A Long Term Investor - Do You Want to Be One?

In this Edward Jones Perspective video, Investment Strategist Kate Warne makes the case for long-term investing and discusses these time-tested principles

Introduction
Generally, long term traders/investors hold their positions for a year or more. However in this article I am going to consider a long term trader as a person who holds his/her positions more than a day. This therefore, include those traders who consider themselves as swing traders. I believe that this modified definition is necessary due to these modern-day type of occurrences commonly known as 'flash crash', 'insider trading', fraud and 'hacking'.

Once you make the decision to be a stock market trader or investor it is important for you to choose what type of trader you are going to be. Assuming you have made the decision to be a long term trader you must pursue a line of study that will make you knowledgeable of the area of trading you have chosen. This line of reasoning is applicable to all forms of trading.

Fundamental Analysis
Go to investopedia.com and chartadvisor.com and learn as much as you can about stock fundamentals and at least the basics on technical analysis, respectively. A long term investor should focus on the story/plan behind the development of small and mid cap companies. Even some large cap may generate some interest due to management, unique products and/or service etc. In this case you purchase the stock of the company you researched and accumulate the stock over time, every time the stock price falls. Check out the blog post I wrote about Apple in Sept of 2007 at Investor Place Blogs.

Stock Split Strategy
Swing traders may study stock split strategies and implement their choice. Even though investing is risky, in a normal market environment you could make good profits with stock splits within a few months. My favorite strategy is buying stocks that are about to split. You monitor and research these stock split announcements at  The Online Investor and at Yahoo Finance, respectively.

You buy the stock before it splits. The more shares you get after the split the better. If the stock chart before the split was gradually increasing and lacks volatility the better. Hold the stock for up to a few months. In many cases if you did your research well you will double or almost double your money.

Obstacles and Concerns about Long Term Trading Success

Many traders adore Warren Buffet because of his success as a long term investor. I believe that what he has accomplished is remarkable. Given the distrust, greed, and immorality that are constantly showing their heads on Wall Street it is very difficult for a modern-day long term investor to replicate what Mr. Buffet has done. Frankly speaking, I just don't trust the market on the long term even though it has trended higher and higher over several years.

Therefore, given the above it seems logical to be a long term investor. Buffet's accomplishments and the history of the market are strong pros - in favor of the long term investor.

However, let us look at some cons that are obstacles that I can't get over to be a long term investor. First, to be such an investor you must have good tolerance for risk. I find it very difficult not to sell  when I see my stock price falling day after day. If you start with a small account and are faced with a series of stop loses in the beginning it could be very discouraging.

Secondly, insider trading and fraud are alive and well on Wall Street. Michael Milken paid a large fine but his family kept over half a billion dollars. The Enrons and the Worldcoms are alive as well so we heard of Bernie Madoff and the recent scams as discussed in the video above. Don't believe the commentators in the video who are giving the impression that the penalties are enough to halt insider trading and the mess on Wall Street. It was even legal for the members of our government to get rich on insider trading.

Thirdly, I do not believe any stats that comes out of Wall Street or the stats from our government. If the truth is known about the Federal Reserve Bank there will be an immediate international financial crash. The major accounting firms that audit the very large companies are not independent. If anyone believe they are, then I own the Brooklyn bridge and it is up for sale.

Fourthly, the Securities and Exchange Commission, the other security regulating bodies and our government are clueless about what is going on at Wall Street and on the Internet. This was shown in testimonies to Congress in the Madoff scandal and the recent 60 Minutes documentary of the $100 million stolen from the banks by hackers in 24 hours. The investment bankers and the hackers are so much smarter than the regulating authorities it is comparable to your kid little league team going up against the NY Yankees.

Finally, given the current financial environment of major insecurities a long term investor may wake up the next morning and find out that most of his/her portfolio if not all has disappeared overnight. Stop loss or diversification will not protect you against an overnight flash crash. In the latter part of 2008 when the subprime loans and credit default swaps became a part of our vocabulary reports show too many people who lost 33% - 66% of their retirement when they were about to retire.

Our best bet is to stay liquid and have accounts in various 'too big to fail banks'. In the interest of preventing a global financial catastrophe, the Federal Reserve along with the world governments will do what they always do to prevent such events from occurring.   

Seven Rules For Success vs. The BluePrints Of A Master Trader

In this short video Brian Tracy reviews what he believes are the 7steps to success for anyone, no matter where you are currently in life.

Introduction
I heard some sayings some time ago and the more I think about them, the more I see them fitting a trader who has failed. One saying says: 'If you fail to plan you are planning to fail'. Next: 'Proper planning prevents poor performance' (5 P's). And then: 'Plan your work and work your plan'. Wow!

Therefore in my journey - From Virtual Trading to Reality, the more I implement what I now call the 'The BluePrints of a Successful Day Trader', I realized that it is impossible to succeed if a trader does not take the following actions...

Plan!
A trading plan could be very simple and short or very long and complicated. I prefer a simple plan with details. In developing a plan it is a good idea to state your trading goal and then write down what you need to do to accomplish that goal. Incidentally, those writings are sufficient to be your plan. Your plan to become a successful trader includes: become educated about the field of trading, practice trading, and master it. You should be able to simplify your plan so that you have a daily plan as you set out to accomplish your goal.

Work!
Once your plan is in place you must work it otherwise it is useless. To become a successful trader you must master your craft. This implies educating yourself; a lot of practice, more practice and then some more practice. Use the luxury of free virtual trading, and paper trade as if you are trading in a real account. Review your work and find out why some trades go bad as some will always do. Then improve and learn from your errors/mistakes.

Be Patient!
Once you turn on your computer to practice and later to trade in a real account you must avoid all distractions no matter how simple it may be. Stay focus as you seek candidates for trading. Wait for your favorite chart patterns and trade them only. Be focused as a laser beam especially when you are in a trade. You do not have to trade if the conditions for trading are not in your favor. Wait for another day!

Execute!
Like driving, many people get into an accident because of their indecision. Once you have determined you are going to make a trade, make the trade, period. When the trade is over then you can do the analysis that's necessary. Enter and exit the trade as per your predetermined plan. Absolutely no modifications during trading. Modifications are done when you review and analyze your work.

Be Disciplined!
Be disciplined can't be over emphasized. It includes focus, but it goes even further. Your emotions must be managed and have no part in a trade. Be very much aware of fear, greed and what you think. What you feel about a stock has nothing to do with your trade. You must only react to what your charts and indicators etc. are showing. Do not act on what you think but on what is.

Be Consistent!
Before you move on from one stage to the next you must first master that previous stage. Think about doing a long division Math problem. In order to do it, it is important that you can multiply and do subtraction. Once you master multiplying and subtracting then you can move on to dividing. The same can be said for trading. Master a strategy before your move to another. Then, after you mastered a strategy just keep on doing it until it becomes an automatic process to you. Do not change until it fails as it may because of the field you are in. It is good practice to quit trading once you have met your daily goals.

In summary many people like to make money and are intrigue by the stock market. They have heard many good stories about the stock market but have forgotten the many horror stories. What I have discerned is that many want-to-be traders fail because of lack of proper preparation to trade.

All the best and good luck in your trading!

Part III - How Small Traders Overcome Inherent Disadvantages in Day Trading

Gary Ender from Candlecharts.com shows you how to use candlesticks with pivot points for better trading results.

Continued from Part II...

Introduction
I received the following from Yogesh, a very good virtual trader on howthemarketworks.com. He was unable to post it as a response to my blog so he forwarded it to me. It is an excellent commentary so I am posting it in its entirety and I am responding 'in blue' to it paragraph by paragraph with resolutions to handle the disadvantages to small time traders. Here are his comments and my response: 

Tips
1. Select stocks between $5-$15, with high volume and volatility for quick results. Larger the number of stocks more will be gain/loss. Playing short gives double the profit in this contest (with no relevance to real trading).

In real trading you need to know if the stock is shortable, marginable, and if the stock is available for shorting. Direct access trading software do provide this information.

2. Don’t leave any stock position open overnight. At the end of every day as a day trader only cash shoud be in your account. If the stock gaps up/down overnight you will have big losses. Up is good, but what is the guarantee!

I agree totally! This is not applicable to swing/long term traders.

3. Use 2 different browsers (preferably Fire Fox and Int. Exp.) for short and long to save time (for this contest).

I even try this to trade in two portfolios. In doing so you save a few clicks.

4. Up/down trend lines in MACD, rsi2 and crossover of moving averages is good guides to decide buy/sell (Study this at investopedia and onlinetradingconcepts.com.

This site has 5 chart formations they claim that all traders should know. The information is very good: chartadvisor.com

5. All the websites I mentioned here are free.

I agree.

6. Study Doji, Bullish and Bearish Engulfing, Hammer, Inverted hammer, Hanging man, Morning star and Evening star for reversal in price trend in the charts. (onlinetradingconcepts)

These are candle stick chart formations and you may research YouTube for help on these formation also.

7. Especially for Elena, you experience drop of price as soon as you buy, and price rise as soon as you short, because you are buying at the top of the uptrend line and selling at the bottom of down trend line.

In understanding indicators, chart patterns, and candlestick patters you will be able to avoid such mistakes. Also, if what you are doing you are getting the negative result on a consistent basis, then trade against your original intent. For example: If you were planning on buying long, then sell short instead and vice versa.

H A P P Y T R A D I N G

All the best!

Part II - How Small Traders Overcome Inherent Disadvantages in Day Trading

This is a very important video as it explains how to best use our free videos for inspiration and how to safeguard you against too big losses testing out new ideas. For example the use of Simulator will protect your trading capital.

Continue from Part I...

Introduction
I received the following from Yogesh, a very good virtual trader on howthemarketworks.com. He was unable to post it as a response to my blog so he forwarded it to me. It is an excellent commentary so I am posting it in its entirety and I am responding 'in blue' to it paragraph by paragraph with resolutions to handle the disadvantages to small time traders. Here are his comments and my response: 

There are many other things that are different here. So don’t think that if you do well here you could make money in real trading. Mack’s blog has good things to say, and what to do. But he has not told you how to do that and where to find the information. I will try and give you whatever I know and practice.

The above is true, however, I entered some related websites in the comment section of the contests and I will be entering relative links to the blog. As a facilitator, I wanted the traders to do some searching for themselves. Also, I do not share my trading set up and the proprietary indicators that I use. I believe each trader has to choose or develop his/her own set up.

Charts and Portfolio
It is very important to follows the charts and know the indicators. You can find them at freestockcharts.com. Find different indicators that suit you and study them at investopedia.com and onlinetradingconcepts.com. I use volume, MACD 12/26, rsi2, Exponential Moving Averages 6 and 30 (i.e. 6 days and 30 days), Bollinger Bands and Stochastic Fast. You may make your portfolio with freestockcharts.com.

I did share about freestockcharts.com before. I even mentioned their premium paid service called TC2000.com. It is similar to the free version but there are many more options. To subscribe to TC2000 is about $100 per month. I am a subscriber. You can even go to the Worden Brothers website, worden.com and watch free Webinars to learn how to use the software and to understand the different features such as indicators and what they mean etc. 

Selection of stocks
1. Go to barchart.com and under Signals, you will find Top Signal Stocks and Bottom Signal Stocks. Make 2 separate portfolios for use of Long and Short. Choose stocks with daily volume of 500,000 and more only. Below that, in this contest, it will go to delayed orders. Higher the volume more volatile it will be. Lower volume stock price change slowly and keep you waiting for long time for a price change. Next to Signals is Hot Stock topic. It gives the top 10 positive/negative moving stocks at that time. Playing these stocks is very useful in this contest.

I use the scanner in TC2000 or if you use the free version there is a scanner you can use there too. My scanner is real time, auto updating, and the best stocks according to my criteria always come to the top of the results. I simplify my set up as much as possible.

2. Yahoo Finance, under Market Movers, gives most active, %gainers and %losers, that are very good guide for selection of stocks. (Remember the volume).

Gainers and losers are old and after the fact information. But you may use the info for trading second wave movement or the pullback and the comeback. My scanner provide me with all the stocks I need to trade. I only trade one stock at a time and every time I trade have from at least 6 or more candidates to choose from.

3. Its a good idea to keep track of earnings status of financial results. Its reaction gives sure up and down

This may have some benefits to long term traders. I do not trust the stock market. I do not listen to any news, period! I tune out all noise, and I focus as a laser/robot. All the information I need are shown on my chart set ups. I strive to be very, very simple.

4. CNBC will give you an idea as to how the market is going to open that day at opening. So you can select long/short play.

This may have some benefit to swing traders or even some day traders. I am a scalper. See response to #3 above.

Continue on Part III...

Part I - How Small Traders Overcome Inherent Disadvantages in Day Trading

Expert trader Linda Raschke discusses her pre-market preparations, technical and fundamental analysis, and important steps traders should take to prepare for each trading day.

Introduction
I received the following from Yogesh, a very good virtual trader on howthemarketworks.com. He was unable to post it as a response to my blog so he forwarded it to me. It is an excellent commentary so I am posting it in its entirety and I am responding in 'blue' to it paragraph by paragraph with resolutions to handle the disadvantages to small time traders. Here are his comments and my response: 

 

With Reference to Howthemarketworks.com Contests

I can't add to your blog. If you think it is fitting can you please include this in your blog that it may be beneficial to the participants of the contests on howthemarketworks.com? I love to share what I know with people, if it can be of any use to them. I would be more than happy if they benefit from my experience.

I would recommend that you all to read Mr. Mack’s blog at mainstreetusa1.blogspot.com . It is very informative. I will like to mention here that this competition is not like what actual trading is. This is a good way of learning different trading methods. There are certain glaring differences between actual trading and virtual trading, which I know about and would like to mention them here.

I agree.

The Contests are Very Different Because:
1. Order execution here is at market price, whereas in actual trading it is on ask/bid price, which may be more or less than 1 cent. So here you can cash-in on 1 cent, you can buy a stock at $8.81 and sell right away at $8.82. But you will have to make at least 3 cents to gain 1 cent, in actual trading.

Some readers may have difficulties understanding this point. In summary, when you trade live, commission ($5) is paid first. Then, the price of the stock you buy is at least 1 cent greater than the price you will get if you sell at the same time. So if you sell as soon as you buy you will loose the cost of round trip commission ($10) and 1 cent by the amount of shares traded (3,000 shares x .01 cents = $30). My goal also include to be able to predict that a stock that I am about to trade will increase or decrease in price by 3 cents or more. To date my predictions are nearly good.

2. There are no worries about buying/selling large a number of stocks here, whereas in actual trading, as soon as you put large stocks on sell/buy, the market will react and the price will change with your order. Your order may not be filled at your desired price. It may not be filled fully , for a long time because there may not be enough buyers or sellers at that time.

To resolve this issue, trade no more than 5% to 10% of the shares currently trading. Also, select only stocks that their current volume exceed 500,000 to 1,000,000 shares. If you still have difficulties, then trade stocks with even higher volume, may be 10 million or more.

3. Stop loss orders put up by small traders, like us, are immediately taken up by market makers and then it comes back to previous market price. Say the market price is 5.81 and you put a stop market order at 5.71, your order is immediately filled at 5.71 and then the price returns to 5.81. Then you feel cheated and fooled. I have experienced this more than 75% of times, before I stopped using stop orders in real trading. In this contest it is fairly dealt and gives you the feeling that it works.

In real trading as a day trader do not enter a stop loss into the trading software you are using. Instead, keep your stop loss in your mind, or draw a line on your chart where your stop loss would be. My stop loss is very simple, if I predict a stock to go up and after I make the trade it turns down, -1 cent, -2 cent; then I would exit the trade; and vice versa for shorting. If I am in this trade, as soon as there is any indication of a red bar appearing in conjunction with my other indicators; I would exit the trade.

4. You can put your short sale orders to use full available money here. But if you do so in actual trading, on a slightest loss you are reminded by the broker to put additional money, lest you’re a/c could be restricted.

This is an easy fix. Just do not use your entire balance to short trade in real trading. Some US brokers require $25,000 in order to day trade others even ask for $30,000, however there are offshore brokers such as SureTrader.com and AllianceTrader.com that only require a $2,000 deposit to open a margin account to be able to day trade.

Continue on Part - II...