| |
| |
|
Stocks & Mutual Funds Information |
|
|
|
Stock Trading Diversification
This is the continuing story of our two imaginary traders, Peter and Paul. Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not. Peter and Paul have had vastly different Stock trading experiences - Peter has just made another substantial profit - this time from the Bear market, Paul has lost heavily. A chance meeting with Peter's group of friends one day at lunch launches Paul on a learning curve that will see him become a good trader, but not without some hard lessons along the way. In discussing the different attitudes of our two hypothetical traders, Peter and Paul, I have tried to share with you the thought processes that make a successful trader. If you read any of the marketing material from the Financial Planning community or the Mutual Fund promoters, they all stress the principle of diversification. They say it enhances returns while minimizing risk - Peter believes that ,as Frank Watkins says in his book, Exploding the Myths, "Diversification is another word for risk minimization, but it has very little to do with making profits." As one of the World's greatest Investors, Warren Buffet, has said on many occasions - diversification is simply an antidote for ignorance! Diversification for diversification's sake simply means that you will have your money in a lot of Stocks or markets that aren't performing to their fullest potential - some will be rising, some will be falling, some will be going nowhere. Hardly the best way to run your trading Business is it? Peter's view of diversification is different to that of the herd - use technical analysis to find several quality Stocks that are rising, then buy all of them in equal dollar amounts to reduce the risk of one Company crashing and taking all of his capital with it. When these quality Stocks stop going up, sell, take a profit and move on. Why hold Stocks in a Portfolio that are not rising, or worse, falling in value, simply because you want to have some diversification? If you look at the typical Brokers Portfolio recommendations, they will include Stocks that are in various stages of trends, both up and down. When you ask them why they would recommend something that is falling in price, they tell you, "Well you have to have some diversification. And based on fundamentals, it's valued at much more than the Market is quoting it. Don't put all your eggs in the one basket, spread your risk through different sectors, etc. etc." Peter merely takes the prudent step of diversifying across several quality Stocks that are rising in price. Simple. Below are some charts of Stocks that Peter found met his criteria - of course, this is in no way a recommendation to go out and buy any of these - they are simply examples of Stocks that met Peter's buy criteria at the time of entry. They might not fit the buy criteria now, and some have given Peter sell signals, but they will give you an idea of what to look for when a Broker or well meaning friend gives you that 'hot tip' and says you should buy as many of 'such and such stock' as you can get your hands on straight away. (Charts available at www.StockTradingReview.com) Study the charts above and you will notice that all of these Stocks were trending strongly with small reactions. The moving averages crossed and gave a buy signal - some gave a sell signal early and then another buy signal, and then they never looked back. Of course, not every Stock Peter bought rallied like these did. If they didn't, they were sold and the proceeds were used to buy something that had more potential. These are the types of trends Peter looks for and diversifies into. He doesn't buy, hold and hope for profits, based on some imagined intrinsic value that his Broker says the market hasn't identified yet... Remember though, if things don't go according to plan, Peter gets out quickly and looks for the next trade - but while the price is going his way, he simply looks for opportunities to compound his position. "Remember this simple rule", Peter tells Paul with monotonous regularity - "With any Stock you are considering buying, don't buy it or hold onto it if it isn't going up!!" Pretty simple advice, really... To Your Trading Success, Tony Spann and the Team Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques. Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com Copyright(C)2005 Stock Trading Review
MORE RESOURCES:
Google News |
|
|
|
RELATED ARTICLES
Different Ways of Buying Stocks Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value. Finding A Good Stock One of the things people are always asking me is how can I find a good stock. The answer I give does not please them. "Fears Only Enemy Is Action" What a great statement!I just heard someone use it in the context of personal and financial success and it struck me as a brilliant summary of an issue we raise in the SMG Tutorials.Fear is a huge issue with a lot of traders. How to Pick Winning Stocks There is nothing more exciting than finding an undervalued stock and seeing it explode out of nowhere rising in value 100% or more in a few weeks. Some stocks can move as much as 1000% in a year and?. Staying Sane While Wall Street Crashes Everybody is riding the Wall Street Roller coaster. Even if you are not invested, the headlines scream out one word: PANIC!It's hard not to join in the panicking. Emotional Involvement I'll bet with almost anyone that has stocks or mutual funds in his portfolio that he has losers, but he won't sell them because he "likes them" or some similar excuse. This is the philosophy of a loser. My Stock - Right or Wrong We all know the expression, "My country, right or wrong", but have you ever thought about the stocks or mutual fund you own and said to yourself, "My stock - right or wrong" and held on to your position even as you saw your hard-earned money disappearing?This is the Buy N Hold strategy and, in case you haven't noticed, lost from 40% to 60% and more of investors' money from 2000 to 2003. Fortunately, for the past year stock markets around the world have gone up and folks have recovered about 25% to 30% from those low numbers. 401K-itis Are you one of those many people who dread reading their 401K statements? You have been watching it decline for about 2 years and are wondering if will ever stop. Just about everyone says the market will come back. Who Knows? The Shadow knows. Remember him? It seems a shadow has a firm grip on this stock market. Selling The stock market has been going up for more than 7 months and many investors who held on through the big crash of 2000 are seeing their portfolios get back some of what had disappeared. Is now the time to sell those equities that are 'even' with what you paid for them? No. Lights of the Stock Market There are red lights, green lights, blue lights and spot lights. There are orange lights, pink light and flash lights. Its A Bull, Its A Bear, Its Suptertrader! The higher the market goes the more confusing are the "experts". In the September 14 issue of Investor's Business Daily newspaper we find the great prognosticators such as:Sheldon Jacobs, editor of No-Load Fund Investor newsletter quoted that he is recommending having more cash in your portfolio. How to Short Stocks? How to Make Money when Your Stocks Go Down by Shorting The stock market can present you with a lot of hot stocks every day. Many of them are new technology stocks that come from the nanotech, biotech, voip, healthcare, homeland defense or internet sectors. Maximizing a Stock Market Investment Maximizing a stock market investmentThere are several factors an investor in the stock market should consider for a maximum return on an investment:1. All stock purchases should be commission-free. Your Trading Objective: Why is that so Important? You've decided to try your luck at trading stocks or commodities, but so called experts tell you that you need to determine your trading objective. What exactly does that mean and why is it so important? Well, it's really a question of your trading philosophy. Two for the Money Look back over the years and try to remember how many different stocks and mutual funds you have owned. Suppose you had owned only 2 different equities during that entire time. Mutual Funds are Dead You may have wondered why your mutual funds have been going down for the past 2 years. The answer is very simple, but not one you will hear from Wall Street as they want you to send money. Lies, Damn Lies and Mutual Fund Returns How many times has this happened to you? You're at a social function and the conversation turns to investing. Pretty soon, people are comparing how well their investments are doing. No Load Mutual Funds or Exchange Traded Funds (ETFs)? If you are fed up with early redemption charges and ever increasing mutual fund management fees on top of bad-performing fund managers, read on. There is a quiet revolution going on in the no-load mutual fund industry and you, the individual investor, may benefit from it greatly. Shadow Bull As one of my regular readers you know I have been a stock market bear for the past 2 years and have encouraged everyone to put their money into a money market account or a short-term no-load bond fund and for the more adventurous what is called a bear mutual fund that goes up when the market goes down. Just being in cash as outlined in my book would have saved 40% or more of your money.
|
| home | site map |
| © 2006 |