[9.1] Lesson 6: stock pick: ETF, stock or basic call option (step 3)

Learn how to pick the right stock, ETF or option to buy in 3 easy steps:-

Step 1 – screen for uptrending stocks that meet basic fundamentals

Step 2 – analyze the watch list from above to qualify for options trading

Step 3 – short list and determine the instrument to buy

Step 1 was explained in Lesson 4 (http://trendtrader-kk.blogspot.com/2011/08/x-lesson-4-stock-pick-etf-stock-or.html) , where uptrending stocks that also meet basic fundamentals can be screened and filtered out into a watchlist. This watchlist can be further analyzed to match a set criteria and qualify for option trading (see Lesson 5, Step 2).

This article:-

Step 3

 How do we short list and determine which instrument to buy? From the analyzed watchlist in step 2, we have a number of “good” counters, selected sector ETF as well as the related options to buy. The next step is to use charts and technical indicators for buying or selling signals.

There are many schools and chartists on the internet. There are too many claims of success stories but how many of them are friends of yours? Do you trust your friends who made and are still making money from trading stocks or would you listen from a total stranger’s so called success story?

Let me try to help:

1. Make trading simple. Lesser technical indicators the better – candlesticks, Bollinger bands, momentum and moving averages will do.
2. Recognize some popular chart patterns – double tops, double bottoms, resistance and support.
3. Draw trend lines and boxes in your charts to check on your trades.
4. Make all trades mechanical to avoid emotions interfering with your decisions.
5. Practice strict money management rules        
• ⅓ of total capital each trade 
• Use money that you can afford to lose 
•  Leverage (margins or CFD) only to add to winning positions
6. Follow the current trend – i.e. buy call option when market is bullish or buy put option when market is bearish. So far, this is the simplest way for me.

The 6 above are my basic cardinal rules which I follow for my trading. It is important that we set some rules, pin them on your wall and follow them strictly otherwise we may end up losing a lot of money. Thinking of trading rules is more important than thinking of the money to make.

CANDLESTICK

Try this book:

THE SECRET CODE OF JAPANESE CANDLESTICK by Felipe Tudela published by John Wiley & Sons Ltd

You may also refer to: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_cand

TECHNICAL INDICATORS

Use a few indicators. Too many may cause confusion and multiple signals.

Try stockcharts.com chart school. It is free education.

 http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators

For starters who are still hunting around, try this combination:

Bollinger bands (set to 12 day period instead of the standard 20 day) to identify trend reversals and entry or exit opportunities

            Set 5 day simple moving average line for entry or exit signals

            Momentum – to indicate overbought or oversold situation (RSI too slow)

            MACD Histogram at standard setting – to indicate trend continuity (may also use GMMA if available instead of MACD)

CHART PATTERNS

So many of them but I suggest you just try to memorise and quickly recognize a few will do.

Try this:

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns

Recommended read:

TREND TRADING by Daryl Guppy

(Aussie Guppy is also the person who introduced GMMA or Guppy Multiple Moving Average lines in many charts today. This GMMA provide excellent signals for trend continuity where we can decide to hold or close a trade).

EMOTION & MONEY

Best for us is to trade with our own spare money. Money that you do NOT need too urgently for the next one to 2 years will do. I strongly suggest not to trade with borrowed money – e.g. margin account, CFD, back overdraft or loans until one is an expert more or less.

Amount per trade may vary from person to person but I suggest that ⅓ of total capital is the best for starters. Some gurus encourage 10% but I feel that such a small portion can make one too relax and lose focus. Maybe the max up to 20% (split into 5 portions).

STOPS

Setting stops is the most important practice. It takes out the emotion in us when sell signals appear otherwise we may be clouded by emotions and become greedy or rely on hope. When sell signal appears, SELL. Holding on may result in losses. Prices on the Stock Exchange are all perceptions. There are no fair values because the prices are reflection of the people’s feelings. If all of us feel bullish, then the market is bullish!

Make all trades mechanical.

 Recommended read:

How I made $2 million in the stock market by Nicholas Davas (www.kensingtonbooks.com)

(Synopsis: He used a simple box theory which can be used in our charts to show resistance and support easily)

Master the Markets by Tom Williams published by TradeGuider systems

(Synopsis: This book is about volume spread analysis. Price & volume action is the key to our chart reading. By reading volumes, we can identify smart money flow.)

GOTO NEXT LESSON:

How to buy options
Read charts with aid of technical indicators with example on qualifying the criteria for a stock option.

http://trendtrader-kk.blogspot.com/2011/09/94-how-to-buy-options-with-aid-of.html

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