Wednesday, November 12, 2008

Gauge Your Entries and Set Your Stops

When I am confronted with multiple picks and their price, I see two things.

1) I see stocks that are ready to run.
2) I see the closing price from the previous day.

Before the market opens I do several things. I go to Yahoo Finance and I look at the stock futures. This tells me if the market is tending to open higher or lower. I look at the news of my picks on their page. I open my streaming quotes and look at the pre-market action on my watch lists, which have my potential buys for that morning.

If Stock Assault gives me, let's say, stock ABC at a price of 18.99 , then I look at the bid / ask prices going on in pre-market action and how many shares, if any, have already been traded. If the futures are somewhat stable and stock ABC is at a pre-market ask price above the previous day and the bid is at or above the same, then I know I can place my order with confidence.

If I see futures really negative and stock ABC is showing pre-market ask and bid below the previous day close, then I will wait and let it run lower with the market before I get in. If I see thousands of shares traded pre-market at lower pricing than previous day close with highly negative futures, I won't even consider a position with ABC yet.

Gauge the market before hand and pick a good entry point. And, as always, place a stop-loss on all your buys reflective of your tolerance. Too tight of a stop will cause you to pre-maturely sell and too loose of a stop will cause you pain.

On most stocks I use a 10 percent stop and those that I see with a more steady nature on a good looking trading day, I may go 5%.

Have a good one,
Roger

ADX as an Indicator

ADX stands for Average Directional Index. It doesn't give buy or sell signals, it simply tells you the strength of a trend regardless of its direction. You'll often see it plotted with two other indicators: the negative direction indicator (-DI) and positive direction indicator (+DI).

I generally ignore the DI indicators and focus on the ADX line itself. A move below 20 indicates shows a weakening trend and a move above 30 or so indicates a developing strong trend. When the line moves sideways below 20, I stay away from those lamers.

I like to see a line above 40 as these trends are winners, assuming an up trend. Just remember, the ADX does not give you the direction of the trend, only its strength.

Have a good one,
Roger

Tuesday, November 11, 2008

Updated Equity Grading System

Sorry for the previous post with the spreadsheet on my personal grading system. It wasn't really a finished piece of work but now I have a more automated version that does all the computations for you.

Just plug in the numbers and it will automatically generate a score for your equity. I have removed the %K stochastic because it has nothing to do with the quality of a stock.

It simply measured the oversold, overbought aspects at any given time. This automatic spreadsheet simply helps you see the quality of a stock based on its performance. I hope you find it useful.

Have a good one,
Roger

Attachment: Rogers_Equity_Grading_System.xls [View on Google Docs]
Don't have Excel?
Use Free OpenOffice.org

Sunday, November 9, 2008

My Personal Grading System

The attached spreadsheet shows a supplementary grading system for picks that I use. It in no way replaces the grading system developed by the pros at Stock Assault and is presented for educational purposes only.

Use Yahoo Finance key statistics to obtain the following information on an equity: Operating Margin %, Return on Equity %, Price/Book Ratio, Shares Short Ratio to Prior Month (just take the shares short and divide by the prior month's shares short), Debt to Equity Ratio and the %K value of Slow Stochastics (just use your favorite charting program, I use Amibroker or look for my older posts on how to do this).

You'll notice that I assign point values for the grades A to E. I add up the total points and compare to the ranges at the top to get the total grade. For negative margins, earnings or growth just use the values in reverse and subtract the appropriate value.

For example, I was evaluating a stock with a negative quarterly earnings growth of 60%. I divided the 60 by the "A" range value of 19 to get a rounded value of 3 which I multiplied by the point value of 5 to get a negative 15.

This is how I evaluate picks in supplement to those of the software. Just thought I would share it with everyone.

Have a good one,
Roger

Attachment: Rogers_Grading_System.xls [View on Google Docs]
Don't have Excel?
Use Free OpenOffice.org