Starters guide on how to make money on stocks

Discussion in 'Strategy Building' started by epic767, Nov 9, 2005.

  1. epic767


    I’ve just started out investing in trades and so far I've made 80% in return in only 3 months compounded, using on average 45% margin(and the account increase allowed me to use more margin, making me even stronger). As I follow up my stocks I have noticed that after it has appreciated, it will always be followed up by a decrease. And I suspect that this is due to greed and fear.

    Companies that have displayed a consistent weekly price increase throughout the year is also subject to this, but the decreases are not in the same scale, mostly because investors know it will keep appreciate due to its good track record. A synergy effect will take place, where 1+1=3.

    To elaborate on that;

    1 The stock is increasing in value
    2 Investors display more confidence and will keep buying and hold the shares for longer periods due to its good track record of having increased consistently during a long period of time

    The two events are not mutually exclusive, and these two events occurring simultaneously will make up for a powerful combination. The stronger get even stronger, and the weaker get even weaker.

    But if you do some stock screening, you will find out that even these powerhouses don't last for two long because you won't find a stock that has increased consistently by 1% every week for 3 years(only found some in 1 year, and more appeared as I shortened the time). This indicates that the probability of a share appreciating or its increasing strength declines as more time has passed on.

    One should therefore harvest while the grass is green. But how does one predict when the grass is beginning to wither?

    You don't want to lose everything you have made on the stock in one day. But if it's slowly declining how can one know not to keep clinging to it in the hope of it return to its usual trend? My advice is to sell it immediately if the stock displays an unusual power in decline that has never before been displayed. If it's declining slowly you will have the opportunity to sell your shares in good time. Never cling to it. Because why would you want to invest your money on something that depreciates? Invest it elsewhere on something that’s increasing in value.

    As soon as the stock has reached its stop limit (you will adjust the stop limit accordingly as the stock changes in price. If it increase in price, you should set the stop limit at a higher price and so on) you should sell it and invest in stocks that’s increasing in value. This will make you experience less decreases and instead taste the fruit of more increases. Don’t play your bets on stocks that you think will increase, without sufficient evidence, and don’t liquidate your stocks because you think it will decrease without sufficient evidence. That’s letting your emotional do the strategy for you.

    If you don’t know how to predict prices, the best advice is to buy stocks when it’s increasing, and sell it when it falls bellow the stop limit. If you however know how to predict prices to some extent, you will be in a very good position to consistently make money by being able to sell your stock just before its going to decrease in value.

    Remember these two rules are for stocks with low volatility (you don't want to invest in a rollercoaster anyway):

    1If the stock is increasing in value, the probability is higher that it will keep increasing and higher the longer the time it has showed this trend, but the price will inevitably decline at some point, so there are two forces here, but the latter one is stronger.
    2 If the stock is decreasing in value, the probability is higher that it will keep decreasing and higher the longer the time it has showed this trend, and there is no guarantee that it will increase in value.

    The one thing that can destroy these assumptions is stocks with high volatility. But remember, the best determining factors are price increases, and price strengths and the length of time it has showed the same trend. And never invest in stocks that go up and down, because you want to be able to predict the price, and you can't afford high risks. The survivors are not people who make big money, and then lose everything, but those who consistently make big money and are still risk averse.

    Don’t ever listen to people who say it’s too risky too buy on margin. This is your greatest amplifier after all. When you buy on margin, you get more money, and you need money to make money. However, one should only use this powerful and dangerous tool, if you are the kind of trader who always gets positive returns. Don’t use this tool if you know that you are very volatile in your returns, because one big bad day can drain almost all of your investments. The stronger get stronger and the weaker get even weaker. This is an omnipresent truth.

    And to help smooth out your returns and make it less volatile, never invest in volatile stocks.

    Another powerful method is to buy dividend shares that guarantee you a dividend by analyzing previous dividend payout and determine whether they have a dividend policy of always paying out a certain amount of dividend regardless of the profitability.

    Another power tool that a lot of investors oversee is rights. As soon as a company wishes to issue rights, you are usually guaranteed a profit or a return of 2% by either selling renounce able rights or sell the discounted shares for the market price.

    And by doing this as many times a possible during a period of time you can increase your asset efficiency by having an asset turnover ratio of 5 times in one month. And if you get 2% time, that’s 10% in one month.

    I don’t want to go too much into this, but options are a great tool as well, by using the covered calls strategy. Many investors won’t agree with me since your profit is limited and your losses unlimited using this strategy. If you however know how to avoid getting exercised this can be a good tool to get a consistent amount of money through your premiums.

    And some other thing, before investing, look up some basic fundamentals of the company and make sure that its return on asset hasn’t been decreasing for two consistent years at the same time as their gearing has been increasing. This means that the cash from its core operation isn’t sufficient enough to fund its assets, and instead they use more debt every year to fund its assets and if cash from operations declines consistently, then an entity is destined to failure. You don’t won’t to lose all your money on insolvency, Especially as ordinary shares is ranked as subordinated debt.
  2. Holy cow!!! :eek: 80% in just 3 months........i been trading just over 2 years and my total return is only 11%

  3. epic767


    I've simply just employed the strategies outlined above.
  4. keyser1


    congrats on the 80% but i think luck may have played a key role in this. if you can keep this up (or even 10% every quarter compounded), you'll have many people here in envy of you.
  5. epic767


    Actual returns on stock is on average 0.54% each day, but by employing aggressive margin trading in conjunction with daily reinvesting and acquiring of dividends and rights such returns are achievable.
  6. Epic-

    What tools do you use for stock screening? Do you use any of the canned screens available from IBD or Reuters?

    Do you screen only on increasing stock price,or do you also look at volume or fundamentals of the company?

    Have you ever traded ETF's. Some are probably smoother than most stocks, but you won't make as much on the upside.
  7. Epic-

    If you are a skilled stock picker, don't you really want to be on the right side of those volatile stocks?

    And how do you buy stocks that are going up, when they make a pullback.. isn't it counter to you whole thinking of going with the trend because they are already starting to come back down.
  8. epic767

    epic767 and have good stock screens.

    What characteristics I use depends on what kind of stock it's and its characteristics. But in general, I mainly screen weekly, monthly, and yearly stock price changes to shape the trend myself. I only buy stock with a price above one dollar.

    I look at volumes after I've screened it or I might include volume variables in the stock screening or make a screening on volumes alone to find out unusual volume changes before any price changes have occurred.
  9. epic767


    With volatile stocks I mean stocks that are volatile on both sides. To get big returns you have to buy stocks that is volatile on the right side. Furthermore, I only invest in stocks that have increased consistently throughout the last 6 months with almost no decrease.

    To protect yourself from big and unusual price decreases you set stop limits at such a point that if the stock reaches that point it means that the stock price no longer follow the historical pattern and thus is unpredictable.

    Since you only isolate yourself to stocks that have displayed a consistent increase throughout the year, any unusual decrease will often be slow and you will have time to liquidate your stocks and still have made a good fortune.

    And to make sure that the stock isn't about to make an unusual decrease, you will have to follow the company and do some fundamental analysis.
  10. epic767


    I don't do any passive trading, but getting 80% is not too hard considering that the American stock exchange index has changed by 28% the last 12 months and then you combine that by picking the good ones in a market whose average return was 28% and just being 70% accurate might give you a return of 40%.

    You should be able to pick good stocks by screening, and do some basic fundamental and technical analysis. And then you can top it off by using many of the trading tools that will at least make you 10% more accurate in your predictions. Finally, you employ an aggressive use of margin and invest in stocks that give you rights and dividends and getting at least 60% in return in one year shouldn't be an amazing feat.

    I seriosly don't understand why some people have such a hard time even making 20% return, let alone people who lose money.

    For god's sake there are 100 of companies out their who can offer their stock advice and who have a proven track record of having averaged 15% for the last couple of years which they can back up. Then you use margin on that, and woala you will get 20%+ in return.
    #10     Nov 10, 2005