Trading Archive

Trading Stocks: Basic Technical Analysis

I’m a firm believer in the concept of having multiple streams of income. The idea is that you have multiple streams flowing together which form a river, making up the whole of your income. Each stream is a producer of income. One stream may be a book, another may be a rental property, another a dividend paying stock. If one stream dries up and goes away, you’re not shit out of luck. I learned this concept from the book Multiple Streams of Income by Robert Allen.The above image is a picture from the book, which I highly recommend reading if this interesting to you.

What I’m going to write about today falls into the aggressive pool. I like to trade stocks for fun and the way I mainly do that is through technical analysis. For a longer term view, I tend to use more fundamental analysis for stocks in my IRA/401k.

I learned a lot about this strategy from my friend Gavin Radzick at Thought Process Financial Education http://thoughtprocessfe.com/

Stocks are interesting. Stocks are awesome because sometimes it feels like all your doing is pushing a button and making money sprout to life out of thin air making you feel like a Greek fucking god. There is of course, the opposite side of the coin when you’re losing money, or about to lose money that can make you feel like an idiot, questioning and doubting if you have a clue what you’re doing. Ultimately, there is a lot of personal psychological management that has to be done. This involves assessing your risk tolerance and putting conditions in place that allow you to still go on with your day without obsessing about your portfolio. I suggest you read about position sizing also for risk management.

Technical analysis, to my understanding basically means using charts with overlying indicators to flatten out noise in the data and look for trends or signals that would incite one to take action. Fundamental analysis is looking at the underlying business fundamentals to determine if the co. is a good buy.

So, without further ado if there is a stock that piques my interest this is what I do. First I’ll go to Stockcharts.com (free!) and setup my chart like this:

I put green arrows to indicate where the 12 week exponential moving average (blue line) crosses UP over the 25 week moving average (red line), indicating a change in the trend of the stock’s movement to the upside (bullish indicator). If you want to buy this stock, a good time to do it would be at the point of the green arrows. A time to sell might be when the trend reverses and the 12 weeks EMA (exponential moving average) crosses down again (red arrow)

2015-12-13 10_42_19-CMG - SharpCharts Workbench - StockCharts.com

The most important thing when buying a stock is knowing your timeline for exiting the position. This may be 20 years in the sake of a 401k/IRA, so you may not even worry about technical analysis and just enjoy using DRiPs. In the context I’m discussing here, for a shorter term trade I’m going to use a chandelier exit for determining where my stop loss will be.

I adjusted my stockharts.com settings with the chandelier exit here:

2015-12-13 10_51_38-CMG - SharpCharts Workbench - StockCharts.com

The chandelier exit basically narrows or widens based off of the stock’s volatility. Volatility is a measure of the magnitude of change of a stock over time. I added the chandelier exit line to the chart below, the third green line tracing under the stock. As you can see it widens or narrows based on volatility.

It’s not foolproof and certainly not magic. If you got in say at the first green arrow I drew in May 2014 and got out in July 2015 (red arrow indicating chandelier exit point) you would have made a tidy profit.

However, if you got in at the second green arrow, August 2015 and got out at the next chandelier exit point, November 2015 you would have lost money. So, sometimes it works and sometimes it doesn’t.

The key points is this: this method is very lumpy. When you’re right, you get a nice big return. When you’re wrong, you cut your losses quickly. It’s sort of like a death by a thousand cuts, but you get saved by really strong healing spell once in a while the boosts you up to level 100, or something…

I know this is a departure from what I normally write. Did you find this useful, interesting? Please let me know in the comments.