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Todays is : Wednesday, 08 September 2010
Perfecting Your Trading Techniques And Observations
Whatever method you use to help make buy and sell decisions, you will call some wrong. There is no perfect method for playing stocks.

It may happen – let’s hope not – the first time you sell using your new method, you may be wrong; the stock will take off a minute after you sell and triple in price. You will feel like kicking yourself then. It may not happen the first time but eventually it will. It’s something you have to accept, simply because no matter what you do, you’re not gonna call all of them correctly.

Focus your trading technique on when to sell. If you use some method to determine when to hold or hold longer, you’ll miss a lot of those too. The problem with a technique to help you decide to hold or hold longer, is that you increase your downside risk. If you call one wrong and you hold it long, and the stock starts plummeting, you stand to lose a lot of the profit you would have gotten by selling. In some cases, it may result in your losing some of your actual cash, when the stock falls so hard you can’t sell it at almost any price.

If you use a technique to help you determine when to sell, you stand less downside risk. By selling into a run as the PPS is climbing, you’re guaranteed a profit. If the stock continues to climb after you’ve sold, you’ve really lost nothing.

What you can do to help you develop your trading method is to paper trade. You can test your method and theories without using real money. For example, pick out half a dozen stocks, or even more if you can find them. The more stocks you paper trade, the more data you gather and more quickly you can see the results of the way you’re trading. Pick out stocks you think are going up – might take a little research but it’s well worth the effort – write down buy X number of shares at Y price and the date. Follow all of them – make a separate watch list for all of them and set alerts for all of them. When they start running, sell when your method tells you it’s time to sell. Record the results, Y price sold at and the date.

Then continue to watch them and see how many continue to go up and how many stop running after you sold and start to go down. This way you can gain some confidence that your method works OK, and you can adjust your sell parameters if need be. For example, let’s say you’re shooting for a 50% profit but you find the majority of the ones you’re picking stop running at 30%. That means you are aiming too high. You can adjust your method to go for a 30% profit and sell when the stocks hit that range. Of course, every stock is different. So if you evaluate a stock and really think it will run to 70%, you can play it that way, holding longer than you would for another stock that you think will only run to 30% for example.

You’ve been trading already so you probably know that paper trades don’t always work the way real trades do. For example on paper, you’re holding 200,000 shares of stock you bought at .0070. Let’s say your commission cost is $10 per trade. That’s a cost of $1410. The stock then moves up to .0075 and sits there for five minutes and doesn’t look like it’s gonna move anymore, so you decide to sell it at .0075. On paper your proceeds from the sale is $1500 minus the commission of $10 or $1490. So your paper profit is $80. The problem with real trading, especially in the pennies, is that you may not be able to sell it at .0075. You may not be able to sell it unless you drop your order to .0073 or .0072 for example. At .0072, you don’t make a cent.

In reality, it is difficult in the pennies, trying to make small profits on small moves in the PPS. Small moves indicate only a small demand for the stock, so by the time the stock hits .0075, all those folks that were willing to pay .0075, and there may have been on one or two of them, have already got fills. When you go to sell at .0075, there’s nobody else at that time who will give you that price for your shares.

I would love to be able to make trades like the one above, even if I’m netting $80 profit per trade. If I could, I’d be doing 10, 12, 15 or 20 trades a day. It’s impossible however to find that many stocks with a sufficiently high demand which will allow you to do that. It’s easy to sell shares when the demand is high and the stock is running. That’s why pumpers do what they do, in order to create demand, so they can dump their shares into the market - you can’t sell shares, or anything else if nobody wants it. Not even the pumpers can do that.

And how many good runners do you see every day? I don’t know about you but I miss most of the first-time runners simply because I don’t know about them until it’s too late to get into them. There are thousands of penny stocks by the way. Most of them we never hear about. So on stocks that move in a narrow range, like in the example above, you not only look for ones that have a high volume but also a large number of trades, relatively speaking. You want to find those stocks that people are buying and selling, so the number of trades is often more important than the total volume. The reason is because of this:

Say a stock has traded 30 million shares so far but the average trade has been 1 million shares. That’s only 30 trades, or 30 buyers, maximum. Heck, for all we know it might be one guy or two guys making several large buys each. It might actually be only ten guys actively buying the stock, even with a 30 million share volume.
Now for a different stock, let’s say it has traded 30 million shares but the average trade has been 200,000 shares. That’s a total of 150 buyers, max. When you get ready to sell your shares, you got a lot better chance with 150 buyers in the market than 30. This is a generalization of course but that’s usually how it works. So for stocks in hot demand and running hard, it’s no problem selling your shares. That’s why you always try to sell into the run before it stops. Once it ceases, buying demand may dwindle next to nothing.

For stocks that trade in narrow ranges where the demand is not so heavy, you look for a lot of activity, the more buyers there are within that range, the better chance you have of selling your shares. You see folks on the boards always talking about volume and equating it with high activity. As you can see, that’s not always the case. A high volume does not necessarily indicate folks are buying the stock. A large volume could mean a few heavy hitters picking up 5 or 7 million shares at a time for example. So for pennies, you want to keep an eye on the number of trades too.

Many users on the boards equate a sudden increase in the volume with a price increase. However, often times a sudden large increase in the volume will indicate traders are dumping the stock. Take a look at some charts for pennies. That’s a frequent occurrence, where you will see a large and sudden increase in the volume being traded, with the PPS dropping, not going up.

Most folks are looking at the volume of trading for the day. That, often times, doesn’t tell you much at all. What’s more important is any sudden increase or decrease in the volume. The sudden changes are more important when you’re trying to flip stocks. They indicate a change in the trading pattern of the stock, and are a much stronger indicator of an impending change in the PPS.

For sub-penny stocks trading in the ranges of .0001 to .0050 for example, a ten percent move doesn’t result in much of a dollar increase. For example, a ten percent increase in a stock at .0050 is a move to .0055. If you have 100,000 shares, that’s a gross profit of only $50, and a net profit of only $30 after the two ten-dollar commissions.

What you can do with these stocks – but it’s risky – is to increase the number of shares you are buying and selling. By doubling or quadrupling the number of shares, you are doubling or quadrupling the amount of dollars in potential profit. However, you’re also increasing the chances that there may not be anyone that wants to buy the larger number of shares you’re now trying to sell. You also stand to lose a lot more, dollar-wise, if the stock suddenly heads south on you. To continue, in the example above, if you are holding 500,000 shares instead of 100,000 shares and sell at .0055, that’s a profit of $150, assuming of course per the discussion above that you can sell at .0055. Likewise if you’re holding 100,000 shares of stock you bought at .0050 and it drops to .0045, you’re down $50. If you’re holding 500,000 shares and it drops to .0045, you’re down $150, not counting the commissions.

I wouldn’t worry too much about how you initially develop your trading techniques. Write down several points or principles you want to follow and begin with small amounts of cash. Your philosophy and method of trading will evolve as you gain experience. Once you have developed your method of trading, continually review it, because the markets are always changing.

Lastly, if you aren’t making money with your technique, or at least holding your head above water, you’re doing something wrong. Review how you’ve been trading and change it. Failure to do so will only result in continuing to lose money.

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