Updated Performance and Transactions

I sat down today and updated my performance and transactions spreadsheet (check out the right sidebar). It is pretty interesting how quickly the market has changed over the last month. With the S&P only up 1.71% this year, I am pretty happy with my current year-to-date performance.

Many of my readers can attest to my recent personal finance binge and the lack of investment posts. That currently does not mean I have stopped trading! I thought I would detail some of the transactions have I been negotiating in an effort to shield myself from this volatile market.

Deal Arbitrage:

I presented several opportunities mergers and acquisitions offer to investors last month. Some privatization deals are particular lucrative to small investors, such as the MCBF trade. While there are certainly some risks with these trades, deal break-offs and shareholder disapproval, statistically, these trades are pretty sure investments. If you are looking for stable returns in-excess of fixed income investments, these deals are a good place to start.

Aggressive Hedging:

I may do a more formal write-up detailing what hedging means, but for now I will simply explain the strategy individuals can implement in this uncertain market. The idea is simple, purchase a stock you feel is going to simply outperform the broader index, maybe it is undervalued or showing great technicals, and short the index that closely follows that stock. If the broader market goes down, your long position in your stock may fall, but your short position in your index will net positive returns. The reverse strategy can be implemented as well.

In short, risk-adverse investors should look for sure-things in this market environment. In order to appropriate protect yourself from this variable market, I would suggest taking both short and long positions. Good luck and happy trading!

Links for Friday

Little late with these...

This Week's Links:

• A lot has been made about the drama around CNBC's stock-picking challenge. Mighty Bargain Hunter questions the value of these contests in his post: Are stock-picking contests totally worthless?
• freemoneyfinance shares a great way to save a lot of money on basketball shoes created by Stephon Marbury.

A Post from the Past:

• For investors that want to start learning technical trading, consider reading my review on Dr. Alexander Elder's Come Into My Trading Room: A Complete Guide to Trading.

Use Behavioral Finance When Picking Stocks

Richard Thaler incorporated behavioral finance into money management by claiming that stocks not only react to information, but to noise creating from buying and selling trends. In short, investors cannot ignore the psychological state of fellow investors when pursing a potential trade.

I am a behavioral finance trader. In order to identify the psychology behind a stock I consult technical indicators. If a stocks technical indicators are strong, I consult their financials to insure its a good trade. If company revenues are rocketing, I look to see if investors have already priced in these expectations by looking at technical trends. While Wall Street is covered with analyst running valuation models, the market is still a supply and demand market driven by investor's willingness to pursue a stock at the current price. This market may sell-off on rumors of interest rate hikes, but will show equal losses when individuals take profit after a recent run-up.

What is an Investor to do?
Diversify your research like you diversify your investments. If you only look at three month chart, your going to get killed. If you look at last years books, your going to get killed. If you happen to notice that the company is expecting an financial sound acquisition sometime in the next several months, and the stock has shown a shift from selling pressure to buying pressure, it may be a perfect time to go long.

In the next few weeks, I plan on sharing several fundamental and technical methods of research. Feel free to share some of your favorites!

Book Review: Come Into My Trading Room: A Complete Guide to Trading

Wow. I cannot believe how much I enjoyed this book. Before I detail how great this book is, I think it is important to note the type of person I am. I am a college student hungry to learn how to maximize my investment account values and overall net worth. I also get very excited learning about new investment strategies and vehicles. If you match these characteristics, I encourage you to finish reading this post and start reading Dr. Alexander Elder’s Come Into My Trading Room.

Overview:

So I definitely took three full pages of typed notes and created a whole Excel workbook with four worksheets all in an effort to better replicate Elder’s strategies. I do not consider myself to be a big note taker, so be prepared to get a lot from this book. The book is basically divided into three parts: characteristics of a trader and an introduction to the trading game, money management, and technical analysis techniques.

Personal Takeaways:

Elder details the typical make-up of a trader and the different environments traders operate in. He explains that there no such thing as a typical trader, but often times successful traders have muted emotions, above-average mental math skills, patience, and a drive to make a lot of money. If you feel you meet the mold then Elder encourages the reader to read on as he describes the types of markets, where to trade, and the time frames one should trade. Once you select your ideal trader make-up you are ready to learn about technical analysis and making money on the psychology of investing.

The technical analysis section is certainly provides the deepest content by informing readers about indicators and oscillators as well as offering strategies for trading once readers understand the basics. I could really go on forever, but I will just give you a taste of what Elder offers. Elder suggest that before trading do the following: identify your favorite time frame and move to the next broad frame (if you like weekly trading, move to monthly charts) and use the indicators to locate a trend, move back to the intermediate time frame and wait for an entry point based on your oscillators, set your profit target and exit strategy, and set what you are willing to loss on the trade by setting a stop.

The final section discusses money management. The core of this section highlights the importance of sticking to your main goal of maximizing your account value. Elder preaches that an individual should never risk more than two percent of his/her account value on a trade and never have more than six percent of the account value at risk during a given month. Traders should also keep diligent records helping traders notice where they are succeeding and which strategies need to be modified.

Recommendation:

I recommend investors interested in active portfolio management seriously consider reading this book with pen and notebook. The book has help diversify my investment strategy and I am eager to use more technical analysis in my quest for wealth.

New Blog!

I have begun to trade based on my recent education in technical analysis. All traders agree that good record keeping is one of the most important keys to success. So I decided to keep my trade records very public, and record them in my new blog: Rick's Proprietary Trading Log.

As I stated in my new blog's header, the purpose of blog is to help document my technical stock selections. My plan is to record the trade in this blog right after I execute the buy or sell order. I have developed a comprehensive excel spreadsheet that tracks my trades as well. I will also post any entries or modifications to my spreadsheet as well.

For each order I plan to write the following in this blog:

1. Overview of the pattern created by the stock
2. Decision to go long/short
3. Strategies for entering the trade
4. Strategies for exiting the trade

Most of my trade decisions will be derived from weekly trends and executed based on daily opportunities. That is my favorite time frame. If you wish to follow the same strategies but want to use a different time frame, simply draw out (or in) the same strategies to your desired time frame.

I am Selling Some CHCG at These Levels

In case anyone bought into CHCG a few days ago, I would suggest taking some profit at these current prices. I managed to sell about 40% of my stake at $7.20/share, but anything about seven dollars is a nice profit (almost 15%).

Congrats to all and good luck longs!

A Recap of Prior Plays

I felt obligated to share the performance of the trades I proposed on this blog. I went all the way back to my November posts (which apparently I was doing my best work) and found how each pick turned out.

The table below shows the performance of my November 10th picks. I simply assumed the investor would have bought shares at the closing price on November 10th and sold the stock after the week was over, sometime around November 15th.

The table below shows the success of my IPO evaluation on November 15th. For these stocks, I assumed the investor initiated a market order when these stocks started trading and sold the stocks at the end of the day.

The table below highlights my most recent round of earnings plays. Like all earnings plays, I assumed the investor bought the stock sometime after the post or around the close before the earnings report and sold the stock the next day sometime around the close.

The last table is my recently recommended "technical analysis" stock. I will try to add more of these as I learn more about TA.

You can interpret these tables however you like, just thought I would throw them out there.

I'm Buying CHCG at These Levels

I am currently reading a book that suggests traders follow five to ten stocks and understand how they swing over time. One of the stocks that I have been following and trading since October is China 3C Group (CHCG.OB), an electronics retailer in China. The stock recently had a significant run-up to $7.50 and it appears that several shareholders have been profit taking over the last several weeks. The stock is currently trading around $6.10, still above its 50, 100, 200 day moving averages.

I think I have made almost 15 trades on this stock and I confident that this stock has room to run. I do not pretend to know anything about technical analysis, but I usually buy this stock after three or four consecutive down sessions. I think this strategy has worked because the stock has great fundamentals and growth prospects. The company stated in its last earnings release that they would announce several more store openings sometime in the second quarter. I noticed that anytime a press release comes out on this company more analyst cover the stock and start to appreciate how great the growth prospects are.
There is a good chance that this stock may retreat a bit more from these levels, but I am confident that as soon as the company releases some news, the stock will soar back to the 7s. Good luck!