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savings growth

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bigwinner2

breakdown of a big winner

Last week I closed out the last half of my biggest winner of the year.  Let’s take a closer look to see what lessons and tactics we can take from it and use going forward.

As I’ve mentioned before, I had a lot of success trading precious metals miners from 2008 to 2011 which, understandably, caused me to grow fond of them.  Unfortunately, this fondness had me “going back to the well” more often than was warranted, resulting in unnecessary losses.  The lesson here is to not become so enamored with a particular investment that you are ignoring or discounting the pitiful technicals.  In other words, don’t fall in love with something that can’t love you back unless you enjoy losing money!

Having gotten burned several times, I was initially skeptical of the rally when gold shot up at the beginning of the year.  Unfortunately, by the time it was apparent that this move was different and appeared to have legs, I didn’t see a safe way to get involved.  The key was to be patient and wait for a low risk buying opportunity.  The signal I was waiting for arrived on March 29th in the form of an 821x buy signal in GLD which I tweeted out.

821x buy signal

821x buy signal with obvious place for stop around $116

Seeing this, I went through my watchlist of miners looking for a good setup.  The one that looked best to me was Pretium Resources (PVG).

PVG consolidating around the 200dma

PVG consolidating around the 200dma

I entered a limit order for $5.30 a share which was the closing price on the day PVG first flashed an 821x buy signal, and got filled the next day.  After a week of consolidation, it broke out of it’s wedge formation and was up over 50% in little over a month!  Shortly thereafter, it had a sharp pullback to the 21 day ema where it put in a pivot with a low of $7.43.  When I saw that the pivot wasn’t going to hold a few days later, I sold half of my position at $7.33 locking in a nice gain of 38% on that piece.

sold half here with the pivot broken and the moving averages curling down

sold half here with the pivot broken and the moving averages curling down

A few days later, PVG gave an official 821x sell signal.  Having already locked in gains on half of the position, I felt comfortable giving it one more day to see if the closing low of $7.04 would hold.  If PVG had closed even one penny below that low I was prepared to close the rest of the position.  Fortunately, it held and proceeded to give an 821x buy signal a week later!  In hindsight, I can see that it would’ve made sense to go back to full size at this point.

PVG held $7.04 and the 50dma and then gave an 821x buy signal

PVG held $7.04 and the 50dma then gave buy signal number 2

The second move was even more explosive than the first, putting my remaining half position up well over 100% by mid July!  Then last week, it finally gave another 821x sell signal.

second 821x sell signal of this trade

second 821x sell signal of this trade

Again, because I had already locked in profits on half of the trade I felt comfortable giving it one more day to see if the closing low of $10.61 would hold.  Unfortunately, this time it didn’t, so I closed out the balance of my position at $9.71 for a gain of 83%.

all good things come to and end...

all good things must come to an end…

Putting the two halves together, I netted a gain of 61% on this trade making it my best trade of the year so far.  For reference and comparison, my biggest loser of the year was WYNN for a loss of only 6%.  Letting your winners run and cutting your losers short is the key to successfully growing your savings in the stock market.

I hope that reviewing this trade demonstrates one way the 821x trading system can be used in practice.  If you have any questions about this trade or the 821x trading system in general, don’t hesitate to ask!

bullriding2

how to ride a bull

After a year long consolidation, the market has broken out to new highs.  As I’ve mentioned before, we have to take seriously the possibility that the post Brexit shakeout ushered in a new bull market (or a resumption of the bull market that started in 2009 depending on how you look at it).  A bumpy ride higher, north of 2,400 in the S&P 5000, seems quite reasonable.

 

beginnings of new bull run?

bull market breakout?

So how do we ride this potential bull?  Sure we can buy an ETF that tracks the S&P 500 like SPY, but that would only yield average results.  To generate alpha we need to actively put together and manage a basket of above average stocks that will outperform passive index funds.

One of the most common questions I get is, “What stocks should I buy?”  Well, no matter how much I believe in a company I would NEVER put a blanket buy recommendation on ANY stock.  I only want to buy a stock when it looks like it’s ready for an IMMEDIATE move higher and there is a stop loss level close by to limit risk.  I call the system I use help me identify these optimal entry points 821x.

When I want to add a new position to my portfolio, I scan HUNDREDS of charts looking for 821x buy signals and only enter the very best looking setups.  Some of the watchlists I scan through are from paid services and others I have built myself.  However, I am going to share with you two of my favorite watchlists that are completely FREE.  Both of these lists are focused on companies that are expected to experience above average earnings growth, which is a great place to put our money in a bull market environment.

IIC 100 – the Sharp Traders site has a wealth of resources on it, but the IIC 100 in particular is a go-to list for me that I review EVERY weekend.

IBD 50 – you have to subscribe to Investors Business Daily to gain access to the most up-to-date IBD 50, however, you can get a decent idea of what’s on the list for free by checking the holdings of the FFTY ETF.

Riding these stocks is actually a lot like riding a real bull.  You are likely to take plenty of bumps and bruises along the way when a trade doesn’t play out the way you hoped it would.  You’ll also likely experience the frustration of getting “bucked off” a big winner before it makes it’s run like we did in OMN and we almost did in NTG.  If it was easy, then everyone would be doing it.  However, if you do your homework and follow your trading system, you’ll come out of this bull run with a lot more money than you had beforehand.

Facing-a-Fear (2)

no need to fear a big drop

“News” that George Soros is shorting stocks grabbed headlines once again this week.  I don’t see why this is getting people so worked up.  Soros has supposedly been making big bearish bets since the beginning of the year.  He’s been warning of a repeat of the 2008 financial crisis and apparently has a 2.1 million share put option against the S&P 500.

I have no clue if George Soros is right.  However, I do know that “news” like this does nothing to help us make money.  We make money when we position our trades in the direction of the 8 and 21 day moving averages.  Right now these moving averages are rising, so we are bullish and long stocks.  In fact, this week the S&P 500 poked through the highs of last November, essentially negating the macro pattern of lower highs and lower lows that has controlled the big picture over the last year.

The only argument bears can make now is that this was a failed breakout which will lead to a fast drop lower.

failed move leads to a fast move?

failed move leads to a fast move lower?

I will grant that this is a possible scenario.  However, the weight of the evidence we have right now still points to higher prices.

If Mr. Soros and the bears turn out to be right, we will have plenty of time to change our stance and position our portfolios accordingly.  We would lock in profits and raise cash as our holdings give us 821x sell signals one by one.  We could look to move some money into other asset classes such as bonds and/or gold.  Finally, we may take bearish bets against stocks alongside Soros by purchasing inverse ETFs,

We will have sufficient early warning.

We have a plan of action.

There is no reason to fear.

stare(crop)

patience pays

A dangerous misconception many DIY Investors have is that our job day-to-day is to “make money”.  Obviously, that is the outcome we are hoping to achieve, but it is not what we actually do.  Remember, we have no control over the direction of the market or of our holdings at any point in time.

No, our primary job is to manage risk.  Day in, day out this is what we  are actually doing.  The stock market can provide life changing monetary rewards, but with those rewards come enormous risks.  The only way to safely gain exposure to the rewards of trading is to strictly define and manage the risk you are taking.

There are two primary ways we do this:

  • Position size – I touched on this in my trading manual, but basically we NEVER want to go “all in” on any single trade.  We need diversification.
  • Stop-losses – This is the price at which we would admit that the trade setup is no longer valid and would therefore sell.  This level should be identified BEFORE we enter any trade.

Our position sizing tool combines these concepts.  I encourage you to play around with it so you can get a good handle on how much you are risking on any given trade.

There is, however, another often overlooked component of risk management that is perhaps even MORE important than the ones above: patience.

By this I mean having the discipline to allow marginal or higher risk trade ideas go without you while patiently waiting for the BEST, low risk, high probability setups.

Warren Buffett has a famous quote that’s relevant: “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.

The fact is, every time we enter a trade we are putting our money at risk.  Therefore, we should always take a moment beforehand to ask ourselves, “is the perceived reward worth the risk?”  Be picky.  Be patient.  I promise you, it will pay off.

This concept comes to mind when looking at a chart of the S&P 500.  The market has just run 15% higher in about two months.  It’s just below a declining trend line that connects the closing highs from last July and November.

showing downtrend line connecting lower highs in SPY

right back up to the downtrend line connecting lower highs in SPY

If the current rate of ascent continues, we could be looking at new all-time highs in just a few weeks!  However, what is most likely to happen?  Personally, I think that after such a big run and at an important trend line, it’s more likely that the market will pull back in this area.  This doesn’t necessarily mean that we should get short.  The market doesn’t HAVE to pull back.  And if it does, keep in mind that it would actually be bullish for the market to put in a definitive higher low before breaking the macro pattern of lower highs and lower lows.

The bottom line is we have a short term bullish market still within a larger bearish look.  These mixed messages are about to come to a head so I believe the best course of action right now is patience.  It makes no sense to increase exposure to risk in the face of this uncertainty by taking big bets here.  Let’s continue to manage our open positions and patiently observe market action in this pivotal area.  There will be plenty of time to pounce when the outlook becomes clearer.

 

coverears(crop)

turn down the volume

In case you hadn’t noticed, the S&P 500 has had a MONSTER rally since February 11, rising over 14%.  Just since the beginning of March, the index has risen over 137 handles!

Knowing this, look at the headlines below:

Has any of the hand-wringing about the, at times, anemic volume of this rally been helpful?  ABSOLUTELY NOT!

I understand the disbelief.  When I calculated the potential measured move of the bullish “W” formation in the S&P 500 on March 5th, I was skeptical that it would actually be reached.  Yet here we are.

measured move hit! I also put arrows on the days the articles above were published

measured move hit!  I also put arrows on the days the articles above were published

Sure this rally is getting long in the tooth.  Sure the 200 day moving average is still declining.  But we make money when price remains above the 8 and 21 day (exponential) moving averages.  Before this rally comes to an end, we are going to AT LEAST need to see a close below the yellow line in the chart above.  Getting bearish before that happens makes no sense.  These simple principles apply to anything you are trading.

Volume is noise.  Tune it out and focus on what makes you money which is price.  Like Brian Shannon, one of my virtual mentors, is known for saying: Only Price Pays.  Profits made on low volume are just as valid as profits made on high volume.

So turn down the volume and listen closely to what the price action is telling you.

winhappiertimes

going for the “w”

Yes, the market is still in a primary downtrend.  The S&P 500 is still below a DECLINING 200 day moving average.  The lower high and lower low that I mentioned a month ago is still very much intact as long as the S&P 500 stays below 2,116.48.  The spirited rally that the market has enjoyed since February 11th doesn’t change any of this.

However, there is an interesting technical chart pattern worth watching now and keeping a look out for in the future.  In the last six months, the market has made two pronounced and tradable “W” formations also called double bottoms.  These are bullish patterns capable of delivering fast gains.

The measured move of a W formation is calculated by adding the height of the W to it’s top.  I calculated a conservative height that ignored the “tails” of the daily candlesticks as well as a more aggressive target including the full height to draw in the rectangular “measured move zones” in the chart below.

two bullish w’s in a bearish market

As you can see, the first W did just barely reach it’s measured move target zone before running out of steam.  IF the current W follows suit, that’s good for at least another 50 points in the S&P 500!

There are a couple of ways you can you play these bullish patterns when you spot them, even in a bearish market.  First, you can just simply buy a tradable index ETF such as SPY.  Both of these Ws featured picture perfect 821x buy signals as they finished forming.

Another strategy you could take is to seek out and purchase stronger stocks as you see this pattern developing in the S&P 500.  That’s what I did in the model portfolio.  Stocks such as RYAAY and COKE are out-performing the market, holding up above their rising 200 day moving averages.  The idea is that, if the downtrend in the S&P 500 resumes, which is likely, these stronger stocks will hopefully not get hit as hard as the market as a whole.

One thing that would be absolutely foolish to do is to complacently buy without a plan, thinking the market HAS to go another 50 points higher.  The market doesn’t HAVE to do anything.  The measured move calculation is just a POTENTIAL scenario to be aware of.

Regardless, it is worth keeping an eye out for these patterns.  We all know that you can never have too many W’s in your trading account.

no exuses

no excuses

You’ve worked hard to build up your savings account.  There’s no reason why you can’t put that capital to work for you.  The stock market is an incredibly powerful and convenient tool that allows you to do just that.

But how do you actually go about using this tool to grow your savings?

The Standard Advice

  • Hire a professional to do it for you.  Unfortunately, when you account for fees and commissions, most money managers fail to beat the returns of a passive index fund.
  • Buy and hold a low cost index fund or ETF.  The downside here is that you would be vulnerable in the event of a major stock market crash.  Depending on the timing and severity, you may have to wait DECADES to be made whole.  It took over 15 years for the Nasdaq Composite Index to reclaim dot-com era highs and 26 years on, Japan’s Nikkei index still sits at BARELY HALF the level it was at the end of 1989.
  • Dollar cost average into a low cost index fund or ETF.  This is better, but it still relies on the assumption that the market WILL bounce back in the timeframe you need it to.  If you have A LOT of time, that has generally been a good bet.  However, I’m not convinced that it will be ALWAYS be a good bet.

Personally, I’m not willing to settle for mediocre returns from an expensive money manager.  I’m also not interested in patiently waiting for my account to recover from a market crash.  Been there, done that.  No thanks.  There is another way.

My Advice:

  • Buy stocks that are going up
  • Sell stocks that are going down
  • and DO-IT-YOURSELF!

It really is that simple.  So why don’t more people do it?  There are a lot of reasons, but for now, let me just address the two excuses I hear most often.

Excuse 1: “It’s too hard”

Repeating this statement is like holding up a white flag.  I mean sure, you have to apply yourself and do some work.  You do have to learn about managing risk and your emotions.  It shouldn’t be a surprise that something worthwhile will take some effort.

But let’s be honest: this isn’t brain surgery.  Hell, I can do it!  My background is computers and music, not Wall Street.  Seven years ago I didn’t know the first thing about stocks.  If I can figure this out, there’s no reason why you can’t as well.

Learn the rules of a trend following system like the 821x and then study charts.  See how a big winner looks at it’s buy point and vice-versa for big losers.  It’s not hard, it just takes practice and repetition to identify the best setups.

 

buy signal

buy signal

 

sell signal

sell signal

 

Excuse 2: “I don’t have time”

Do you have time to watch TV?  Do you have time to play video games?  Do you have time to surf the web?  I could go on but I won’t.  Just answer the following questions and be completely honest with yourself.

Is it worth investing the time it takes to develop a valuable skill that will ultimately lead to increased personal freedom? 

Is the short-term sacrifice worth the long-term benefit? 

If your actions are not congruent with your answers, perhaps you need to spend some more time on this to figure out the truth.  For example, if you continually engorge on junk food, one would have to seriously question the veracity of any claim you make about wanting to lose weight.

Another thing to keep in mind is that the first step is always the hardest and most time intensive.  Once you get past the learning curve of a system like 821x, it really should only take a few minutes a night to look through charts and enter orders if any.  The cost in time spent is miniscule in comparison to the potential benefits.

So get busy.  Don’t be afraid to make some mistakes.  Lose the excuses.  You can do it!

stoicism

focus on the process

Some things are within our control.  This category is the internal realm which includes our actions, perceptions and attitudes.

Then there is everything else; things we only have limited influence over at best.  This is the world external to us which includes the actions of others and nature for example.

Stoic philosophy contends that confusing these categories is the primary source of our unhappiness.  How many people fret over things which they cannot control, resulting in unnecessary stress and frustration?  There is no reason to allow external events to hold our happiness hostage.  We hold the power to avoid this self-imposed trap by simply changing our attitude and focus.

Again, obsessing or stressing about things outside of our control is counterproductive. 

Instead, we should focus our effort and energy on those things we actually do control.  

I make it a point to live by these principles.  Not because I’m such a great guy, but because I’m allergic to stress.  Seriously, I detest stress.  Stress ages youStress makes you fatStress weakens the immune system.  Stress just plain sucks.

Also, I don’t want to pointlessly spin my wheels.  Life’s too short.  I only want to invest my limited time and energy on action that counts.

One example of how this principle looks applied is process vs. outcome.  We control the processes we develop and follow.  However, we do NOT control the outcome of those processes.

Let me give you a real life example.  When we were trying to sell our house in San Antonio, it took much longer than expected or hoped.  As the summer started to draw to a close, I could feel the stress level my wife and I experienced start to elevate.  After every showing, we were consumed with self-doubt, second guessing ourselves with questions: “Are they going to make an offer?”  “Why aren’t they calling?”  “What’s wrong with this house?” etc.

Eventually I started to remind my wife (and myself) that we don’t control the whether the person viewing the house will buy it or not (outcome) so there is no point in worrying about that.  Let’s just focus on cleaning the house and making it appear inviting before each showing (process) and be content with doing our best.

If we focus on improving and following our process, the outcome will generally take care of itself.

Of course, we eventually did sell that house and importantly, we did it while also saving ourselves a lot of unnecessary stress when we changed our focus and mindset.

This principle can be helpful in many areas of our lives, such as if we are trying to lose weight or learn a new skill.

It also happens to be especially useful when trading.

We have absolutely no control whether a stock goes up or down.  The only thing we control is when we buy and when we sell.

It’s critical to remember this, especially when we inevitably hit a string of losing trades.  It’s easy to lose our confidence which can paralyze us from taking further action.  Worse, we may lose our discipline and try to “make it all back” by taking on too much risk and then end up blowing up our trading account.

We must remember to focus on what WE control.

Develop and follow a proven trading system.  If you need help, start with my 821x system.

Don’t obsess on whether a trade was profitable or not.  Again, you have no control over that.  It’s pointless to beat yourself up over a losing trade.

Instead, evaluate how well you followed your trading system.  Did you chase a stock that was spiking higher?  Did you panic and sell early or get stubborn and hold on too long?  Did you break your own rules?

Over time your decision making skills will become congruent with your system.  It will become habit.  It will become second nature.

Only after you reach this level can you start to gain enough experience to know when a market environment dictates that you deviate from your system.  This is the level of the elite performer and is obviously not something a beginner should attempt.  It’s just like any other competency.  You must start with the fundamentals and internalize them before you can begin to attempt to understand when it may be appropriate to override them.

So learn your trading system.  Internalize the rules.  Consistently follow your process.

Your trading system should be designed to identify and cut losing trades quickly and let your winning trades run.

Trust that over time you WILL achieve the outcome you desire, an overall increase in wealth.

If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to 
revoke at any moment. - Marcus Aurelius
a powerful savings growth vehicle

a powerful savings growth vehicle

Enough about the ineffectual helper.

Where can you find a valuable partner who will actually move the needle in advancing your financial goals?

In other words, how can you actually GROW your savings?

Hard assets such as real estate and precious metals are viable ways to store and sometimes grow your wealth.  However, they are illiquid, meaning they are generally difficult and time consuming to sell and transaction costs are high.

Rental properties are an excellent way to grow your savings that I highly recommend.  I have a rental property myself and it has been a fantastic investment.  Like any investment though, it’s critical that you buy well.   In the case of rental properties this means the right price, the right house and the right neighborhood among other things .  You also have to be prepared to handle ongoing maintenance which can include things such as fixing leaky plumbing and dealing with late rent checks.

This brings me to my favorite way to growth wealth; the stock market.

Financial markets are one of most powerful and convenient vehicles for wealth creation in the history of world.  There’s a reason the wealthiest 10% in America own 81% of all stock assets.

Stocks don’t suffer the same drawbacks that the other asset classes mentioned above do.  They are extremely easy to buy and sell (i.e. they are liquid).  They don’t require ongoing maintenance the way rental properties do.  Another often overlooked advantage they have is you can make money whether they increase or even decrease in value.  In general, all other asset classes must increase in value in order for you to make money.  However, you can make a fortune in stocks even if the stock market crashes by selling short, buying puts or using inverse ETFs.

I understand though, that there are two major hurdles keeping most on the sidelines:

– lack of time

– fear of losing money

Let me briefly address both of these concerns.  Frankly, the learning curve to consistently making money with stocks is actually pretty steep.  You will need to spend a significant amount of time initially to develop a trading system that you trust works.  However, once you have that down it doesn’t really need to take a long time to manage your portfolio.

The second concern is also a valid one.  The stock market is like a minefield.  Buy the wrong stock at the wrong time without a robust risk management plan and you can easily blow up your account.  At a high level, the key is to cut your losers quickly and be patient with your winning trades.  If you do this consistently, you can have more losers than winners and still make money overall.  This is because some of your winning trades will represent much larger percentages than your losers.  For example, if your position sizes are all the same, a single 25% winner more than makes for four 5% losers

I’m not going to lie.  Making money with stocks is not easy.  However, the rewards are immense if you can develop these skills.  I share the nuts and bolts of one of my trading systems in the 821x eBook.  Feel free to take that as a starting place as you start to develop a trading system of your own.









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Model 821x Trade

stock quote day % change total % change
YRD
23.38