Where To Find Certainties –Stock Trading Analysis (17)
Where To Find Certainties — Stock Trading Analysis (17)
Since the future is hard to predict, buying a stock based on dreams, hopes and luck is far too risky. The small investor can do better by finding some certainties in the market in order to survive and prosper. The certainties are not what you hear or read everyday because 95 per cent of them are either dated or irrelevant. You must employ your own power of reason and observation.
Short Term strategy
Suppose you purchase 1000 shares at $10 each with an initial investment of $10,000. The price then rises to $30 in one year. You will have made $20,000 profit. This is no doubt an exceptional case that you can never predict. On the other hand, suppose you can profit $100 average everyday in the stock market. In one week, you will have earned $500. Lets say the stock market opens 50 weeks in the year. Your annual earning will add up to be $25,000. Obviously, this opens another avenue of choice.
Is it reasonable to expect $100 average daily profit? In fact, you can make more with the same $10,000 initial investment, rather than waiting one year hoping for your stock to rise. This of course requires you to put in some efforts on a daily basis. A couple of hours online will do.
Your strategy should be to act in the short term in order to build the long term. This strategy is no different than your job or your own business. You work hard everyday in order to build a better future. This is how regular people succeed in life. The only obstacle is that you cannot find time.
Price Fluctuations
The price of a stock must move. The big players will drive it up and down for their own benefits. They are working everyday to amass cash. Hopefully, the small guys will enjoy the roller-coaster ride with them. The price always moves up and down a few times in a day regardless the current up or down trend of the stock. This movement within the day represents a certainty and an opportunity for profit. The small investor needs to identify a list of stocks having a wide daily fluctuation to enable him to play. The following are some examples:
Date chosen: Thursday, 10/23/08
Alcoa (AA). Range: $9.52 - $10.85. Close: $9.99 down $0.53.
Applied Materials(AMAT). Range: $10.94 - $11.74. Close: $11.36 down $0.28
Intel (INTC). Range: $13.90 - $14.95. Close: $14.51 down $0.67.
Citicorp (C). Range: $12.50 - $13.60. Close: $13.11 down $0.21.
Bank of America (BAC). Range: $21.56 - $23.20. Close: $23.0 up $0.34.
Given the daily fluctuation of around $1 for each of the above stocks, all you need is to catch one half of its range to earn the profit target of $100 per day. Suppose you buy 400 shares of Alcoa at $10 and sell them at $10.50 by catching the mid-range on that day. Your earning will be $200. If you are lucky, you can catch this a couple of times during the day. If you are out of luck, you just wait for next time or another day. This is feasible for the US stock market where you do instant buy and sell online via limit orders. You just put in a limit buy ($10) and a limit sell ($10.50) and let the stock pass through your limits without having to follow its movement through the day.
Determining the Limits
Your own judgment tells you where to set the limit orders. This depends on your observation of the stock and the external economic environment. That is why the historical perspective of the stock price is so important, which will provide you with some rough idea about its likely movement. This is not hard to do but requires some time to observe. All you need is to pay some attention to the stocks of your choice on a daily basis.
Selecting the right Stock
The stock selection should be purely practical and profit-oriented. You select a stock because it fulfills the following requirements and nothing else:
•It fits your budget. Google or IBM is out although they are good.
•The stock has a wide daily fluctuation, more than $1.
•Although cheap, the stock is not on a dangerous slide such as GM.
•The stock appears close to the bottom waiting for a rebound.
•Preferably the stock pays dividends. All those selected above do.
Day Trading
Playing the daily fluctuations often results in the buy/sell of a stock within the same day. The brokerage companies do not like that. Do you guess the reason why? Some brokers require a $25,000 deposit for day traders. However, if you buy using cash instead of margins or options, there is no limitation against day trading.
For further information, please email to stockfessor@comcast.net
