The Stock Market Project

2 Paper Trades

2006-10-03T20:07:00.000-07:00

So in order to build my confidence and to help refine all my reading into an actual "action plan" I'm going to "paper trade" for 2 monts (technically 3 but December is historically a slow 'trading' month). Investopedia has a stock market simulator which starts you off with $100,000 imaginary dollars. I intend to follow all the same rules I will with my real money, the idea is to get comfortable enough with my decisions that I'm not fretting or second guessing myself when it really matters (with my money). So, below are the entry conditions for two trades I entered earlier this week ....

First up is Verizon Wirless (VZ). You may notice the bars are colored "oddly". I've been experimenting with 'paintbars' in QuoteTracker and have put some to use. The price bars are colored according to the Impulse System set forth in Come into My Trading Room. Essentially, when both the 26-bar (in this case week) EMA and the MACD are increasing the bar is colored green. This indicates a strong uptrend as both averages are moving upward. When the EMA and MACD are both decreasing the bar is colored red, as a downtrend is in effect. If the EMA and MACD can't agree then the bar is blue. The Impulse gives more of a "don't" signal, when it's green (uptrend) don't go short, and vice versa. This keeps me from going 'against the grain' of a significant trend. As you can see in VZ to the left there is a pronounced uptrend with over a month of 'green'. Since this is a strong uptrend my options are to go long (buy) or stand aside. Both the DJIA and Telecom stocks have similar uptrends, AT&T (T) had a similar profile to VZ but AT&T had a worrysome signal I'll talk about below.

Which brings us to the daily view of VZ. After first asessing that the long-term trend was up (above in the weekly view), it's time to look for a good place to enter. The best place to buy during an uptrend is when the trend pulls back to (or temporarily below) the EMA. I plot both a 11 and 22 day EMA, when the prices are in between those it's a good place (assuming the remaining indicators still show a general uptrend). At the right edge of the chart you'll notice that the prices had dropped towards the EMA and hugged it for the last two days of the previous week. The MACD lines are still very positive (the boxed value indicated in the 3rd panel), and the Elder Force Index is on the rebound (the colored bars in the 4th panel have turned green, this is a paintbar I set up). This indicates a temporary pullback to the main upward trendline. So I entered an order to buy at 1/16th of a point above Friday's closing high, @ $37.29. My profit taking point is the upper channel (techincally envelope) line (the light blue), however I expect the stock to hug the EMA for a while as it did last month. My stop was initially set at $35.50, this seems a little low but is due to the recent correction to the EMA. This sudden return makes the stock appear more volitile to the equation I use to determin stops, so the stop is placed farther out to avoid daily volitility. As the trend progresses and becomes less volitile the stop will steadily increase.

The day I entered the VZ trade, Alcoa Inc (AA) started to look good. On the right you'll see the weekly chart. A steady fairly steady downtrend. While the MACD was rising slightly (turning the bars blue) it was still significantly negative. The downtrend should continue.

Now here's the daily chart for AA. This is one day after I entered the trade. You'll notice a small red arrow at the bottom of the price chart. This is a paintbar that I created. It samples Elder Force Index and the Slow Stocahstic; it's looking for a condition where the Stochastic 'reverses' direction and the EFI moves 'against' the trend. In a downtrend if the EFI becomes positive while the Stochastic begins a downtrend it's a good time to enter short. Add to that the daily impulse turning red also signaled a shorting opportunity. The only worrying condition is the long slow bullish divergence of the MACD histogram. Still the order was entered to short at 1/16th of a point below the daily low. Unfortunately the simulator order software became a little confused. I entered the order well after market close and specified a "One Day Only" order, for some reason the simulator started calculating the 'one day' from the time the order was entered not the time the market opened. When I arrived at work the next day the order had shown as expired despite the fact that the price had moved in my direction. I decided to enter a market order anyway; the end result I sold short at $27.30 instead of $27.52. We'll chalk that up to a learning experience, which is part of the reason I'm paper trading right now.

You may notice the little arrows show up a lot. I'm tweaking with the 'sensitivity' still. At first I had it trying to approximate what the weekly charts look like with only daily data (paintbars can't reference other timescales, I can't have a daily chart reference a weekly chart). I figured it would be easier to censor them manually. If the weekly chart is saying "NO shorting" I'll ignore the shorting signals (something I forgot on the proposed AT&T trade earlier), and vice versa.

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $5,000.00

Current Value: $X.XX

Highest Value: $X.XX

Lowest Value: $X.XX

Highest Drawdown: XX%

Paper Trading

2006-09-26T12:17:00.001-07:00

The AT&T trade wouldn't have gone the way I wanted had I been able to put it on. I may have been able to break even before the stock turned around and ran the other direction. I'll post more about that later.

Over at Investopedia they have a simulator for paper trading the stock market. I'm planning on using that to paper trade for the remainder of the fiscal quarter, develop some more confidence and come up with some rules for my trading system. I will be using all the same money management rules and tracking for the paper trading excercise. If I do see a trade that I can enter with my real money account I will. I'll update here for the paper trading as well.

I'm also learning more about 'paintbars', which are a programable option in the QuoteTracker software. Basically they can recreate all the user friendly 'signals' that you see in the over-hyped software advertised on TV. If selected indicators are behaving in a defined way symbols and/or coloring can be added to the charts with these "paintbars". Yesterday I set up a paintbar to show the "Impulse indicator" suggested in Come into my Trading Room. I'll see what else I can come up with.

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $X.XX

Current Value: $X.XX

Highest Value: $X.XX

Lowest Value: $X.XX

Highest Drawdown: XX%

Procrastination, Perfection, and the Plunge

2006-09-11T21:45:00.000-07:00

Okay, so it's been a while since I posted here. In my quest to lessen procrastination I found that this project was yet another way for me to procrastinate. Why do the dishes / laundry / clean the bathroom, when I have so much to learn about Trading? So this project took a hiatus while I struggled to get things under control. The struggle isn't quite over but I'm at the point where it's equally important to make time for the (worthwhile) things I want to do. You'll also note a few procrastination related books in the book corner, I highly recommend them if you to are struggling with that particular imp.

One of the other insights my end-of-procrastination quest has lead me to is I'm a little bit of a perfectionist. More accurately, I wish things were perfect, and if they're not I avoid them. How does this relate to trading? Well looking and learning at the 'middle' of the chart is one thing, but things get "murky at the hard right edge" to paraphrase Dr. Elder. Since I can't see a 'perfect' trade I'm reluctant to pull the trigger. One suggested solution is to paper trade until you gain confidence. The problem with that is, with no penalties mistakes have less meaning. It doesn't hurt to loose paper money, it really hurts to watch your account dwindle. Since perfection isn't realistically atainable, I'll have to make do with what I got. And so ....

On the left you'll see the "Tide view"" for AT&T (click to enlarge). This is the weekly price data for the past year. My handily drawn yellow lines (the ones with arrow heads) show the increase in price and upward slope of the EMA's in the top price chart. Prices are well above the 26-week EMA (orange), and are near the upper price channel (teal). The strong positive MACD histogram tends to confirm the strength of the bulls in pushing prices even higher, however, the slope of the MACD histogram is starting to head downwards (as indicated by my yellow line). Combined with the steadily decreasing volume as prices drift upwards (more noticeable in the Force Index which accounts for both volume and price change), this may mean the recent bull trend is coming to a close. Even if this is a simple retracement, with prices temporarily returning to the 22-week EMA (as seen during March and April) there is still money to be made on the short side.

On the right you'll see the "Wave view" of AT&T. This is the daily price over the past three months. Again there is a general increase in prices, along with an upward sloping EMA. The big change is the bearish divergence in the MACD and (2-day) Force Index. The decreasing "tops" of the MACD and Force Index, while price plots increasing "tops" suggests an end to the bull trend. Further the Stochastics shows that just a few days ago AT&T was "oversold". It looks like there is money to be made on the short side.

So what am I going to do about it? Well I'm going to place a Stop Market order to sell short at $31.16, which is 0.13 points below the previous closing. The Stop Market order will trip if the price falls to $31.16 or below. I'll go one further and use a feature of MBTrading to hold the execution until a certain time, after the opening madness. The price channel is roughly 5 points wide, I'm looking for at least 0.5 points of movement (in my favor). If my stop order is filled, I'll set a trailing stop 1 point above my purchase price to stay within my 2% Rule.

WHOOOPS! "Cash accounts may not short" says MBT. I'll have to find the paperwork for a Margin Account. I'm too tired now, hopefully I can resolve this soon.

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $5,000.00

Current Value: $5,000.00

Highest Value: $5,000.00

Lowest Value: $5,000.00

Highest Drawdown: 0%

I'm dangerous now ...

2006-06-09T16:33:00.000-07:00

So my trading account has been funded. However, I forgot to send in some additional paperwork to allow me to trade options. A 3 page document that highlights how "dangerous" and "complicated" options are, asking for my previous experience in trading, and asking for my annual income and net worth. Again, since I'm using a deep discount broker no one else is looking out for me.

So what does this mean? Well if I happen to find a trade I think is profitable, I'll enter. I'll stick to my money management rules and buy limited quantities of the stock, instead of options. I won't make as much, but money is secondary to finding and entering good trades. Identify and enter the good trades and money will follow.

DIS, HD, KO and WMT remain the stocks to watch for entry points.

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $5,000.00

Current Value: $5,000.00

Highest Value: $5,000.00

Lowest Value: $5,000.00

Highest Drawdown: 0%

New week ...

2006-06-05T19:10:00.000-07:00

A new week has started so it's time to scan the Dow Jones 30 and look for potential. Stocks to watch daily: GM, HD, KO, T, WMT. Stocks to watch with interest in coming weeks: AIG, C, HD, INTC, JNJ, VZ.

Now the super condensed version of each analysis.

AA - Alcoa Inc.

Long view - Middle of a downtrend, missed the boat.
Middle view - If I hadn't missed the boat a good place to add to a 'short' position was Friday of last week.

AIG - American International Group

Long View - In a long downtrend, might be ending in coming weeks.

AXP - American Express Inc.

Long View - Middle of shaky uptrend, going against the general market is tough.
Middle View - Opportunity to add to an earlier 'long' position may be coming in a day or two.

BA - Boeing Co.

Long View - Middle of downtrend, missed the boat.
Middle View - Friday was good point to add to an earlier 'short' position.

C - Citigroup

Long View - Uptrend (since Feb.) coming to a close, possible change in direction in coming weeks.

CAT - Caterpillar Inc.

Long View - Middle of downtrend, missed the boat.
Middle View - Friday was a good time to add to a 'short' position.

DD - Du Pont

Long View - Middle of downtrend.
Middle View - Friday was a good time to add to a 'short' position. (Do I sense a theme here?)

DIS - Walt Disney Corp.

Long View - Long uptrend (since Oct/Nov 05) losing steam.

GE - General Electric Co.

Long View - Previous uptrend dissolving into "sideways" trendlessness.

GM - General Motors

Long View - Middle of Uptrend.
Middle View - Opportunity to add to previous 'long' position may be coming in a few days.
Possible entry point, needs more examination.

HD - Home Depot Inc.

Long View - Complicated. Currently in downtrend, supported by Head and Shoulders top (Head in late March). Also has evidence of decent support at current ('bottom') price.
Middle View - Doesn't help clear up situation.
Best to wait for confirmation one way or the other.

HON - Honeywell Inernational Inc.

Long View - Established Downtrend.
Middle View - Friday was a good time to add to 'short' position.

HPQ - Hewlett Packard Co.

Long View - Previous uptrend disolved into trendlessness.

IBM - International Business Machines

Long View - Effectively trendless, weak oscillating trends.

INTC - Intel Corp.

Long View - Long downtrend, that has been "slowing" since February. An example of the adage "stocks can fall from their own weight".

JNJ - Johnson and Johnson

Long View - Uptrend, possible resistance at current price. Possible breakout from further view (monthly) downtrend.
Watch in coming weeks.

JPM - JP Morgan Chase Co.

Long View - Middle of Downtrend.
Middle View - Good 're-entry' point last Friday.

KO - The Coca-Cola Co.

Long View - Uptrend starting to reverse, may be short lived (a correction in an even longer term view).
Middle View - Friday was a decent entry point.
Watch daily for entry points.

MCD - McDonalds Corp.

Long View - Middle of slow downtrend.
Middle View - Last friday a good point to add to 'short' position.

MMM - 3M Co.

Long View - Middle of downtrend.
Middle View - Last friday a good point to add to 'short' position.

MO - Altria Group Inc.

Long View - Effectively trendless, weak oscillating trends. (Would be strong trends if I had a shorter investment time-frame).

MRK - Merck Co. Inc.

Long View - Middle of downtrend.
Middle View - Last friday good point to add or 're-enter' a 'short' position.

MSFT - Microsoft Corp.

Long View - Established Downtrend, possibly weakening.

PFE - Pfizer Inc.

Long View - Middle of Downtrend.
Middle View - Good add-to or re-enter point today.

PG - Proctor and Gamble Co.

Long View - Established downtrend.

T - AT&T Inc.

Long View - Recent uptrend.
Middle View - Possible entry point coming soon.
Watch daily for entry points.

UTX - United Tech

Long View - Middle of downtrend.
Middle View - Good add-to / re-entry point last friday.

VZ - Verizon Communications

Long View - Establihed downtrend, may be coming to a close.
Watch in coming weeks.

WMT - Wal-Mart Stores

Long View - Recent downtrend, probably short lived.
Middle View - Missed entry point at start of trend.
Watch daily for confirmation and entry points.

XOM - Exxon Mobil Corp.

Long View - Middle of downtrend.
Middle View - Last friday good add-to / re-entry point.

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $X.XX

Current Value: $X.XX

Highest Value: $X.XX

Lowest Value: $X.XX

Highest Drawdown: XX%

Triple Screen in action ...

2006-06-01T16:45:00.000-07:00

Alright so let's put this Triple Screen strategy through it's paces.

To the left you'll see the chart produced by QuoteTracker (click to enlarge), for "AA" Alcoa Inc (formerly ALuminum COrporation of America). It's set to look at my long term horizon. Each Candlestick bar represents 1 week of trading action. At the top is price data in Heikin-Ashi Candlestick format, below that trading volume, below that a MACD with divergence histogram, followed by a Directional Movement Indicator, and lastly an Elder Ray oscillator.
So what do all these things tell us? I'll start at the top and work my way down.

The price data shows a recent top followed by 3 weeks of decline (the last candlestick is this week and doesn't include Thursday or Friday), over the past 6 months there has been a fairly steady increase in price aside from a 1 month dip from mid February to mid March. AA is currently in a downtrend.
The Volume data shows an increase in volume during the latest upward surge starting in April. After that the volume declined, foretelling the slowing and eventual reversal. Of course during the most recent slide the volume has declined as well, implying that it too is running out of steam. AA is in a downtrend that is starting to slow.
The MACD histogram shows the steady incline during the April surge. However, it is important to note that while the stock price reached a new high the MACD histogram did not rise above it's January levels (a lower stock price). This also implies that the April surge was coming to an end in early May. The histogram shows a sharp downtrend and is confirmed the second week when the MACD line crosses to below it's signal (light blue falls below the orange). Shorter term average prices are falling faster than longer term prices. The histogram changes sign during this crossing if the lines are hard to see. AA is in a downtrend.
The green line (ADX) in the Directional Movement indicator is a sign of "trendiness", when it is upward sloping the current trend is becoming more established. Values above 40 indicate a trend that has been in effect for some time. After a slight dip in March the uptrend returned, and in May it started to collapse again. While this current dip resembles the dip in March, having it fall from above 40 implies the longer trend itself is coming to a more permanent end. AA is in a downtrend, potentially a significant one.
The Elder Ray oscillator shows the strength of "bulls" and "bears". The light blue line represents the "bulls" and is usually positive. Again the price peak in early May was not supported by an equally higher peak in "bull" strength. During the recent decline the "bulls" lost strength while the "bears" gained strength. The most recent week shows the "bears" losing strength even though the "bulls" aren't gaining (again this weeks data isn't complete and is also a shorter trading week). AA is in a downtrend that is losing strength, since the "bulls" aren't stepping in to take control the price patter will probably oscillate listlessly until one side gains momentum again.

A majority of the indicators show a downtrend. A majority also show that downtrend is losing steam. I can't tell if the trend will reverse itself, or simply dissipate into "sideways" narrow oscillations, let's look at the middle term horizon and see if it can tell us.

Here is the second 'screen'. Here each screen represents 1 day of activity, it spans the past 30 days. It doesn't make use of Heikin-Ashi smoothing. Below the price data is, again, trading volume. Followed by an Elder Force Index oscillator, a Slow Stochastic oscillator, and a Chande Momentum Oscillator. I'll start from the top and work my way down again, with the exception that I'll be leaving the EFI for last.

The price data shows the downtrend starting May 11th. The down day on May 10th is the uptrend finally 'giving up the ghost'. The short surge starting May 24th undid a point and half or so of the fall. The last two days have closed "down" but the 31st still opened at the same (higher) price as it did on the 30th, the 31st also failed to close as low as it did on the 30th. AA's downtrend (and the "bears") are losing steam.
The volume confirms the price data. Since the start of the fall on May 10th the volume has decreased. Each short surge up quickly died out. The volume of each downturn has also been steadily decreasing. AA's downtrend is slowing down.
The slow stochastic serves two purposes. The most important is that the slope of the stochastic verifies the slope of prices. From May 11th through the 18th the slope of the stochastic as been downwards, this coincided with the majority of the downward price movement. The very brief upturn May 15-16th didn't phase the stochastic slope, this indicates a good place to sell short as the temporary price increase is doomed to be short lived; this occurrence is a "bearish" divergence the prices went up but the stochastic stayed in it's downward trend. The second purpose of the stochastic oscillator is that it shows "over bought / sold" conditions, over 80 the stock is "over bought" under 20 it is "over sold". These signals are not as clear if the stock is in a significant trend (hence the first screen). Since the first screen established the stock was in a downward trend the "buy signal" generated by the "below 20 and rising" condition can be ignored. This doesn't imply it has no meaning just that it is no longer a good "buy signal". The stochastic falling below 80 and further falling below it's signal line is a strong "sell signal", since the first screen indicated a down trend May 10th or 11th would have been good times to sell short (or buy a put option). The "bearish" divergence on May 16th was another good "sell signal". The latest uptrends are not good times to sell short since the stochastic is sloping upward along with prices. The best times for profit have passed, and AA's downtrend is losing strength.
The CMO oscillator serves the same purposes as the stochastic, it is calculated slightly differently in an attempt to capture smaller movements. You'll note that the brief upturn on May 16th had a discernible effect on the CMO. Also the most recent days have altered the slope as well. I'm using the CMO primarily as a confirmation of the stochastic and for all important indicators it concurs. The conditions for oversold and overbought for the CMO are -50 and +50 respectively. AA's downtrend is losing strength.
Last the EFI is very sensitive to combined price and volume action. It's purpose is to signal as many buy / sell opportunities (in this case sell). To avoid false signals sell orders would be placed below the day's price action so that it is only activated when the trend is confirmed by the price moving the direction predicted. The EFI produced sell signals on May 11th (crossing to negative and continuing after the end of the uptrend), May 16th (the significant uptick), May 21st (crossing to positive) and May 24th (crossing to positive). Orders placed after closing on May 11th and 16th would have been executed as prices continued to fall the following days. Furthermore the signals on the 11th and 16th were confirmed by the stochastic and CMO. The best profit points for AA's current downtrend have passed.

Conclusion? The boat has sailed on the AA downtrend, hence no need to employ the third 'screen' and examine intraday hourly prices. The second week of May was the prime time to enter a trade. If the weekly downtrend somehow continues and the daily oscillators show divergences or "overbought" sell signals, it may be a good time to re-enter; volume will have to be particularly strong to confirm though. Whether the downtrend will fully reverse into an uptrend is unclear. A new agreement was reached with union workers today, so I'll watch to see if this has a lasting effect beyond today's price increase (charts did not include today's market activity).

Up next, probably another example ...

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $X.XX

Current Value: $X.XX

Highest Value: $X.XX

Lowest Value: $X.XX

Highest Drawdown: XX%

Notes to self ...

2006-05-31T16:55:00.000-07:00

Doing more reading while I wait for my account to be funded. These are just some notes for myself, so they may not make much sense.

1) I do not have to trade.
This is not my job. I do NOT have any real need to trade. I will only enter a trade because I have determined it to be a 'good' trade. My broker doesn't care if I win or lose on a trade as long as entered the trade.

2) Stop-loss orders are my only friend.
Just like poker every dollar I lose is someone elses gain, every dollar I gain is someone elses loss. Nobody is looking out for me but me. Many people have volunteered their experiences in the stock market when they find I'm doing this. Without fail their stories fall into 2 categories. Winning stories; where they tell me about some stock they bought at the "ground floor" to see it rise (most of these people are the 'buy and hold' types, and the increase took place over many years). Losing stories; where they tell me about all the times they lost money, from not being able to "watch" the market or from hoping it would turn around. Nobody who shares a story with me ever mentions where their stop-loss points or take-profit points were, they had no plan if the market turned against them, not the winners or the losers.

3) My goal is to find good trades, not massive profits.
Similar to #1. In poker my winnings took place over thousands of hands. On average I only bothered playing with 30% of those hands. By only entering with good hands I could average 3-5 big bets in profit every 100 hands (including rake). There my be thousands of trade opportunities every year, I will only enter the good ones.

4) Volume, Volume, Volume!
Price is a "meeting of the minds" between buyers and sellers at a specific point in time. Price may fluctuate wildly as different people with different goals and different mindsets come together at certain points. Volume gives indication that the particular "meeting of the minds" is backed by the 'crowd' of the market. A price move has different meanings depending on the relative move in volume.

5) Herd mentality
Trends gain strength because of the herd mentality of crowds. If everyone and their mother is in on a trend, it's probably about to end.

6) Amatuers open, pros close
The opening price of a given day (and more so on the first day of the week or month), is influenced by 'amateurs' placing orders after market hours and those orders being filled at the market opening. When placing a stop order to enter a position, delay the order for an hour or two to avoid the rush and correction.

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $X.XX

Current Value: $X.XX

Highest Value: $X.XX

Lowest Value: $X.XX

Highest Drawdown: XX%

Rules, rules, rules (part 2) ...

2006-05-30T17:11:00.000-07:00

The other set of rules I need to create is my trading system. There are a TON of technical indicators available, no really. The key is building a select few into a trading system. There is no "golden bullet" indicator, they all have flaws, they are all wrong at times (hopefully different times). The more I read about the various indicators the more it appears they are very similar to one another.

As I see it there are three main groups: (search investopedia for descriptions I'm not going to link each one)

Chart patterns ("Head and shoulders", triangles, flags, sushi rolls, doji stars, fibonacci fans / retracements, etc.)
Trend indicators (MACD, DMI, Bollinger / Keltner Bands, etc.)
Supply / Demand oscillators (CMO, Stochastics, RSI, MFI, etc.)

Chart patterns are shapes or patterns that can be seen by examining historical price data. Usually the pattern or shape itself isn't an indicator, but the price data breaking the boundries of the patter or shape is the indication of future movement in a particular direcion. For example, if a previous point of support is broken (price hit a certain low then rebounded on several occasions until finally falling below the "rebound" point), then that penetration is an indication that prices will continue to move lower in the future. I included fibonacci fans / retracements here because they to point to "decision" levels for price, if a stock retraces 33% of it's gain / loss you need to examine if it will change direction or continue.

Trend indicators show the direction of a trend, the strength of a trend, and sometimes both. They tend to "lag" behind current price data. So while a chart pattern may indicate a reversal of direction the trend indicator will verify it a few data points later, in general.

Oscillators generally indicate where the stock price is in terms of supply and demand. A high value usually indicates the stock is "overbought", lots of people buying the stock have driven up the price. A low value indicates the reverse, lots of sellers creating oversupply and driving down he price.

Dr. Alexander Elder put together a "Triple screen Trading System" in his book Trading for a Living (very good book). I like the system, as it combines various indicators to compensate for each others weaknesses. The first step is to determine my "trade horizon", or how long I intend to be in each trade. Day traders have horizons in terms of hours, buy and hold types have horizons in terms of years; I'm looking at days or a few weeks (only 5 days in a trading week). Once I have my horizon (measured in days), this will become the data grouping to examine intermediate trends. So when looking for intermediate trends I will use charts showing daily price data. Long trends will be an order of magnitude larger, so I will use charts with weekly data to determine long trends. Short trends will be an order of magnitude smaller, so I will use charts with hourly data to determine short trends. An analogy Dr. Elder uses is Tides, Waves, and Ripples.

The first screen employs a trend following indicator to determine the direction of the long term trend (Tide). I will be using weekly price data represented with a Heikin-Ashi Candlestick representation, this helps smooth out "noise" and make the prevailing trend more obvious. A MACD indicator will be my primary indicator of trend direction, and an ADX indicator will help me confirm the strength of the trend. Chart analysis techniques (Candlestick patterns, Fiboniacci fans / retracements) will be used as additional confirmation for trend diretion changes.

The second screen uses oscillators to identify consolidations (Waves) during the prevailing trend (Tide), a temporary fall or sideways action during an uptrend signals a good point to enter the trend ("buy low" afterall). I will use daily price data in both Candlestick and Bar representations. An EFI (Elder Force Index) oscillator will be my primary indicator, with a CMO (Chande Momentum Oscillator) providing confirmation of "over bought / sold" conditions. Again chart patterns will provide additional confirmation. Since oscillators can give false signals during longer trends (ie. A long uptrend will have an oscillator showing "overbought" conditions for some time as buyers continue to drive the price up over a longer period.), employing them as a second screen after determining the longer trend allows me to identify which signals to ignore. Continuing the example, if the long term trend is up only oscillator signals saying "buy" will be used; the "sell" signals will only be used if the long term trend changes.

The third screen doesn't need many analytical tools. Once an entry point has been confirmed in the second screen, an order is entered just outside the previous day's boundaries. Continuing the example; the long term trend is up, the mid-term trend identifies a temporay pull back, the third sceen looks at the previous day's hourly action and a stop-buy order is placed above the previous day's high. On the next trading day, if the price rises (as predicted by the first screen) the buy order is executed and we got into the up trend at a low point. If the price decreases (as predicted by the second screen) then the stop-buy is adjusted to just above that day's high, as long as the primary long term trend has not changed this will ensure we enter the uptrend at the lowest point.

This covers when to enter a trade, equally (some would say more) important is when to exit the trade. After the position is acquired a stop-loss order is placed on the opposite side of the day's boundaries. Finishing the example, yesterday the stock was purchased; a stop-sell order is placed just below yesterday's low. If the trend changes rapidly, we are spared the minimum loss. If the trend continues as we predicted in the first screen, then the stop-sell order can be increased steadily to lock in profits.

I'll have to use a small change to the Dr. Elder's system. Since my money management rules preculde my from buying sizeable amounts of the stocks I'll be screening (DJIA members); I'll be buying options instead. The frist two screens will be unchanged, but the third screen will examine the daily price movement of the related stock option. Stop-buy and stop-sell orders will be applied in the same fashion.

Up next, an example of the Triple Screen System in action ...

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $X.XX

Current Value: $X.XX

Highest Value: $X.XX

Lowest Value: $X.XX

Highest Drawdown: XX%

Rules, rules, rules (part 1) ...

2006-05-30T16:22:00.000-07:00

Before I start putting my money at risk there are two sets of rules I have to create. The first set of rules cover money management, how much money to risk and how often. Investopedia has a good article on this. In limit poker part of the rules were defined for me. I could only risk bets in set increments defined by the table stakes.

The other two limit poker rules were:

Have a bankroll of 300 times the size of the "big blind". (So at $0.50/$1 tables, have a $300 bankroll)
Start each table session with 30 times the size of the "big blind". (Assuming same stakes, $30)
If you exhaust your funds for the session; stop, "cool off", and examine the table situation and your performance before deciding to call it a day or continue playing.
Fold when you KNOW you are beat. (This is the hardest to learn.)

These rules helped weather the inevitable losses, or drawdowns.

For my stock market project the rules will be:

Each trade will only be 2% of my total account value.
Total money at risk (over all current trades) will be less that 20% of total account value.
Use REAL stop-loss / take profit orders, not "mental" stops.
Stop, "cool off", and re-examine if I reach 30% drawdown.

Which brings us to the new footer below. The "Current Trades" portion will show each of my open trades. What I'm trading (1 July Call Option on Citigroup, Strike price $50), the Ticker symbol, how much it cost me (less than 2%, not counting commission), how much it's currently worth, and at what value my stop-loss (or take profit) order is set to. The "Account Summary" portion will show my current available balance, the current value (including holdings at risk in 'current trades'), the highest value my account has reached, the lowest value my account has reached, and the previous two entries in terms of drawdown percentage.

Right now they are all just place holders, until I fund my account later this week.

Current Trades

What is it? BlahBlah

Ticker: XXXX

Cost: $X.XX

Value: $X.XX

Exit Point: $X.XX

Trading Account Summary

Current Balance: $X.XX

Current Value: $X.XX

Highest Value: $X.XX

Lowest Value: $X.XX

Highest Drawdown: XX%

And now the DJIA ....

2006-05-28T15:45:00.000-07:00

Above you'll see a 6 month chart for the Dow Jones industrial Average, the chart has the same components as the S&P500 chart. One notable exception is the orange line indicating a support line. You can see that prior to February this line acted as resistance; this is not uncommon.

The end of this chart (showing market close on Friday May 26th), shows a brief up-trend just like the S&P500. In the case of the DJIA this up-trend reached it's 20 EMA; however, just like the S&P500 it did so on comparatively low volume. This is not surprising as the DJIA and he S&P500 have high correlation. The outlook is similar to the S&P500, since the latest trend reached the EMA on low volume we'll have to see if the DJIA moves back into the trend channel or continues to fall, the trading volume is again an important indicator of the strength of these possible moves.

Why should I care?

Per my "game plan" I'll be looking for entry and exit points for the 30 stocks that make up the DJIA. Discerning the general trend of the overall average helps indicate where the underlying stocks may be heading. In this case if the indications are not clear the stock in the DJIA will most likely trend "sideways" or down in the short-term.

Next week prediction: DJIA will revert to a slight down-trend. The previous down-turn was related to people turning to other investments on the news of rising interest rates. Despite the up-turn (on weak volume) there will continue to be downward pressure as "slower" investors shuffle where they put their money.

Next up, getting back on schedule with Money Management ...

S&P 500 General Analysis

2006-05-27T22:33:00.000-07:00

Slight change in programming, I'll start with the general market trends.

The above chart covers the past 6 months. The top portion shows the price of the index, followed by the trading volume, then the Average Directional Index, lastly the Relative Strength index. The blue line on the price chart is a 20 day Exponential moving average, the red line a 50 day exponential moving average, the green line is hand-drawn to show the previous general up-trend and lower trading channel of the index.

So what does it all mean?

As the green line demonstrates there is a gentle long term uptrend. If we plotted price data on a weekly basis instead of daily this would be more obvious, and it would also be indicated in an ADX value rising steadily towards 40. This is further supported by noticing that the price will increase then fall back to the 50 day moving average. Since this uptrend is a very gentle slope, the market can be considered trending "sideways" in the near term (weeks, instead of several months).

But what about the recent downturn?

As you can see the recent downturn took prices below the green trendline, as well as below the moving averages. The downturn found support near the 1265 price mark, this value also provided support back in January and February. In the very near term (days, maybe 2 weeks) I expect the price to return to the moving averages and perhaps touch the green trend line again. Where it goes from there depends a lot on the trading volume during the coming days. If the "return move" is conducted on high volume this will indicate a strong short term uptrend. If the return is accompanied by low trading volume then it is likely the market will continue it's downwards fall (the next question then becomes, will it find support at 1265 again?). Since the most recent minor uptrend has been on decreasing volume, I predict the later option.

So why should I know this?

The general 'wisdom' is "don't fight the trend", if the market as a whole is in a down trend so will a majority of the stocks I'm going to examine; those stocks that appear to be moving against the general trend will have to have strong indications that the move will take place.

Prediction for next week: The S&P500 index will continue it's slight rise until it meets it's moving average values. After that it depends largely on next weeks' trading volume.

Up next, the Dow Jones Industrial Average ...

Account Opened

2006-05-26T15:52:00.000-07:00

So I opened an account with MB Trading. They offer $0.01/share stock trades (minimum $1 per order), and $1/contract Options trades. No account minimums or transaction minimums for these commission rates. The Options ability comes with a catch, for Options quote data feed it's $10 per month, this fees does get waved with 10 options contract trades per month. Even with the $10 it's still cheaper than most other brokerages. As I get better at this I might not even be paying that $10. This is a real deep discount brokerage, no frills, just raw data and fast efficient order execution. I'm not paying for advice or research or stock screening, that's what "hands on approach" is all about.

I called their customer support to ask some questions and was connected with a live human. They also provide an online chat service to talk to customer service reps as well, which also provided prompt attention. One form I need to sign and mail to them and then I can fund my account directly with a single ACH transfer from my savings account.

Next up Money Management, and maybe some general market analysis ...

We have the technology ...

2006-05-25T13:15:00.000-07:00

So, I have my game plan. What's next? The tools to do the job.

I've downloaded the Medved QuoteTracker software. There are a myriad of third party tools that help analyze stocks. Most (including QuoteTracker) seem to be geared to the more active (day) trader. QuoteTracker is free though, and I'm a cheap bastard. I don't pay for a service to provide "real-time" stock quotes. I don't need it, I'm not doing intraday trading (buy and sell within the same day). The software offers a variety of technical analysis tools, and integrates itself with a variety of online brokerages. This isn't supposed to be an ad, just why I chose it.

There are also two very good chart analysis tools available online, Prophet.net and BigCharts.

With the software and charting tools out of the way it's time to choose a broker. Currently MB Trading looks the most appealing to me. They have some of the lowest commission rates, but I need to call them and find out what sort of strings their "0.01 per share" plan has. Usually plans like this require a certain number of trades per month, or a monthly fee. While they didn't list any such requirements on the website, they didn't specify that these requirements don't exist. In addition they support the free software I have, allowing me to do analysis and trade orders all in one place and 'offline' (aside from data input). I also looked them up at the NASD website, and they are properly registered (and located in the US as opposed to the Cayman Islands).

Next up, opening an account ....

Pre-game warmup.

2006-05-25T12:37:00.000-07:00

Theory: "I turned $50 into $300, playing on-line poker. I can do this too!"

Reality: Honestly I think there is a correlation. Poker has taught me about analyzing risk vs. reward (pot odds), money management (choosing table limits, when a front running hand becomes worthless), and about taking smaller more regular winnings over homeruns. Those 3 things are often overlooked by "novice" stock market investors like myself.

On the other hand, I had a strict mathematically proven game plan to follow with limit poker. Much like blackjack, there is a proven chart of starting Texas Hold-'em starting hands, when they are worth calling / raising / etc. From there it's more math about pot odds, and the odds your hand will improve. Playing limit poker takes out a large part of the 'guesswork' involved with bluffing as seen in 'No Limit' Hold-'em. For stocks, there's not really a proven game plan to follow. There are a dizzying array of strategies and systems but it's tough to separate the scams from the real deal. Not to mention I could be spending my $5,000 on the trading system alone.

So what's MY game plan in the stock market?

I'm going to split the middle. On one side there are "buy and hold" investors. These folks see purchasing stock as buying part ownership in companies, as a result they put considerable effort into selecting profitable companies. They can be considered Fundamental analysts. On the other side are the "(day) traders". These folks see stock as a commodity to trade, as a result they put considerable effort into determining the best time to buy or sell a stock. They can be considered Technical analysts.

Technical analysis interests me more, but I can't deny the track record of "buy and hold", so I'm splitting the difference. I'm going to "time the market" with stocks that have a proven fundamental track record. For example, the stocks that make up the Dow Jones industrial Average, or are found in Warren Buffet's Berkshire Hathaway portfolio. I see this as similar to the online poker game plan, smaller more regular wins by "properly" playing proven starting hands.

The flaw with this plan is that with only $5,000 I can't buy very many shares of big name stock. More to the point money management rules suggest limiting any individual trade to 2% of your capital, or $100 in my case. The solution at the moment is to invest using Options. There is added risk in the sense of time value (options expire at a certain time), and leverage (movement of the stock is magnified by the lower initial investment), but there is also reduced risk in the form of set maximum losses (the premium on the option).

I'll no doubt be altering my game plan as I learn more but that's where I'm starting for now.

Let's see how things go.

How did we get here?

2006-05-25T12:24:00.000-07:00

1) I got a ~$5,000 tax refund this year (YAY! homeownership).

2) I want to take a more hands on approach to investing.

3) I did a lot of reading (for me) on item #2.

4) I discovered $5,000 isn't very much when it comes to hands-on investing. With the exception of the infamous and nefarious stock market.

5) More reading on item #4 as well as the futures market (not enough money again).

6) Jenny started her finance centered blog.

7) I recalled that when I was dipping my toes into online poker I ran across several blogs that reviewed the authors progress. Often complete with thoughts at the time, after the fact analysis, etc.

8) Dusted off my geocities and blogspot accounts, et voila!

So with the stated mission of turning $5,000 into $25,000 (lofty goal? of course), let's begin.