| Case Study: How to make $100 (profit) in the stock market |
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Kunal of HelloStockMarket
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| Case Study: How to make $100 (profit) in the stock market |
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I’ve been fairly optimistic with the stock market since the March 2009 lows. My passion is the stock market, and I kind of wanted to put out a feeler out to you guys – I was thinking of doing a case study of how I plan on making my first $100 profit in the stock market. Like, a real case study – something where I would really be putting up some of my own cash, to see if it actually can do something.
Would this be something you would find interesting? I kind of want your feedback to see if this was something I should do privately, or if you guys would find it useful here.
Thanks for your input!
Kunal Kalsani
Starting from scratch? See my blog, HelloStockMarket.com for my Free 5 Day Guide To Building an Awesome Portfolio - from my own experiences.
Last edited by Kunal of HelloStockMarket on Tue Feb 09, 2010 3:28 pm; edited 1 time in total |
Tue Feb 09, 2010 12:43 am |
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oldguy
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Saw your blog - nice work.
You mentioned 'trend following' - when you look at technical indicators - ie, chart patterns, candlesticks, cup & handles, Elliot waves, Fibonaci ratio's, yada - you are looking at one thing, history. And trend following is also a way to look at history and extrapolate that trend into a future projection.
But the Market does not follow history, the patterns do not repeat - tomorrow's prices will be detemined by an event that has not yet happened, it will happen tonite. If you look in the Library of Congress you can find hundreds of books on how to predict stocks, how to 'beat' the Market - but if it were possible it would not require 100s of books over 150 years, it would fit in a single little book. Yet people keep trying - LOL - and writing/buying books.
Same with puts, calls, writing covered calls, etc. You have probably sat in the classes (after some of us retired we went to the 'classes' for the coffee & donuts) - the purpose of the 'class' was to sell the $3500 software. Run the screening program, buy one of the green lite positions, sell when it turns red - and you'll be right half of the time - and wrong half of the time, LOL.
Early on, when I was still in my 30s, I set aside a small trading account, maybe 5%, and seriously invested the other 95% in my core account. Whenever I compared the returns on the two accounts, the core won (they were close). But the trading account got all of the attention, all of the work - corn futures, options, short positions, individual stocks/ mini stocks. At any rate, I glad I limited it to 5% - and I became wealthy after I quit trading and after I quit tying to beat the Market. Confession: It sucks to have to admit that you suck at stock picking - but later, when you are wealthy, everyone assumes that you are a great picker, LOL.
But if you like to trade - buy any stock that you like - ie, throw a dart, pick a pretty name, whatever. When you buy it, place two sell orders, one about 15% down and one about 50% up. And then LEAVE IT ALONE, never second guess yourself, never "give it one more day, maybe it will come back". Then, when one of your sell orders executes, take your money, pick a new stock, and do it again.
As for picking stocks based on fundamentals, balance sheets, PE, etc - there are good companies with bad stock, and there are bad companies with good stock - and you can't know which is which. Stocks move based on Market pyschology, buyer/seller perception of reality, not quite the same as reality (or maybe that IS reality, ie, a semantics issue?)
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Tue Feb 09, 2010 2:13 am |
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Kunal of HelloStockMarket
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Hey Oldguy, thanks for the response! And thanks for the compliments to my site.
I like the detailed answer you gave, however, I agree and I disagree with your points.
First of all, I am an engineer by trade, so maybe my bias is naturally towards technical analysis and understanding (well, trying to make some sort of rational sense) of numbers.
I agree with your basis of the curse of how people use technical analysis for use of extrapolating previous/historical data in preparation of where a future price could be. The stock market is much more than finding a “head and shoulders” pattern breakout, and using the theory in a technical analysis book to determine a price target – that would be pretty much like playing a slot machine. It takes everything from what a specific company is doing in operations and how they see their profits increasing, all the way up to economic impact of globalization – to really appreciate how price moves at any given moment. So “yes” to your point, fundamentals are what drive a market.
Personally, I am bullish on the markets. I think over the long haul (and I’m talking YEARS), the markets will eventually go higher. Of course there will be bear markets in between, but I think overtime, I believe companies will either become better (or become extinct because of competition), countries (like the US, the only country that I invest in) will eventually become stronger (of course with hiccups along the way). So with that being said, I am either LONG the market, or I’m OUT of the market (by means of cash on the side).
Do I believe the market will go up, yup. But anyone who has put money in the market will say that it doesn’t go up all the time – there are cycles. And this is where I use technical analysis (TA).
I don’t speculate on where COULD a price be heading, but I use TA on HOW MUCH RISK I’m willing to put on the table. Stocks move in cycles, short-term, mid-term, and long-term. So, I use TA to create entry and exit points. I use TA to take certain candlestick bounces. I use TA to watch for indicator crossovers. I use TA to review oversold and overbought conditions. Etc. Etc. Etc.
Ideally, I like my trades to be months in duration, however, I will use TA to better manage my position during cycle corrections – by means of selling calls, buying puts, or exiting the position completely (if bid-ask prices get way out of hand). And by “hedging” I mean either I am net neutral, or I reduce my bullish exposure – for example: buying a stock means your are 1-to-1 with the price movement of that company – meaning – if I buy Apple at $194, if Apple moves to $190, I have to sell my shares at $190. But if I sell a call option, depending on month of expiration and strike of contract, I can reduce my exposure, so instead of losing $4/share as Apple goes from $194 to $190, I may only lose $2. But because the max you can get on a sold call option is basically the premium of that option, a better idea may be to buy a put option for that added insurance policy.
What I’ve learned from the bear market is that, I don’t like losing money on small cycles – since you have no idea on how long a cycle may last or even if this harmless looking pullback can turn into a bear correction. Remember, it always starts small, and snowballs into something larger.
I believe in picking good stocks, but I believe in that you don’t know what’s going to happen tomorrow. I love Apple – and yes, I did have Apple in 2008. But I got out of Apple when it broke a major support line – and boy was I glad I did. Did I lose money? For sure. But not nearly as much as I could have, had I not known TA inside and out.
A fundamentalist is a perma-bull, just as I am. If you believe in investing in a stock based on fundamentals, you are basically hoping that it will go up over the long run. I am doing the exact same thing. But instead of buying Apple and holding it during a bear market. I will buy Apple, use TA to determine my exit point, exit when it breaks a support level / breaks weekly or daily candlesticks, and then use TA to tell me when it’s a little safer to get back in. I’m sure there are many people who wish they knew a bit about TA when Apple, a $200+ stock in Dec 2007 fell all the way down to $80 in the lows of the bear. Of course, you can’t pick the tops or the bottoms, but there were plenty of support levels broken all the way down from $200 to $80, as there were plenty of resistance levels broken as the stock went from $80 and clawed all the way back up to $200. (Wow, I love Apple.)
So, Yes, in the traditional sense of speculation of price based on technical patterns – that would be an incorrect use of TA (which is probably the most common way of using TA in the first place). But using TA to appropriately position your risk and exposure in any trade? I think that is extremely valuable asset of TA (which often gets overlooked).
Thanks for reading this far – hopefully it was received well… What can I say, I love this stuff!
Kunal
Starting from scratch? See my blog, HelloStockMarket.com for my Free 5 Day Guide To Building an Awesome Portfolio - from my own experiences.
Last edited by Kunal of HelloStockMarket on Tue Feb 09, 2010 3:28 pm; edited 1 time in total |
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Tue Feb 09, 2010 5:34 am |
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oldguy
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quote:
I agree and I disagree with your points.
Looks like you mostly agree. Good point about the perma-bull. The Market trends ever upward. Society grows its 'wants' as a function of time - 3 cars instead of one, 5 TVs instead of one, a 2500' house instead of 1200'. Population growth is superimposed onto the 'wants' growth. And currecny inflation is superimposed onto those. That drives business to produce ever more goods, more profit, more growth, more value-added, so stock values grow ever upward. Productivity/automation facilitates efficient more output with less input - so that too drives profit ever upward. Check the SP500, nearly all 30-yr blocks provide a double-digit year-over-year growth.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
As for TA and moving out to avoid dips, and moving back in to capture gains - brokers have reported that clients literally are 180 out of phase. When the Market falls they eventually sell to avoid a crash (invariably near a bottom) and then they wait for the Market to 'recover' so that it 'is safe to buy back' (invariably near the top). Over a 23 yr study in a 12%/yr index, the in/out's got a 2.8% return. They literally snathed defeat from the jaws of victory.
It seems intuitive to sell into a downturn, buy in an upturn, but the human condition tricks us - we suffer from recency. Whatever the current trend, we extrapolate it, some people even put dates with it - (housing prices are falling, they will keep falling, realtors expect them to fall for 3 to 5 years) LOL. Of course, the reversal could have already happened - when it does everyone shifts gears and predicts that real estate will go upward forever, LOL.
The SP500 index has about a 15% standard deviation - a plus/minus 2 std dev has a 95% probability of occurance. So the one-year Market outcome would be +/-30% for 19 of 20 years and more/less in the outlier year. That is nearly useless info to an investor, we already know that from observation, and we already know that the Market is not a short term vehicle. But when you string 30 data points together, provide time for statistical averaging to occur - the probable outcome is then relatively straight forward.
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Tue Feb 09, 2010 6:30 am |
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coaster
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quote:
Originally posted by Kunal of HelloStockMarket
First of all, I am an engineer by trade,
Kunal
EE by training, but not by trade. I think the disciplines are too far removed. Accounting is probably best suited for fundamental analysis. A person with a mathematical bent might be more interested in system trading.
Stocks by their very nature aren't the best vehicles for trading, IMO. The whole concept behind the equity market is ownership. Trading cares nought for ownership.
~Tim~
Eye Candy : Why Whimsy
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Tue Feb 09, 2010 7:55 am |
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oldguy
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Mech Engineer here, retired. 
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Tue Feb 09, 2010 3:20 pm |
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samurai
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Loved your blog, and it is good to see someone with a more optimistic view of the future!
Many of the methods you guys use to analyse equities is new to me(me, being a doctor), and am trying to get a grasp of how to invest on my own. Thus, your blog, and many of the contributors here, have been very helpful for me.
Even in my neck of the woods, the recent crisis has been painful. Not because I lost chunks of cash, but because the companies I was investing with; AIG, HSBC, and our local banks, might go the way of the dinosaurs!
I've got a long way to go to get a grasp of the stock market, but with blogs like yours, I get a fair amount of inspiration.
The best way to predict the future is to create it.
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Wed Feb 10, 2010 11:25 pm |
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Kunal of HelloStockMarket
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OHhh ... thanks Samurai!
It's definately hard work! But it forces me to keep up to date with my info, plus I have about 30+ investing books that I (still!) need to go through.
But back to the topic ... I am pretty bullish on the markets, but I am quite cautious right now, I've been watching a lot of support levels get broken, and that tells me that I should be sitting on the sidelines.
However, I have found a few stocks that didn't have their support levels broken, which is kind of nice to see!
Starting from scratch? See my blog, HelloStockMarket.com for my Free 5 Day Guide To Building an Awesome Portfolio - from my own experiences.
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Thu Feb 11, 2010 4:55 am |
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alok.singh
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I afraid to invest my money in stock market. Especially in the current market scenario.
Buy My House
We Buy Houses
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Thu Feb 11, 2010 7:26 am |
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samurai
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...as Buffet said, be greedy when everyone is afraid...
BTW, Buffet's fund isn't doing so great, is it? Maybe this isn't great advice after all...
The best way to predict the future is to create it.
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Thu Feb 11, 2010 8:26 am |
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Kunal of HelloStockMarket
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Well ... Alok ...
Unfortunately you cannot make any money if you don't take any risks. However, I'm currently working on this case study where I use minimal amount of risk exposure to generate a bit of profit ($100).
Why $100? Well, even though it may seem like a small amount, the funadmentals that you use to generate this profit can be scaled larger into something more meaningful, like say for example, making $3k a month -- which is something that I'm currently working towards.
Kunal
Starting from scratch? See my blog, HelloStockMarket.com for my Free 5 Day Guide To Building an Awesome Portfolio - from my own experiences.
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Thu Feb 11, 2010 3:47 pm |
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Kunal of HelloStockMarket
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Samurai,
To me, Buffet's words of wisdom is the conventional idea of a contrarian. Don't ask me WHY it happens, but I've noticed in so many instances where the opposite move happens when everyone thinks it's going to go in a certain direction.
The latest: Everyone thought the dollar would fall forever, but it has been going up over the last little bit - that in turn has been causing my beloved commodity stocks to fall dramatically (luckily I hedged/exit most of my positions early!)
Starting from scratch? See my blog, HelloStockMarket.com for my Free 5 Day Guide To Building an Awesome Portfolio - from my own experiences.
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Thu Feb 11, 2010 3:51 pm |
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oldguy
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quote:
Everyone thought the dollar would fall forever, but it has been going up over the last little bit
recency (It's explained in my earlier post )
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Thu Feb 11, 2010 9:28 pm |
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samurai
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In my experience in the past four years, even the best minds cannot predict the market. A few years ago, I bought a number of structured notes over a period of months from HSBC Premier . These are baskets of investments in stocks, currencies, and commodities from the US, Canada, Australia, Europe, and China.
The reason why I bought was, let's face it, these guys had such a great spiel and claim to be the best brains when it comes to investing, using the most cutting edge principles of TA and FA.
Also, they were all principal-protected, so if they predicted wrongly, then I get my money back at maturity. At a minimum of $20K per structured note, I bought quite a few.
And, in the spirit of diversification, I bought shares of a global bond fund from AIG, amounting to about $40K.
Suffice it to say, NONE OF THEM MADE MONEY. And so, I just wait for each maturity to withdraw and buy fixed income investments instead.
That is why now, I'm trying to learn the ropes of investing my funds myself, because all these 'experts' aren't worth a dime.
The best way to predict the future is to create it.
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Fri Feb 12, 2010 12:19 am |
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Kunal of HelloStockMarket
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Samurai,
That was EXACTLY why I wanted to learn about how to invest my own money. I learned, basically, from scratch.
As they say, NOBODY cares more about your money, than you do.
When I go to any seminar, I make a quick exit once the sales pitches come into effect. Because, don't forget, at the end of the day every seminar is just a sales pitch for a more expensive (but equally useless) seminar upgrade.
Well... also because I actually like spending a lot of time looking at charts and analysing them. And I actually like reading university-sized textbooks on technical analysis (hello... I'm an engineer, ok!)
But yes, you are right ... some financial education is ALWAYS a good thing. But I would suggest always start with just a little cash, and grow it organically. What I mean is this: even if you have $50K to invest, use only a fraction of that amount to test if your system works. Remember, you can always scale into a position once you know it works ... but you can't always get your money back if you go "all in" at the beginning.
Good luck!
Kunal
Starting from scratch? See my blog, HelloStockMarket.com for my Free 5 Day Guide To Building an Awesome Portfolio - from my own experiences.
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Fri Feb 12, 2010 12:37 am |
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