Are You a Trader or an Investor?

Sounds like a confusing question, doesn’t it? Trading and investing are two terms that are used so interchangeably that it’s difficult to know the difference. In the language of the stock market, there is a big difference; and for those that confuse stock trading and long term investing, the difference can be painful.

There isn’t a big secret about the difference between the two. First, it is important to say that neither is bad nor wrong. Each is a different approach in a stock trading plan and the problem enters when someone starts out with one philosophy and switches to the other.

Let’s start with the difference between stock trading and investing long term in a company:

• If you come to the conclusion that you should purchase a particular stock because of your technical analysis, you are trading stocks.
• If you come to the conclusion that you should purchase stock because of your fundamental analysis of the company’s future prospects, you are long-term investing.
• If you buy or sell stocks because of short-term movements in stock prices, you are trading stocks.
• If you don’t sell struggling stocks because the outlook says “this is just a temporary downturn”, you are long-term investing.
• If your only interest in companies is whether you should make a quick purchase or sale of hot stocks, you are trading stocks.
• If your interest in a company is its impact on your stock portfolio, you are long-term investing.

Simply put, if you invest in stocks, you are a stock trader; if you invest in companies, you are a long-term investor. Again, neither of these philosophies is bad, both are looking for profit, just in different ways. The confusion between these two starts not when things are good, but when things get difficult. To make money investing in stock when things go bad, it is important to have stop loss strategies in place. Stock trading says to set a percent target and sell the stock if it reaches that level to minimize the loss. Long-term investing looks to first determine the reason for the fall, and then decide what the long-term impact on their portfolio is. If it outlook is bright, the investor will probably stay with the stock. If the future is bleak, it may be time to sell.

The problem is actually more of an emotional issue of greed and fear than anything. Since stock traders usually look at the daily trends and long-term investors focus on forecasts, making decisions outside of their expertise can be costly. If a stock trader decides to hold a struggling stock, he or she is less likely to understand the dynamics behind a downturn. If a long-term investor decides to quick-sell, he or she may miss the long-term implications by forsaking the investment philosophy.

Whether you choose to be a stock trader or a long-term investor, it is important to develop a solid stock trading system or stock investing system that coincides with your decisions and goals. Being a short-term trader or long-term investor is great, just be sure you know the difference
 

It’s so easy to do, it will surprise you. The excitement of joining the world of investing, the opportunity to turn your $500 into millions, and the chance to impress your friends make it irresistible. You don’t know many stock market terms and you have no clue about a productive investment philosophy, but you are ready to go. Are you really? Even if you’re an investing veteran, it won’t hurt to refresh your memory. We’ll start with the basic types of investment strategies: growth investing, income investing and value investing.

Growth Investing

The name says it all; growth investment is the investment strategy of looking for the big winners in the stock market. Growth investors are looking for companies that traditionally have high growing earnings. In theory, high growth equals high stock prices and in turn, high profits. People involved in growth investing take their risks wagering that young, upcoming companies will break through and become leaders in their industry. When you think of this investment strategy, think Google. Google stock is a perfect example of a growth stock, as were many of the technology stocks in the 1990’s.

Many growth companies applicable to this investment strategy started with a dream, an idea and very little operating capital. They were able to overcome the obstacles and become strong profitable companies. Companies like this can achieve initial success but tend to be limited by capital. As they start attracting investors, the results can be very good. This investment strategy offers risk reward ratios that are quite drastic. While the rewards can be very high in growth investing, the risks are high as well.

Income Investing

Income investing is the most conservative and easy to understand investment strategy. Income investors target companies that consistently pay high stock dividends. This is a preferred stock market strategy for those around retirement age. This investment strategy looks for companies that tend to be large and well-established. There is always risk in stock market investing, but income investing is the most conservative investment strategy; in fact it is also known as defensive investing because it tends to protect the trader.

Value Investing

This investment strategy is a search for one thing; investors try to find stocks that have been overlooked by the rest of the market. While this doesn’t necessarily mean they are low priced stocks, it does mean that for whatever reason, the market has undervalued a particular stock. Many times, a stock gets overlooked while investors chase profits in another company in the same stock sector or a similar company that is perceived differently by investors. Technical analysis is important with such companies since an investor doesn’t want to confuse undervalued with under-performing. A value investor can look at the price/earnings ratio as one guide to the value of a stock. The hope of the value investor is that the market will recognize the worth of the company and its stock will be bid up to true value, realizing a profit for the trader.

Conclusion

These investment strategies are all beneficial to the successful investor. The significant difference between them is their level of risk. Part of formulating your trading plan is identifying your current risk tolerance. It is likely that a younger investor will have a greater tolerance for risk due to a greater time to make up for any losses, while an investor close to retirement might choose a conservative approach to make money yet better protect his or her investments.

To see why stock price history tells successful traders when securities are oversold or overbought, we must first define the meanings of “oversold” and “overbought”. An oversold condition can be defined as the price where sellers will be replaced by more buyers who are hunting for bargains or looking for profit opportunities by buying securities when their prices bottom out. Overbought conditions occur at the price where buyers are replaced by sellers for a position in that stock. This is similar in theory to the economics concept of “supply and demand”.

When analyzing chart pattern reversals to better estimate price resistance and price support levels to help you exploit profit opportunities and to handle your trading decisions using stock price history, any stock chart profile can be reviewed. If you are buying and trading options, stripping dividends, writing covered calls, or even writing LEAPs, you can apply this regularly used information to your advantage.

So exactly what happens in the real world and how do the outcomes of stock price history translate to stock chart patterns as they relate to price points or plots?

A price level on a stock chart profile where we can expect an increase in the demand for a security, where the buyers take over as the weak sellers fold, is indicated by support (bottom price support). How do we know this? We know this by identifying the previously documented reaction to a price level in the chart’s stock price history. While learning how to read stock charts, we see that for any stock there are certain price levels where the selling pressure slows down or subsides, and the price trend shifts and reverses as stock price increases. We can assume, when this happens, that this price level will retain its significance when the price approaches that level again in the future.

It is important to note that all recorded plots at the end of the day represent the capital buying and selling net results of investors or institutions. Thus, it is very clear and factual. A bottoming price is known as the price support level, because the stock begins its recovery and the security’s price is supported at this level. Conversely, the overhead price resistance is the level where the security price has shown an inability to rise anymore, and a reversal to the downside can be expected. The best technical analysis tool to review for that price level is the RSI technical indicator.

When examining the stock chart patterns of hundreds of high quality, similarly profitable companies, you would notice that most move up and down regularly, if not predictably, with an upward long term bias, and that there is little, if any, similarity in the timing of the movements between the stocks themselves. This is the “stock volatility” that most people are afraid of and that Wall Street loves them to be afraid of.

It can encompass practically everything or be narrowly confined to certain sectors, it seems that either can be the case. The broader it becomes, the more likely it is to be classified as either a correction or a rally. Most of the time, there will be one or two of each in any particular year. This is considered normal in the stock market community. Don’t take it for granted when it goes up, and pay close attention to it when it goes down. Learn to live with stock volatility in the uncertain times, work with them in whatever direction they move, and you may eventually tame the beast!

It may come as a surprise, but it is this natural stock volatility, caused by hundreds of variables political, economic, natural, or human greed and fear, that is actually the only real “certainty” that exists in the financial markets.
Call it foresight or hindsight if you want to argue the point, but a view of fundamental and technical analysis in the longer term removes any guesswork and indicates fairly clearly a trading mentality that keys on the natural stock volatility of hundreds of equities. During corrections, consider these simple facts:

1) Don’t be in a rush to fill your portfolio, but if cash dries up before it’s over, you are doing it “correctly”.
2) Steep and fast corrections are better than the slow attrition variety.
3) Always accept even half your normal profit target while buying opportunities are plentiful.
4) When everything is down, don’t worry so much about the price of individual holdings.
5) Although the sellers outnumber the buyers, the buyers intend to make money on their purchases.

Volatile markets create opportunities with every trend change, but you have to be willing to buy or sell to get the benefits. It is necessary as a first step to realize that both “up” and “down” markets are forces with great potential. A proper attitude about the “down” markets will make one appreciate the “up” markets even more. Most stock market strategies demand answers to unanswerable questions, with an attempt to be in the right place at the right time.
Uncertainty regarding decision-making isn’t going to work. To be a successful trader, investment strategies require an understanding of the disciplined rules of portfolio and money management. Transitioning back to individual securities help you move toward your goals. Most of the time, the opportunities are out there. You just have to recognize them when you see them!

If you will learn to live with some new stock investing concepts for dealing with this investment game and its stock volatility, and can live in harmony with them for a few cycles, you will soon be buying good stocks, both old and new, at lower prices during corrections, and take reasonable profits on.

The psychology of investing not only affects individual investors but also affects the market as a whole. Many investors often underestimate or are unaware of the affects that our emotions have on our return on investment. Many well educated and competent traders lose money due to trading anxiety and trading emotions. In today’s article we will discuss various emotions felt everyday by online stock investors and how each emotion affects trading decisions and trading performance.

The Psychology of Investing Emotions

Greed and Fear

Greed causes traders to buy at high prices or buy a large amount of the same share, therefore increasing risk. Fear causes investors to exit the markets too early causing a loss of otherwise attained profits. Traders suffering from fear are afraid that the price will decrease further so they get out before the timing is correct, instead of letting the trade play out.

Overconfidence

Traders who are overconfident tend to trade more rapidly and tend to overtrade. These traders lose money in commissions, taxes in addition to simply losing out on trades themselves due to the illusion of control. Greater participation in trading stock makes some traders feel more in control even though they are not. These traders also tend to invest in smaller and riskier companies and lack portfolio diversification.

Herding

The psychology of investing tells us that many investors tend to follow the crowd. They hear of hot stocks and they jump on the bandwagon only to lose money. What they fail to realize is that those stocks were hot until you and everyone else in “the herd” heard about them. Pass on these hot stock market picks. Even if they were money makers at some point, that time has passed. Find your own stocks to invest in based on your own proven research and analysis.

Confirmation Bias

Too often investors believe what they want to believe. We pay attention only to the information that supports what we believe, and ignore information that does not support what we “think we know.” Confirmation bias directly results in poor investment decisions and a loss of profits. An example of confirmation bias is when we become attached to a certain stock. Perhaps it performed very well in the past so we ignore all signs that it is currently not performing as well as it did and we invest anyway.

There are many factors to consider when studying the psychology of investing and how it affects stock traders everyday. Successful investors understand investment psychology and all it entails, they have determined their strengths and their weaknesses, and they proactively practice and develop the skills necessary to controlling their trading emotions so that they are successful in the stock market.

Learn more about Eliminating Emotions; The most profitable skill that can’t be taught!

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Market Direction

“If this trading system works so well, why can’t I make money with it?” Have you ever asked yourself this question? It would seem logical that a proven trading technique should work for everybody all the time. What is the element that is different between somebody using a trading technique successfully and somebody else using the technique unsuccessfully? Emotions!

Being taught the mechanics of a successful trading program is fairly easy. Unfortunately, this education usually assumes investors will automatically implement the program based upon controlling their own emotions. Most trainings do not address this very important element of investing. Why? Because most investors want to hear how easy it is for them to make money with a new trading technique. They do not want to hear about the difficulties they will run into when utilizing any trading method.

A major facet of successful investing involves eliminating fear and greed from the decision-making process. This is the most difficult part of successful investing. Rational decision-making gets thrown out of the window when it comes to making investment decisions. Learning to control our emotions is the most difficult aspect of successful investing. We have to teach our own thought processes to respond completely different than the normal emotional reactions. Most investors do not even know they have to address this problem, let alone correct it.

Learning how to trade successfully is a two-part process. Implementing the correct executions based upon the information provided from your trading program and controlling your emotions while the trade is proceeding. Learning how to use candlestick analysis is easy. Learning to control your investment emotions becomes much easier when using candlestick signals correctly. The Candlestick Forum will be spending more time showing investors not only why and how candlestick analysis is profitable but also demonstrating what each investor needs to know about their own emotions to make investing successful. Look for the new e-book.

Does candlestick signals produce consistent profits? That may be a slightly different question than does candlestick signals consistently produce profits. Candlestick analysis is the proven investment technique that puts the probabilities of being in profitable trades in the investors favor. This does not necessarily mean the results are in a consistent style of return. It merely places an investors funds into situations where the probabilities are likely to produce a profit. This is why using a consistent money management system is important. Not every trade is going to work out as expected. There will be losses. However, based upon the results that candlestick signals have produced over the past 400 years, when all aspects of candlestick signals are in alignment, the total results should be a strong positive  return.

This has been  clearly illustrated in these market conditions. The morning and afternoon member commentary should have conveyed market conditions that are not overly bullish. Somewhat bearish as a matter of fact! But during the past few weeks, there have been excellent profits made by being in the correct sectors. The identification of these sectors were strictly due to the information illustrated from strong candlestick buy signals. The shipping sector and the mining sector have produced excellent profits over the past few weeks.

DOW

Candlestick signals and patterns are created by investor sentiment. Candlestick price patterns reveal information that most investors overlook. Common sense! A bullish price pattern  developes for a certain reason. It becomes more pronounced when the general market conditions are bearish. Simple logic implies that if the general market trend is down and a price pattern in a specific stock is moving positive, buyers are entering that position with the knowledge the rest of the market is selling off. EYE is a perfect example of utilizing a price pattern, a Fry Pan bottom. This candlestick pattern clearly illustrates bullish sentiment coming into the stock price. This was occurring when the Dow could clearly be seen as in a negative trend. The Candlestick Forum recommended this position based upon what the pattern was revealing. Was there any knowledge that a buyout bid was in the making? Definitely not! Unless any of us have an extensive research department to monitor each and every opportunity in the market, the best strategy is to use a trading technique that reveals what other investors are doing, Candlesticks!

EYE

EYE produced better than 150% return in a three-day period. Obviously, this does not happen all the time. The important fact is that the candlestick signals/patterns allowed for the analysis of the possibility of a big price move. Having the good fortune of being in the right place at the right time is a result of the probabilities created by these patterns. It does not take a large number of situations such as this to produce a much better return annually than other trading programs.

Learn how to use candlestick signals correctly. The proper use of money management and emotional control produces a much greater potential result than any other trading program available.

Chat session tonight for members 8 PM ET.

Good investing,
The Candlestick Forum Team

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Online Training Sessions with Stephen Bigalow

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January 24th & 25th, 2009
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This Week’s Special – NEW RELEASE!

Stephen Bigalow’s latest ebook on Eliminating Emotions retail price of $129 reduced to $69 for our Introductory Special Price to Newsletter Subscribers

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Sell Stock and Buy Stock with Technical Analysis

There is so much to technical analysis that it takes many investors quite some time before they have a full understanding of it concepts and terminology. Once understood, however it can lead to successful trading and great profit potential. In today’s article we discuss important steps that every investor should take if looking to sell stock or buy stock using stock technical analysis.

Keep it Simple

You may become overwhelmed at the number of technical indicators available to investors to use when short term stock trading. You should have an understanding of the majority of them however you should not use all of them when you are trying to trade. You should use two or three in conjunction with one another. Some of the most popular technical indicators include the moving average, candlestick patterns, as well as support and resistance levels.

Back-Test Technical Indicators

Investors should back-test their technical indicators against historical data. You should do an ample number of tests in order to develop a trading system that works for you.

Paper Trade

Stock traders should practice paper trading before trading with real money. Investors should sell stock and buy stock using their trading plan and technical indicators on paper first in order to ensure that they have a plan for success in place. Online paper trading is very popular among investors these days. Just be sure that you don’t develop a fear for stock trading with real money. You will need to enter the market at some point! You will also need to work out the kinks with our trading plan in order to tweak it so it works to its full potential.

Stop Loss Orders

Just as you should know your entry points, you also need to set your exit strategies. Investors use stop loss orders in order to do this. This prevents the investor from holding onto a losing trade for too long with the hopes that it will reverse. While you still lose, you are limiting your losses significantly through understanding and implementing stop loss strategies. You must however be sure that you practice discipline and follow your strategy when you sell stock.

Many investors have found that technical analysis tools are extremely helpful when investing in the stock market. Keep in mind many investors opt to utilize the tools associated with fundamental analysis in order to practice long term investing. You can do both if you would like. It really depends on your philosophy and what you feel comfortable doing.

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Market Direction

Let the market tell you what the market is going to do! This is professed by the Japanese Rice traders. It may seem like a very simplistic statement but it has some very powerful consequences. As observed in the Dow chart and the NASDAQ chart, the recent pullback looked exactly like the pullback of mid August. After the pullback, there were a couple of indecisive trading days. For the candlestick investor, this provides valuable information. One of two things was going to happen. Had the markets traded lower after those indecisive trading days, breaching the potential formation of a trend channel, it would be obvious the bears were in control.

As was witnessed, after the indecisive trading days, the small Spinning Top followed by a small Bullish Engulfing signal, the trend started moving back up. This made for a situation where profits could confidently be made. The positive trading of Thursday, Friday, and today confirmed the upward trading channel was still the predominant analytical factor. Having that knowledge, made easier to see with the candlestick signals, alerted the candlestick investor to close out short positions and build up the long positions of the portfolio. The visual aspects of the signals and the trend makes for easier and more decisive decisions.

DOW

The pullback of last week appears to be profit taking. This short-term selling atmosphere, prior to the last three days, has created Jay hook pattern’s. This now allows for the exploitation of the next price move. Knowing what a Jay hook pattern foretells allows an investor to pinpoint where the most powerful price moves may be occurring. As demonstrated in the XIDE chart, the strong price move was followed by a pullback and now the new buying can be witnessed.

XIDE

Knowing the correlation between the first wave and the third wave, an investor to develop the appropriate investment strategy to maximize the profits from the potential next move. This could either be buying stocks or buying options strategies. Understanding what a pattern will produce creates more than one advantage for the investor. It not only identifies the appropriate time to be reestablishing a position, it identifies which price moves should have more strength than a conventional price move. Wave three can be measured based upon the magnitude of wave one.

The Scoop pattern also is providing some big price move opportunities. Placing positions in the portfolio that are the result of a price pattern identification creates a much stronger probability that at least one, if not more, positions in the portfolio might have the potential to provide a huge price move. That potential can be seen in the ASH chart and in the NUAN chart.

ASH

NUAN

Consistently adding positions to the portfolio that have high probability results produces a self disciplined trading program. It helps an investor to make decisions that constantly improve the probabilities of being in the right place at the right time. When the force of a trend can be analyzed utilizing candlestick signals, an additional benefit is the ‘protection’ to the downside. Even during a strong reversal in the overall market trend, the charts that had shown inordinant strength before the reversal will usually have enough ‘carry through’ to allow the liquidation of that position with much less loss compared to other positions.

The added strength of a candlestick chart pattern makes options strategies an extremely viable trading platform. The direction of a price movement can be well defined with candlestick signals. Those price moves become much better leveraged when applying simple option strategies. Candlestick analysis is merely the identification of a price trend based upon the signals created by investor sentiment. Profitable investing is the result of taking advantage of those price trends.

Good investing,

The Candlestick Forum Team

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2-Day Training Webinar

 

Not only is it important to know when you should buy stock, but you obviously need to know when you should sell stock as well. In today’s article we discuss a few reasons why an investor may want to sell their stock when investing in the stock market.

One reason an investor may choose to sell their stock is if they determine that the stock is overvalued. It is important to study the market and analyze the value of your stock so that you don’t end up losing big. Often times, stocks are pushed past their true value only then to fall in value significantly. The goal when stock investing and selling stock, is to sell a stock when it is over valued and then buy the stock back after the market has had a chance to correct itself. This is not exactly easy to do as this takes accurate knowledge of pricing in the stock market as well as consistency, however many stock traders and stock investors are able to make a significant profit.

Another reason that investors opt to sell stock is when they decide to rebalance their stock portfolio. Perhaps financial circumstances have changed and the ratio of stocks to bonds to cash needs to be adjusted. Selling stock is one way to do this and the investor must be sure that not only is selling the stock profitable, but that his or her investment portfolio is still well diversified afterwards.

The last reason for selling stock that we discuss today may be for personal reasons. Perhaps you have some major unexpected bills and you need some cash in hand. This is especially relevant in the current economy and many investors are reevaluating their asset allocation as a result. This is a good time to determine which stocks may be under-performing. Liquidating stocks to pay bills should of course be a last result, but it is one option that some individuals these days have to do.

There are many additional reasons for selling stock in addition to the above. Investors should look elsewhere first before using money that is tied up in investments in the stock market and they must be sure that they understand the consequences. It is not the end of the world is it is necessary, and once the economy and most individuals’ financial circumstances change, there will be more opportunities to invest in stocks in the future.

When it comes to investing in the stock market, one measurement stands out above the rest; how much did the investor earn at the bottom line and in turn, how does that earning compare to the price. Traders use many tools to help determine their stock trading plan, but the most common tool for assisting an investor is price to earnings ratio, or P/E ratio. Price to earnings ratio is an example of stock fundamental analysis; this is the method of examining businesses at the most essential levels. This process of review evaluates many key ratios of a business to attempt to determine the stability and financial health of a company and to determine the value of its stock.

It is safe to say that the number one ratio investors cite when discussing fundamental analysis is price to earnings ratio. This number is raised aloft like it possesses an authority above all others. It is, in fact, only one of many examples of fundamental analysis that successful traders should use before implementing trades. The price to earnings ratio evaluates the relationship between the price of a stock and the company’s earnings; it is the most widely used metric in fundamental analysis but far from being the only one that a trader should use. When reviewing the price to earnings ratio, it is wise for the investor to consider other ratios as well as using a stock trading system to search for the most complete information on a stock and its trends.

Simply put, to calculate price to earnings ratio, divide the share price by the company’s earnings per share (EPS). For example, if a company has a share price of $50 and an EPS of 10, the price to earnings ratio is 5. While a higher P/E ratio is generally considered a good thing, to some investors it signals an overpriced stock. It is very important that the trader views the P/E ratio only as a stock market trading tool to help draw an overall conclusion. Using a method such as candlestick analysis, an investor is better able to understand the dynamics of a stock before deciding to purchase or not.

So what does the price to earnings ratio tell the investor? It gives an idea of what the stock market is willing to pay for a company’s earnings. While it is generally accepted that a high P/E ratio is favorable and a low P/E ratio isn’t, even that conclusion isn’t accepted by all investors; therefore, it is wise to view the price to earnings ratio as a tool for helping to identify a potential stock purchase. When used with a stock investing system and other analysis ratios, it can help the investor to determine the best stock market investing strategy possible.