Trading Stocks and Strategy

Phillip Fisher has sometime said “The stock market is filled with individuals who know the price of everything, but the value of nothing”. Actually this is true, but is real value what drives the stock markets today? After the introduction of the derivatives market back in 1987 nothing is the same regarding the financial markets activity. Due to the domination of the Derivatives, the financial markets today have turned to shorterism and thus they are trading the news more than they are trading real value.

A smart investor must be an investor and a trader at the same time. So when the time is right he must trade the news and other times he must trade real value. We could say that the news-trading is more suitable in short-term periods while the real-value trading is more important in long-term periods. 

Trading Stocks Strategy

In this Article it is presented a strategy to trade stocks focusing on real value. This strategy is clearly investing-oriented and that involves long-term thinking.

Stock Trading Systems: » Jason Bond Picks | » Top Dividend Stocks | » Trademiner, Stocks, Futures & Forex 

4 Simple Steps to Choose and to Trade Stocks

Here are the four (4) steps:

Step-1: Define your Investing Profile and Choose a Market

In order to define your investing profile you must answer first three key questions. Here are the three questions:

1) What is your available capital and for how long it will be available?

2) How much total losses can you suffer?

3) What annual returns can make you happy?

If you hold a medium capital and choose to invest seeking high returns you will probably choose aggressive stocks within aggressive industries (for example technology stocks on Nasdaq). From the other hand, if you are risk –averse you will probably choose the safety of the blue chips listed for example on Dow Jones Industrial. If you are trading CFDs or Binary Options or any other Derivative you can adjust your risk exposure by altering the rate of leverage you are trading. The stop-loss orders can narrow your risk exposure furthermore, especially if you trade derivatives.

Step-2 Define the Master Trend

I will not try to confuse you by analyzing how technical analysis may be used to evaluate the master trend, instead I will give an easy tip:

→ When an Index (for example Dow 30) is above its 260 days moving average the master trend is considered bullish

→ When an Index is below its 260 days moving average the master trend is considered bearish

Here is an example on Dow Jones industrial. In the following chart the blue line represents the price of Dow Jones Industrial for the last decade (2003-2013) while the red line is the Moving Average of 260 days.

Chart: Dow Jones Industrial (May 2003 - March 2013)

 

Keep in mind that there are some funds that are selecting their trading periods only by using a moving average. Depending on the selected market and your accumulated experience you can use more sophisticated ways to evaluate the master trend.

Step-3: Select and Compare Industries

You must not pick any stocks before you focus to an industry first. An industry should be chosen by performing comparisons upon industries and the General Index. New technological or other developments can make an industry a future star or a future victim. Try to find the stars. If you can’t find the stars concentrate on technology that usually ‘runs’ during bullish markets. Technology means industries like the Internet or the Biotechnological sector.

Measuring and Comparing Industry Value

In general industry value can be measured by making comparisons using ratios such:

1) P/E or EV/EBITDA (these are ratios measuring profitability, you must use both past data and future forecast). Don’t forget that high-growth industries can justify high P/E ratios (for example P/E=30) while static industries can not justify ratios even P/E=10. To measure growth over time in combination with profitability you can use also P/E/G ratio (Price / Earnings / Growth).

2) Industry Performance over past 52weeks (compare the average returns of an industry to the general index or other industries performance). For example since the year started the General Index of a Stock Market has performed +20%. In such a market, an industry that has performed +5% can be considered undervalued while an industry that has performed +40% can be considered overbought.

My tip here is to choose at least two different industries in favor of your portfolio diversification.

Step-4: Select your Stocks

If you have now chosen one or a couple of industries, it is time to select your stocks. As an easy start we are interesting mainly in market leaders, in other words companies holding the greatest market share in a national or international level. Leaders are the first choice of fund managers and that is important. Here are some more filters to pick the right companies within a chosen industry:

1)     P/E and EV/EBITDA Comparisons

2)     Corporate Debt and other Liquidity Comparisons

3)     Past and Future Investment Comparisons

4)     Management Past Performance Comparisons

And of course focus also on:

5)     Stock Performance Related to the Industry’s Performance, during a certain period (for example since the year started)

The General Trading Rule you must Never Forget

Either you are trading classic stocks or CFDs or any other instrument keep in mind that diversificating your trading portfolio means surviving. Diversificate in terms of different Markets, Industries, Companies and Currencies.

Related Links: » Warren Buffett Investment Advice | » NYSE EURONEXT | » Nasdaq on the Web

 

 

Compare Brokers Trading Stocks: » Stock Traders | » Trading Indices

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■ Trading Stocks & a Winning Strategy

By Giorgos Protonotarios, Financial Analyst, BinaryValue.com, March 25, 2013

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