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Discussion Starter · #1 ·
I know I'm beating a dead horse here but please bear with me. The one constant that I read why most people lose money stock trading is they hold losers too long and take profit too soon on winners. And I know that is true for me.

Higher math goes well over my head but I have a firm understanding of basic math, percentages, and decimals. I like patterns and numbers but not equations. I like Fibonacci number sequence for a lot of reasons. Its simple: 3+2=5; 5+3=8; 8+5=13 and so on and it is a pattern. and if you divide 5 by 8 the result is PHI; the golden ratio. The key percents are 60%, 50%, 38%, 23%, 14%, and 9%. 3,5, and 8 also seem to be key time frames too.

But I ran the numbers using a 10% stop loss and 23% trailing order with a 50/50 won/loss ratio and after a year the gain was 650%. I know that number is not realistic in one way because it depends on finding enough favorable trades and strict discipline but it is something to shoot for and I believe achievable with experience and a plan.

Since this strategy is swing trading understanding and using technical indicators are one key. I'll be using what I term a setup using bollinger bands in a narrow range, MACD divergence, and SMA crossover as a trigger to look farther. I don't know if this will deliver a 50/50 won/loss but I ought to be able to tweak it do better.

Part of this strategy is assuming most stocks have highs and lows a couple times a year. Apple's lows and highs last year ranged from near $90 to $140 (50%) which I believe occurred twice. I assume over time one would accumulate a file on such companies.

Below is my math and I'd like your opinions on the 50/50 plan (anyone here have a method that is 50/50 and care to share any of it) and are the 10% and 23% stops realistic. It seems a little hard to believe a 650% return on a stock picking system that gets it wrong half the time.

Again here that chart starting with a $1,000: I started by assuming losing 6 of 10 trades so it starts out clunky the first month. I believe losing 6 of 10 would still show a similar profit assuming a 30% gain on the winners but I felt that was stretching it too far so I changed over in the first month to 50/50.

Example 10 trades @ $500 each; 6 losers and 4 winners with losers sold at 10% loss and winners sold at 23% gain what is the total profit of the 10 trades counting commissions. 10 trades equal 20 fee transactions and equal $200. 6 losing trades at 10% equal $300. 4 winning trades at 23% gains equal $460 for a net loss of $40. Half and half wins/losses net a profit of $125. That’s a 25% gain or 12.5% if a $1,000 is needed to execute 10 monthly trades at $500 each.

2nd month each trade is $550 and using the same scenario of 50/50. Fees remain at $200, losses are now $275 for a total of $475 against gains of $630 and a net profit of $155 with the same percent gain. At the end of 2 months your account is up $280.

3rd month: each trade is now worth $625 with fees still at $200 and losses now at $312 for a total of $512. The 5 winners yields $719 with a gross profit of $207.

To recap at the end of month 1 you have a gain of $125 and a total of $1125. Month 2 sees a gain of $155 and a total of $1280. Month 3 profit $207 and we now have in our account $1487. I have each month increased the value of each trade by 12.5% rounded.

4th month: Trades are now worth $700 each. Fees equal $200 and losses of $350 total $550. 5 winners total $800 and the net profit is $250 and a grand account total of $1640.

5th month: Trades now worth $790 each with losses and fees totaling $600 against 5 winning trades of $910 and a $310 profit with an account at $1950.

6th month: Trades are now $900 each counting fees and losses totaling $650 against $1035 in gains with a difference of $365 and an account worth $2315 for a 6 month gain of 123%.

7th month: Trades= $1012. Fees= $200 Losses = $506. Total = $706 .Winning trades = $1164. Profit = $460. Balance = $2775

8th month: Trades = $1140. Fees = $200 Losses = $570. Total = $770. Winning trades = $1310. Profit = $540. Balance = $3315.

9th month: Trades = $1280. Fees = $200 Losses = $640. Total = $840. Winning trades = $1472. Profit = $630. Balance = $3945

10th month: Trades = $1440. Fees = $200 Losses = $720. Total = $920. Winning trades = $1655. Profit = $735. Balance = $4680

11th month: Trades = $1620. Fees = $200 Losses = $810. Total = $1010. Winning trades = $1860. Profit = $850. Balance = $5530

12th month: Trades = $1820. Fees = $200 Losses = $910. Total = $1110. Winning trades = $2090. Profit = $980. Balance = $6510.

Is that not 650%?

So what are your thoughts?

Katie
 

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I'd be curious how you plan to identify 4 good trades each worth +23% in a month. Your 10% stop loss would have you left with $349 if you took on 10 positions that all ran to your stop loss, assuming you never had more than one position open at a time and you used 100% of your available capital. You'll need to accept that you will have months where you just can't get a break. Maybe even entire quarters, or worse.

My thoughts? Your 10% stop loss rule will probably leave you wiped out in short time and the 23% expected return for 4 individual trades occurring in a single month is highly unrealistic. I doubt you'll be able to find those trades month over month. But as several others (myself included) have said in the past, try it out and let us know how it goes.
 

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this is basically gambling, not investing. If you are fine with gambling then go for it.

The house edge in vegas is as low as .5%, the house edge in stocks is transaction fees and ordinary income taxes on gains.

People lose money in stock trading because it is gambling and there is no way to consistently predict what is going to happen in the short term. You might be up after 30 trades. But after 300 or it might take 3000, you will be a loser.

The one advantage you have over all the pros is that they have to show profits every quarter. This means they cant hold on if they are taking short term losses, even if the stock is fundamentally undervalued.
 

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May I offer a different perspective?

Companies you may want to consider investing in are old companies firmly entrenched. Some people call these wide moat companies.

A wide moat company is well established in their industry. An example would be CSX rail. It is extremely difficult for you and I to start a new railroad. You would need right-of-way, rails, cars and engines. Not to mention employees and customers. That's why you don't see a lot of new railroads starting. This means they don't have to be concerned with new competition.

Every year they have revenue and expenses. Most years they have a profit. But the profit fluctuates. The question becomes how much is the company worth? This line of philosophy is called value investing.

One way to estimate the value of the company is to compare the price of the stock to the cash flow. Ever hear of a price earnings ratio? This would be the price /cash flow ratio. What it tells you is how many dollars it would cost you to get a dollar of cash flow.

Take the lowest price of the stock for ten years and divide the year's low price by that year's cash flow. Then average the price/cash flow ratios for those years.

That gives you a low ratio that actually occurs in an average year. Multiply that average by this year's estimated cash flow to get you a buy price. The price/ cash flow won't go that low every year, remember it is just an average.

Do this for several old companies and buy when the price is right and you will be fine. This is what Buffett does (more or less).

If you can buy stocks in companies who increase their cash flow each year, so much the better. The whole trick is to buy stock of good companies at the right price.

This is exactly what I do.

Good luck.

And one last thing. Don't plan to get rich quick. That's rare. Get rich slowly over the long term by making wise investments.
 

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May I offer a different perspective?

Companies you may want to consider investing in are old companies firmly entrenched. Some people call these wide moat companies.

A wide moat company is well established in their industry. An example would be CSX rail. It is extremely difficult for you and I to start a new railroad. You would need right-of-way, rails, cars and engines. Not to mention employees and customers. That's why you don't see a lot of new railroads starting. This means they don't have to be concerned with new competition.

Every year they have revenue and expenses. Most years they have a profit. But the profit fluctuates. The question becomes how much is the company worth? This line of philosophy is called value investing.

One way to estimate the value of the company is to compare the price of the stock to the cash flow. Ever hear of a price earnings ratio? This would be the price /cash flow ratio. What it tells you is how many dollars it would cost you to get a dollar of cash flow.

Take the lowest price of the stock for ten years and divide the year's low price by that year's cash flow. Then average the price/cash flow ratios for those years.

That gives you a low ratio that actually occurs in an average year. Multiply that average by this year's estimated cash flow to get you a buy price. The price/ cash flow won't go that low every year, remember it is just an average.

Do this for several old companies and buy when the price is right and you will be fine. This is what Buffett does (more or less).

If you can buy stocks in companies who increase their cash flow each year, so much the better. The whole trick is to buy stock of good companies at the right price.

This is exactly what I do.

Good luck.

And one last thing. Don't plan to get rich quick. That's rare. Get rich slowly over the long term by making wise investments.
take a company like CSX, a great time to invest is if one of their trains crashes, releases toxic chemicals and they start getting sued. Their stock drops through the floor, but they are still a fundamentally good company. The traders ride it down so it overshoots in the short term.
 

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Discussion Starter · #8 · (Edited)
So you're assuming

that i take 10 losing positions in a row. That may happen but it won't in a month of that much I know. After three in a row I'd reevaluate my model.

I closed a trade Friday and took a 12% loss. A lesson learned there was not to ignore price action. It was a bio-tech stock that was and had been trading between $1.10 and $1.25 for six months or longer as it was on my radar but was at that time trading near $1.50.

The price dropped in half in one day on news that it had pulled the plug on a drug in early stage testing. They had revenues from other drugs so I placed a bid at .63 cents about 20% under the then price of .75 cents. It took a couple of days to fill and I felt like I had bought near the bottom and that it would rebound to its low earlier this year at least of .80 cents and a nice 30% profit. It spent 3 weeks trading .60-.65 before drifting lower last week. I still believe it will rebound but I'm not riding it down.

You asked if I could find 4 good trades and using a BB and MACD simple scan I found HWAY that closed at $10.00 on 4-11 and on 4-22 closed at $11.87 for nearly 20% gain in 10 days. Personally if I owned this stock I'd either sell or place a limit at $11.50. To be fair hindsight is 20/20.

CPRX is a stock in a month long bollinger squeeze with MACD just turning positive and its trading at $1.21 with support and resistance at $1.00 and $1.40. It could breakout or breakdown just as easily. At $1.21 23% is $1.48 and Fibonacci retracement suggests $1.33 to $1.44 are likely targets.

If I were to take a position I'd bid at $1.06; from there a 10% loss tests all time lows and a 23% gain is only $1.30 well below its resistance and comfortably inside the Fibonacci retracement levels.

Of course I could be wrong and it take off and test its high last summer of $5.80 but its been in a six month free fall so I wouldn't expect that. All i'm looking at is short term price action.

IF I decide to take a position in CPRX I'll let you and others know how it turns out.




I'd be curious how you plan to identify 4 good trades each worth +23% in a month. Your 10% stop loss would have you left with $349 if you took on 10 positions that all ran to your stop loss, assuming you never had more than one position open at a time and you used 100% of your available capital. You'll need to accept that you will have months where you just can't get a break. Maybe even entire quarters, or worse.

My thoughts? Your 10% stop loss rule will probably leave you wiped out in short time and the 23% expected return for 4 individual trades occurring in a single month is highly unrealistic. I doubt you'll be able to find those trades month over month. But as several others (myself included) have said in the past, try it out and let us know how it goes.
 

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I still think you should download a free trial of TradeNavigator or esignal (there are other reputable platforms as well) and input your criteria and run a backtest. That will give you a simple thumbs up or down on your strategy. You have to choose which security you will be trading, because it may work on 'A' but not 'B' or 'C'. Maybe that will help you fine tune your stops or even find the right security..... I'm not too optimistic about trading stocks in the near future however.... A lot of doom and gloom is starting to hit the media.
 

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take a company like CSX, a great time to invest is if one of their trains crashes, releases toxic chemicals and they start getting sued. Their stock drops through the floor, but they are still a fundamentally good company. The traders ride it down so it overshoots in the short term.
That might work great but the point I was trying to make was that if there is no significant news on a stock the price of that stock will vary substantially over the course of a year.

Buffett has said repeatedly over the years that the book The Intellegent Investor is one of the best books ever written about investing. In that book Graham speaks about the inherent value of a stock. Yet, he never explains how to calculate the inherent value.

This has lead some to believe that the inherent value of a stock may not be a specific value but rather a range of values.

Rather than saying the value of XYZ stock is $38.97 you might say the value is from $38.00 to $40 per share.

The high end of the range could be obtained by also calculating the price/ cash flow ratio using the highest price of the year.

This would give you a natural range of the price of a stock over the course of a typical year.

Then what you do is simple. Buy low, sell high.
 

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Backtest, and then backtest some more

I was a professional trader. I traded US Government Bonds 10-30 years for a very large very well known firm. I was the only 'technical' guy on the desk, everyone else was a 'fundamentalist' in their proprietary accounts.

Trading is work, it's hard work. Many systems seem to look great and then in real life only lose money.

First, backtest the system and make sure you are running it over different market environments.

Second, account for slippage and trade costs. You will rarely get the fills you want and you have to account for trading fees, the more trades you do the higher the cost and the smaller your 'winners', the greater impact it will have on returns.

Third, backtest some more, but do so in a general environment across a large number of securities to make sure that you didn't 'curve fit' your results to a single period or limited universe of of securities.

Fourth, 'paper trade' your system. The hard part here is being honest and trading your system JUST LIKE IT WOULD BE WITH REAL MONEY and make sure you are accounting for slippage and trade costs.

A general observation. You are talking about system that as a roughly 50/50 hit rate or less and making money. That would have to be some sort of trend following system which makes sense given your discussion of Fibo, Boll bands, and MA crossovers. Thats fine, but in a flat market environment, like the the last 15 months you could easily get whipped sawed back and forth. You might want to look at the Turtle system, it sounds like something that might interest you.

FYI, I run a small investment firm and I still use technical analysis in combination with a longer term fundamental view. TA is extremely useful in looking at entry and exit points.
 

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Discussion Starter · #12 ·
Thanks I looked at

both products but logical statements and equations and I don't get along well. I understand what options are but not their intricacies and that is similar to those programs. I'm trying to not make it harder or more complicated until I understand the basics better.

In my younger days I shot a good game of pool but I hit a wall until I began playing for money. That is when my skill level took off.

In my first reincarnation as a trader that spanned 18 months I lost money but I learned some lessons. After two years off I am ready again to use what I learned and test new theories out. I don't know if I'll be profitable in this reincarnation but I will do better this time around and I'll do better in the future.

When I get a strategy that works for me then I will look to programs like the ones you suggest to automate it.

I know that the size of my account makes margins razor thin and profit and losses are pennies apart. Entry and exit points are critical as is principal protection. But because the size of my account dictates risky money management (any position is 60-70% of account) my stop losses are tighter than what is probably optimal. And I'm more prone to taking profit earlier.

But I'll learn and get better and with a smaller account making it easier to be profitable with a larger one. I know value investing works in the long term but I don't have that kind of time. I'm looking first at producing income then wealth not the other way around.

If I start with a $1,000 and value invest for 7 years adding $300 each year how much am I liable to have in 7 years? $25,000 to $50,000 drawing from 5% to 10% and paying me on average $250 a month.

If I'm right I can double that dollar amount including paying taxes with $5,000. And eventually I'll get it right.

But I do thank you for the program information.


I still think you should download a free trial of TradeNavigator or esignal (there are other reputable platforms as well) and input your criteria and run a backtest. That will give you a simple thumbs up or down on your strategy. You have to choose which security you will be trading, because it may work on 'A' but not 'B' or 'C'. Maybe that will help you fine tune your stops or even find the right security..... I'm not too optimistic about trading stocks in the near future however.... A lot of doom and gloom is starting to hit the media.
 

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Discussion Starter · #13 ·
Thanks Mark

Yes you're not going to be able to buy and sell at precisely your entry or exit points and neither are you likely to buy at the bottom or sell at the tops.

I figured a 50/50 strategy using a 10% stop loss and 23% gain as being overall profitable. They might not be but I'm testing a theory. Those percentages are fibonacci retracement percentages though I rounded 9% up. I've also read that fibonacci numbers 3,5, and 8 timeframes are ripe for reversals. I don't know if that's true but I do believe patterns exists in the market just as they do in nature and in life.

Yes I believe it is a trend following system. I want to start with a single basic indicator and add to it. I don't believe there is any argument with a bollinger band squeeze that either a breakout or breakdown will occur. That's almost a 100% certainty. The money is in knowing which way. Will MACD divergence help or is MA cross better?

I suppose you could use options to hedge or make money from but I don't understand options enough to venture there.

I do a quick look at fundamentals and look at SEC filings to see that they are a real company.

The Turtle system is that Investor's Daily or something like that?


I was a professional trader. I traded US Government Bonds 10-30 years for a very large very well known firm. I was the only 'technical' guy on the desk, everyone else was a 'fundamentalist' in their proprietary accounts.

Trading is work, it's hard work. Many systems seem to look great and then in real life only lose money.

First, backtest the system and make sure you are running it over different market environments.

Second, account for slippage and trade costs. You will rarely get the fills you want and you have to account for trading fees, the more trades you do the higher the cost and the smaller your 'winners', the greater impact it will have on returns.

Third, backtest some more, but do so in a general environment across a large number of securities to make sure that you didn't 'curve fit' your results to a single period or limited universe of of securities.

Fourth, 'paper trade' your system. The hard part here is being honest and trading your system JUST LIKE IT WOULD BE WITH REAL MONEY and make sure you are accounting for slippage and trade costs.

A general observation. You are talking about system that as a roughly 50/50 hit rate or less and making money. That would have to be some sort of trend following system which makes sense given your discussion of Fibo, Boll bands, and MA crossovers. Thats fine, but in a flat market environment, like the the last 15 months you could easily get whipped sawed back and forth. You might want to look at the Turtle system, it sounds like something that might interest you.

FYI, I run a small investment firm and I still use technical analysis in combination with a longer term fundamental view. TA is extremely useful in looking at entry and exit points.
 

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http://www.investopedia.com/articles/trading/08/turtle-trading.asp

How I grew my trading account was by paying myself 10% PRE-TAX from my 9-5 job. One day I said screw it and just put away $100 per pay check (which was weekly) which was more than my 10% minimum. It adds up quicker than you think.

Options tend to be hard to liquidate and a have a bit of a learning curve to them. They can offer more leverage than stocks but personally I don't trade anything on margin.
 

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I have turned $1700 into $96,000 but it has taken 15 years of trading to do so (this was a rollover IRA from a tiny 401K that I just wanted to have fun with).

I probably have paid about $5,000 in trading fees over those years. The compounded annual return works out to be about 30%.

Not sure I could have done this with more money as I took some serious risks (one was buying Netflix options when Reed made it tumble by raising prices too fast...that turned out to be a triple even though I sold way to early)
 

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trying to beat the market is like trying to beat the roulette wheel, there are systems but nothing can beat the house long term.

for me buying and holding and pressing the bet was the way to build wealth, there was no entry or exit triggers it was all done by the seat of the pants, gut instincts and investing savvy.

i view traders as daily gamblers at the casino, might hit big or lose for the day. as a buy and holder i was at the casino only once a month
 

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Discussion Starter · #17 ·
I think investing vs swing trading

is a lot like the debate of gold vs food or community vs the individual; the truth is it's both. I believe each person has to find what works for them.

I don't like the term "beat the market" instead I feel a better term is working with the market. I have a small account and will have to take risks that I wouldn't with a larger account.

When my account does get larger though I do not intend to be a buy and hold investor because I believe you leave too much on the table though I would hold stocks longer.

Doing a quick search using the filters of the NASDAQ, high beta, and mega cap yielded 50 stocks. randomly clicking on three showed two a 200% rise each in almost two years (2012-2014) with some drawbacks but nothing a 10% trailing stop would trigger. But each stock gave back a third last year. The last stock had a slower rise but its stock rose last year and has about 300% increase in the same time frame. Each company pays dividends.

The buy and hold strategy returns 190% in three years while the strategy of riding the trend selling the first two and investing that amount in the third returns 250% Assuming buying a 1,000 shares in each company that amounts to a portfolio value of $79.000 compared to $103,000. That's an extra $8,000 a year and represent 20% extra return each year.

I'm not sure timing the market holds true here as a 10% trailing stop would have triggered sells in each of the two stocks. 10% represents $2.00 plus drop in price.

Ericsson (ERIC) is testing 5 year lows falling from above $12 to $8 in the last year. If I had the account to I might look at this stock to hold for six months to a year. I also noticed that in today's news that ERIC released an IoT (Internet of Things) accelerator.

But I have to look at under $5 stocks with volatility where a $1 move represent 50-100%; high reward high risk. Option provides leverage but I don't understand them well enough.






trying to beat the market is like trying to beat the roulette wheel, there are systems but nothing can beat the house long term.

for me buying and holding and pressing the bet was the way to build wealth, there was no entry or exit triggers it was all done by the seat of the pants, gut instincts and investing savvy.

i view traders as daily gamblers at the casino, might hit big or lose for the day. as a buy and holder i was at the casino only once a month
 

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I know I'm beating a dead horse here but please bear with me. The one constant that I read why most people lose money stock trading is they hold losers too long and take profit too soon on winners. And I know that is true for me.

Higher math goes well over my head but I have a firm understanding of basic math, percentages, and decimals. I like patterns and numbers but not equations. I like Fibonacci number sequence for a lot of reasons. Its simple: 3+2=5; 5+3=8; 8+5=13 and so on and it is a pattern. and if you divide 5 by 8 the result is PHI; the golden ratio.


You have that backwards, 8 divided by 5 is PHI, not 5 divided by 8.
 
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