Developing My Stock Market Investing System Part Two

OK. So, I've taken a little time off from developing my stock market investing system and thought that I would get back to that now. In a previous post called Developing My Stock Market Investing System Part One, I talked a little about market direction and here I thought that I would expand on that. In the meantime, I've given a great deal of thought I what the next steps should be after that and also thought I would go through those decisions as well.

When it comes to investing in the stock market, I see it as breaking down into the following steps. They are:

• Determining market direction
• Screening the stock market today for potential investment opportunities
• Analyzing charts of the stocks that appear on those screens for certain chart patterns like cup with handle, double bottom, saucer, flat base and the like.
• Determining proper buy points
• When to sell your positions

What I want to do is break down each stage of the process in detail here to create a roadmap of where we are going to go with my investment strategy. Keep in mind that as I refine it, I'll tweak it here and there. Also, with any trading strategy, you have to make it your own. You've got to identify an investing philosophy you like and can enjoy. Then you got to set out to become an expert at it. Don't flip flop between strategies. Choose one and go with it. Break down each and every step into a finely tuned investment action plan that you execute daily. Don't leave anything to change.

In choosing an investment style, you have two basic optons. They are:

• Value investing
• Growth investing

If you have been reading my site, then you'll know that I will be focusing on growth investing and particularly the CANSLIM investing approach put forth by William O'Neil in his book How To Make Money In Stocks. To implement his strategy, you will almost certainly need a subscription to the Investor's Business Daily. (You can get a free trial to the IBD by clicking the ad down underneath this post.)

Let's get on with it.

Determining The Stock Market's Direction

As I write this, the market is in a correction according to the IBD Big Picture Column which analyzes the overall trend of the market. Each and everyday, you must review the market's direction. It's been documented by O'Neil that 3 out of 4 stocks follow the trend of the market. Rule number one is to never invest in the market when the market is in a downtrend. Only invest when the market is in a confirmed uptrend.

Each day what I do is analyze the four major indexes for price and volume action to get a feel for what happened in the market today and you should too. This information is free at investors.com and you should utilize it daily even if you don't have a subscription.

Once you start to look at this data every day, you'll start to notice that you do the same thing every day. That's why you should take this a step further and break what you are doing down to a specific set of steps, or investing checklists, that you follow day in day out. Start by putting these steps down on paper and then refine them as you use your checklist to put into place a quick action plan you can follow after the market closes each day.

Here is what I've done so far as far as market direction goes in my investing checklist:

-- Determine The Stock Market Direction Today --

• Review the indexes for price and volume action
• Review the S&P 500 Composite Index
• Review the Dow Jones Industrial Average Index
• Review the New York Stock Exchange Composite Index
• Review the NASDAQ Index
• Watch the IBD TV Market Wrap
• Read the Big Picture to determine the stock market's direction.

When you are reviewing the indexes, take the time to decide for yourself what the market did today. Was the particular index under accumulation or was it under selling pressure. You can do that by following three basic principles at first.

They are:

• If an index closes higher on higher volume, it's being accumulated
• If an index closes lower on higher volume, it's being sold off - or distribution days
• If an index closes higher or lower in lower volume, ignore it for now

In addition to the price and volume action on the major indexes, you might decide to add some additional secondary indexes. One additional one that I've decided to adopt is from ChrisPerruna.com and relates to the number of stocks making new highs versus stocks making new lows. He talks about it in a post he wrote called New Highs - New Lows Ratio (NH-NL). For now, I've decided to add the following steps to my daily action plan as I get more accustomed to seeing the data I'll incorporate it in my strategy.

Here are the additional steps:

• Record the new highs and new lows from the NYSE
• Record the new highs and new lows from the NASDAQ

He doesn't use the American Stock Exchange.

I've stared putting this data in a spreadsheet. Here's a snapshot of it.

I've got a second sheet that includes the NASDAQ data. For now, I'm just recording that data and as I build it up a history of stats, I'll get back to it. For now, let's move on to the main thing I wanted to talk about today and that was the second step.
Screening The Stock Market Today For Potential Investment Opportunities

Once you've determined the stock market's trend, it's time to start finding potential stocks to invest in. The first step is narrowing down the field of stocks to a few you can concentrate on. This is called stock screening. Stocks are typically screened for certain fundamentals or actions like price and volume.

One of the things that I found tough to do is find information on how to screen stocks. In reviewing, Chris's blog, he made a post called Fundamental Screens and Scans that I found very helpful.

I want to take step back here before I start getting into how I am going to develop my screens and talk a little bit about the ones he has developed. Personally, I like his very much but there's one drawback to using his approach and that is that he uses a tool called the Custom Screen Wizard at DailyGraphs.com. He even gives you the criteria to use. In the article he says that he pays $45 a month for it, but for us to get that screener now, we have to buy it as a total equity package that costs $999 per year or $112 per month. If you are just starting out with limited investment capital, I suggest that you refrain from spending your money on tools outside of the subscription to the IBD. It eats away at your return. What I am going to try and do instead is focus on building my screens from the data I get in the paper each day and from the website. Later, once I feel I can justify it, I will probably spring for the equity package. For now, though let's review the stocks screens he suggests and I will list the alternative to his screens that I will use for now.

1. Quality Stocks within 10% of the 200-day Moving Average

I got the feeling that this is an important scan he runs but I couldn't quite replicate it with the IBD. In it's place, I am going to put the Stocks In The News columns. I felt this would put the leaders on my radar. My choice doesn't match but it was a good replacement.

2. Quality Stocks that are trading within 15% of 52-week Highs

Here, I felt that the Weekly Review column best fits the bill here.

3. Institutional Sponsorship Increasing

In this case, I decided that I would use a combination of screens from the paper. The first one is the Stocks On The Move and the second is a screen of the day called Acclerating Mutual Fund Ownership.

4. Quality Stocks making New 52-week Highs:

I will build this list from the New Highs and New lows. This is actually the easiest screen to replicate. I went through and created the same list the custom screen wizard generated. It just took a little longer.

5. Quality Stocks with a new IPO within the past two Years

In this case, I decided to opt for one of the screens of the day called Young Guns.

6. My official CANSLIM Screen

Here I decided to use the IBD 100.

7. Strong Earnings Increase 40%+

I am going to develop this list from the earnings reports and a screen of the day called Estimate Beaters.

8. Potential Shorting Opportunities

In this case, I don't have the experience to short stocks and will be focusing on stocks to buy long. So in it's place, I'm going to put the IBD Top Composite 200 stocks that is published each week on Thursday.

So there you have it. These are the starting screens that I am going to use to narrow the universe of stocks to a more manageable list to review. That being said, I'm expecting that in bull markets, this will produce a number of stocks to review each day. For now though, what I am going to do is fine tune how I am going to use these screens and the steps I take to put them together.

It will definitely take longer than using the custom screen wizard, but we will see exactly how long it takes here pretty soon.

This will then get me a number of stocks to watch each day. This will be the list of stocks I will use to review charts of and help to build my watch lists for actual purchases of stocks. Check in later as I talk more about that.

Here's a video where I walk you through the same thing.

Buy Shares

I was just about ready to buy shares in a stock I spotted the other day. It was called China Automotive Systems, Inc. (CAAS). It had good fundamentals and the stock check up looked pretty good. I don't have a lot of experience buying shares so instead of actually placing an order with real cash, I placed an order in my stock simulator account. In hindsight, I am glad I did because I think it was the next day that they tightened China's monetary policy and the stock market has kind of corrected a bit. Looking at the fundamentals of the stock, they seem strong and this could be just a case of the market trend working against the stock. Whatever it is, the main thing is that whenever you decide to take a position in a stock, you need to have a strong set of rules in place to protect your capital. That first rule is always limit losses. If a stock doesn't do what you hoped it would do, cut your losses at 7-8%. Fortunately, for me, I did it with my virtual account. But doing it while using real money is quite another.

I guess what I'm saying is that if you are just starting to learn how to buy shares of stock, it is important to spend some time laying out your procedures for how you will identify stocks to buy, how you will pick stocks and how you will enter and exit them. While the benefits of paper trading aren't the same as real trading, you can get the mechanics down. Get an idea of the decisions you'll have to make. Once you do that, you'll figure out the answers to questions like, will I put hard stops on my buys or mental ones. Will I sell intra-day or at the end of the day. While real trading with real cash provides the best learning experience, I suggest that you use a simulator for a bit before you actually buy shares online. Once you've set up your system, then start buying shares online with real cash.

The other thing I would recommend is keeping a trade journal that tracks why you bought the shares you did. I'd include:

• A chart of the stock's price and volume action 
• A chart of the market indexes 
• The fundementals of the stock 
• What the stock looked like when you sold it 
• How long you held it 
• What the result was 

When you buy shares, document why you bought them like snapping a picture of its chart so you can remember why you bought it later.

When the market is in a downward trend, I'd then use that time to do post analysis of your trades and what exactly the reasons you bought it to begin with were. I'd also keep track of your winners versus your losers. Deciding which shares to buy today is the easy part. Learning what to do after is where the real work begins in your stock market investing program.

Good luck!
Ty Coon

Stock Market Investing Using The Superbowl Indicator

In a post called Who Dat?!, the Rajin' Cajun talked about how it's hard to focus on stock market investing with his Saints in the NFC Championship game. I'm having the same problem over here on my site because I am a Colts fan over in the AFC. Being from Indiana, I'm a Drew Brees fan because he played for Purdue. I'm routing for a Colts - Saints match up.

Which got me to thinking about the so called Super Bowl Indicator. If you are not familiar with it, what the superstition is that if an old team from the old AFL (think Jets) wins the Super Bowl, the stock market will fall in the upcoming year. If a team from the old NFL, think Colts, Saints or Vikings win, the stock market will go up. The stock market investing indicator has been right about 81% of the time.

Therefore, the most important thing is that the Colts get to the Superbowl.

If the Colt's and the Saints reach the Superbowl, maybe if that happens the Rajin' Cajin and I ought to make a little wager.

While it's not a 100 percent accurate because the Colts are from the old NFL. Here's an old video that talks about the Super Bowl Indicator.

The Poor Man's Stock Market Investing Challenge

OK. So, I've been thinking about a way to start a stock market investing challenge for my site here and did some thinking about how I'd like to go about it. What I came up with is a different kind of challenge that I hope I'll get some takers for. My guess is that I'll be on my own for the first several of these but here's the background and I hope you'll participate.

I wanted to look at investing in the stock market from a beginner's perspective. I also wanted it be a challenge for even the best investor. In the end, I hope that it benefits both. I started my search for a stock market simulator to host my little challenge and after narrowing it down to investopedia and the virtual stock exchange, I settled on the vse because it seemed a little easier to work with. My first step was to review some of the other stock market games going on there and noticed that alot of them started with way too much money. There was one that had $1 billion dollars! Talk about a huge investing fund. That is really unreal. Even a $100,000 which is what a lot of them started with seemed a little over a beginner's head. It also gives the strong investor a lot of cushion.

What I decided to do then was reduce the investment fund to the size that many small beginning investors might want to start with but don't think that it's possible to succeed with. And, for that reason, never start investing in individual stocks at all. While I believe it's probably not the ideal approach and the investment method probably ought to be different, I'm motivated by William O'Neil's book -- How To Make Money In Stocks. In it, he says he started at age 21 by investing in just FIVE shares of Proctor and Gamble stock.

To see what's possible, I decided that this investing challenge would start with a mere $500 dollars. I am pretty sure that this is the amount O'Neil started with in his investment club. Starting in February 2010, I'm going to start the challenge. You'll be able to join at any time you might come across this.

The beauty of this challenge is that it puts a financial limitation on all participants that many new investors face. I look on the internet and see so many get rich quick ideas from forex to options. To me, the best option is the stock purchase. It's easy to understand, yet hard to make money doing. I am big believer that the average guy can do as well as his investment advisor. He only lacks one thing and that's experience.

What the small investor needs is a gym to practice in to gain confidence. And, while it's my belief that you really can't learn true investing using a simulator because the emotion isn't the same. You can work on your mechanics. You can work on your fundamentals. You can work on your system. Just like sports, the real work is done when no one is watching. You've got to do the same with investing. You've got to work at it. But before the season starts, you've got to get in game shape. That's what this challenge is about. Helping you get ready for the big game.

As part of that, some good coaches in the gym at the same time would help beginners, so I will extend an invitation to some of the better known investment bloggers that I read and see if they'd be kind enough to join us. But, to be honest with you, I doubt I'll have any takers.

The hard part is that since my site is pretty new, I really have my work cut out for me. You see when you first start out working on a site, you don't have any readers. And, the established sites aren't so sure that you'll be around tomorrow, so they are a little skeptical to help you out as well which is understandable. You could have the best site in the world, with the best content but in the end it doesn't really matter. You see, I know that everyone started a site just like I did. With no real base of people reading their site, you still have to start somewhere writing content, even if no one reads it and if you are one of my beginning readers, I hope that you'll join the challenge when you come across it and see what you can do. As time goes on, we'll win a few more people over.

To join the challenge, go to virtualstockexchange.com, register and enter the game id: investingchallenge

UPDATE: I got to looking at investopedia and decided to set up a second challenge over there. Go to simulator.investopedia.com and find the Poor Mans Stock Market Investing game that starts with $1000.

Then join the game. It's FREE. Good luck!

Stock Market Investing For Beginners Using The IBD 200

Since I started this site, I've spent some time talking about stock market investing for beginners and how you need to manage your own investments. I've also taken some time to answer some reader questions. One thing that I haven't done for awhile, is continue the development of my investment strategy. If you have read any of my articles, you know that I lean towards being a growth investor and am a big fan of William O'Neil's CANSLIM strategy. I read the Investor's Business Daily and keep an eye on the direction of the market. Based on his teachings, I've become pretty comfortable with what follow through days are and also know that I want to invest when the market is in a confirmed uptrend. The next step though, is creating a list of stocks to put on my watch list. The question is where do you begin your stock hunt?

There are thousands of stocks to choose from on the NYSE and the NASDAQ alone and although I read the paper everyday and notice so many stocks come through the different columns such as the Big Picture, the Weekly Review, the IBD 100 and 200, the Stocks in the News. I was first confused on the methods I should use to reduce the number of stocks to research and also how long to watch them and what am I really looking for. So, I set out to answer these questions for myself and found a great strategy that answers all of these questions and while it still generates more, it gets me moving in the right direction.

How To Make Money Investing In The Stock Market For Beginners

I started doing some research on the web and came across a guy named Pradeep Bonde who runs a site named Stock Bee and he wrote an article a couple of years ago called How to Beat the Market for $1.25 a Week. In this article he lays out a simple strategy of creating your list of hot stocks to watch using the IBD 200.

Here is the basic strategy:

Get a copy of the Thursday for $3.00. You can tell that it's been a while since he wrote the article since a paper used to be $1.25. Personally, I have a subscription to the electronic edition of the Investor's Business Daily. If you don't have one click this link to get one and get a special offer. Get 4 Bonus Weeks when you subscribe to Investor’s Business Daily Digital Edition! The electronic version is easier to build your watch list from. If you like this post and buy it through that link, I'll make a small amount of money. 

Inside the Thursday's paper, you'll find a column called the IBD's Top 200 Composite Stocks.
Put these 200 stocks in a watch list. I personally put my watch list in my stock lists feature at investors.com.

• Identify stocks that increased in price over 2% on minimum volume of at least 100,000 that's higher than the previous trading day. 
• Buy the next day with 1% risk. 
• Trail with a stop 
• Enjoy your profits. 

I noticed that I had a lot of questions about this strategy and so did a number of people who read his approach so I thought I would break it down even further for myself. The easy part was getting the paper with the IBD 200. How to create your watch list, and where to keep them needed some expanding on so what I did was use the "My Stocks List" feature to create my watch list.

This is a really nice part of your subscription. The watch lists are nice. My only complaint with them is that you can't add more than 50 stocks to each list but that's ok.

Here's a detailed video that shows exactly where to find the IBD 200 and how to set up your watch list.


 

Once you've done that, the next thing you want to do is to populate your watch list with the 200 stocks in the IBD 200. If you use the electronic edition of the IBD, it's really easy to do. Here's a video that shows you how I did it.


 

Once you've done that, the next thing to do is find the stocks that meet the criteria in step 3. Here's how I did that.