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©LeadingTrader.com
Master Class on Stocks
With Alessio Rastaniwww.LeadingTrader.com
©LeadingTrader.com
Quick Quick RecapRecap on Previous Lesson on Previous Lesson
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1) Investing Golden Rules & Psychology
2) Understanding the big picture
3) Choosing Quality companies
4) When to buy and when to sell
5) Take Action!
The 5 steps to Stock Investing Success
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Fundamental
Technical
Execution
4
©LeadingTrader.com
1) What do we buy? (fundamental analysis)
2) How many do we buy? (money management)
3) When do we buy? (technical analysis)
4) When do we sell? (technical analysis & a bit of fundamentals)
4 Questions we ask BEFORE we buy a stock:
©LeadingTrader.com
2) Understanding the big picture
a) The Economy
Economic Cycles:
1
2
3 4
5
1) Early Expansion 4) Early Contraction
2) Middle Expansion 5) Late Contraction
3) Late Expansion 19
Certain sectors perform better at specific points in
the cycle
Boom Bust
e.g. technology
e.g. Health care
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©LeadingTrader.com
2) Understanding the big picture
During the economic cycle which sectors should I invest in?
1) Early Expansion – Capital Goods, Technology, Transportation
2) Middle Expansion – Capital Goods
3) Late Expansion – Energy, Basic Materials, Consumer Staples
4) Early Contraction – Utilities, Consumer Staples,
5) Late Contraction – Financials, Consumer Cycles
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©LeadingTrader.com
Which shares should I invest in?Which shares should I invest in?
Auto Parts, Automobiles, Broadcast Media, Building Materials, Entertainment, Hardware & Tools, Homebuilding, Hotel / Motel, Household Furn / Appl, Leisure Time, Manufactured Housing, Publishing, Restaurants, Retail, Shoes, Textiles, Toys.
Consumer Cyclicals
Insurance Brokers, Investment Bank / Brokerage, Insurance, Banks, Personal Loans, Savings & Loans, Financial.
FinancialsLate Contraction
Beverages, Cosmetics, Distributors, Foods, Health Care, Hospital Management, Household Products, House-wares, Medical Products & Supplies, Retail, Tobacco.
Consumer Staples
Electric Companies, Natural Gas, Miscellaneous.UtilitiesEarly Contraction
Beverages, Cosmetics, Distributors, Foods, Health Care, Hospital Management, Household Products, House-wares, Medical Products & Supplies, Retail, Tobacco.
Consumer Staples
Aluminium, Chemicals, Containers, Gold Mining, Metals, Paper, Steel.
Basic Materials
Oil & Gas Drilling, Oil, Oil Well Equipment & Services.EnergyLate Expansion
Aerospace, Electrical Equip, Engineering & Construction, Heavy Duty Trucks & Parts, Machine Tools, Machinery, Manufacturing, Pollution Control.
Capital GoodsMiddle Expansion
Airlines, Railroads, Truckers, Transportation.Transportation
Communication Equipment, Computer Software & Services, Computer Systems, Electronics, Office Equipment & Supplies, Photography / Imaging,Telecommunications.
Technology
Aerospace, Electrical Equip, Engineering & Construction, Heavy Duty Trucks & Parts, Machine Tools, Machinery, Manufacturing, Pollution Control, Packaging.
Capital GoodsEarly Expansion
INDUSTRIES IN EACH SECTORSECTORS (S&P 500)CYCLE
© Copyright, Leadingtrader.com, 2012
©LeadingTrader.com
Sector PerformanceSector Performancewww.marketwatch.com/tools/industrywww.marketwatch.com/tools/industry
SELECT PERIOD
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NOW MAKE A NOTE OF THE 10 BEST
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Sector Performance Sector Performance www.sectorspdr.com/marketmapwww.sectorspdr.com/marketmap
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1) Pay attention to the bigger market indexes.
2) E.g. S&P 500, Dow 30, Nasdaq, FTSE, Dax etc.
3) Remember: A rising tide raises all the boats (and vice versa).
4) Therefore if the market indexes start rising, they will most likely push the price of the majority of stocks up as well.
The Markets vs. Stocks
©LeadingTrader.com
Choosing Quality Companies
Fundamental Criteria What do we want?PEG RATIO <=1
CURRENT RATIO >=1
EPS GROWTH >=20%
5 YEAR EARNINGS GROWTH >=5%
NET INCOME (REVENUE) >=$50 Million
NET INCOME GROWTH >=20%
DIVIDEND YIELD >=1
NET INCOME MARGIN >=10%
P/E RATIO <=20
Optional additional criteria:
>= Greater than or equal to <= Less than or equal to
©LeadingTrader.com
Screening for Screening for TOP QUALITYTOP QUALITY Companies Companiesin seconds…in seconds…
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Screening for Quality CompaniesScreening for Quality Companieswww.nasdaq.com/reference/StockScreener.stmwww.nasdaq.com/reference/StockScreener.stm
www.leadingtrader.com/stockscreenerwww.leadingtrader.com/stockscreener
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You should then have a list of between 50 – 100 companies.
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Strategy #1 – Trendline Ambush
BIDU re-tests theTrendline support3 times. Either of theseis a buy opportunity.
BIDU - Baidu
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Strategy #1 – Trendline Ambush
Retest of the“New” Trendline
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Strategy #2: 200 MA Ambush
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Amazon
DAILY chart
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Exit StrategiesExit Strategies
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EXIT based on close BELOW the Weekly 8 EMA (T-line)
SELL
SELL
©LeadingTrader.com
1. Shares / stocks
2. CFDs
3. Spreadbetting
4. Options
5. ETFs of industries
You STILL get paid dividends with CFDs and spread betting (not just shares).
Different Methods of Investing:
©LeadingTrader.com
Selling Short • Making money in a downward market, index or stock.
• Sell high - buy back low.
• Selling something you do not own.
• Borrow shares from broker and sell to the market place.
• Account is frozen to the current value of the shares borrowed.
• When the share prices falls you buy back the shares at a lower price.
• Transaction is complete shares are returned to the broker and you keep the difference.
• If the share price goes up to close your position you have to buy the shares back at a higher price.
©LeadingTrader.com
You Market Maker
You Sell to market @ £10 x 100
Account Frozen by £1000
Buy Back from the market 100 shares x £5 = £500
YouMarket Maker
Price drops to £5 per Share
YOU KEEP £500! Receives Back 100 Shares
Lends You 100 Shares
100 Shares Owed to Market Maker
©LeadingTrader.com
1) Borrow 1000 shares of BP1) Borrow 1000 shares of BP
from brokerfrom broker
SELL SHORT BPSELL SHORT BP
@ £6 per share@ £6 per share
BUY BACK BPBUY BACK BP
@ £3 per share@ £3 per share
2) Broker will require deposit2) Broker will require deposit
of £6000 from you (£6 x 1000)of £6000 from you (£6 x 1000)
3) SELL BP shares at £6 / share3) SELL BP shares at £6 / share
- You now have £6000- You now have £6000
4) BP stock drops due to bad news4) BP stock drops due to bad news
5) BUY BACK BP shares at5) BUY BACK BP shares at
discounted £3 per share (£3,000)discounted £3 per share (£3,000)
6) Return the shares to broker6) Return the shares to broker
BP shares - 2010BP shares - 2010
©LeadingTrader.com
1) Borrow 1000 shares of BP1) Borrow 1000 shares of BP
from brokerfrom broker
SELL SHORT BPSELL SHORT BP
@ £6 per share@ £6 per share
BUY BACK BPBUY BACK BP
@ £3 per share@ £3 per share
2) Broker will require deposit2) Broker will require deposit
of £6000 from you (£6 x 1000)of £6000 from you (£6 x 1000)
3) SELL BP shares at £6 / share3) SELL BP shares at £6 / share
- You now have £6000- You now have £6000
4) BP stock drops due to bad news4) BP stock drops due to bad news
5) BUY BACK BP shares at5) BUY BACK BP shares at
discounted £3 per share (£3,000)discounted £3 per share (£3,000)
6) Return the shares to broker6) Return the shares to broker
BP shares - 2010BP shares - 2010
©LeadingTrader.com
Bank of AmericaBank of America
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Bear StearnsBear Stearns
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Choosing Poor Quality Companies
Fundamental Criteria What do we want?EPS GROWTH (last year) <=1%
SALES GROWTH <=1%
5 YEARS SALES GROWTH <=5%
NET (Profit) MARGIN <=5%
CURRENT RATIO <=1
NET INCOME GROWTH <=5%
PEG RATIO >=2
P/E RATIO >=20
SHORT % OF FLOAT <=10%
Optional additional criteria:
>= Greater than or equal to <= Less than or equal to
©LeadingTrader.com
Net Profit MarginThe profit margin is how much profit a company makes (after tax) for every $1 it generates in revenue or sales.
$ net profit ÷ $ revenue = net profit margin
(x 100 becomes % net profit margin)
©LeadingTrader.com
Go to Yahoo Finance – Key Statistics – Short % of Float – this tells you the percentage of shares publicly traded that has been sold short by traders.
Be cautious of “short squeezes”!
Over 10% = HIGH
Over 20% = Woah! Extremely High!
(Note: We will check this criteria only at the very end.)
Short % Of Float
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Only 2% of AAPLshares are beingshorted – this isOK for shortingas there’s little risk of a shortsqueeze.
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Very high!
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http://www.nasdaq.com/reference/stock-screener.aspx
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ClickRunScreen
©LeadingTrader.comClick Export
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Save the Excel Spreadsheet.
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Mastering Sector : Stock Index
Relative Strength
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• We look at Sectors i.e. a GROUP of stocks in a specific industry instead of just individual stocks.
• We compare the sector’s performance against the Stock Index (e.g. the S&P500, Dow Jones, FTSE).
• This can give us more reliable analysis.
• To calculate Relative Strength, we divide the sector index by the S&P 500 value and we get the Relative Strength “ratio line”.
Relative Strength & Sector Analysis
©LeadingTrader.com
• We will use stockcharts.com for this – a handy tool.
• For example, to compare the performance of the financial sector against the S&P500, we type this symbol: XLF:$SPX
• This DIVIDES the Financial sector ETF (XLF) by the S&P500 index.
Relative Strength & Sector Analysis
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If the line is DECLINING, it means sector isUNDERPERFORMING the S&P.
If RISING, this shows OUTPERFOMANCE.
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• You can also divide it by:
S&P 500 ETF = SPYDow Jones 30 = $INDUFTSE (UK 100) = $FTSEGold = GLD Silver= SLV
And so on…
Relative Strength & Sector Analysis
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QQQ:SPY - Nasdaq ETF vs. S&P500 ETF
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$XAU:SPY - Gold/Silver index vs. SP500 ETF
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Comparing an individual stock against its own sector:
Goldman Sachs vs. Financial Sector
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Comparing Countries: USA vs. China
SPY:FXI
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S&P 500 ($SPX or SPY)Euro (ULE)U.S. Dollar ($USD)Treasury Bonds (TLT)Gold (GLD)Oil (USO)
Energy (XLE)Natural Gas (UNG)Silver (SLV)Gold Stocks ($HUI)Volatility ($VIX)Japanese Yen (FXY)
British Pound (FXB)Australian Dollar (FXA)Canadian Dollar (FXC)
Full List for stockcharts Relative Strength
USA (SPY)UK ($FTSE)Germany ($DAX)France ($CAC)Europe (FEZ)Singapore (EWS)Japan (EWJ)Israel (ISL)Canada (EWC)India (IFN)Taiwan (EWT)China (FXI)S. Africa (EZA)S. Korea (EWY)Russia (TRF)Lat. America (ILF)
Construction (PKB)Health Care (IYH)Consumer Svcs (IYC)Media (PBS)Financials (IYF or XLF)Insurance (PIC)Water (PHO)Telecom (IYZ)Real Estate (IYR)Industrials (IYJ)Transportation (IYT)Retail (PMR)Defense (PPA)Software (PSJ)Biotech (PBE)Big Tech (QQQ)Utilities (XLU)Basic Mat (IYM)Nanotech (PXN)Semis (PSI)Alt. Energy (PBW)
©LeadingTrader.com
• For investing, I look for sectors that have been in decline and are breaking their downtrend line, or breaking their 200 daily MA.
• For shorting I look for sectors that are breaking an uptrend line.
• Important: look for divergences on MACD.
Relative Strength & Sector Analysis
©LeadingTrader.com
• I also like to use the MACD indicator to look for DIVERGENCES between the price and momentum.
• A Positive Divergence shows the force or strength of a downward trend is weakening (i.e. the market is preparing to reverse and go higher).
• A Negative Divergence shows the force or strength of an upward trend is weakening (i.e. the markets is preparing to reverse and go lower).
Relative Strength & Sector Analysis
©LeadingTrader.com
A ship’s “wheels” turn BEFORE the actual ship itself turns.
This is similar to a divergence. Technicals like momentumstarts turning before the price does.
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Weekly Chart of AAPL.Weekly charts are useful asthey smooth out a lot of the noise on daily charts.
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AAPL breaksthe uptrendLine.
Weekly Chart of AAPL.Weekly charts are useful asthey smooth out a lot of the noise on daily charts.
Negative Divergenceon MACD. It failed to makea higher high even though the price did. Trend is weakening.
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Clear sign of divergence in theTechnology / stock index ratio line.
Break of uptrend line
Resting on200 MA
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Keep an eye out forDivergences.
Break of downtrend lineis a good buy signal.But watch out if it breaksbelow the 200 MA.
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Energy:stock RATIO LINEhas broken downtrend line(bullish) AND broken its200 weekly MA (blue line).
MACD crosses into positiveterritory which is bullish. Onceweekly MACD goes above zeroit can stay there for long periods.
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No divergence, butMACD has crossed intoPositive territory.
Oil & gas Exploration / stock index ratio line
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Gold Stocks / stock index ratio line
Keep an eye out forDivergences.
©LeadingTrader.com
Shorting StrategiesBasic & Advanced
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BE AWARE:
• The psychology is different near market bottoms than it is near market tops.
• Near Bottoms market is ruled by fear. Market acts differently when people are selling to exit losing positions.
• Near Tops market is ruled by excitement and euphoria as more and more late-comers join the scene.
• Therefore the chart patterns are slightly different. Bottoms are more crisp and sharp. Tops are broad and stretched out.
Shorting Strategies
©LeadingTrader.com
We can either short a bullish market (uptrend) or short a bearish market (downtrend).
• Shorting an uptrend can be more profitable in termsof risk-reward, BUT can result in a lot of whipsaws (false signals). Therefore we’ll commit smaller positionswhen doing these trades.
• Shorting a downtrend can be easier, but it can usuallymiss the start of a major downturn. Less headaches andsimpler to execute. Can commit bigger positions.
Shorting Strategies
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Was there a divergence on MACD?
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Was there a divergence on MACD? YES!
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2 Consecutive closes BELOWA trend line give confirmationof trend break.
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Was there a divergence on MACD?
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Entry at break of theLOWER trend line(support).
Entry at test of the UPPERTrend line (resistance).
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Entry at break of theLOWER trend line(support).
Entry at test of the UPPERTrend line (resistance).
Divergence on MACD
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Shorting a Downtrend
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If you miss the entry point at the trend line, you can enter again
at a pull back to the 21 EMA and 50 SMA.
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Candle Reversal Patterns
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NO. YES.
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Doji candles
Shooting Star candles
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Shooting Star candle
We wait for a close belowshooting star candle before wesell short.
©LeadingTrader.com
Waiting for the BIG andPowerful momentum moves
Small risk.Great Profit potential.
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Bollinger Bands (20,2)
Keltner Channels (20,1.5)
LeadingTrader.com/etx
©LeadingTrader.com
ADX (setting 14)
LeadingTrader.com/etx
©LeadingTrader.com
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ADX is a big clue as to whichsqueeze breakouts are likely to be
the biggest in magnitude.
Squeeze with ADX below 20 = “Turbo squeeze”which usually result in big moves.
Squeeze with ADX above 20 = These are good too but less likely to be big moves.
©LeadingTrader.com
1. ADX is a measure of volatility (as well as trend strength).
2. Low ADX corresponds to low volatility.
3. Since the squeeze is about a transitionfrom LOW to HIGH volatility, then low ADX indicates the “perfect” squeeze conditions.
Why does this happen?
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Combining 2 time-frames:
Weekly240-min (or 60 min)
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Combining a weekly squeeze breakout with a 4-hour squeeze.
Wait for the weekly squeeze to fire first(Bollinger bands exitingKeltner channels).
Take Squeeze on a4 hour chart (or a 60min chart).
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Stop-Loss andEffective Risk Management
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Average True Range(ATR)
Minimising Risk (stop-loss)Minimising Risk (stop-loss)LeadingTrader.com/etx
©LeadingTrader.com
• Use the Average True Range (ATR) of the next higher time-frame as the stop-loss.• ATR is a measure of volatility.
• E.g. If you’re taking a trade on daily chart (e.g. a squeeze or trendline), use the Weekly ATR as stop-loss.
• If trading on 60 min use the daily ATR as stop.• If trading on 240 min use weekly ATR.
Effective Stop-loss and Risk management
©LeadingTrader.com
• Once the stock has moved by ½ (half) the higher time-frame ATR (e.g. ½ the weekly ATR) then move stop to Entry Point (breakeven point).
• This way, you move from a position of RISK to ZERO RISK as soon as possible.
• I do this method for 90% of all my trading.
Effective Stop-loss and Risk management
©LeadingTrader.com
Use the Weekly ATR as stop distance whenyou’re taking a trade (e.g. a squeeze on 240min or daily chart.
ATR on weekly chartis 20. Once stock
moves by ½ weekly ATR (10 points) move stop to breakeven.
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ATR on weekly chartis 5.
Stoploss is placed 5 points ($5) away.
Once stock has moved by ½ the weekly ATR (2.5 or 3 points) then move stop to breakeven.
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ATR on weekly chart is 8.
Stoploss is placed 8 points away.
Once stock moves by 4 points (1/2 the weekly ATR) move stop to breakeven.
©LeadingTrader.com
Market Correlations
©LeadingTrader.com
Positive correlation = markets move together in same direction. If one goes up, the other also goes up.
Negative/Inverse Correlation = markets move in opposite directions. If one goes up, the other goes down.
Market Correlations
©LeadingTrader.com
Positive correlation
Stock Indexes e.g. S&P 500 and Dow 30Stocks (S&P 500) & EuroStocks and Gold (and silver)Gold and SilverStocks and Crude oil (recent exception)Stocks and AUDJPY (hedge funds).
Market Correlations
©LeadingTrader.com
Negative/Inverse Correlation
Stocks (S&P500) and US Dollar.Stocks and VIX (volatility index).Stocks and Treasury Bonds (10yr, 30yr).Gold and US Dollar.Japanese Yen and Crude Oil.Bond prices and Bond Yields.
Market Correlations
©LeadingTrader.com
Sentiment
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The 2 Main Option Contracts:
• Calls• Puts
You buy:
CALLS = Make money when shares go UPPUTS = Make money when shares go DOWN
Sentiment and Open InterestSentiment and Open Interest
©LeadingTrader.com
Don’t worry.
You don’t have to know ANYTHINGabout options to do this bit.
(We just compare 2 numbers.That is all.)
©LeadingTrader.com
The total number of option contracts that are open on a particular day (which have not been closed or exercised).
An indicator of liquidity.
Sentiment and Open InterestSentiment and Open Interest
©LeadingTrader.com
Google Finance – We use this for Individual Stock Sentiment Analysis
(see next page for annotations)
©LeadingTrader.com
Type SymbolSelect Expiry date (3rd Friday of Month)
Set to Straddleview
Current price ofthe stock
Call Open interest Strike Prices Put open interest
Google Finance – We use this for Individual Stock Sentiment Analysis
©LeadingTrader.com
Simple Rule: Compare 2 numbers i.e. the Open interest for calls and puts.
Important Tip: We look for SIGNIFICANT differences between Call and Put open interest (e.g. over 50% or 100% discrepancy). A difference of less than 20% is not verysignificant.
E.g. if CALL open interest is 2000 and Put open interest is 4000 this IS Significant (100% difference).But if CALL open interest is 2000 and Put open interest 2500 then this is NOTparticularly significant.
Sentiment and Open InterestSentiment and Open Interest
©LeadingTrader.com
If PUT open interest is SIGNIFICANTLY greater than CALLopen interest this indicates BEARISH sentiment.
If CALL open interest is SIGNIFICANTLY greater than PUTopen interest this indicates BULLISH sentiment.
Sentiment and Open InterestSentiment and Open Interest
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AAPL Open Interest Strike Price
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Bear Stearns
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Bear Stearns
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We can change the Expirationto April 2013(2 months from now)on the same stock.
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Exit out of a Trade
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Just like in the investing course, we wait for priceto close beyond (above) the 8 EMA to exit.
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When long, we wait for close BELOW 8 EMA.
Note: if it is hugging the 8EMA or closes very close to it, this does not count as an exit signal. Must be a decisive break.
By the way, notice the divergence.
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When Short, wait for priceto close beyond (above) the 8 EMA to exit. In the GRPN examplebelow, this would have kept you in the trend for $15 gain (75% return).
Did we have divergence?
©LeadingTrader.com
Execution
Full video on Trade Execution on:www.leadingTrader.com/chart
©LeadingTrader.com
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Selling Short Using ETX Platform: www.LeadingTrader.com/etx
This is What I use.It is safe, reliable and user-friendly.
For a full video and PDFon using ETX platformgo to:
LeadingTrader.com/chart
©LeadingTrader.com
Buy /Short
Entry
Stop-loss
Target
Using ETX Platform: www.LeadingTrader.com/etx
©LeadingTrader.com
Important Do’s and Don’ts
©LeadingTrader.com
Avoid Shorting very low priced stocks (e.g. below $5).Remember we want to sell short HIGH, buy back low.
It is NOT worth shorting low priced stocks because there is little DOWNSIDE potential.Better to short more expensive shares (ideallydouble digits).
©LeadingTrader.com
Avoid Stocks that are going sideways for very long periods of time, specially after a gap in price.
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Avoid Stocks that have too many spikes on their pricebars (use a candlestick chart to see this).
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Avoid Stocks that have too many gaps in the price.This can cause a lot of slippage and increase your risk.
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Too many gaps in the price.
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Avoid very thinly traded stocks – they look like this.
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Avoid very thinly traded stocks – they look like this.
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Avoid erratic stock chart that look like this.
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Congratulations.
You’ve made it through theFirst Day!
