to buy them, when to sell them, and when to ignore them.
I find it fascinating now that everyone from Jim Cramer to other Wall Street pundits on CNBC are starting to share their thoughts and analysis on charting technicals in an effort to better identify when's a good time to buy a stock and when's best to ignore a stock. I've made my living in and around the stock market now going on 20 years, and never have I ever seen so much commentary and analysis on charting technicals in the media like I have over the last few months.
I've said for a long time the advent of the Internet and all of the technology associated with real-time data and charting these days has provided professional traders and investors a significant edge using this fascinating and often reliable form of analysis. And now that these markets have entered a time period of extreme volatility and uncertainty, everyone out there is looking for that extra edge, so of course the media is starting to finally exploit it.
The bottom line is although fundamentals are clearly important when it comes to multi-year long-term investing in any stock; literally nothing is more important to the near and mid-term landscape more than charting and technical analysis.
Of course nothing in the markets is 100% reliable 100% percent of the time, but if you're willing to pay close attention to the charts, and assess things without any emotion whatsoever, you're likely going to put yourself in that top 20% of the investing population that makes 80% of the money.
This is precisely why we work diligently to not only bring you timely and reliable technical and fundamental analysis day in and day out with respect to the broader markets, the sectors associated and the plethora of individual stocks that make up the markets, we also make a big effort to try and educate you all along the way.
At the end of the day for us, it's all about helping you become more profitable, and ultimately help you become a more knowledgeable investor or trader - whatever your strategy might be. Like the old saying goes, give a man a fish feed him for a day, teach a man to fish feed him for a lifetime.
Rest assure, we spend countless hours assessing the markets and thousands of individual quality fundamental names in an effort to pinpoint when's the best time to participate in those names, and ultimately give you the kind of edge it takes to be consistently successful. We're clearly not always right, but it just goes to show just how much time it takes to spot potentially profitable opportunities, while reducing the potential risk as much as possible.
After years of helping professional investors and traders make better decisions, and ultimately more profitable, here are 10 of our most important rules we’ve found to help even the savviest individual.
Excerpts from 9/20/2019 Newsletter Edition - Biggest Portfolio Killers and Tips Reiterated
I get an awful lot of emails and phone calls from time-to-time from many of you with questions regarding trading/investing strategies. I also receive many inquiries and questions many of you looking for a second opinion on an individual stock you own, have heard about elsewhere or are thinking about buying.
With that, I've assembled what I believe a very short list of the biggest portfolio killers, and a short list of tips on how one can improve their short and/or long-term portfolio performance.
First and foremost, many investors and trader participate in WAY too many overly speculative small and micro cap stocks that literally haven't proven their ability to substantially grow revenue and/or earnings. It's typically not a good idea to buy something just because someone has a great story about it. I prefer to focus on companies that actually have proven their fundamental worth already, have the necessary financials to grow their business, and do appear to have attractive forward growth prospects. Add all of that to a potentially attractive technical landscape, and you have a much higher probability of success for the idea in question. Even then, you or I are not always going to be right, which leads me to the next big tip.
Basically, it's imperative you participate only in high quality fundamental names and ETFs that trade high volume that are still fundamentally and/or technically attractive. The old adage buy low and sell high is all fine and good, but if you're not participating in proven companies and/or ETFs that have proved performance worthy, and are liquid enough to get in and out of them whenever you want, you're probably asking for trouble. I love to speculate as much as the next guy, but I will only speculate on something that has actually proven more than just a little fundamental something, and does appear to be technically attractive for more than just one reason.
Further, many investors and traders have a tendency to hang on to their losers way too long - especially when it comes to those overly speculative small and micro caps that haven't proven much of anything. There's absolutely nothing wrong with hold something for the long haul, as long as it's a very quality name that continues to prove it's still a good idea to hold it from a fundamental perspective. Cash and debt on the books are a big tell for any company, so it's always important to look at those two line items before deciding if you're going to continue to hold something or not. There's nothing wrong with cutting an idea when an idea goes south. We've all hung on to losers far longer than we should have at times, but that's human nature - we don't want to accept a loss. Trust me, it's better to cut something before the losses really pile up in the wrong idea.
Another one of the biggest market no-no's is being way too overly active - participating in just about anything and everything that comes your way - no matter where it comes from. I can't emphasize how important it is to be selective, and know when patience is warranted. There's nothing wrong with doing nothing sometimes - especially when the current market environment isn't offering any sort of definitive direction. As for us, remember, we're simply a source of ideas to help you be successful in the markets, so it's very important you only ever participate in those ideas you have strong conviction for after reading the context here in the newsletter for why we like the idea in question.
Know your strategy and stick to it. Play the long game or the short-term game, or a combination of both, but pre-define the strategy on the idea before you decide to enter. Hindsight is always 20/20 so don't spend too much time on the coulda shoulda woulda unless there's something definitive to learn from it. Know your strategy in advance of buying or shorting anything. In other words, before you actually buy or short something, determine in advance if you're going to invest in it for the long haul, or if it's simply a short-term swing trading idea you're going to attempt to shave for some profits.
Lastly if you don't fully understand how the options markets work, don't buy or sell them. Everything from liquidity to implied volatility are important toward determining whether or not an options trade is worth the risk. Consider the timeframes, and always give yourself ample time that makes sense based on the cost of your options' purchase - all in an effort for those options to end up being profitable. It's enough to identify an attractive fundamental idea that is starting to look technically attractive, but often times it takes time for the idea to play out. Meaning, when you add time to the equation things become even more difficult - yet many investors and traders get sucked into buying options because of how much leverage and how profitable they can be when right. Sometimes, it's better to just be a seller of options rather than a buyer of them.
Excerpts from 2/21/2020 Newsletter Edition: Anticipation Vs. Confirmation - Positioning Power - Options Chains Often Don't Suggest What's Really Happening
Before I get into the meat of today's edition, I want to cover a few things I think can help every single trader and investor out there - no matter what your strategy might be. Whether you're looking to learn how these markets actually work, or you're simply looking to expand your already astute knowledge of how these markets work, there's something valuable in every section of today's newsletter to help you accomplish that.
First, I often talk about waiting for confirmation vs. trying to overly anticipate things too much all of the time. One might think those are two in the same when it comes to the equity markets, but there's actually a big difference between the two. Anticipating is jumping on something because of the way something is behaving in a minute or a day, while waiting for confirmation is actually waiting for something technically definitive to confirm itself before making a move.
All too often traders and investors will make knee-jerk decisions, only to end up being whip-sawed very quickly. Will they be right from time-to-time and capture more gains in the process? Sure, but hindsight is always 20/20. The truth is when a trader or investor actually waits for definitive confirmation, they're going to be right far more often than they're wrong. Sure, the more disciplined traders and investors are going to give up some gains sometimes by waiting for confirmation, but in the end they're going to consistently be a LOT more successful.
When it comes to something I call positioning power, I think it's prudent to wait for extremes for the timeframe and instrument in question. Meaning, when we jump the gun too soon (no matter what the chart timeframe in question is), we often can put ourselves in a position that's not optimal.
In other words, when we jump on a short or long trade too soon, and the idea in question moves quickly in the other direction we become trapped. Meaning, now we have to wait and hope for the idea in question to work itself back in the other direction. However, if one waits for an extreme, and then uses disciplined protective stops, they're often going to put themselves in a position of power. And, it's that power that allows them to not only feel more comfortable with the trade in question, but also gives them options.
Don't get me wrong, you could be the best trader or investor on the planet and you're still going to end up in unfavorable positions at times, but that's just one general rule I think everyone should consider before trying to anticipate something too soon.
Lastly, although I'm not a huge fan of options I do want to point out a big misnomer when it comes to the options markets. I see and hear it all of the time in and around the financial media, whereby people say they can tell what's going on with a particular options chain for a company or instrument.
You'll see and hear things like... someone bought a massive number of calls or puts with a strike price of X. However, what nobody really knows is whether or not that call or put purchase is a hedge against a much bigger underlying position - one that's actually meant for the opposite direction. Meaning, if someone buys a large number of puts, many might think that stock is going down when in fact it's merely a hedge against a much bigger bullish position in the stock.
So, just be careful getting sucked into relying too much on how many puts or calls are open or being purchased in an options chain at any given time, and more importantly rely on your charting prowess to determine what a stock is actually in a position to do.
Excerpts from 12/23/2020 Newsletter Edition: Stretching Gains and Flirting with the Markets' Overbought Conditions - Trader/Investor Psychology and Using Stops
While every trader/investor is always looking to achieve maximum alpha, it's never as much about the desire for alpha as much as it will always be about the risk associated with achieving it, and right now these markets have technically extended themselves to levels that will likely end up proving to be overextended within a fairly short amount of time.
It has been well documented here lately we're not all that far away from our near-term targets of $317 for QQQ and $388 for SPY. They've been the two primary index ETFs that have led these markets for years now, and that's been a good thing for most of you and us. However, it's important at this point to start questioning just how much higher these markets can go before we get a much bigger breather than anything we've seen since the early September selloff.
First, for those of you who been around long enough, you know we've been as good as anyone out there at calling the short and longer-term tops and bottoms for these markets. I warned everyone in the few months leading up to the selloff that ensued in October of 2018 and was pretty close to calling the bottom in December of the same year. We then called the breakout in October of last year, warned during the two months leading up to this year's February collapse, and then once again got pretty close to calling a perfect bottom in late March.
To be critically fair of my own technical analysis, however, I did not expect the big run that continued throughout this Summer. I strongly questioned these markets' ability to move all that much higher without first staging another big pullback, but instead they kept going until we finally got a big enough breakdown in early September to suggest a bullish reset, and thank God we continued to expose high quality names for some tremendous gains ever since.
What I'm working to say here is although stocks, and the markets in general, have a long history of moving much higher and lower than most would tend to think, I do believe we're fast approaching fairly concerning levels to suggest another looming selloff at some point soon enough.
Although nobody knows what will actually end up spooking the markets, the one thing we know is it won't be interest rates. Not yet anyway. Another thing those with experience know is that stocks go up, stocks go down, and nothing ever typically goes up in a straight line for long. Couple that with some very overbought technical conditions, and today's newsletter edition is warranted.
Further, when you consider the fact QQQ is now only 2.5% away from our near-term target and SPY is a little less than 6% away from our near-term target, it's important to know we're close enough to those targets to trigger at least a little cause for concern. Why? Because calling perfect tops and bottoms to the number are virtually impossible. As a matter of strong opinion, if one is within a few hundred points on the NASDAQ or S&P of calling a tradable top or bottom, and roughly a thousand points on the DOW, that's pretty darn good.
So how should traders/investors deal with all of it? While there's no question we continue to try and stretch gains from all of our current open ideas (ex SVM of course), our ongoing strategy of taking profits on the run-ups when they're there should continue to serve everyone well. Sure, some ideas will end up going higher on a short-term basis than one would have thought at times, but again nobody has the perfect crystal ball. Instead, it's all about risk management.
With that, I probably receive more questions about protective stops than anything else. Where to use them, when to employ them, and even if they're something traders/investors should trust using. The latter has everything to do with traders/investors having used protective stops before, only to have them taken out, and then watch the idea in question work its way higher.
Trust me when I say though, one person's protective stop is not going to be the target subject of market makers' as long as there's enough volume in the idea. Now if there's enough traders/investors with hundreds of thousands, or better yet millions of shares, sitting around a fairly specific protective stop level, that can be an entirely different story, which is why the old idea of support/resistance levels (when simply eyeing a chart without tools) are often take out to the upside or downside before the idea in question has a strong tendency to reverse.
In short, it's a modern day market maker tactic to clean up very large positions around old support/resistance type levels, and then reverse the idea in the other direction. Many of you here already know this happens all of the time. And, although I know many of you are very accomplished charting technicians, we've got a fairly high number of clients/subscribers who are not, but that's perfectly OK. It's part of the reason many use our analysis here from day-to-day, week-to-week and month-to-month.
So when and where should one employ a protective stop? The first thing you need to ask yourself is are you trading the idea on an intra-day basis, over the course of a few days, weeks, months or even years? That is so hyper-critical to answer first before one should ever try and employ a protective stop. Why? Again, it's not about having a perfect crystal ball - it's all about managing risk. So, you also have to ask yourself how much risk tolerance are you willing to accept in exchange for potentially higher levels?
Once you have answered that question, then you drill down into the chart timeframe in question. In other words, if you're intraday trading then it's all about those minute and hourly charts. If you're swing trading over the course of more than just a few days, then it's more about the daily charts and so on...
Lastly, the most important technical tools to effectively know when and where to place a stop have everything to do with price action, retracement/expansion levels, and then finally those key 14, 50 and 200 period moving averages for the chart timeframe in question, as well as those ever reliable exponential moving averages, or better yet those displaced moving averages we like to use so often.
It's also VERY important to keep the emotions of fear and greed out of the equation, because there's no place for the whole coulda shoulda woulda mentality when it comes to trading/investing. So, when something gets way too far away from those key moving averages on the chart timeframe in question, it's time to take the profits or employ an extremely tight stop.
If you're long an idea, and it starts to back up, then you employ a stop far enough behind the moving average you want to use depending on your risk tolerance. For some, and depending on how much you're up or down in the idea, you may want to use just behind a 14 period moving average, 50 period and so on, but again it's all about the chart timeframe you're trading.
Remember, there is never reward in stocks without risk, and more often than not the bigger the risk the bigger the potential reward. Therefore, it's far more about your timeframes, strategies and risk tolerance than anything else. And then, deciding behind what levels you're willing to accept in the event you or I are wrong.
Right now is clearly one of those times trader/investors should be addressing all of the above, because when these markets do finally decide to take a big enough breather there's the very high probability it's going to come swiftly. That's just the way these markets work anymore, and I seriously doubt that is going to change anytime soon. Therefore, it's hyper-important we make proactive decisions, and be completely willing to live with whatever the outcome may end up being.
Excerpts from 2/02/2021 Newsletter Edition: Most Important Rules to Trading/Investing Now and Forever
As expected, after achieving those last final short-term moving averages on Friday, all of the major indexes bounced sharply to close out the day yesterday. This once again proves a few of the most important rules to trading/investing in this current market environment: remain completely pragmatic/objective about what these markets are capable of, pay close attention to the technicals, and avoid relying too much on one's feelings/emotions.
Basically, all of the major indexes proved their resilience yet again yesterday, and they did it around very logical technical levels. As a matter of fact, it was those last key short-term moving averages yesterday that were expected to serve up a bounce, and possibly even take these markets on to new all-time highs.
Although we've clearly yet to achieve new all-time highs again, everyone should know by now what these markets are capable. Meaning, no matter what politics are suggesting or what the financial media is spewing, it's still all about interest rates, momentum and revenue/earnings - in that order. Those are the three most important components to the ongoing behavior of these markets, and that's likely never going to change.
Sure, there are going to be unexpected major geopolitical and black swan type events like 9/11 and COVID, but as long as nothing like that surfaces it's still all about the BIG 3 - interest rates, momentum and revenue/earnings. And, anyone that tells you otherwise doesn't have a pulse on these markets. Case in point, it doesn't matter who's President until the President or administration in question changes a policy that could have a dramatic effect on a sector, a stock or the markets as a whole.
With that, it was all about momentum yesterday. However, yesterday proved once again short-term index traders must remain very tactical and surgical - buying the extreme logical lows around the most important short-term moving averages, use tight enough protective stops, and then sell or short the big rips once the instrument in question has gotten too far away to the upside from its key short-term moving averages.
If you can't or don't have the time for that, it's always best to adopt the buy and hold strategy, or simply give an idea enough time to work itself out and then take the profits when they're there, because as long as you're in the right high quality names they're going to work out when it's all said and done.
This also brings me to another very important rule traders/investors should always adhere to: never chase anything higher or lower unless you're getting in during the very early stages of an expected upside/downside expansion. Meaning, depending on your trading/investing timeframe and strategy, it's best to take the profits on the big run-ups, and then let the idea come back to you. Conversely, when you're looking to short something, wait for the big bounce or run-up and short from there.
Although the buy and hold strategy should only ever be focused on two things (buying very good fundamentally attractive companies when the charts look good enough), the short-term trader must always deal with risk management and positioning - especially since things in this market environment are moving VERY quickly from day-to-day.
This is why I prefer to teach short-term traders to use the most important moving averages to make decisions. These markets are making big moves in a very short amount of time - sometimes all in an hour, so the bottom line is it's extremely important for the short-term trader to be proactive rather than reactive. Reactive traders are getting whipsawed in a New York Minute, while proactive traders continue to better position themselves from a risk management perspective.
I know this sounds so cliche but it really is all about buying low and selling high. Sounds simple right? Well, if you've been around the markets long enough, and watched the behavior of new traders/investors along the way, then you know greed, fear of loss, and the fear of missing out can make buying low and selling high a real problem for many.
Therefore, I'd strongly suggest everyone here take stock of their emotions/feelings, continue to stick with their trading/investing timeframes and strategies, continue to remain completely objective/pragmatic about all of the possibilities, and only participate in high quality fundamentally attractive names that look technically attractive at the time. Everything else isn't for me or for us.
If we all collectively do this, we're all going to be far more right than wrong, and more importantly consistent with our success over time - especially if we continue to manage risk accordingly and give the right idea enough time to work out. There's no question very short-term charts can be tricky at times, which is why long-term charts and long-term fundamentals always win in the end.
Excerpts from 2/09/2021 Newsletter Edition: How To Trade Small/Micro Caps, Biotech & Six Names to Consider - RPD On Deck - Markets Run Hot
First, many of you here already know I cut my teeth in this business in the small and micro cap space. I've done it all, I've seen it all, I've made every mistake one could possibly ever make, and I've had glorious winners all along the way. However, all of it has taught me that if one is going to speculate on small/micro cap stocks, he/she must adhere to a certain set of rules:
1) Don't believe the hype. Do your diligence, because the small and micro cap space is littered with companies that will never end up making it when it's all said and done. As a matter of fact, most end up failing over time.
2) Make sure the company in question has enough cash on the books to make it. If you dig into most penny stocks, you'll probably find you've got more in the bank than they do. That tells you right there to run from the idea, and run fast.
3) Be willing to deal with whatever volatility is going to surface in that idea. Most small stocks will gain and lose as much as 30% or more over the course of just a few weeks, and sometimes just a few days.
4) Make sure the company in question actually has a business model to change the world, change lives or change an industry. If it does, then refer to rule #3 above.
5) If you do decide to trade a small or micro cap stock make sure you decide in advance how much you're willing to lose, and where you'll cut the idea if it doesn't work out. Most only ever think about what they stand to make, only for the stock to end up cratering.
6) Also, decide in advance if you're going to stick with the idea no matter how well or poorly it trades, or if you're simply just going to date it for a relatively short amount of time. In other words, plan the trade and trade the plan.
7) Make sure the stock in question is showing some semblance of attractive technicals, and don't chase it higher. In other words, there's got to be something attractive developing on its chart before you consider jumping in.
The bottom line is if you adhere to those above rules (no matter how big or small the company might actually be), then you can catch lightning in bottle from time-to-time, and sometimes even generate life-changing returns. We've done very well over the years for those who've bought and held most of our suggested small cap ideas, but again it has everything to do with the above rules. And, the gains with those ideas over time typically never came without at least a little concern and frustration along the way.
John Monroe - Senior Editor and Analyst