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As a trader, I review a lot of stock charts, like the weekly chart of the Dow Jones US Autos & Parts ($DWCAUP), which implies I look for patterns and repeatable similarities as well as differences of price action. That’s my personal research niche. Nonetheless, I also research many news and views by specialists about the economy, which is not my niche. Even there, I believe every trader has to have a method.
As the primary auto secor stock writer for Torquenews.com , I get quite a few letters. Problem is, I cannot legally advise on what to buy or sell; and I wouldn’t if I could. I treat stock purchases like religion; meaning, it’s private. Besides, following someone else is seldom in your best interest. Education, yes, blind following, no. What is in your best interest as an investor is to think fully and act fully on your own. That requires education and dedication. I hope the following resolution ideas help.
1) Develop a method to track the trend bias of the general market: I paid dearly for that advice. The mentor that I was assigned was very clear that trading against a trend bias was a clear violation of economic sanity. Fact is, only large hedge funds have the cash and the fortitude to stomach large drawdowns that naturally come with trying to be a contrarian.
Some people use a pay system like Investools or Vector Vest to know if the light is green, red or yellow. There is a cheaper way, though: use moving averages. The market majors are the 20-day, the 50-day and the 200-day. On the longer term, I prefer the 150-day, because I have witnessed its success via Carter Braxton Worth on CNBC’s Fast Money.
2) Buy stocks only when the general trend bias is in your favor: Regardless of your system, just be sure to always honor it. For the record, Larry Connors of http://www.tradingmarkets.com/ has the data to prove that buying stocks only that are above their 200-day moving average make money than those that don’t.
3) Learn to use options: Contrary to some beliefs, options are your friends, not your enemies. Options give you the right but not the obligation to purchase very expensive stocks with far less outlay of cash. Put options allow you to short a stock as well as perform as a hedge in case of downturn.
For more information, please visit the Chicago Board of Options Exchange website where there are free educational tools: http://www.cboe.com/
4) Let the fundamental research determine what you buy: Quality or what Jim Cramer of CNBC’s Mad Money calls “best of breed” is best determined through research. There are many resources for this like, Investor’s Business Daily and CANSLIM, Investools, Vector Vest, MarketWatch, etc. Regardless of what you choose, you still have to have a basis for choosing the best or a method to choose those that have potential to be the best.
5) Use technical analysis to help define timing or purchases and sells: W.D. Gann once wrote, “Time is more important than price.” In that respect, a price-time chart becomes the basis for determining entry because it reflects the dynamics of prices.
T.A. requires a lot of study in the beginning. However, after some time, it becomes a part of you, rather natural. You begin to see repeatable price patterns, upswings, downswings, support, resistance. In time, you can learn to project.
6) You cannot manage risk, only yourself and your money relative to all that is risky: This is the philosophy I established for myself; and it is the theme behind my book, “Awaken Your Speculator Mind.” , available on Amazon.com by the way.
Do not be fooled; it is not just a play on words. Fact is, only the arrogant believe they can manage market risk. Every market wizard realizes this and has the humility and the winnings to prove it.
7) Learn to think in terms of probability, never certainty: Insurance companies use statistics all the time. They know by age and lifestyle the average age by which certain people will die; yet some live longer; others shorter. Well, statistics are also used by successful investors, at least in the way they think and view information.
Fact is, there are no certainties in markets. They are just too large, fickle and subject to “black swan” events like earthquakes, wars, floods, etc. That is why I use technical analysis as it helps me determine the degree of probability, but that is all.
Final Comments
I enjoy writing about stocks and technical analysis as much if not more than auto technology. So I am pleased that TorqueNews allows me this freedom.
For 2012, I suspect the auto secor will still be subject to the higher market forces. Nonetheless, technology has the power to change things quickly. For that reason, I track those auto technologies that I perceive to have the potential to change our future.
Sure, I believe EVs are here to stay, but thay must come down in price to have any significant impact. However, I also believe that some form of electrification will become standard on every car as we go forward; perhaps not fast enough for me, but more in 2012 than in the past. I look forward to seeing engine technologies like the Tour and the Scuderi split-cycle engines give every EV a run for its money.
With that, I wish you a prosperous and successful 2012.
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Full Disclosure: At time of publication, Sherosky, creator of the auto sector charts for TN, is neither long or short with the mentioned stocks or futures, though positions can change at any time. None of the information in this article constitutes a recommendation, but an assessment or opinion.
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About the Reporter: After 39 years in the auto industry as a design engineer, Frank Sherosky now trades stocks, futures and writes articles, books and ebooks like, "Perfecting Corporate Character," "Awaken Your Speculator Mind", and "Millennial World Order" via authorfrank.com. He may be contacted here by email: [email protected] and followed in Twitter under @Authorfranks
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