Know this!

[ceasar73]

Buy rising stocks and sell falling stocks.
Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the
general market. If it's rising you should be long, if it's falling you should be short.
Co-ordinate your trading activity with pivot points.
Only enter a trade after the action of the market confirms your opinion and then enter promptly.
Continue with trades that show you a profit, end trades that show a loss.
End trades when it is clear that the trend you are profiting from is over.
In any sector, trade the leading stock - the one showing the strongest trend.
Never average losses by, for example, buying more of a stock that has fallen.
Never meet a margin call - get out of the trade.
Go long when stocks reach a new high. Sell short when they reach a new low.

Other Useful Trading Guidance

Don't become an involuntary investor by holding onto stocks whose price has fallen.
A stock is never too high to buy and never too low to short.
Markets are never wrong - opinions often are.
The highest profits are made in trades that show a profit right from the start.
No trading rules will deliver a profit 100 percent of the time.

BTW - its how Darvas/Livermore did it.

 

[cynic]

Markets are never wrong - opinions often are.
BTW - its how Darvas/Livermore did it.

If this is true then why does the market need to have so many corrections?

As far as I'm concerned the market is rarely ever correct - it simply is what people make it to be by exerting their opinions when they participate!

P.S. I strongly advise you not to take my advice!

 

[Tanaka]

As far as I'm concerned the market is rarely ever correct - it simply is what people make it to be by exerting their opinions when they participate!

I'm a trader; the market is always correct, I'm the one who is ever wrong

 

[AlterEgo]

If this is true then why does the market need to have so many corrections?

As far as I'm concerned the market is rarely ever correct - it simply is what people make it to be by exerting their opinions when they participate!

P.S. I strongly advise you not to take my advice!

Well if the share price is wrong, I ask you “What is correct?”.

I suppose you’ll give me some sort of accounting formula with which I can determine the “correct” price. The trouble with that is that if I ask 10 different fundamentalists what the “correct” price is, I’ll get 10 different answers. Obviously there can’t be 10 different “correct” answers! So as there is no agreement as to what actually is correct, how can you say the share price is wrong?

The true value of a share (or any other asset, good or service) is only as much as what someone is willing to pay for it. The stock market, as the name implies, is a marketplace. It’s the marketplace that determines what something is worth (due to supply and demand), not the seller. A seller at a market could put a price of $50 per kilo on his bananas – does that make them worth $50? If he can’t get a sale until he reduces his price to $5, then they are only worth $5, not $50. They may have cost him $10 to produce, but the market only values them at $5. So it’s the market that determines what the correct price is.

Imagine you have a very rare painting – what’s it worth? You could calculate what the value of the materials used in it cost, and add on a component for labor and come up with say $500. But then it sells for $5 Million at auction – which value was correct, the $500 or the $5 Million? If someone is willing to pay $5 Million for it, that that is what it’s worth.

You assume that because the stock price is different to your accounting calculation, that the stock price must be wrong. It’s not the stock price that’s wrong, it’s your calculation that’s wrong! The stock price is always correct, as the stock price is always a correct reflection of supply and demand. No calculation that anyone could ever come up with could correctly gauge supply and demand, only the market place can correctly do this.

 

[pixel]

Well if the share price is wrong, I ask you “What is correct?”.

I suppose you’ll give me some sort of accounting formula with which I can determine the “correct” price. The trouble with that is that if I ask 10 different fundamentalists what the “correct” price is, I’ll get 10 different answers. Obviously there can’t be 10 different “correct” answers! So as there is no agreement as to what actually is correct, how can you say the share price is wrong?

The true value of a share (or any other asset, good or service) is only as much as what someone is willing to pay for it. The stock market, as the name implies, is a marketplace. It’s the marketplace that determines what something is worth (due to supply and demand), not the seller. A seller at a market could put a price of $50 per kilo on his bananas – does that make them worth $50? If he can’t get a sale until he reduces his price to $5, then they are only worth $5, not $50. They may have cost him $10 to produce, but the market only values them at $5. So it’s the market that determines what the correct price is.

Imagine you have a very rare painting – what’s it worth? You could calculate what the value of the materials used in it cost, and add on a component for labor and come up with say $500. But then it sells for $5 Million at auction – which value was correct, the $500 or the $5 Million? If someone is willing to pay $5 Million for it, that that is what it’s worth.

You assume that because the stock price is different to your accounting calculation, that the stock price must be wrong. It’s not the stock price that’s wrong, it’s your calculation that’s wrong! The stock price is always correct, as the stock price is always a correct reflection of supply and demand. No calculation that anyone could ever come up with could correctly gauge supply and demand, only the market place can correctly do this.

You could be my own Alter Ego - that's how completely I agree with what you're saying.
But that too doesn't make us right - as in "accepted by everybody" - on this Forum.

There will always be different opinions: be it about an individual's approach to trading/ investing, or about how to read market action. From a respondent's general comments and demeanour, we may be able to guess how they interpret certain simple words or concepts. It's often very different from a logical approach; but the further removed from reason a person's opinion is, the less likely we are able to convince them by rational argument.

 

[cudderbean]

Buy rising stocks and sell falling stocks.
Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the
general market. If it's rising you should be long, if it's falling you should be short.

Some excellent points there, Caesar. Thank you.

Not a frivolous question, but how do you decide when the market is clearly bullish or bearish?

Of course you can always ask the neighbour's kid to view a chart and tell you the bleeding obvious in exchange for a bag of lollies, provided of course that the lollies cost more than $2... tax deductible expenses for your financial adviser.

What do other traders use?

That the price or index should be above the following MAs and/or the MAs pointing in a particular direction

200 day SMA
150 day SMA
21 EMA
8 EMA

Guppy MMAs clearly separated and both sets headed up or down

SPI futures figures for that trading day?

Weekly, daily, monthly charts?

I had this problem myself the other month when in Excel I created a trendbreak alert system to scan the market for short term and longer term trendbreaks. But for a stock to break down it had first to be trending upwards. And what constitutes a trend upwards? In the end for short term purposes I settled on a 5 day EMA.

I am curious what others use?

Thanks for your help.

 

[cudderbean]

The true value of a share (or any other asset, good or service) is only as much as what someone is willing to pay for it. The stock market, as the name implies, is a marketplace. It’s the marketplace that determines what something is worth (due to supply and demand), not the seller. A seller at a market could put a price of $50 per kilo on his bananas – does that make them worth $50? If he can’t get a sale until he reduces his price to $5, then they are only worth $5, not $50. They may have cost him $10 to produce, but the market only values them at $5. So it’s the market that determines what the correct price is.

Imagine you have a very rare painting – what’s it worth? You could calculate what the value of the materials used in it cost, and add on a component for labor and come up with say $500. But then it sells for $5 Million at auction – which value was correct, the $500 or the $5 Million? If someone is willing to pay $5 Million for it, that that is what it’s worth.

On the whole I am in your camp, AlterEgo, when it comes to valuations.. the chart tells all. Although one has to take care...the market is shark infested and we need to watch out for pump and dump situations.

But I had a little chuckle thinking back on some of Bondie's valuations.... buying "Irises" for a record $54 milllion .. err but with a bank loan he never repaid. Or buying Kerry Packer's TV stations for $1 billion then selling them back for $700m, prompting the famous insult "You only get one Alan Bond in your lifetime, and I've had mine"

I wonder how much Bondie pays for his bananas?

 

[cynic]

I'm a trader; the market is always correct, I'm the one who is ever wrong

That's great, so I take it that your making good profits by getting it wrong too? Well done!

BTW I've also been doing a lot of sharemarket trading (over the past 12 years in fact) and I've been getting it wrong too!. This financial year I managed to get it so wrong that I realised my best year's share trading profit ever! I didn't bother to examine any charts, I rarely used stops, I met all margin calls, and I completely ignored the trends. I also traded every single trading day of the current quarter. Over 90% of my trading profits this year are directly attributable to my trading activities within this final quarter. I don't actually know who those generous traders are who keep donating to my early retirement fund, but I cannot help but wonder whether they might be following the "fashionable" trading methodologies/conventions and hence joining the ranks of the 90%+ share market losers.

 

[cynic]

Well if the share price is wrong, I ask you “What is correct?”.

My only concern when speculating on market instruments is that I get it at a price that I believe is likely to present a future opportunity for profit. The price can be as incorrect as it pleases, provided I can identify a way to stack the odds of profitability in my favor, I will consider the instrument worthy of my attention. I have encountered one brief situation early in my trading experience when a stock that I held was actually correctly priced. The company became insolvent and the stock became worthless. I then knew it's true value and the market was in 100% agreement with me i.e. $0.00. So yes the market got that one correct!
This was an experience that I never repeated as it was not conducive to wealth accumulation. So I'm happiest when the market gets it wrong, because that's when I find high probability opportunites to profit from other investor's mistakes. Interestingly enough, I've been finding these opportunites in abundance this financial year.

Well if the share price is wrong, I ask you “What is correct?”.

I suppose you’ll give me some sort of accounting formula with which I can determine the “correct” price. The trouble with that is that if I ask 10 different fundamentalists what the “correct” price is, I’ll get 10 different answers. Obviously there can’t be 10 different “correct” answers! So as there is no agreement as to what actually is correct, how can you say the share price is wrong?

It isn't just me saying that it's incorrect, I am frequently observing respected market media stating certain major indices are either "overbought" or "oversold" ( although sometimes they do report "fair value"). So if you don't believe me, then you probably don't believe many of the "respected" market news services either. But that's okay , I'm a cynic too!

You assume that because the stock price is different to your accounting calculation, that the stock price must be wrong.

I don't specifically recall ever having made such a statement or assumption. Perhaps you could direct me to the thread in which I purportedly indicated this to you!
Do I actually use an accounting calculation ? Does it work well? (After all, you're the one telling the story here!)

The stock price is always correct, as the stock price is always a correct reflection of supply and demand. No calculation that anyone could ever come up with could correctly gauge supply and demand, only the market place can correctly do this.

How can one correctly gauge the true value of all shares on issue of one company on the basis of supply and demand for a smidgin of the total shares on issue? It is simply the way they have chosen to do it (it's not the only conceivable model), and it leaves the market susceptible to manipulation which is evident from various reports about certain (dare I say it) "shady" practices that seem to occur during periods of thin volume. i.e. ratcheting , stop hunting , pulling of bogus orders etc. Some of these practices might be legally questionable, but we are all aware that there are people whom will happily exploit the vulnerability of any process or technology for easy profit. I personally know of three people whom have traded on the basis of "inside information". They were simply too naive to realise that what they were doing was actually illegal, and by the time I found out what they'd done it was too late for me to warn them.

The true value of a share (or any other asset, good or service) is only as much as what someone is willing to pay for it.

This is another one of those fashionable mantras that I abhor with a passion. This statement can only be true within an extremely limited context but is definitely not universally true.
I have approximately 90,000 pieces of evidence that prove that your statement is either incomplete or incorrect. Every one of these reasons has an Australian dollar sign in front of it and each now resides in one or more of my various accounts.
When the highest offer for purchase of one of my houses is beneath the price I am willing to sell at (my valuation) then I simply refuse to sell, no transaction occurs and the bidder walks away empty handed. However, if my bank foreclosed on me first, then your statement might, in that instance prove to be true, as the bank might then be willing to dispose of the house at whatever the market happens to offer. Given that no bank has ever foreclosed on me, this statement has never been valid in my 20+ years of investment experience. Having said this, it is conceivable that I may have been on the winning end of an investment purchase where the vendor was obliged (or simply willing) to sell for whatever the market (that's me in this instance) offered.


BTW Thanks for taking the time to provide such an articulate and well considered challenge to my previous post.

 

[skc]

Markets are never wrong - opinions often are.

Can I invite someone to give an example where you make a profit without the market being wrong?

 

[tech/a]

Can I invite someone to give an example where you make a profit without the market being wrong?

Bull run
2001---2007

 

[Tysonboss1]

A stock is never too high to buy and never too low to short.
Markets are never wrong - opinions often are.

So when BHP was $50 the market was right in pricing it's value and then a few months later when it was $20 the market was still right in pricing it's value and now that it is $43 it is still right.

thats an interesting concept.

So at $50 it wasn't to high to buy and at $20 it's not to low to short, Interesting.

 

[wayneL]

So when BHP was $50 the market was right in pricing it's value and then a few months later when it was $20 the market was still right in pricing it's value and now that it is $43 it is still right.

The pricing was correct as there were willing buyers and sellers, hence agreement.

Value is another matter.

As your poster boy said at one time or another - "Price is what you pay, value is what you get".

thats an interesting concept.

Only if you are not aware of the simple irrefutable truth of it. Par for the course for the rest of us.

So at $50 it wasn't to high to buy and at $20 it's not to low to short, Interesting.

This can only be determined in retrospect... and of course what you do when you realize you are wrong matters much.

 

[AlterEgo]

My only concern when speculating on market instruments is that I get it at a price that I believe is likely to present a future opportunity for profit. The price can be as incorrect as it pleases, provided I can identify a way to stack the odds of profitability in my favor, I will consider the instrument worthy of my attention.

Exactly! It really makes no difference whether you consider the price right or wrong. I think we’re both on the same page, it’s just that your definition of “value” differs from my definition. You buy because you anticipate that the price will increase in the future. You say it moves up because the current price is incorrect (if I understand you correctly) – I say it moves up because the balance of supply/demand changes. I’d say what you’re really doing is anticipating higher future demand for the stock, rather than it moving towards some supposed “correct” value. But the end result is the same though – it’s just a different way of looking at it.

How can one correctly gauge the true value of all shares on issue of one company on the basis of supply and demand for a smidgin of the total shares on issue? It is simply the way they have chosen to do it (it's not the only conceivable model),

I think it’s the most realistic model though, if you’re being honest with yourself. Many people get in to a lot of trouble because they argue with the market. Stock price has been constantly dropping since they purchased it, and it’s all so easy to find an excuse (any excuse) and just say the market is wrong. Most people (not saying you) can’t accept that they may have been wrong – much easier for them to say the market is wrong.

I believe it’s much healthier though (both emotionally and financially) to just accept that you were wrong (the market is right), cut your losses before they become excessive losses, and move on to a better opportunity.

You still haven’t answered my original question – if the price is wrong, what is right? For you to say the price is wrong, you must know what the right value is, otherwise you can’t say with any certainty that the price is wrong.

How would you value a rare coin? Don’t know about you, but I’d look up the most recent price that it traded for at auction. What’s a gold bar worth – look up the most recent gold price and multiply it by the number of ounces in the bar. Why would you think the value of a share is any different to price? Value is the same thing as price!

This is another one of those fashionable mantras that I abhor with a passion. This statement can only be true within an extremely limited context but is definitely not universally true. I have approximately 90,000 pieces of evidence that prove that your statement is either incomplete or incorrect. Every one of these reasons has an Australian dollar sign in front of it and each now resides in one or more of my various accounts.

I don’t see why you should abhor that statement – it seems pretty common sense to me. If you say your house has increased in value, what you’re saying is that current prices in the area have gone up – ie. people will be be willing to pay a higher price for it now. If someone is willing to pay a higher price, then the value has gone up. If the property market has dropped and people are no longer willing to pay as high a price for your property than before, then the value of the property has gone down. Value and price are the same thing! I think it can be pretty dangerous when people start thinking of value and price as different things, as it can cause people to hold on to a "dog" of a share just because the share price is below what they think it should be worth, and they aren’t willing to entertain the idea that their analysis may be incorrect.

You’ve got a method that works – that’s great. Doesn’t mean price is wrong though. I’m also doing well in the current market. Despite the market dropping 9% over the last 2 months, my account has increased quite a significant amount over the same period. My account is currently at new highs. But so what? Many different methods can work. There’s more than one way to skin a cat. However, I should say that although the trading ideas at the top of the thread do work (I have used a similar system in the past to great effect) and am a great fan of Darvas and Livermore, I am not actually trading that way at the moment, as I’m not sure that a trend following approach is the best way to go in this market. In general though, I think those are pretty good rules to follow and should keep most people out of trouble. It’s not the only way to make money in the market though.

When the highest offer for purchase of one of my houses is beneath the price I am willing to sell at (my valuation) then I simply refuse to sell, no transaction occurs and the bidder walks away empty handed.

Yes, but it’s still all your house was worth on this particular day. It may be worth more next month, so you may sell it then instead. That’s up to you. If you think it is likely to be worth more at a later date, then you can hold on to it until then. It’s more difficult to know the value of a property than a share at any given time. You don’t get a valuation on your property every day, but you do get a valuation on your shares every day as they are constantly trading every day.

 

[skc]

Bull run
2001---2007

So prices were lower in 2001 and higher in 2007? Does it not mean that the market was wrong in 2001? It didn't foresee the growth in economy, rise in income and debt, increase in commodity prices, industrialisation of China, increase in investor demand/confidence/risk appetite...(insert your own explanation - fundamental or technical). Does prices move = market is wrong?

Anytime anyone takes a position, he/she is saying that the market is wrong. Thinking about it, that's what a position means. The trader is saying "I am buying this at $1 because I believe $1 is the wrong number by next minute/day/weeks/years". The trader can only make a profit if the market is proven wrong, and the price moved as a result (again, of whatever factor one cares to list here). The trade will lose money if he/she is wrong, although that doesn't mean the market is right.

Having said all that, the market is often right and a trade/investor should always have a healthy respect for the market's ability (but not inevitability) to be right.

You still haven’t answered my original question – if the price is wrong, what is right? For you to say the price is wrong, you must know what the right value is, otherwise you can’t say with any certainty that the price is wrong.

How would you value a rare coin? Don’t know about you, but I’d look up the most recent price that it traded for at auction. What’s a gold bar worth – look up the most recent gold price and multiply it by the number of ounces in the bar. Why would you think the value of a share is any different to price? Value is the same thing as price!

Jack walks into a Cash Converters store and cashed his $500 pay cheque for $450 cash. Oh no! The value of my own pay cheque has just gone down 10%.

Price is price. Value is value. Price may be lower, equal or higher than value. Price may or may not move towards value. But they are not the same thing.

 

[tothemax6]

So to summarize OP:
"trend follow = money"

See? That's called efficiency.
Of course, if this tactic was profitable it would already be priced out of the market. A HFT could plug his computer into the exchange, hire a fairly mediocre mathematician, and he would be rolling in dough.

Back to reality.

 

[AlterEgo]

So prices were lower in 2001 and higher in 2007? Does it not mean that the market was wrong in 2001? It didn't foresee the growth in economy, rise in income and debt, increase in commodity prices, industrialisation of China, increase in investor demand/confidence/risk appetite...(insert your own explanation - fundamental or technical). Does prices move = market is wrong?

No. Price was correct in 2001 factoring in commodity prices at that time, and all those other factors you've mentioned. Higher commodity prices etc, etc, in 2007 made the higher price the correct price in 2007 also. The market is constantly changing to reflect all these changing factors.

Anytime anyone takes a position, he/she is saying that the market is wrong.

No - well that's not what I'm saying anyway. I'm just following a system that I have throughly tested and know works. The "valuation" of the stock has no bearing whatsoever on my decision to buy it.

 

[So_Cynical]

Know this...the premise of this thread is a crock!

Never do this, always do that, you should be, don't be a blah blah blah...Twaddle, pure twaddle.

Sell XYZ for more than you paid for it, in the shortest time frame possible, following whatever strategy you like....simple hey.

 

[AlterEgo]

So to summarize OP:
"trend follow = money"

See? That's called efficiency.
Of course, if this tactic was profitable it would already be priced out of the market. A HFT could plug his computer into the exchange, hire a fairly mediocre mathematician, and he would be rolling in dough.

Back to reality.

If that were true, then so called "value investing" should also be priced out of the market due to efficiency.

The fact remains that trend following does work. I know because I've done it. Many others on the forum have also done it. Many people have made absolute fortunes doing it, Darvas & Livermore for example. If you don't believe me, have a read of this white paper that was written by some fund managers on the topic: http://www.trendfollowing.com/whitepaper/Does_trendfollowing_work_on_stocks.pdf

 

[AlterEgo]

Know this...the premise of this thread is a crock!

Never do this, always do that, you should be, don't be a blah blah blah...Twaddle, pure twaddle.

Sell XYZ for more than you paid for it, in the shortest time frame possible, following whatever strategy you like....simple hey.

It's one way, not the only way. I think the nick "So_Skeptical" would suit you better.

Have a read of the link I posted above. Those fund managers put a lot of work in to testing trend following on stocks, and their conclusion was that the strategy "would have yielded a significant return on average" and that "a significant positive mathematical expectancy does exist for long term trend following on stocks".