Introduction

Since about 2004 we have been learning a systematic approach to managing our investments. Originally introduced to us through Business Week, we are learning from Investools, Market Tamer, and some other sites. We will share here what we are doing, and what is working for us.

Why are we sharing this? Because there is nothing here you cannot find as easily as us, on your own, and much much more. Nothing here can produce a significant influence on the market. There are some technical strategies and methods we may share only in basic description, perhaps only by a name. This is to protect intellectual property, either our own or that of associates we are exchanging investment ideas with. In small and illiquid markets certain strategies can easily be manipulated. People are protective of their ideas and we simply will not share any ideas here without permission.

This is not investment advice, it is testimonial, and documentation. It is documenting our own information for our own purposes, but if it provides insights you find useful, you are welcome to them. There are as many different approaches to investing as there are people investing in the market. Investools does not prescribe a particular approach, they provide a foundation of knowledge and tools, and the advice of instructors and coaches to help you determine rules that suit your own tolerance for risk.

The tools we are using beyond the Investors Toolbox at Investools are the Think or Swim desktop platform. This trading platform provides Think Back allowing one to get stock and option pricing for years past, and not just closing prices - the tool allows you to determine the theoretical price of options based on the market at that time. The platform also has a powerful trade analysis tool, allowing you to visualize the sensitivity of a position to price movement, volatility, and time; and to add simulated trades to adjust the position. Once the adjustment is determined then orders can be created and executed.

We use additional sources of information to guide our expectations of the market environment, some ($) are subscription fee sites:

($) Investors Tool Box - So far as we have seen, the best one-stop has-it-all investor education website.
($) Market Tamer - If you can't afford Investools give these folks a serious look... Even if you CAN afford Investools, give these folks a look.
($) Think or Swim - Best trading platform we have seen, also look to Option Planet for education.
($) Investors Business Daily - Great source for news, commentary, and stocks to watch.
($) John Murphy Market Message at Stock Charts recommended from a member of our investor group who used to be a mutual fund manager.
The Chartsignals Blog is provided by one of the most popular instructors at Investools. His blog provides useful analysis of the market form someone who has many years of experience.
The Slope of Hope has been a useful guide. His watch lists and also his list of favorite websites have been helpful on the down side of the market.
Money Central at MSN - Specifically for MSN Stock Scouter.
If you don't know how to read candle charts, learn the basics at Candlesticker.
Once you have the basics, though, go to The Pattern Site. This place has candle and chart patterns, and provides some statistical analysis for the reliability of patterns.

Investools has education for many areas, they try to cover everything and do fairly well. They also have search tools and analysis tools which are very powerful and useful. But, to be honest, there are some people who just don't get it with Investools alone. We are such people and know plenty of others, too.

Market Tamer has an outstanding education program. If you already have gone the investools path and are still floating without much direction, sign up here. The folks at Market Tamer have made a real difference for us and many others we know.

I think many people simply need to learn at least two perspectives. Consider the cyclops, one point of vision, you can see what is around you but vision alone is limited. With stereoscopic vision you see everything from two perspectives and have perception of depth and distance. You have more ways to approach a trade, and in this area the one with the most tools (and knows how to use them) wins.

Option Planet has been great, but recently has been a marketing arm for TD Ameritrade and Investools. They are still free and at least worth listening to for the price, but the last couple of workshops we visited did not cover nearly the material they did before the merger. They used to stretch your mind, now they try to stretch your wallet. I hope they return to some of the material the covered before the merger because they introduced us to advanced complex option strategies and helped us to really understand them, but it really took 3-4 workshops to absorb enough material to get it. Like standing in front of a fire hose, you just could not take it all in at once.

We only subscribe to the basic EIBD at investors.com. What we have seen of their principles for investment are sound. Their IBD 100 list is very useful. Their market analysis is fairly conservative and sound. If you follow our short term trading concepts you may be ahead of them in some trades, you may not want to wait for their confirmation before acting.

John Murphy provides market analysis on so many levels it is staggering. Very sound and clear.

David Johnson is one of the few people I know who quotes himself in his own lessons. Nonetheless, it is still sound advice. He is one of the most popular instructors at Investools for a good reason, and is probably the biggest single influence in our trading rules and style. His entry and exit points tutorial at Investools is the best $50 we ever spent.

Slope of Hope has been helpful to us in bearish times, and that is how we use it.

Money Central is where we go for some alternative scoring and analysis for stocks.

Overlying Trading Guidelines

First, understand that when we say Trade, a Trade can last for hours or years, your own rules will set the time frame for any trade.

Here's a few thoughts to temper all the sources of information:

Knowing all those (candle and chart) patterns is probably as helpful as having the names of constellations in the night sky. They are useful for reference and discussion, fantastic at coctail parties. But as the constellations are just stars in the sky, these patterns are just manifestations of support and resistance. Stocks bounce up off support and down off resistance. Candles are indicators of immediate momentum, and fair indicators for action over the next few days at best. Larger patterns on charts are indicators of action for the next days to weeks. There will be smaller patterns within larger ones, but it is all just manifestation of support and resistance.
Different people have different interpretations of the same data. That is what makes the market work. When you buy somebody else is selling. You both think you are right, and there is a chance that you are both right, you may both profit. All the patterns and their projections are subjective. Support and resistance are not.
Markets do not move, markets are moved. They are moved by big money. Most of the time you will not have the slightest influence on the market. When big money buys markets stop going down, when they sell markets stop going up. The goal, as a technical investor, is to figure out where the big money is moving and ride in their wake.
A (former) Hollywood stock broker I met pointed out: It takes months of training to become a hair stylist, and days of training to become a broker. Still, don't take investing advice from a hair stylist, either...

Some price charts are screen captures, by permission, from Prophet Charts. Prophet Charts are a powerful and flexible analysis tool available from the Investors Tool Box, and Think or Swim, as well as at the Prophet home web site. All other charts are from the Think or Swim platform, Prophet is included in the TOS platform.

You should already be considering these things for your own trades, but here are some guidelines you should consider.

Since the generational market low in March 2008, we have mostly been trading ETFs for diversification to avoid single stock risk. You should understand your risk tolerance and formulate your strategies to incorporate your actual tolerance for risk.

If you are trading and find you don't want to incur the losses you are experiencing, then reduce position size and evaluate your strategy for the current market conditions. Consider paper trading and more back testing to understand the expectations you should have for your strategy.

The methods for technical analysis we discuss should apply to the price action of every heavily traded and highly liquid security. For example, we had a small position in an ETF which traded only about 50000 shares a day. We only had 1000 shares, so, in theory, were only 1/50 of the typical volume for any given day. On the day we were liquidating the position, in fact, the volume was much higher than average, but when our order hit the market for about 5 minutes WE WERE THE MARKET... We're not going to be there again, you should make sure what you are trading will not bite you.

In general about 75% of stocks move with the market, so we generally try to trade with the market which makes finding something to trade easier. If you consider 3 basic directions for the market, Up, Down, Sideways, and the market is going Up then about 12% of issues are going Sideways and about 12% are going Down.

If you can only trade long stocks and ETFs, and the market is not going up there are only 4 things you can do:

Stay in Cash until the market is going up again.
Find the roughly 12% of stocks that are going up and trade them as long as their trend continues.
If the market is down, find a few Inverse ETFs which go up as the market goes down.
Learn more complex strategies which can earn you money no matter the market conditions.

We chose door number 4. No matter what you choose, though, discipline is something you need to use to achieve success. Discipline in your rules, your analysis, and your actions.

You must always trade the charts you are watching. Do not allow the news, or anyone else's thoughts, or even your own expectations, interfere with what you see on the chart. Certainly it is impossible to completely remove emotion from your thoughts, but well defined rules can help. In a class I once took the instructor said: "It's OK to think, just don't trade what you think." Instead, you can make what you think be part of your action plan in the event it actually plays out, but until then trade the chart you have instead of the one you think you will have in the future. Nobody knows the future.

You should probably also redefine your concept of success and losing trades. Any trade in which you follow your rules is a good trade. Every real strategy will have some losing trades, your only edge will be in keeping losing trades small and allowing winners to run, depending on your rules. Sometimes there will be several consecutive losers, you should know what to expect of your strategy. It is fairly common for people to think of a losing trade as a bad trade, if you have bad trades then you may be a bad trader? We all want to be good traders - good investors. So re-program yourself to realize that any trade in which you follow your rules is a good trade, win or lose.

Of course it helps to have good rules, but without differences there really isn't a market. This means that what is good for us may not be good for you, the methods we use may not work well for you. There are plenty of methods and systems out there, and they can all work. In fact, without the differences, none of them would work.

Have a plan in mind for each and every trade, it helps to commit it to paper. Plan your entry and exits at a minimum, possibly targets. Sure you can adjust your plan, but you should have rules for the adjustments, at least guidelines to keep you from running completely out of control.