1. Cup with Handle:
- last from 7 weeks to 65 weeks, but mostly from 3 to 6 months.
- The correction is 12% to 33%.
- at least 30% price increase in the prior uptrend, together with improving relative strength and increasing volume
- Prefer a“U” shape than a very narrow “V”shape.
- Plunge 40% or 50% is rare.
2. C = Current big or accelerating quarterly earnings and sales per share.
- Earnings per share(EPS) up at least 25% in the most recent quarter versus the same quarter the year before.
- Sales growth of at least 25% for the latest quarter, or at least an acceleration in the rate of sales percentage improvement over the last three quarters.
3. A = Annual Earnings Increases:
- 25% and higher Annual Earnings Growth Rates
- 17% and higher Return on equity. ROE is calculated by dividing net income by shareholders’equity. This shows how efficiently a company uses its money.
- Annual cash flow per share could be 20% greater than actual earnings per share.
- The stability and consistency of annual earnings growth over the past three years.
- Bull (up) markets last two to four years.
- Don’t overlook a stock just because its P/E seems too high. And never buy a stock just because the P/E ratio makes it look like a bargain. P/E ratios are an end effect of accelerating earnings that, in turn, attract big institutional buyers, resulting in strong price performance. P/Es are not a cause of excellent performance.
- For example, if Charles Schwab’s stock breaks out of its first base at $43.75 per share (as it did in late 1998) and its P/E ratio at the beginning buy point is 40, multiply 40 by 130% to see that the P/E ratio could possibly expand to 92 if the stock has a huge price move. Next, multiply the potential P/E ratio of 92 by the consensus earnings estimate two years out of $1.45 per share. This tells you what a possible price objective for your growth stock might be
- Another faulty use of P/E ratios, is to evaluate the stocks in an industry and conclude the one selling at the cheapest P/E is always undervalued and therefore the most attractive purchase. The reality is, the lowest P/E usually belongs to the company with the most ghastly earnings record. You can’t buy a Mercedes for the price of a Chevrolet
- Don’t Sell High-P/E Stocks Short
4. N = Newer companies, new products, new management, new highs off properly formed bases.
- What seems too high in price and risky to the majority usually goes higher eventually, and what seems low and cheap usually goes lower.
5. S = Supply and demand: big volume demand at key points
- Companies in which top management owns a large percentage of the stock (at least 1% to 3% in a large company, and more in small companies) generally are better prospects because the managers have a vested interest in the stock.
- Excessive Stock Splits May Hurt. 2-for-1 or 3-for-2 splits are better than 3-for-1 or 5-for-1 splits.
- Incidentally, a stock will usually end up moving higher after its first split in a new bull market. But before it moves up, it will go through a correction for a period of weeks.
- A stock will often reach a price top around the second or third time it splits.
- it’s usually a good sign when a company buys its own stock in the open market consistently over a period of time. (A 10% buyback would be considered big.)
- A Low Corporate Debt-to-Equity Ratio Is Generally Safer and Better.The earnings per share of companies with high debt-to-equityratios could be clobbered in difficult periods when interest rates are high or during more severe recessions. These highly leveraged companies are generally of lower quality and carry substantially higher risk.
- A corporation that’s been reducing its debt as a percentage of equity over the last two or three years is worth considering. If nothing else, interest costs will be sharply reduced, helping to generate higher earnings per share.
- watch for is the presence of convertible bonds in the capital structure; earnings could be diluted if and when the bonds are converted into shares of common stock.
- When a stock pulls back in price, you typically want to see volume dry up at some point, indicating that there is no further significant selling pressure. When the stock rallies in price, in most situations you want to see volume rise, which usually represents buying by institutions, not the public.
- When a stock breaks out of a price consolidation area, trading volume should be at least 40% or 50% above normal. In many cases, it will increase 100% or much more for the day, indicating solid buying of the stock and the possibility for further increases in price. Using daily and weekly charts helps you analyze and interpret a stock’s price and volume action. Monthly charts are also of value.
- You should analyze a stock’s base pattern week by week.
6. L = Leader or laggard: which is your stock?
- Buy Among the Best Two or Three Stocks in a Group. The top one, two, or three stocks in a strong industry group can have unbelievable growth, while others in the pack may hardly stir.You should buy the number one company.
- Avoid Sympathy Stock Moves. A sympathy play is a stock in the same industry group that is bought in the hope that the luster of the real leader will rub off on it. But the profits of such companies usually pale in comparison. “The first man gets the oyster; the second, the shell.”
- When you buy a stock, make absolutely sure that it’s coming out of a sound base or price consolidation area. Also make sure that you buy it at its exact buy, or pivot, point.
- The more desirable growth stocks normally correct 1? to 2? times the general market averages. However, in a correction during a bull, or upward-trending, market, the growth stocks that decline the least (percentage-wise) are usually your best selections. Those that drop the most are normally the weakest.
- Once a general market decline is definitely over, the first stocks that bounce back to new price highs are almost always your authentic leaders.
- It seldom pays to invest in laggard stocks, even if they look tantalizingly cheap. Look for, and confine your purchases to, market leaders. Get out of your laggard losers if you’re down 8% below the price you paid so that you won’t risk getting badly hurt.
7. I = Institutional sponsorship
- Institutional sponsorship refers to the shares of any stock owned by such institutions. A winning stock should have several at a minimum twenty institutional owners. Look for Both Quality and Increasing Numbers of Buyers. Note New Stock Positions Bought in the Last Quarter
- Is Your Stock “Overowned” by Institutions? The danger is that excessive sponsorship might translate into large potential selling if something goes wrong at the company or if a bear market begins.
- Don’t be swayed by a stock’s broad-based popularity or an analyst advising investors to buy stocks on the way down in price.
- Institutional Sponsorship Means Market Liquidity
- In summary: buy only those stocks that have at least a few institutional sponsors with better-than-average recent performance records and that have added institutional owners in recent quarters. If
8. M = Market direction
- A normal intermediate decline is typically 8% to 12%.
- General Markets: SP-500, NASDAQ, DJIA and NYSE
- Bear markets usually end while business is still in a downtrend. The reason is that stocks are anticipating, or “discounting,” all economic, political, and worldwide events many months in advance. The stock market is a leading economic indicator, not a coincident or lagging indicator, in our government’s series of key economic indicators. Similarly, bull markets usually top out and turn down before a recession sets in. For this reason, looking at economic indicators is a poor way to determine when to buy or sell stocks and is not recommended.
- A 33% Drop Requires a 50% Rise to Break Even. Preserve as much as possible of the profit.
- The Myths about “Long-Term Investing”and Being Fully Invested. The buy-and-hold strategy was also disastrous to anyone who held technology stocks from 2000 through 2002.
- When market indexes peak and begin major downside reversals, you should act immediately by putting 25% or more of your portfolio in cash, selling your stocks at market prices.
- Using Stop-Loss Orders.
- Distribution day is heavy volume without further price progress up. Normal liquidation near the market peak will usually occur on three to five specific days over a period of four or five weeks. In other words, the market comes under distribution while it’s advancing!
- After the market does top out, it typically will rally feebly and then fail. After the first day’s rebound, for instance, the second day will open strongly but suddenly turn down near the end of the session. The abrupt failure of the market to follow through on its first recovery attempt should probably be met with further selling on your part.
- You’ll know that the initial bounce back is feeble if (1) the index advances in price on the third, fourth, or fifth rally day, but on volume that is lower than that of the day before, (2) the average makes little net upward price progress compared with its progress the day before, or (3) the market average recovers less than half of the initial drop from its former absolute intraday high. When you see these weak rallies and failures, further selling is advisable.
- The typical bear market (and some aren’t typical) usually has three separate phases, or legs, of decline interrupted by a couple of rallies that last just long enough to convince investors to begin buying.
- A rally attempt begins when a major market average closes higher after a decline that happened either earlier in the day or during the previous session. For example, the Dow plummets 3% in the morning but then recovers later in the day and closes higher. Or the Dow closes down 2% and then rebounds the next day. We typically call the session in which the Dow finally closes higher the first day of the attempted rally, although there have been some exceptions.
- Starting on the fourth day of the attempted rally, look for one of the major averages to “follow through” with a booming gain on heavier volume than the day before.
- Occasionally, but rarely, a follow-through occurs as early as the third day of the rally. In such a case, the first, second, and third days must all be very powerful, with a major average up 1_% to 2% or more each session in heavy volume.
9. The first rule for the highly successful individual investor is . . . always cut short and limit every single loss. To do this takes never-ending discipline and courage. Lose small and win big is the holy grail of investing. The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.
10. Use 3-to-1 ratio between where to sell and take profits and where to cut losses. If you take some 20% to 25% gains, cut your losses at 7% or 8%. If you’re in a bear market like 2008 and you buy any stocks at all, you might get only a few 10% or 15% gains, so I’d move quickly to cut every single loss automatically at 3%, with no exceptions.
11. Always, without Exception, Limit Losses to 7% or 8% of Your Cost. Which do you want,Wiped out, or sell and cut a loss?
12. Valuable secret: if you use charts to time your buys precisely off sound bases (price consolidation areas), your stocks will rarely drop 8% from a correct buy point. So when they do, either you’ve made a mistake in your selection or a general market decline may be starting.
13. Once you’re significantly ahead and have a good profit, you can afford to give the stock a good bit more room for normal fluctuations off its price peak. Do not sell a stock just because it’s off 7% to 8% from its peak price. Now you’re working on a profit, so in a bull market, you can afford to give the stock more room to fluctuate so that you don’t get shaken out on a normal 10% to 15% correction.
14. Gerald M. Loeb: “I would hope (the loss )to be out long before they ever reach 10%.”
15. It takes a lot of time to learn to make follow-up buys safely when a stock is up, but this method of money management forces you to move your money from slower-performing stocks into your stronger ones. I call this force-feeding. You’ll end up selling stocks that are not yet down 7% or 8% because you are raising money to add to your best winners during clearly strong bull markets.
16. Keep in mind that growth stocks can top at a time when their earnings are excellent and analysts’ estimates are still rosy.
17. Cutting Losses Is Like Buying an Insurance Policy. The stock you sell will often turn right around and go back up, don’t conclude that you were wrong to sell it. If you hesitate and allow a loss to increase to 20%, you will need a 25% gain just to break even. Wait longer until the stock is down 25%, and you’ll have to make 33% to get even. Wait still longer until the loss is 33%, and you’ll have to make 50% to get back to the starting gate.
18. Take Your Losses Quickly and Your Profits Slowly. Never average down. “The only problem is we hope when we should fear, and we fear when we should hope.” Knowing and acting is better than hoping or guessing. The fact that you want a stock to go up so you can at least get out even has nothing to do with the action and brutal reality of the market. The market obeys only the law of supply and demand.
19. The Turkey Story. They hope more turkeys will return to the box when they should fear that all the turkeys could walk out and they’ll be left with nothing.
20. price-paid bias. When you think about selling a stock, you probably look at your records to see what price you paid for it. If you have a profit, you may sell, but if you have a loss, you tend to wait. After all, you didn’t invest in the market to lose money. However, what you should be doing is selling your worst-performing stock first. It’s bad business to base your sell decisions on your cost and hold stocks down in price simply because you can’t accept the fact you made an imprudent selection and lost money.
21. Analyze your stocks every month. Keep the one doing well, and remove the one at the bottom of the list. This forces you to focus your attention NOT on what you paid for your stocks, but on the relative performance of your investments in the market. Write down the price at which you expect to sell if you have a loss (8% or less below your purchase price) along with the expected profit potential of all the securities you purchase.
22. The Red Dress Story. Get rid of the unpopular yellow dress with a 10 or 20 percent discount.
23. Be a Speculator, not an Investor
Jesse Livermore: "Investors are the big gamblers. They make a bet, stay with it, and if it goes wrong, they lose it all.” There’s no such thing as a long-term investment once a stock drops into the loss column and you’re down 8% below your cost.
Baruch: “The word speculator comes from the Latin ‘speculari,’ which means to spy and observe. A speculator, therefore, is a person who observes and acts before [the future] occurs.”
24. Do not over-diversify. Wide diversification is a substitute for lack of knowledge.
25. Risky and foolish: “I’m Not Worried; I’m a Long-Term Investor, and I’m Still Getting My Dividends”
26. Forget your ego, swallow your pride, stop trying to argue with the market, and don’t get emotionally attached to any stock that’s losing you money.
27. Remember: there are no good stocks; they’re all bad . . . unless they go up in price. Learn from the 2000 and 2008 experience.
28. The best way to sell a stock is when it’s on the way up, while it’s still advancing and looking strong to everyone else. If you don’t sell early, you’ll be late. The object is to make and take significant gains and not get excited, optimistic, greedy, or emotionally carried away as your stock’s advance gets stronger. Keep in mind the old saying: “Bulls make money and bears make money, but pigs get slaughtered.”
Bernard Baruch : “Repeatedly, I have sold a stock while it was still rising—and that has been one reason why I have held on to my fortune. Many a time, I might have made a good deal more by holding a stock, but I would also have been caught in the fall when the price of the stock collapsed.”
Nathan Rothschild : “I never buy at the bottom, and I always sell too soon.”
Joe Kennedy believed “only a fool holds out for the top dollar.” “The object,” he said, “is to get out while a stock is up before it has a chance to break and turn down.”
Gerald M. Loeb stressed “once the price has risen into estimated normal or overvaluation areas, the amount held should be reduced steadily as quotations advance.”
29. Jesse Livermore: the objective in the market was not to be right, but to make big money when you were right.
30. “Averaging up” is a technique where, after your initial stock purchase, you buy additional shares of the stock when it moves up in price. This is usually warranted when the first purchase of a stock is made precisely at a correct pivot, or buy, point and the price has increased 2% or 3% from the original purchase price. Essentially, I followed up what was working with additional but always smaller purchases, allowing me to concentrate my buying when I seemed to be right. If I was wrong and the stock dropped a certain amount below my cost, I sold the stock to cut short every loss.
31. sell at +20% rule: I’d buy each stock exactly at the pivot buy point and have the discipline not to pyramid or add to my position at more than 5% past that point. Then I’d sell each stock when it was up 20%, while it was still advancing.
32. If the stock was so powerful that it vaulted 20% in only one, two, or three weeks, it had to be held for at least eight weeks. Then it would be analyzed to see if it should be held for a possible six-month long-term capital gain. (Six months was the long-term capital gains period at that time.) If a stock fell below its purchase price by 8%, I would sell it and take the loss. I came to almost always make my first follow-up purchase automatically as soon as my initial buy was up 2% or 2.5% in price.
33. I came to almost always make my first follow-up purchase automatically as soon as my initial buy was up 2% or 2.5% in price. Second, beware of the big-block selling you might see on a ticker tape or your PC just after you buy a stock during a bull market. The selling might be emotional, uninformed, temporary, or not as large (relative to past volume) as it appears. The best stocks can have sharp sell-offs for a few days or a week. Consult a weekly basis stock chart for an overall perspective to avoid getting scared or shaken out in what may just be a normal pullback.
34. Climax Tops
1. Largest daily price run-up. If a stock’s price is extended—that is, if it’s had a significant run-up for many months from its buy point off a sound and proper base—and it closes for the day with a larger price increase than on any previous up day since the beginning of the whole move up, watch out! This usually occurs very close to a stock’s peak.
2. Heaviest daily volume. The ultimate top might occur on the heaviest volume day since the beginning of the advance.
3. Exhaustion gap. If a stock that’s been advancing rapidly is greatly extended from its original base many months ago (usually at least 18 weeks out of a first- or second-stage base and 12 weeks or more if it’s out of a later-stage base) and then opens on a gap up in price from the previous day’s close, the advance is near its peak. For example, a two-point gap in a stock’s price after a long run-up would occur if it closed at its high of $50 for the day, then opened the next morning at $52 and held above $52 during the day. This is called an exhaustion gap.
4. Climax top activity. Sell if a stock’s advance gets so active that it has a rapid price run-up for two or three weeks on a weekly chart, or for seven of eight days in a row or eight of ten days on a daily chart. This is called a climax top. The price spread from the stock’s low to its high for the week will almost always be greater than that for any prior week since the beginning of the original move many months ago.
In a few cases, around the top of a climax run, a stock may retrace the prior week’s large price spread from the prior week’s low to its high point and close the week up a little, with volume remaining very high.
I call this “railroad tracks” because on a weekly chart, you’ll see two parallel vertical lines. This is a sign of continued heavy volume distribution without real additional price progress for the week.
5. Signs of distribution. After a long advance, heavy daily volume without further upside price progress signals distribution. Sell your stock before unsuspecting buyers are overwhelmed. Also know when savvy investors are due to have a long-term capital gain.
6. Stock splits. Sell if a stock runs up 25% to 50% for one or two weeks on a stock split. In a few rare cases, such as Qualcomm at the end of 1999, it could be 100%. Stocks tend to top around excessive stock splits. If a stock’s price is extended from its base and a stock split is announced, in many cases the stock could be sold.
7. Increase in consecutive down days. For most stocks, the number of consecutive down days in price relative to up days in price will probably increase when the stock starts down from its top. You may see four or five days down, followed by two or three days up, whereas before you would have seen four days up and then two or three down.
8. Upper channel line. You should sell if a stock goes through its upper channel line after a huge run-up. (On a stock chart, channel lines are somewhat parallel lines drawn by connecting the lows of the price pattern with one straight line and then connecting three high points made over the past four to five months with another straight line.) Studies show that stocks that surge above their properly drawn upper channel lines should be sold.
9. 200-day moving average line. Some stocks may be sold when they are 70% to 100% or more above their 200-day moving average price line, although I have rarely used this one.
10. Selling on the way down from the top. If you didn’t sell early while the stock was still advancing, sell on the way down from the peak. After the first breakdown, some stocks may pull back up in price once.
35. Low Volume and Other Weak Action
1. New highs on low volume. Some stocks will make new highs on lower or poor volume. As the stock goes higher, volume trends lower, suggesting that big investors have lost their appetite for the stock.
2. Closing at or near the day’s price low. Tops can also be seen on a stock’s daily chart in the form of “arrows” pointing down. That is, for several days, the stock will close at or near the low of the daily price range, fully retracing the day’s advance.
3. Third- or fourth-stage bases. Sell when your stock makes a new high in price off a third- or fourth-stage base. The third time is seldom a charm in the market. By then, an advancing stock has become too obvious, and almost everyone sees it. These late-stage base patterns are often faulty, appearing wider and looser. As much as 80% of fourth-stage bases should fail, but you have to be right in determining that this is a fourth stage base.
4. Signs of a poor rally. When you see initial heavy selling near the top, the next recovery will follow through weaker in volume, show poor price recovery, or last fewer days. Sell on the second or third day of a poor rally; it may be the last good chance to sell before trend lines and support areas are broken.
5. Decline from the peak. After a stock declines 8% or so from its peak, in some cases examination of the previous run-up, the top, and the decline may help you determine whether the advance is over or whether a normal 8% to 15% correction is in progress. You may occasionally want to sell if a decline from the peak exceeds 12% or 15%.
6. Poor relative strength. Poor relative price strength can be another reason for selling. Consider selling when a stock’s IBD’s Relative Price Strength Rating drops below 70.
7. Lone Ranger. Consider selling if there is no confirming price strength by any other important member of the same industry group.
36. Breaking Support: Breaking support occurs when stocks close for the week below established major trend lines.
1. Long-term uptrend line is broken. Sell if a stock closes at the end of the week below a major long-term uptrend line or breaks a key price support area on overwhelming volume. An uptrend line should connect at least three intraday or intraweek price lows occurring over a number of months. Trend lines drawn over too short a time period aren’t valid.
2. Greatest one-day price drop. If a stock has already made an extended advance and suddenly makes its greatest one-day price drop since the beginning of the move, consider selling if the move is confirmed by other signals.
3. Falling price on heavy weekly volume. In some cases, sell if a stock breaks down on the largest weekly volume in its prior several years.
4. 200-day moving average line turns down. After a prolonged upswing, if a stock’s 200-day moving average price line turns down, consider selling the stock. Also, sell on new highs if a stock has a weak base with much of the price work in the lower half of the base or below the 200-day moving average price line.
5. Living below the 10-week moving average. Consider selling if a stock has a long advance, then closes below its 10-week moving average and lives below that average for eight or nine consecutive weeks, unable to rally and close the week above the line.
37. Other Prime Selling Pointers
1. If you cut all your losses at 7% or 8%, take a few profits when you’re up 20%, 25%, or 30%. Compounding three gains like this could give you an overall gain of 100% or more. However, don’t sell and take a 25% or 30% gain in any market leader with institutional support that’s run up 20% in only one, two, or three weeks from the pivot buy point on a proper base. Those could be your big leaders and should be held for a potentially greater profit.
2. If you’re in a bear market, get off margin, raise more cash, and don’t buy very many stocks. If you do buy, maybe you should take 15% profits and cut all your losses at 3%.
3. In order to sell, big investors must have buyers to absorb their stock. Therefore, consider selling if a stock runs up and then good news or major publicity (a cover article in BusinessWeek, for example) is released.
4. Sell when there’s a great deal of excitement about a stock and it’s obvious to everyone that the stock is going higher. By then it’s too late. Jack Dreyfus said, “Sell when there is an overabundance of optimism. When everyone is bubbling over with optimism and running around trying to get everyone else to buy, they are fully invested. At this point, all they can do is talk. They can’t push the market up anymore. It takes buying power to do that.” Buy when you’re scared to death and others are unsure. Wait until you’re happy and tickled to death to sell.
5. In most cases, sell when the percentage increases in quarterly earnings slow materially (or by two-thirds from the prior rate of increase) for two consecutive quarters.
6. Be careful of selling on bad news or rumors; they may be of temporary influence. Rumors are sometimes started to scare individual investors— the little fish—out of their holdings.
7. Always learn from all your past selling mistakes. Do your own post-analysis by plotting your past buy and sell points on charts. Study your mistakes carefully, and write down additional rules to avoid past mistakes that caused excessive losses or big missed opportunities. That’s how you become a savvy investor.
38. When to Be Patient and Hold a Stock
Buy growth stocks where you can project a potential price target based on earnings estimates for the next year or two and possible P/E expansion from the stock’s original base breakout.
In a few cases, you may have to allow 13 weeks after your first purchase before you conclude that a stock that hasn’t moved is a dull, faulty selection. This, of course, applies only if the stock did not reach your defensive, loss cutting sell price first.
Pay attention to the general market
Any stock that rises close to 20% should never be allowed to drop back into the loss column.
“It never is your thinking that makes big money,” said Livermore. “It’s the sitting.”
When a stock breaks out of a proper base, after its first move up, 80% of the time it will pull back somewhere between its second and its sixth week out of the base. Holding for eight weeks, of course, gets you through this first selling squall and into a resumed up-trend, and you’ll then have a better profit cushion.
39. Always set a limit on how many stocks you will own, and stick to your rules. Most people with $20,000 to $200,000 to invest should consider limiting themselves to four or five carefully chosen stocks they know and understand. Even investors with portfolios of more than a million dollars need not own more than ten well-selected securities.
40. In a bull market, one way to maneuver your portfolio toward more concentrated positions is to follow up your initial buy and make one or two smaller additional buys in stocks as soon as they have advanced 2% to 3% above your initial buy. However, don’t allow yourself to keep chasing a stock once it’s extended too far past a correct buy point.At the same time, sell and eliminate stocks that start to show losses before they become big losses.
41. Should You Invest for the Long Haul? The answer is that the holding period (long or short) is not the main issue. What’s critical is buying the right stock—the very best stock—at precisely the right time, then selling it whenever the market or your various sell rules tell you it’s time to sell. The time between your buy and your sell could be either short or long.
42. Do not day trade! Most investors lose money doing this. The reason is simple: you are dealing predominantly with minor daily fluctuations that are harder to read than basic trends over a longer time period. Besides, there’s generally not enough profit potential in day trading to offset the commissions you generate and the losses that will inevitably occur. Don’t try to make money so fast. Rome wasn’t built in a day.
43. Use Margin? It usually takes most new investors at least two to three years before they gain enough market experience to be able to make and keep significant profits and to start using margin. The best time to use margin is generally during the first two years of a new bull market. Once you recognize a new bear market, you should get off margin immediately and raise as much cash as possible. Never Answer a Margin Call. Don’t put up more money; think about selling stock. Nine times out of ten, you’ll be better off.
44. Sell short:
- Keep the limit to 10% or 15% of available money.
- In selling short, you also have to minimize your risk by cutting your losses at 8%.
- Rule 1: Don’t sell short during a bull market.
- Rule 2: Never sell short a stock with a small number of shares outstanding.
- Two best chart price patterns for selling short: 1. The “head-and-shoulders top. 2 Third- or fourth-stage cup-with-handle or other patterns that have definitely failed after attempted breakouts.
45. The safest time to buy an IPO is on the breakout from its first correction and base-building area. Once a new issue has been trading in the market for one, two, or three months or more, you have valuable price and volume data that you can use to better judge the situation.
46. Build up your weaknesses until they become your strong points.
47. Twenty-one costly lessons:
1. Stubbornly holding onto your losses when they are very small
and reasonable.
2. Buying on the way down in price, thus ensuring miserable results.
3. Averaging down in price rather than averaging up when buying.(WNR)
4. Not learning to use charts and being afraid to buy stocks that are going into new high ground off sound bases. The best time to buy a stock during any bull market is when the stock initially emerges from a price consolidation or sound “basing” area of at least seven or eight weeks.
5. Never getting out of the starting gate properly because of poor selection criteria and not knowing exactly what to look for in a successful company.
6. Not having specific general market rules to tell when a correction in the market is beginning or when a market decline is most likely over and a new up-trend is confirmed.
7. Not following your buy and sell rules, causing you to make an increased number of mistakes.
8. Concentrating your effort on what to buy and, once the buy decision is made, not understanding when or under what conditions the stock must be sold.
9. Failing to understand the importance of buying high-quality companies with good institutional sponsorship and the importance of learning how to use charts to significantly improve selection and timing.
10. Buying more shares of low-priced stocks rather than fewer shares of higher-priced stocks. Low-priced stocks may cost more in commissions and markups. They do not have a top-notch following. Cheap stocks also have larger spreads in terms of the percentage difference between the bid and ask price.(hnu.to)
11. Buying on tips, rumors, split announcements, and other news events; stories; advisory-service recommendations; or opinions you hear from other people or from supposed market experts on TV.
12. Selecting second-rate stocks because of dividends or low P/E ratios. You should focus on earnings per share growth.
13. Wanting to make a quick and easy buck. Wanting too much, too fast—without doing the necessary preparation, learning the soundest methods, or acquiring the essential skills and discipline—can be your downfall. Chances are, you’ll jump into a stock too fast and then be too slow to cut your losses when you are wrong.
14. Buying old names you’re familiar with.
15. Not being able to recognize (and follow) good information and advice. Friends, relatives, certain stockbrokers, and advisory services can all be sources of bad advice. Only a small minority are successful enough themselves to merit your consideration.
16. Cashing in small, easy-to-take profits while holding the losers.
17. Worrying way too much about taxes and commissions. The name of the game is to first make a net profit.
18. Speculating too heavily in options or futures because you see them as a way to get rich quick.
19. Rarely transacting “at the market,” preferring instead to put price limits on buy and sell orders. By doing so, investors are quibbling over eighths and quarters of a point (or their decimal equivalents), rather than focusing on the stock’s larger and more important movement. With limit orders, you run the risk of missing the market completely and not getting out of stocks that should be sold to avoid substantial losses.
20. Not being able to make up your mind when a decision needs to be made. Many investors don’t know whether they should buy, sell, or hold, and the uncertainty shows that they have no guidelines. Most people don’t follow a proven plan, a set of strict principles or buy and sell rules, to correctly guide them.
21. Not looking at stocks objectively. Many people pick favorites and cross their fingers. Instead of relying on hope and their own opinions, successful investors pay attention to the market, which is usually right.
48. The majority of the leading stocks are usually in leading industries. Studies show that 37% of a stock’s price movement is directly tied to the performance of the industry group the stock is in. Another 12% is due to strength in its overall sector. Therefore, roughly half of a stock’s move is driven by the strength of its respective group.
49. When you see activity that impresses you, always refer to a weekly chart to see if the stock is building a base or if it is extended too far past its buy or pivot point. If it is extended, leave it alone; it’s too late. Chasing stocks, like crime, doesn’t pay.
50. Review a comprehensive chart book every week and make a list of stocks that meet your technical and fundamental selection criteria. Keep this shopping list with you every day for the next couple of weeks as you watch the market. In time, one or two of the stocks on your list will begin to approach your buy point. This is the time to get ready to buy— when the stock trades at your buy point, you anticipate the day’s volume will be at least 50% above average and the general market direction is positive. The more demand there is for a stock at the buy point, the better.
51. Don’t Buy on Tips and Rumors
52. Watch for Distortion around the End of the Year and in Early January and option expiration day. The January effect, where small- and mid-cap stocks get a boost during January, can be a misleading and spurious indicator.
53. When domestic or foreign news of consequence hits the street, capable market sleuths are sometimes less concerned with whether the news is good or bad than they are with analyzing its effect on the market. For example, if the news appears to be bad but the market yawns, you can feel more positive. The tape is telling you that the underlying market may be stronger than many people believe. On the other hand, if highly positive news hits the market and stocks give ground slightly, the tape analyst might conclude the underpinnings of the market are weaker than previously believed.
54. After it’s been repeated several times, both good news and bad news become old news. Old news will often have the opposite effect on the stock market from what it had when the news first broke.
