Great Companies Great Charts - stock scanning, trailing stops, and portfolio risk reduction

Trading Book Review

This is my trading book review that's been floating around the internet for years now. I tend to prefer technical, mechanically back-tested methods of trend following along with authors that can tell a good story. These are just my subjective opinions, please take them with a bag of salt.

:) :) :) :) :) Excellent
:) :) :) :) Very Good
:) :) :) Average
:) :) Did Not Enjoy
:) Really Did Not Enjoy

1. The Dow Jones-Irwin Guide To Commodity Futures Trading Systems
:) :) :) :) :) By Babock, Bruce Jr.
1989-Irwin Professional Publishing, 240p: Out Of Print

2. Winner Take All: Inside the Mind of a Top Commodity Trader
:) :) :) :) :) By Gallacher, William R.
1993-Probus Publishing Company: 264p: $17.56

3. Technical Trader's Guide To Computer Analysis Of The Futures Market
:) :) :) :) :) By LeBeau, Charles & David W. Lucas
1991-Irwin Professional Publishing, 312p: $60

4. Technical Analysis Of The Futures Market: A Comprehensive Guide To
Trading Methods & Applications
:) :) :) :) :) By Murphy, John J.
1986-NY Institute of Finance: $56

Technical Anaysis of the Futures Market: Study Guide
1987- NY Institue of Finance: $27.95

5. A Complete Guide To The Futures Markets: Fundamental Analysis,
Technical Analysis, Trading, Spreads & Options
:) :) :) :) :) By Schwager, Jack D.
1984-Wiley, 741p: $88

6. Market Wizards: Interviews with Top Traders
:) :) :) :) :) By Schwager, Jack D.
1993-Harper Business, 480p: $12.80

7. New Market Wizards: Conversations with America's Top Traders
:) :) :) :) :) By Schwager, Jack D.
1994-Harper Business, 512p: $12.80

8. The Futures Game? Who Wins? Who Loses? Why?
:) :) :) :) :) By Teweles, Richard J. & Frank J. Jones
1987-McGraw, 672p: $39.96

9. Martin Zweig's Winning on Wall Street (Stocks)
:) :) :) :) :) By Zweig, Martin
1994-Warner Books, 304p: $11.99

10. The New Technical Trader: Boost Your Profit by Plugging into the
Latest Indicators
:) :) :) :) By Chande, Tushar S. & Stanley Kroll
1994-Wiley: $51.96

11. The Encyclopedia of Technical Market Indicators
:) :) :) :) By Colby, Robert W. & Thomas A. Meyers
1988-Irwin Professional Publishing, 250p: $56

12. The New Commodity Trading Systems & Methods
:) :) :) :) By Kaufman, Perry J.
1987-Wiley: Out Of Print

13. Martin Pring On Market Momentum
:) :) :) :) By Pring, Martin J.
1993-Probus Publishing Company, 250p: $23.96

14. Elements of Successful Trading: Developing Your Comprehensive
Strategy Through Psychology
:) :) :) :) By Rotella, Robert
1992-Prentis-Hall: $32

15. Keys to Investing in Stock Options & Futures
:) :) :) :) By Apostolou, Nick
1991-Barron, 160p: $7.15

16. New Facts on Futures: Insights & Strategies for Winning in the
Futures Markets
:) :) :) By Bernstein, Jake
1992-ProbusPublishing Company, 325p: Out Of Print

17. Liar's Poker: Rising Through the Wreckage on Wall Street
:) :) :) By Lewis, Michael
1990-Viking Penguin: $11.20

18. Getting Started In Futures
:) :) :) By Lofton, Edgar K.
1993-Wiley, 288p: $15.96

19. Intermarket Technical Analysis: Trading Strategies for the Global
Stock, Bond, Commodity & Currency Markets
:) :) :) By Murphy, John J.
1991-Wiley, 282p: $60

20. Design, Testing, & Optimization of Trading Systems
:) :) :) By Pardo, Robert
1992-Wiley, 176p: Not Available At This Time

21. High Performance Futures Trading: Power Lessons from the Masters
:) :) :) By Robbins, Joel
1994-Probus Publishing Company: Not Available At This Time
http://www.amazon.com/exec/obidos/ASIN/1557385718/taunt

22. The Money Game
:) :) :) By Smith, Adam
1976-Random: $8.00

23. Panic on Wall Street: A Classic History of American Financial
Disasters - With a Timely Exploration of the Crash of1987
:) :) :) By Sobel, Robert
1988-Nal-Dutton, 512p: Out Of Print

24. The Mathematics of Money Management: Risk Analysis Techniques for Traders
:) :) :) By Vince, Ralph
1992-Wiley, 368p: $55.96

25. New Concepts In Technical Trading
:) :) :) By Wilder

26. The Definitive Guide to Futures Trading, Vol. I
:) :) :) By Williams, Larry
1988-Windsor: $50.00

The Definitive Guide to Futures Trading, Vol. I I
:) :) :) By Williams, Larry
1989-Windsor: $50.00

27. Winning Market Systems
:) :) By Appel, Gerald
1989-Windsor: $31.96

28. Market Masters: How Successful Traders Think, Trade & Invest...& How
You Can Too
:) :) By Bernstein, Jacob
1994-Dearborn Financial, 256p: Out Of Print

29. Gold Futures: Facts & Figures, Trading Strategies & Tactics
:) :) By Commins, Kevin
1990-Probus Publishing Company, 266p: Out Of Print

30. Trading for a Living: Psychology, Trading Tactics, Money Management
:) :) By Elder, Alexander
1993-Wiley, 302p: $52

31. Trading For A Living Study Guide
:) :) By Elder, Alexander
See Above For Infomation $31.96

32. Technical Analysis of Stocks, Options & Futures: Advanced Trading
Systems & Techniques
:) :) By Eng, William F.
1994-Probus Publishing Company:

33. Trading Systems Tool Kit: How to Build, Test & Apply Money Making
Stock & Futures Trading
:) :) By Krutsinger, Joe
1993-Probus Publishing Company: $44

34. Reminiscences of a Stock Operator
:) :) :) :) By LeFevre, Edwin
1992-Traders Press, 308p: $19.95

35. A Random Walk down Wall Street: Updated for the 1990s Investor
:) By Malkiel, Burton G.
1991-Norton, 409p: $13.56

36. Fractal Market Analysis
:) :) By Peters $55.96

37. Volume & Open Interest: Cutting Edge Trading Strategies in the
Futures Markets
:) :) By Shaleen, Ken
1990-Probus Publishing Company: Not Available At This Time

38. Neural Networks in Finance & Investing: Using Artificial Intelligence
to Improve Real World Performance
:) :) By Trippi, Robert R & Efraim Turban
1992-Probus Publishing Company, 400p: Not Available At This Time

39. Fibonacci Applications & Strategies for Traders
:) By Fischer, Robert
1993-Wiley, 192p: $44

40. Worlds Most Powerful Money Manual & Course
:) By Roberts, Ken
Call 1 (800) 827-3910: $225.00 + $5 S&H
not available but his Rich Man's Secret is $8.95

41. You Can't Lose Trading Commodities
:) By Wiest Out Of Print

42. Trade Your Way To Financial Freedom
:) :) :) :) :) By Dr. Van K. Tharp
McGraw Hill 1999 $23.96

43. Extraordinary Popular Delusions and The Madness Of Crowds
:) :) :) :) :) By Mackay / De La vega
Wley 1841 / 1688 $11.20

44. Trading As A Business
:) :) By Charlie F. Wright

45. Managed Trading: Myths and Truths
:) :) :) :) Jack Schwager
Wiley 1996 $44

46. Quantitative Trading and Money Management
:) :) :) :) By Gehm
Irwin 1995

47. Mastering Commodity Futures & Options
:) :) :) By Kleinman
FT Pitman 1997 Out Of Print

48. Masters Of The Futures
:) :) By Slutsky
McGraw Hill 1999 $27.95

49. Smarter Trading
:) :) :) By Kaufman
McGraw Hill 1995 $26.36

50. The Magic Of Moving Averages
:) :) By Scott Lawry
Traders Press 1998 $29.95

51. The Battle For investment Survival
:) :) :) By Loeb
Fraser 1935 $22.36

52. Where Are The Customer's Yachts?
:) :) By Fred Schwed Jr.
Wiley 1940 $70

53. Winning In The Futures Markets
:) :) By George Angell
Probud 1979 $18.36

54. The Encyclopedia Of Technical Market Indicators
:) :) :) By Colby and Meyers
McGraw Hill 1988 $56

55. Advanced Trading Rules
:) :) :) By Acar Satchell
B|H 1998 $150

56. Trading System Analysis
:) :) By Barnes
McGraw Hill 1998 Out Of Print

57. Market Masters
:) :) By Jake Berstein
Dearborn 1994 Out Of Print

58. The Handbook Of Technical Analysis
:) :) By Jobman
McGraw Hill 1995 $60

59. Getting Started In Technical Analysis
:) :) :) By Schwager
Wiley 1999 $15.96

60. Beyond Technical Analysis
:) :) :) :) By Chande
Wiley 1997 $68

61. Schwager On Futures: Technical Analysis
:) :) :) :) By Jack Schwager
Wiley 1996
can't find but fundamental version available for $80

62. Randomness
:) :) :) :) By Deborah Bennett
Harvard 1998 $19.96

63. Against The Gods - The Story Of Risk
:) :) :) :) By Peter L. Bernstein
Wiley 1996 $13.56

64. Statistics You Can't Trust
:) :) :) By Steve Campbell
Think Twice 1999 $24.95

How To Continue An Investing Education

Learn More Secrets
We've reached the last chapter in my reader's digest version of Great Companies, Great Charts. I'm continually impressed with the information that can be found in "books". If you're going to become a solid trader, you need to learn and practice, just like in any other competition. One of the best ways to learn and practice is by reading more books and websites. Here are some of my favorite books and websites:

Screeners
My favorite screener, bar none, is the MSN Money Investor Screen. The AAII American Association Of Individual Investors just reviewed all screeners and this one came out on top with perfect marks. I have been using it for years and love it. It kicks ass.

MSN Money Deluxe Screener
http://moneycentral.msn.com/investor/finder/customstocks.asp?

Charts
I use three great sites for charting.

Big Charts
http://bigcharts.marketwatch.com/default.asp?

StockCharts.com
http://stockcharts.com/index.html

MSN Money
http://moneycentral.msn.com/investor/charts/charting.asp?

Newspaper
I love Investor's Business Daily. It's the only financial paper I read.
http://www.investors.com

I occasionally double check my research with their Stock Check-up tool as well. I find that most of my stock picks rate A- or higher on the investor's site. It seems that canslim do things a little differently, but end up with the same answer some of the time.

Newsletters
I haven't renewed recently, but the one financial newsletter I enjoy for it's longterm, level-headed outlook is the Louis Rukeyser letter. I don't look at individual stocks the same way as he does, but I like his overall attitude and ideas on the market in general.

Books
I've read many books on stocks, futures, probability theory and gambling, and below are some of my stock market favorites. I have an older page that hasn't been updated in a couple years with my reviews on futures trading books with some stock trading titles here and there. Now for some of my stock market favorites:

How To Make Money In Stocks
William J. O'Neil

The Motley Fool Investment Guide
David Gardner

The Wealthy Barber
David Chilton

Martin Zweig's Winning on Wall Street
Martin Zweig

Market Wizards
Jack D. Schwager

The New Market Wizards
Jack D. Schwager

Where Are the Customers' Yachts?
Fred Schwed

Thank You!
Thanks for reading my blog. :) I hope you've enjoyed these posts. If you would like to read the full version of my theories and techniques, please check out my new book at amazon.com, Great Companies, Great Charts.

Three Tricks To Improve Investor Skills

Points Vs Percent
I pull my hair out whenever I turn on the financial news and hear "Dow up 70 points today." I scream "so what!". Points or dollar values, like "IBM up $1" has no meaning in the grand scheme of things. Investing is all about percentage. We need to know how much the dow and nasdaq went up as a percentage. We need to know the percent a stock gained or fell today. All investing is about percentage increases, not points or price. This is the same topic I talked about earlier in the week with regards to owning X shares of ABC stock at Y price. I don't care the price of the invidiual stock (as long as it's over $20). I care about the total amount invested in that stock, and how that amount moves up and down each day, based on percent.

Log Charts Vs Linear
This is the same issue as above but with regards to charting. A linear chart tells us nothing. If a stock is going up over time, on a linear chart, this will begin to look like a ski jump and offer us little visual value. Log charts turn the price moves into percents. This is what we need to be looking at. Here is a quick example....two charts of VNBC, here is the linear ski jump, and here is the nice clean, lay a ruler on it, log chart. That stock's log chart shows steady yearly growth.

80 20 Rule
The 80 20 rule when applied to stocks suggests that 20% of your portfolio will make as much as the other 80%. I find this often to be true. You may find that if you hold 10 stocks, 2 will accel and make all your gains. If you understand this can be very normal, you won't be alarmed when it occurs. It doesn't happen all the time, but it's often the case that a small number of stocks in your portfolio will make all the big gains.

Trader Mike
I want to thank Trader Mike for reviewing my book on his excellent blog! Check out his site.

Why I Don't Believe in Stock Timing, Market Randomness, and PE Ratio

Timing, Randomness, PE
I believe strongly in not timing the market. No one can predict the market in the short run; in the long run it has historically increased about 10% a year. Hopping in and out of the market is a great way to miss big up moves and be left on the sideline. Louis Rukeyser always tells a story about two brothers who invested in the market. One started early but was the worst timer their was, the other started late and was the best timer there was. In the end they both had the exact same sized portfolio. The moral of the story is to invest continuously and invest early, for the long haul. No one can time perfectly, but we can start investing now. You might enjoy Louis Rukeyser's newsletter.

I don't buy into random market theory. I guess I assume what the mathematicians are saying is that "if the market is random, no one can profit from it." This is simply not true. I also find it hard to believe the market is random when it historically trends up in the long run. I could probably agree in the short term it can be random.

“The markets are not random, because they are based on human behavior, and human behavior, especially mass behavior, is not random. It never has been, and it probably never will be.” —Jack D. Schwager, author of Market Wizards

I don't care about P/E. This is more about how I trade than if PE has value. Traders like Warren Buffet an Martin Zweig would use PE since they are value shoppers. Traders like William O'Neil "canslim" would not. The stocks I hold vary greatly from one PE to the next. I have renamed PE to the "Popularity Evidence" ratio. I simply see PE is popularity guage. Some stocks are simply more popular with Johnny Q Trader.

“A stock’s P/E ratio is not normally an important cause of the most successful stock moves.”
—William J. O’Neil, author of How to make Money in Stocks

Easier Ways To Invest In The Stock Market

Easier Ways To Invest
Not everyone is comfortable with picking individual stocks; they don't want to spend time or energy developing a trading plan. There are a couple of good alternative ways to invest in the market that offer above average returns in the long run.

Indexed Mutual Funds
The Motley Fools have written on several occasions about Indexed Mutual Funds. These funds generally have very low costs and track the major indexes. The most famous of index funds is the Vanguard 500. You can see it's performance here. Click on that link, then click Personal Investors, then scroll down and click 500 Index Fund. This fund has averaged an amazing 12.39% since inception in 08/31/1976. It is stock symbol VFINX. Index funds generally outperform the vast majority of index funds in the long run.

Diamonds, Spiders, and Qubes
Diamonds, Spiders, and Qubes are unit investment trusts. These are traded just like stocks but act like mutual funds. They offer greater liquidity and less paperwork. You will pay stock based commission on trades which might be higher than the costs of mutual funds and so you need to do a little math and determine which is best for you. I personally like these vehicles more than funds since they trade much more like pure stocks. The symbols are DIA, SPY, and QQQ.

Why Are Stocks Often a Good Investment

Why the Stock Market
There are many investment choices that we all must decide upon:

Bonds
CDs
Stocks
Futures
Real Estate
Small Business
Venture Capital
Lottery
Gambling
etc...

My favorite two are "small business" and "stocks'. I also like futures but consider them too risky for the vast majority of investors.

Bonds
Bonds and CDs offer a relatively safe investment, but the return is low. All investments trade risk for reward. The higher the potential risk, the higher the potential reward. With too much risk comes almost certain loss as in the lottery and gambling where mathimatically you cannot win in the long run. Historically, bonds underperform the stock market. If you can stomach some volatility, you can do better with your money in stocks than you can in bonds.

Real Estate
I used to think that real estate averaged 10% a year on an average home. Recently I looked up my home's value in 1972 and then did the math and was shocked to find out that the appreciation was 5%. This does not include yearly costs or commisions etc. Many people do well with real estate as land lords or as developers, but its more difficult than it appears on the surface. You can leverage your investment with loans, but you can do the same things with stocks and a margin account. Real estate is a good investment but I consider it to be less work and more headaches that Wall Street.

Venture Capital
Venture Capital is a great way to light money on fire. I've lit my share. VC investments are very risky and maybe only one in five or ten pays off and has to make up for all the others. VC investing is too risky for most investors.

Futures
Commodies and Futures are exciting to trade, but most investors lose. I like to say that if stocks are arithmatic, then futures are calculus. If you house is paid off, kids are done college, and you have 1M in your IRA, then now is a safe time for you to try futures. :) Until then, consider trading commodities to be difficult and dangerous. I read over 50 books on futures before my first trade and still lost 200 large. :O Owe that hurts. I still invest in futures today but am cautious.

Small Business
Have you read the Millionaire Next Door? What an awesome book. Most millionaires own their own business and live below their means. I used to try and get all my friends to open their own business. I discovered that most people can't. They just don't have the entrepeneurial gene and they can't take that large risk of betting the mortgage and quitting work to try and make it on their own. They do not want to leave the man and his dental and health plan. If you have the entrepeneurial gene, consider a small business.

Stocks
Stocks offer investors returns of say 8%-12% a year when considering the historical indexes. Could the stock market disappear tomorrow? I guess so, but it hasn't for 100 years and if it did, so much would be going wrong in the world that it would not matter what you were invested in. The Motley Fools often talk about the Vanguard 500 indexed mutual fund. This fund has average 12.39% since 1976. That is an excellent return. Most people have IRAs or 401ks and stocks these days. People are comfortable with the stock market. The American IRA and Canadian RRSP are two of the last greatest tax loopholes left. 12.39% in a tax free IRA is a license to print money!

Try this...
$0 starting money, 3k a year for 32 years at 12.39%
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

There is your million dollars. This is not witchcraft voodoo. This is the stock market and the power of compounding interest. Almost anyone can find $3000 a year. I would even go as far as saying....put it on your credit card. Yes! LOL :) The key is disciplined yearly investment. You must put that 3k or more into the IRA or investment each and every year and you must think long term.

The stock market offers:

-above average returns
-reasonable risk
-no tenants customers or employees
-tax free vehicles

Up, Down and Flat Markets

Up, Down, and Flat Markets
The market goes through periods of up, down and flat trends. Up markets are the most fun and easiest to trade since the vast majority of stocks are going up. I was researching "investment clubs" yesterday with Google; I wanted to find active clubs to send a free copy of my book. I was surprised to find that there were hundreds of clubs, but most of them were now dead or inactive. It seems that there was a club boom from 1998 to 2000. The market then crashed and the investors gave up. It helps if an investor is mentally ready for all types of market conditions. The big dangers in an up market is the euphoria of thinking you can do no wrong. You can be tempted to make poor trades because everything you try is working. Stick to your plan.

Down markets are mentally difficult. They test and retest your mettle. It takes self-discipline and fortitude to be able to watch money catch on fire and not blink. You really have to believe that what you are doing is correct. It's almost impossible to follow a guru's advice in long periods of decline. You must believe in yourself and in your trading ideas. I try to step back, look at the big 100 year charts and say "in the long run, the market goes up 8%-12% a year". I continually reinforce this. The other thing I try and do is "beat the indexes". If the nasdaq or dow drops 15% in a year, and I drop 8%, that is a big win and I am doing something correct. Invest for the long run and be steadfast in your ideas.

Sideways markets are boring and frustrating. They often tempt investors into "adjusting" their system. Just ride them out. They are not fun; at least they are not painful like down markets. Again you must believe in your ideas and stick with them. If you can stay flat when the market is down, you are winning. If you can make 3% when the market is 0%, you again are winning. Winning traders are not always making 15% or more each year; their portfolios fluctuate up and down and form and average that is higher than the market average.

Reducing Risk With Portfolio Allocation

Risk Reduction With Allocation
Every stock is unique and trades in its own unique range. Let me make up a simple example with a three stock portfolio to show how risk can be distributed more fairly.

Stock A is tradiing from $20 to $25 in the last 90 days
Stock B is tradiing from $20 to $40 in the last 90 days
Stock C is tradiing from $20 to $60 in the last 90 days

Let's say you want to invest $30,000. Many investors would buy $10,000 of each stock. If you use the trading range with buy and sell stops, the risks of each stock are uneven. Assume all stocks tank and go straight down, what is the loss for each?

Stock A we would have 400 shares and the loss is 400 x (25-20) = $2,000

Stock B we would have 250 shares and the loss is 250 x (40-20) = $5,000

Stock C we would have 167 shares and the loss is 167 x (60-20) = $6,666

Even though we puchased even amounts of all three stocks, the risk we purchased was not even. You can use a spreadsheet or a formula or a calculator, and get close to a more fair initial risk.

700 shares of Stock A = $3,500 risk and $17,500 cost
180 shares of Stock B = $3,600 risk and $7,200 cost
90 shares of Stock C = $3,600 risk and $5,400 cost

total cost $30,100

This is a more even distribution of initial risk. I go into this in greater detail in chapter 14 and show the groovy formula made for me by my good friend Bruce "Math Ninja" Chidley. He made up a formula to quickly do this allocation.

Three Trailing Stop Orders

Three Trailing Stops
Here are three trailing stops that are simple and effective:

Trading Range
Overall Percent
Pro-Level Percent

In my book I go into greater detail than I will here today but the general description to follow will give the basics on how these stops work.

Trading Range Stop
Take any stock chart and pick a timeframe...I prefer 90 days. Find the highest high and the lowest low for that stock in that timeframe. This distance is the distance to make a trailing stop. In the screen cap above, the amounts are 47.12 and 33.25. I go a little high and a little lower and would use 47.50 and 33.25. The high and low are $14.25 apart and you can use this to trail the stock upward, moving your sell stop to $14.25 less than the highest high as the stock moves upward. This stock works well. The only drawback is when you get into a stock at a low value, say $20 and then the stock shoots up to over $100...mathematically your stop is inadvertantly tightening as it goes higher and higher. I like to use the mathematical example of a stock trading between $2 and $3 and then advances to $100. The low was originally 66% of the high but at $100, it's 99% of the high. There is inadventant mathematical tightening with this method.

Percent
You can pick a percent decline level for any stock or portfolio. If my stock drops 10%, I will sell. This method again works well. The weakness here comes from lumping all the stocks into one basket. Some stocks have greater volatility and some have less. Some industries are more volatile. Some years are more volatile. Keep this in mind when using an overall percent.

Pro-Level Percent
I use this method and it is a combination of the first two. I look at the 90 day range for any given stock and divide the high by the low to get my stop percent. Each stock has it's own stop based on its own 90 day volatility. In the example above, I would move my stop on IGT to 33.25/47.50 = 70.00% of the new high.

Entering A Stock Trade With A Buy Stop

Entering With Buy StopsHere is one of the stocks I am watching and have an order in to purchase it if it breaks upward, out of the current 90 day trading range: VNBC Now this is not a pretty chart like I normally want, but it was a pretty chart when I first placed the order. Once I place a trade, I am more lenient with the chart. On this chart you can see the highest high is $48.75 and lowest low is $33.70. Back when I first placed the trade the low was $32.50. I pick my range as a little bigger than the highest high and a little lower than the lowest low so my personal range is $49 and $32 in this instance.

I don't enter trades with a market order, instead I prefer to let market activity get me into the trade. The stock must break-out and prove to me that it's going up. I place a Good Til Cancel Buy-Stop order at $49. A buy-stop is NOT a limit order. The buy stop becomes a market order once the target price has been touched. It looks like I may get into this trade in the next few days. The public jumped off banks a few weeks ago and that is what sent the price down. Some banks have recovered nicely.