Here are 4 steps to improve your trading process and results | Exchange places with Tom Bowley
Let’s get started right away. For me, it all starts at the TOP. I take a top-down approach to trading. And when I say “top” I mean market direction.
Step 1: Is it a bull or bear market?
Listen. This is a very easy step for me. Look at the long-term chart of the S&P 500. Are prices rising from left to right? Or are you moving downward from left to right? It’s that simple. Don’t try to figure out why it’s going up or down. Don’t let your personal biases into the equation. Look at the chart and answer the questions.
I have eliminated almost all technical indicators. There is no volume. There are no momentum indicators like PPO, MACD, RSI or Stochastic. There are no moving averages. This is just a 10-year weekly price chart for the S&P 500, NASDAQ 100, and NYSE. If you look at this chart from left to right, what do you see? Is there an argument here? The stock market has been rising (with occasional weakness) for years!!!! If you’re constantly holding on to cash or trying to short stocks because you think they’re overvalued, you’re missing out on an opportunity to create massive personal wealth. stop!
Whether you believe it or not, we are greatly influenced by what we hear in the news. I remember my parents talking about America’s massive debt in the 1970s, and the discussion never ended. Meanwhile, $1 invested in the S&P 500 on January 1, 1980 is worth $50 today (before adjusting for inflation). So the absolute first step to becoming a better investor/trader is to understand that your chances of making money are much better on the long end than on the short end. Selling stocks should be considered very rarely and only when the chart moves downward from left to right. In a bull market, repeatedly hitting the top is financial suicide. The trend is friends, right?
Step 2: Sectors, Industries and Stocks Are Not Created Equal
The Semiconductor Index ($DJUSSC) is an industry group comprised of high-growth companies. As the economy and GDP grow, many of these companies find very interesting growth opportunities and take full advantage of them. This allows the leaders within this rising group to reap the benefits that can lead to massive wealth accumulation in the stock market. However, not all groups are growing as fast as the semiconductor group. Companies in slow-growth regions never post that type of sustainable revenue growth. However, we have too much faith that the short-term growth rates of other industries will develop into long-term growth like semiconductors. It simply doesn’t happen that way and we lose money waiting for it.
Let’s compare Semiconductors with several other industry groups within the aggressive sector (XLK, XLY, XLC, XLI, and XLF) over a 20-year period. The nine “Other” industries are Software ($DJUSSW), Specialty Retail ($DJUSRS), Gambling ($DJUSCA), Internet ($DJUSNS), Broadcast and Entertainment ($DJUSBC), Wireline Communications ($DJUSFC), and Aviation ($DJUSFC). $DJUSAR), insurance brokers ($DJUSIB), banks ($DJUSBK). The chart below is a 20-year weekly chart, with each industry represented as a percentage chart relative to the benchmark S&P 500. See if there are any differences.
Take a look at relative charts for 10 industry groups. If you trade stocks in one of these industry groups, does it matter which industry group it belongs to?
If you’re looking at the charts above and thinking about trading one or more of them, the first question that might come to your mind is, “What are my time frames?” If I’m thinking about a long-term swing trade, I highly prefer that the stock falls into one of the blue industry groups above, i.e. one that shows much better long-term performance. When we look at gambling transactions, they are likely to be quick, short-term transactions. And if I were to leave the stock alone, I would absolutely want to keep a tracking stop because the stock was performing well. A falling relative strength line indicates that funds are rotating from this RED group to groups such as the upper BLUE group.
So, in the short term, you can trade stocks in any of the 10 groups, but over the long term, you’ll be much more interested in the BLUE group, which is showing upside relative to the benchmark S&P 500.
I think it’s common sense, but I’m sure most traders wouldn’t consider this.
Step 3: Forward stock trading
There are many ways to assess relative strength, but one simple way that is already part of the StockCharts.com trading platform is to look at the parent SCTR (short for StockCharts Technical Rank). Personally, I tend to use SCTR only when looking at very recent performance. If you study the formulas for calculating SCTR, you will quickly realize that none of the formulas are based on performance over more than 5-6 months. Although this is a very short-term relative strength indicator, it is nonetheless a powerful indicator, especially for those who trade momentum in the short term.
You can use Summary View to get a ChartList and add an SCTR column to it. For example, in the Raised Guidance ChartList (RGCL), researched for EarningsBeats.com members, here’s how to find Internet stocks that raised their guidance last quarter, and to list them in order of their SCTR scores from bullish to bullish. weak:
Personally I would be much more focused on trading the above stocks with a SCTR above 75 and ignoring the rest. remember, Leading stocks from major industry groups. This is how you increase your trading success rate.
Step 4: Be patient and use proper timing techniques
An impatient trader who simply wants to invest money all the time is generally a bad trader. Buy stocks at the price you want, not the price the market maker wants. In my experience, “chasing” trending stocks has resulted in my biggest and fastest losses. In many cases, these stocks become leading stocks after producing great quarterly earnings reports accompanied by high price differentials. Chasing such stocks can be a big problem. This is especially true if the stock “closes the gap” or reverts to its previous closing price before the gap. We try to coach our members to “stalk” stocks. Find a stock you like, then wait, wait, wait some more. Buy on key price/moving average support with tighter stops. This won’t eliminate bad deals, but it will definitely reduce your risk when making a purchase.
Conclusion: Example
Every weekend (or almost every weekend) I give the Fab 5 on YouTube, which is essentially a 5 trade setup. Please keep in mind that any trading you undertake is entirely at your own risk. However, I believe that if you time your trades similar to these settings, you will experience better trading results over time. Check out this video:
Fab 5: 5 stocks to watch right now
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Happy holidays and happy trading ahead of the shortened week!
tom
