Reading Price Action.

The market has really taken a run for the bulls and those of you who did a bit of shopping in the last week or so would be smiling your way to the bank.

I have been developing two systems. One a daily short term system and the other a longer weekly system.

But while all this is happening I am wondering can I just trade by looking at price action ? No use of indicators etc. I'll need help. So lets start some work on it.

Nice Day

Today was a nice day for pretty much all of the market. If it continues this way we are on the track to the best week we had in a while and as I type this the the US Futures are up, so we could have another good day, but I'll let the market say that.

I have started work on my system and I am trying various permutation and combinations to get a decent positive return with low drawdown.

Looks Good, fingers crossed.

Today was a nice day in between all the the doom and gloom. However, don't become complacent and let your guard down. Its not over till its over, and this correction is defnitely not over. Today's rise was too fast and too good and if any more bad news pops out of the subprime market we definitely gonna get hit as well.

Fixed Fractional position sizing

Most of us who have dipped their foot into the market are generally concerned about making money. The first rule I see of making money is to not loose what I already have. While its next to impossible not to loose a trade or two its imperative that I do not loose all or most of my trading capital.

I was lucky enough to stumble across the above term and although it sounds quite sophisticated, its quite a simple concept to implement.

Lets say, for an example, you have a total capital base of $100,000; then you divide the lot into 10 parcels of $10,000 each. You would only invest one parcel on one stock. So you are basically spreading the risk across ten stocks.

Now lets say you wish to trade a $1 stock with the first parcel.
.
You don't wish to risk more than 5% of your capital on the trade.
So maximum risk is 10,000*5/100 = $500.

You plan to buy stock and think that a 5c stop would be best.
So $500/.05c = 10000 so you CAN buy 10000 with a 5c stop.

Lets say you think its going to run so you only have a 2c stop.
so $500/.02c = 25000 so you could maintain the same $500 risk and invest in $25000 of shares.

OK lets say you wish to use a wider stop can you still buy 10000 shares?
So $500/.20 = 2500 obviously no you can't. You must buy 2500 ONLY to maintain the same 5% risk with a 20c stop.

So same maths applies to any position you take.

$15300 capital, 5% risk how many shares can I buy of a stock trading at $1.92c with an 18c stop?

$ at risk = 15300 x .05% = $765.
765/.18c = 4250 shares 4250 x $1.92 = $8160 so you can ONLY buy 4250 shares at an 18 cent risk to maintain the same 5% risk to capital.

I'll go further and talk about Reward to Risk or the R/R ratio.
If you buy and then sell the $1.92 stock for a 54 cent profit you have returned on that trade a 3:1 R/R ratio.
This is calculated by 54c (the profit)/18c (The risk) = 3 so 3 times the risk has been returned.
So if you win 2 out of 3 trades with this sort of R/R ratio then your doing well.

I have a spreadsheet that does the above calculations and anyone of you need it I am happy to post it here. Other wise there are couple of free applications on the net that can do the calculation for you. Two of them are:
TradeSize Pro
This can be found here.

The other one is called MM Calculator and it can be found here.

Lemme know if you know of any other applications that do a similar job. Happy trading.

Feds cut rate

Just saw the news that Fed cuts discount rate to 5.75% to ease credit crunch.

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from regional Federal Reserve lending facilities. It differs from the key federal funds rate, which is the rate at which private institutions lend to other depository institutions overnight.

The result, as I type this, DOW INDUSTRIALS up more than 300 points in opening minutes; NASDAQ up 2.5%.

So we clear of the woods ? Not yet. This will put breaks on further market slide provided there are no more ugly news from sub-prime market coming across.

So now we can look at a few findamentally strong companies. These stocks are best poised for a sustained rebound on the ASX.

BHP
RIO
WES
CBA
CTX
LLC
COH
CSL
OXR
WOR
ANN
ANZ
UGL
NCM

Correction or a Bear Market ?

So is this just a correction in a bull market or the beginning of a Bear Market ? Time to get that crystal ball out. lol. To be honest no one know. Poll 100 people and its likely 50 will be right as it will be either a yes or a no.

One thing is for sure, any stock that is speculative will get its price brought to ground reality. So now would be a good time to get that fundamental checklist out and start looking for stocks that are holing well and are fundamentally strong. QAN, LEI, CBA come to mind.

It keeps coming

There was more pain today although I have been on the sidetracks to protect my capital till things settle down there has been a few good news stocks like JBH CRG etc. So we have been getting these mixed signals but now is a time when extreme caution is to be exercised.

Tonight the US market is at a brink, if it breaks down more the damage will be more difficult to come out of.

More Pain

Investors stayed away from the market today probably cos they have become wiser like me from experience. Everytime they have jumped in, the market has thrown a nice surprise ball at them. I have been on the sidelines for a while now.

It looks like DOW is be going to take a bit of hammering tonight. Stand aside, train wreck coming.

Tuesday

The injection of funds from central banks in US and Europe seems to have stabilised the market a bit but I am hazarding a guess here that its only temporary and there will be more skeletons falling out for the simple fact the the market still does not know the full extent of the sub-prime issue, does any one ?

Monday

Sorry for not being able to post for the last couple of the days, I had been travelling, but it was some week. The retest came and it came with quite a bit of strength. I guess as skeletons keep falling out of sub-prime market in US we would keep seeing this wild moves. If you are a seasoned trader you can take advantage of the moves and can make a packet.

One thing I have been doing is keeping an eye for stocks that defy the pull of the bears too much and pick a small quantity of them. This way I will have my foot in the door if it takes off and it fails then stop loss would save me taking big hit.

My scan picked up the following stocks.

MGW
It seems to have broken its downward spiral and has made a breakout. There is good support at $2 and at $1.92. It has hit the resistance at $2.26 and if it breaks out of this I might take a small position in it. The next resistance would be at $2.27. There is a spike in buying which is good but I would need more of these.





AGK
Its been forming an ascending wedge for quite some time and for the last three days the volume has been positive. If it breaks out of the resistance line at $16.40 then it would be a good buy.



My scan also picked up BOL, PPX, BBG but they are all in the same group as MGW, there is strength but they all need confirmation.

Stay safe.

Wednesday

We had a nice day today. Most of the stocks were up but I am still expecting a slight dip before the market resumes it normal trend.

My system identified ARG this night and overall it looks ok. Its poised to breakout with positive above average volume coming in for the last three days. If the markets hold this could be a runner.

The Market.

The Dow industrials recorded its best day since June 2003 but surprisingly the local market did not follow it. I guess investors here are cautious as in the past the wild ups and downs have got them wary.

The decision on interest rates and tonight's market depends on the decision as it will effect the outcome of the US market and will have flow on effects on the ASX.

Hunting.

I am now cautiously bargain hunting. My shopping list consists of

FPH
OXR
BHP
BSL
CEU
CUE

Now these stocks, to me, have been oversold or resisted the selling pressure quite well and hence tomorrow I will see if I can pick them up cheap. Mind you I will take small positions in them if at all and will keep a finger on the sell button as well. This is a very volatile market and caution is the key.

New week.

That was some week. Friday, the US markets dropped quite a bit and I am expecting a fairly volatile week as investors are gonna be on edge due to the sub-prime debacle.

During these times I am keeping a close eye to see if I can spot any good bargains but definitely gonna be on the cautious side. Now a lot of companies are gonna be reporting earnings in this week. If their earnings are positive then I expect the market to get on an even keel. Either way expect a volatile week.

Waiting it out.

There was wide fluctations in the S&P ASX 200 and this kinda tell me we are still not in the clear and it sure will be a bumpy ride.

I am still on the sidelines.

The day.

Wow I was right about the X Factor. What a day it was, pretty much every market took a hammering and the Aussie market dropped about as much as it dropped on 9/11.

if you look at the big picture, the economy is doing great, unemployment is at its lowest, exports are up. So over all the pillions holding up the economy are doing OK, no cracks there. Once the jitters about the US sub-Prime mortgage settle down, I am expecting the market to rebound.

Keep an eye for stocks that are defying or resisting the downtrend. These stock will definitely take off once the market returns to its normal uptrend.