Always Analyze a Stock Before Investing

Money printing run amok

Like every trader involved in the financial markets, I have watching world stock markets rise higher and higher since the beginning of 2013. The logic of this persistent rise in stocks without any sort of significant pull back in prices is both exhilarating and perplexing. Does this have to do with QE and what all that the central banks around the world are doing? Probably, but it gives rise to a strange investing strategy that I believe is fundamentally unsound.

To provide some background, QE has had a few notable effects on world economics.

1. It has kept interest rates really low. This means that borrowing money is cheap by almost any historical measurement.
2. It has added supply (i.e. printing money) to national currencies forcing a decline. The basics of supply and demand economics is that more supply puts downward pressure on prices, so in currency terms, currency depreciates.
3. It has facilitated and allowed governments to borrow massive sums of money at low cost to support their respective economies.

The logic in this investing strategy goes like this. If interest rates are so low, savings are a poor investment, yet at the same time, borrowing money is cheap. Buying bonds also provides very little returns, so the only real opportunities lie in stocks (especially those that pay a dividend). Simply put, there is nowhere else to put your money and get a reasonable return except stocks.

Why is this a bad strategy? Buying stocks because you feel there is no alternative without doing any sort of fundamental, technical or timing analysis is a recipe for loss. So long as the markets keep going up without a fundamental catalyst (other than QE), this strategy will show profits, but markets will always price in macro economic and company fundamental data at some point and that could easily shift the direction of stock prices with very little notice. Stock prices will fall and many investors will suffer heavy losses as the only reason they were in stocks was the returns.

Investing should always be a well thought-out process with sufficient analysis done before hand and using stops, options and other tools to protect your capital while in a position. Simply buying stocks because there is no alternative is folly and a road to losses.

Trade well,

Dan

Three Types of Trading Analysis

Timing is Money

I often read articles stating that there are only two types of trading techniques; one using fundamental analysis and the other using technical analysis, but to be honest with you, I believe that there is third type of trading technique and that is timing analysis. Keep in mind that each type of analysis is completely different from the other and alone, each requires a completely different way of thinking, but timing analysis can bring the other two together.

Timing analysis is what really determines a trade's success or failure. I'm not talking about trying to catch market tops and bottoms, but rather finding the right moment in a stocks movement or pattern to enter or exit your trades. Timing analysis can be a stand alone trading technique just as technical and fundamental analysis can be, but all three techniques are most effective when used together. By using all three techniques, you can be wrong in the short term yet still make a profit so long as your timing is good.

Timing analysis works simply because of the way financial markets move. Efficient-market hypothesis states that financial prices always exhibit random walk behaviour. If you are interested in learning more about what random walk is click here. In short it is an idea that a mathematical path takes random steps (like a zigzag pattern). If you look at any stock chart, it almost never goes up or down in a straight line, THis is what makes timing your entry and exit so important.

Combining technical, fundamental and timing analysis into your trading or investing can generate some very positive results and I believe that it is definitely a viable investment strategy.

Trade well,

Dan

The Longevity of a Trading Blog

Koi, Photo by DanCentury

I'll get straight to the point. I want to make sure that this blog has longevity. By that I mean that if you were to come read one of my blog post one year after it was written, it would still be relevant. There are so many blogs out on the web that post 'daily market updates' or 'recommended stock picks' and they are easy enough to find. I don't want this blog to become a blog where each post has a limited shelf life. If you are looking for a daily market analysis, I have posted some links (on the left side) with good blogs that have just that type of information.

Over the life of the ProfitMonkey blog, I hope to cover topics on combining fundamental and technical analysis and how best to bring these to types of analysis together for investing success. From this same perspective I'll cover some additional important topics:

1. Elliott Wave principal;
2. Understanding trends;
3. Trader and investor mind set;
4. Behavioral economics;
5. Trading plans;
6. Trading styles;
7. Managing your money;
8. What's important in a balance sheet;
9. Managing emotions and admitting when you're wrong - accepting failure;
10. The simplicity of market movement;
11. Don't panic - the importance of patience when trading;
12. Why timing is everything;

If you have any other questions or ideas that you'd like to see on the blog, comment below and I'll add it to the list.

Trade well,

Dan

My Opening Gambit

Photo by JasonBrown2013

This blog has been around for some time in some iteration or another.

I've had some trouble trying to figure out what this blog's niche could be so that it doesn't just end up being another blog analyzing the markets, giving stock picks or just being simply generic. I have read so many technical analysis blogs and frankly, I'm bored of them. There must be hundreds if not thousands of these type of blogs. So what can I do differently... Well, the answer is, not that much, but I can try to be as useful giving my opinion on the markets along with some techniques that I use to be a successful investor.

I say investor for a couple reasons:

1. Although I have tried my hand at day trading, I have never been successful enough. I know when I've been beaten so I have moved on.
2. I do trade stocks, options and futures, but I hold positions longer than a day. I have found that holding trades longer produce better returns/results with lower risk. I consider myself more an investor than a trader, although you could make the argument either way. I'm no Warren Buffet.
3. I use both fundamental and technical data to make my purchase decisions. Fundamental (and other macro) data often drive the decision to enter the trade while technical data is very useful for timing an entry and exit.

One final idea that I believe will provide the niche I'm looking for here to answer a question that I repeatedly get from friends who don't trade for their own accounts. "How do I get started trading stocks or options?" Trying to answer this question has been tricky and I feel that there really isn't a single resource available on the the internet to answer this question simply and clearly and without bias. I'm talking about breaking things down to their absolute basics and that is what I hope to accomplish. Whether I succeed remains to be seen, but I'm willing to give it a try.

I expect to be writing a blog post 2 or 3 times a week to start and then see how the blog evolves. Along the way, feedback will always be welcome and I'll make efforts to integrate ideas and comments as they are added by readers.

I hope this blog will become a useful tool for any trader or investor as a repository of knowledge and information; helping each individual on their own unique journey to profiting from the financial markets.

Trade well,

Dan