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Can you use Technical Analysis alone for Trading Stocks?

Financial traders tend to either love or hate technical analysis in predicting the behaviour of stocks. And what about fundamental analysis, which some traders swear by? Which school of thought has the most success? And do you have to use just one system or the other to get a coherent trading method that works for you?

Recent research has shown that, as far as can be established, nearly 60 per cent of technical analysis based trading decisions turn out to be profitable. That’s enough, given sensible money management, to ensure a long-term profit. But unfortunately it doesn’t mean that the same percentage of traders using technical analysis to make decisions will be successful.

If you use technical analysis, how can you put the odds more in your favour and reduce the number of losing trades you make? I believe there is a way of doing this, but it does mean acknowledging some of the limitations of technical analysis, and utilising some aspects of other stock market trading systems, in particular fundamental analysis, to get the best possible combination of systems.

Technical analysis assumes the market knows everything and responds to events in a logical manner. In fairness, it has to make this assumption because there’s no way of measuring the illogicalities, fear, greed, mistakes and other psychological factors that influence human behavior in the stock market. It is at its best when used in extreme circumstances, where, for example, a stock has risen sharply and broken through its previous resistance level. And it favours short term trading rather than long term investing.

It’s rather like driving a car while having only the rear view mirror to help you decide which way to steer. It can tell you when you’ve been driving on the wrong side of the road or nearly in the ditch, and if there’s been a pattern in the direction of the car to left and right. But more than anything it can tell you what not to do next, even if it can’t tell you precisely what you should do.

You can therefore use it as a filter, so you’re aware of when you shouldn’t trade at all in any given stock. It’s not easy to apply this because it requires strict discipline, but if you can manage it you’ll save yourself a lot of losing trades.

When your selected stock passes the technical analysis “double negative” test (i.e. it’s not a stock that shouldn’t be traded right now) and you have what you might call a “gut feeling” about it, then you can apply fundamental analysis to  confirm to yourself that the next major price move really will be in the desired direction. Of course this will sometimes not be the case – always be ready to cancel your planned trade at the last minute. I believe this system, as adapted for your individual trading style, can help you avoid losing trades and increase your profits over the long term.

But remember the best system of all. Follow the one person who can help you towards a highly successful career trading the financial markets.

Just go to our home page and complete the form for your Secrets of Successful Trading.

Philip Gegan

Which Stock Market Trading Systems Will Work For You?

Perhaps one of the best stock market trading systems ever devised – and the simplest – is said to be used sometimes by Warren Buffet. He buys a stock or commodity that is at or near a periodic low. If it moves up he makes a profit and if it moves further down he simply buys more of it, but twice as much. That way he’s into profit once it recovers just half of what it lost.

This is a low-risk strategy in that the stock can never go below zero, and if the trade is of an index or a commodity then the danger of insolvency is removed as well. So all in all this is an excellent trading system.

But what about those of us who don’t have WB’s billions to trade with? What stock market trading systems can we turn to in order to minimise risk and maximise profits?

Any such system has to incorporate the collection and display of sufficient information about the stock or other security that we’re trading. It has to take into account our own targets and limitations, the capital we have available and any handicaps, such as lack of time, that we have to deal with. It then has to produce rules that we can easily understand and obey.

The situation is confused by hundreds of systems of various kinds available for sale on the internet, all claiming to be capable of making you thousands a week in profits, and nearly all being sold by people who never actually trade on the stock market. They can therefore largely be ignored as being of no use in the real world.

The remaining systems nearly all incorporate one or both of the two main techniques that have been around for many years – fundamental analysis and technical analysis.

Many traders are proponents of just one or the other, but it seems that those who are most successful use both methods.

Let’s take equities as an example. It must make sense before making a trading decision to check one or two fundamental indicators that may affect the price direction of the stock. If the price has been rising steadily it may be that buyers have been active ahead of a profits announcement due in a couple of days. If the profits are high this might have already been discounted in the market, and if they are disappointing the share price will probably fall.

If you’re a committed technical analyst then you would probably not take any notice of such matters, relying solely on the chart of the price history, and some chart-based indicators. Certain indicators may show a danger signal that the stock is already at a high and has nowhere to go but down.

You’ll probably find that a combination of fundamentals and technical analysis, perhaps with the right stock trade software, gives you the best information. By regularly studying your charts you will be able to determine with sufficient accuracy if a market is nearing or has now reached a periodic high or low. Blending such observation with fundamental analysis, i.e. knowledge of market conditions, special factors that will probably impact on the price, and so on, is what successful traders do to make consistent profits.

The important thing is that you as a trader develop your own trading system that suits just you and your own unique style. This may take you some time, so why not find a successful trader who will teach you his system, and adapt it? Just go to our home page and complete the form for your Secrets of Successful Trading.

Philip Gegan

No Penny Stock Trading System Can Beat Covered Warrants

No matter how good your penny stock trading system may be, there are enough dangers in penny stocks to prevent it from delivering the regular profits that you might expect of it. There is a simple solution, but it means adapting what you’ve learned trading penny stocks to another market – covered warrants. Let me expand on that.

Trading penny stocks can be very profitable on occasion. They can suddenly increase in price by sometimes 100 per cent or more in days. Increases of 500 per cent in a couple of weeks have been known. No wonder they’re so popular.

But, of course, this comes at a price. The price can go down as well as up, and many traders have been caught out by a sudden fall in the share price. Even when the price has gone up it can be very difficult to sell the shares. This is because most penny share companies are very small and there is therefore a lack of liquidity, with few people buying or selling the shares.

There’s often no regulation at first. Information about the issue and the company can be hard to obtain and may be unreliable. The share price is therefore very difficult to put a value on. The share issue is normally not very large, it is usually thinly traded and is therefore easily manipulated.

Then there is the “pump and dump” scam. False information can be spread, usually involving a fantastic story of a technological breakthrough of some kind that will bring in large profits. If you’re offered shares that have recently increased in value, through a not-very-well-known broker against such a background then be on guard. Does your penny stock trading system protect you from this?

Most brokers dealing in penny shares operate a spread rather than charge a commission. The difference between the selling price and the buying price can often be 25 to 33 per cent, and sometimes up to over 100 per cent. And there are two sets of bid and ask prices – the inside and the outside.

Add to this the fact that brokers often mark the prices up on top of that, to cover the extra risk, and you have a situation just made for exploitation of the unwary by the unscrupulous. In any event this helps explain why penny shares are usually over-priced, and the windfall profits sought after by traders are so elusive, no matter how good their trading system is.

Every reason you can think of, really, not to get involved in penny stocks, no matter what stock trading tools you have.

So why not look at another investment vehicle that also allows you to get your foot in the door with a limited amount of capital, offers frequent profits of 200 per cent or more, but without the risks of penny shares?

I’m referring to covered warrants. These enable you to effectively buy the right to a newly issued security at a fixed price at a certain date in the near future. There’s unlimited upside potential with strictly limited downside risk. And they can be traded in the stock market, with the underlying share being in a larger, more reliable company and therefore less-prone-to-manipulation than penny shares.

They are certainly worth finding out more about. And you can do this quite easily. Just go to our home page, fill out the form, and click on “Secrets to Successful Trading”.

Philip Gegan

Index Option Trading – Less Risk, More Profits

Not many financial traders know much about index option trading. But it’s possible to make regular large profits with minimal risk with this method.

Most of us know about options. Instead of buying actual shares, you buy the option, or right, to buy them at a later date, e.g. 3 months ahead, at a price similar or identical to their current price.

So if you consider the stock of XYZ Inc, current price $10.00, is about to rise, then you could buy an option to purchase, say, 1,000 shares at $10.00 each in, say, 3 months’ time. The cost (or premium) of the option might be 10 cents a share, total $100 (1,000 x $0.10).

In addition, your risk is less, because the most you can lose is your premium of $100, if the price does not rise. If you bought the actual shares your theoretical risk would be $10,000, though only if the company was to go bankrupt and the shares become worthless. In spite of this, options are an excellent alternative to shares, and you can have an interest in many more shares for your money, which brings us to the next point.

If the share price rises as you predicted, then you can make a massive profit. In this example, if the share price rose just a little to $12 from $10 within the three months, which is quite feasible, then you would be able to sell your option for $2,000, i.e. you’d in effect buy the shares for $10 each, total $10,000, and sell them for $12 each, total $12,000. The profit is therefore $2,000, less the original $100 premium, giving a net profit of $1,900.

If it’s as easy as that, then why would anyone sell an option to you? Because they might be of the view that the shares will probably go down in value.

Now we come to index option trading. The trouble with the example I’ve just given is that it can be very difficult to predict future price movements of individual stocks unless you are very familiar with what’s going on in that company. But you can easily do this with an index of a number of companies in a particular category.

Suppose you are keeping close track of what is going on in the utilities sector. If you find a suitable index of the companies in that sector, you can track it, and when you consider a move upwards in price is due then purchase the index option. Or sell it if you think the price is about to go down. The advantage here is that any individual share volatility will be ironed out and you will be protected against unexpected price moves.

Of all the stock trading tools you may find, this must be one of the best. If you keep yourself well-informed in a few sectors as I’ve explained, something that’s not too difficult to do, then you should be successful far more often than not, and given the risk/reward ratio explained above you should be able to make regular profits with minimal risk.

Philip Gegan