Tuesday, September 9, 2008

Announcing the Wilderness Investor Forums

MORE BIG NEWS! Zach has moved his Wilderness Investor Group to a phpBB style discussion forum, anyone can join! You can get there now by clicking, www.zacharybass.com/forum.

Wilderness Forums

Click the banner to go directly to the Wilderness Investor Forums.

Come join the discussion, where hundreds of investors and traders congregate to talk the Markets, Apple, Trading and Investment Strategies, Options, General Discussion, etc!

Friday, May 23, 2008

Zach's Apple Investor Blog, Investor in the Wilderness Has Moved

BIG NEWS! Zach has upgraded the Investor in the Wilderness blog to Wordpress. You can get there now by clicking the new domain name, www.zachbass.com.

Click the banner to go directly to the new Investor in the Wilderness.

The new site has many features that will make it much easier for you to find all the content on the blog. There's "Featured Stories," recent commenters, and categories. I hope you enjoy the new site. Please update your links.


Friday, April 25, 2008

Using Support and Resistance to Predict Price

Stocks move up and stocks move down. And like all things like bananas, price is ultimately determined by supply and demand. If demand goes up, the price goes up. If the supply goes up, the price goes down. If demand goes up and supplies goes down; well, let's just hope you bought plenty banana futures.

When a stock is in an uptrend or down trend, it can be said that the supply/demand equation is stable or not changing. And so, the stock continues on in that trend. But sooner or later, something is going to affect either supply or demand, or both, and cause that stock to change direction. These changes in the supply/demand equation are what cause support and resistance.

What's the Difference Between Support and Resistance
Support is a price level below the current price of a stock. So that it tends to keep a stock from moving downward through that level. Resistance is the exact opposite. It's a barrier above the current price of a stock, that tends to prevent a stock from moving up through that level.

Changes in Price
The interesting thing about past changes in the supply/demand equation, is that they tend to affect future change in the supply/demand equation. Armed with this knowledge, the trader can use this to predict future price movement of a stock or market. Simply draw a horizontal line across the chart, starting from a noticeable change in price direction, and you have established a level that might provide support or resistance.

You may be wondering is there a way to know the strength of that level? In other words, can I assume some price changes may affect future price movement more strongly than others? The answer is a resounding, yes! There are certain events in the history of a stock that tend to reinforce support or resistance. Here are some of those events:
  • Changes in price with greater than average volume
  • Multiple, unsuccessful attempts to move through a price level
  • Gap-ups and Gap-downs

Trends and Patterns
Analyzing charts is an interesting art, there is some science mixed in, but there's even more psychology. That's because the markets are made up of millions of traders, people like you and me, that act as a mob. So your actually analyzing mob behavior. Sure, there are computers in the mix, doing programmed trades, but those computers were programmed by people, so they act like people to some degree as well.

Some say that the market is unpredictable because in it is completely random due to the wide variety of influencers, it's like chaos. But even with chaotic behavior there are patterns that emerge, and those patterns can be analyzed to predict with some degree of certainty, what may happen in the future. Also, there are trends that can be observed, that also provide a degree of order.

Trends are one of the more interesting aspects of analyzing charts, because you can draw lines along trend lines, and these lines will more often than not indicate levels of support and/or resistance. And like changes in price, the strength of these levels are usually determined by the same points listed above.

In the next few posts, I'll provide specific examples of how to identify trends, and how we can use those levels to predict future price movements. I'll also be posting various chart patterns that you should look for that indicate bullish and bearish trends, which will help you as well.

Stock Price Chart Lesson

I'm often asked what tool I use for charting, and what should I look for in a stock chart. Well, I'm not going to go into all the different types of charts, because that would take a book. What I will do is describe what I use, and what I look for in a chart.

I do most of my analysis using StockCharts.com, they simply have the best web-based charts on the Internet. The basic service is free, though it could hardly be called basic. I also use charting and trading tools that my broker provides(Fidelity's Active Trader Pro) , so that I can analyze intraday charts. But I'll stick to StockCharts for the vast majority of my stock screening.

Most charting software provides you with a variety of time frames to view prices. I'm primarily a swing trader so, I usually start with 6 months. I'll change between shorter or longer time frames to see if that time span tells me a more complete story about that stock. The chart above shows a 6 month view of AAPL. This is known as a candle stick chart because the elements representing price tend to look like a candle with a wick.

The thick part of the candle is referred to as the body, and the thin lines on the bottom and/or top are called the wick or tail. In general, white candlesticks indicate a positive move in the stock price, and red candlesticks represent a negative move.

Price and Volume
The two most important data points for a technical trader are price and volume. Virtually all your technical analysis will be based on the time series of price and volume data points. Below, you can see how price and volume are overlapping, making it easy for the chartist to associate the two with just a glance. The volume scale is on the left and the price scale on the right.

Note the extremely high volume on January 23 of nearly 125 million shares.

At the top of the chart are important data points showing historical and up to the minute information. The free service on StockCharts has a 15 minute delay, the subscription service provides real-time data.

Directly above and below the price chart you'll find two charts that show waves, that roughly correspond to the fluctuations of the price data. These waves reveal information about the price movement that traders can use as buy and sell signals, or as confirmation for various analysis the trader may make. They are called oscillators because they move up and down in a semi regular way.

There are many types of oscillators that you can overlay on the chart using the various controls. The oscillators you see on this chart, the RSI (Relative Strength Index), and the MACD (Moving Average Convergence Divergence) are the default indicators. You can add or remove oscillators to your desired configuration. I will cover the various uses of oscillators in future posts.

You should now have a good understanding of price charts. In future posts I will go into more detail of how to use a chart to analyze and place trades. We'll cover support and resistance and how to use these levels to spot potential trading opportunities. If there's anything in particular you would like explained, or written about in more detail, please write it in the comments below.

Tuesday, April 22, 2008

Position Sizing, How Much Should I Invest?

There are many theories and techniques that professional traders use to size their positions. For some, it can be very formulaic, especially for forex traders, taking the human element out of the equation and let the computer do the work. A properly sized position can mean the difference between great gains and spectacular losses.

For the average investor, position sizing is equally important. The difference is, we don't have and need sophisticated systems and formulas to calculate our positions.

There are many techniques to determined a properly sized position, but I'm going to describe just two, that are straight forward and easy to use. The two methods are Risk Sizing and Martingale. In this post I'm going to describe Risk-based Position Sizing. I will follow up in another post to describe Martingale Sizing.

Risk-based Position Sizing
The first step is to determine how much you're willing to risk, as a percentage of your total trading capital. Studies have shown that the optimum amount of capital to risk per trade is 2%. So, if your investment capital is $100,000, then you shouldn't risk more than $2000 per trade. This amount will be used to determine your stop. Everything else in your setup, will be based on this point.

So, let's look at an example. Suppose you have determined that there's strong support for AAPL at $160. This will be your stop. The price is currently at $163, and you believe the next resistance point is $170. This translates to a risk-reward ratio of 1:2. Or $3 at risk, $6 of potential profit. So $3 is your risk, let's figure out how that translates to $2000, by dividing 2000 by 3. We get 667 shares. So, if you buy 667 shares at $163, and set your stop at $160, your maximum loss is $2000.

Figuring in Volatility
Now, in reality, this is not a very practical model, because AAPL can move $3 in the blink of an eye. I should take that into account, and look at the next resistance level I can use, let's say $158. Now the number of shares works out this way, my entry of $163 minus $158, or $5, divided into my risk capital of $2000 equals 400 shares. But now my risk-reward ratio is pretty close to 1:1. This just might not be the trade for me, because I'm looking for at least a 1:2 ratio. Unless I have reason to believe that AAPL will make it to $173, then I'm all set.

I usually create setups in advance. Sometimes several at a time, so that in the following trading sessions, I'll have various potential setups that I can choose from, and try to enter the ones that looks most promising according to the market and stock price action in that session. To make my setups practical, I should have a potential range of entry price. This will affect two things, 1) the number of shares I can buy, and 2) the risk:reward ratio. This is because, the stop is pretty much a hard stop, not flexible, determined by support levels that exist.

So, if my entry range is $2-$3 dollars, I have to understand the affect on my risk-reward ratio, and the number of shares I can buy. This is why it is advisable to create multiple setups, so that you can monitor them and enter those that present the greatest chance for success.

-zach bass

What is a Pre-Market Routine?

Anyone that has played competitive sports at a higher level, knows the importance of consistent routine, because it builds Muscle Memory (MM), and the routine positively reinforces that MM. For example, the golfer works tirelessly in her routing addressing the ball prior to the swing, the 9-ball player, the archer, the batter in baseball, etc. It is apparent the success comes from perfecting your form, and the pre-XXX routine is a common tool among top performers. So, why not traders, shouldn't they also have such a routine before pulling the trigger?

What is your pre-market routine?

I'll be publishing a document soon and make it available for download in my Zach's Google Group, it will describe in detail the elements of an effective pre-market routine, for the Day Trader and Swing Trader styles. I'll also include an article I wrote for a prominent Pool magazine several years ago, that describes this routine in terms of the pool stroke. Yup, Zach is an A class 9-ball player.It doesn't have anything to do with trading, but it certainly illustrates the importance of a pre-routine.

You can subscribe to the group and download other documents that you can you without restriction. Subscribe by using the subscribe form on the left sidebar of this page.

-zach bass

Sunday, April 20, 2008

What Style of Trader Are You?

Trading styles can be categorized in to one of three categories; Day Trading, Swing Trading, and Position or Trend Trading. The styles differ essentially by the amount of time the position is open or in play. Traders that day trade, like the name implies, open a position and close it within the same day or trading session. Swing traders have longer horizons, where their trades can be open for several days or even weeks. And Position traders can have positions in play for many months.

Each of the styles have their advantages and disadvantages. And traders are generally predisposed to one or the other style based on a wide variety of factors. Some traders, use all three styles in varying weights depending upon things like market conditions and business objectives. The styles also differ in the amount of time a trader must allot in any given day to the setup and management of a position.

In terms of the number of active traders, Day Trading is by far the most popular style, followed by Swing Trading, and the least popular is Trend Trading. Following is a brief compilation of of the advantages and disadvantages of each style.

Day Trading
Advantages: No overnight exposure, more opportunities, cut losses quickly.
Disadvantages: Greater transaction costs, greater need for advanced resources (computers, advanced software, feeds, etc), constant attention required throughout trading day.

Swing Trading
Advantages:Potential for larger gains per trade, more time to analyze and setup trades, not nearly as intensive as Day Trading.
Disadvantages: Increased risk per trade, overnight exposure, requires more work to setup trades, Swing Traders tend to follow markets closely throughout the day, even if they don't take positions.

Trend Trading
Advantages:Requires the least amount of time preparing for trades, potential for huge gains, less likely than Swing Trading to get stopped out due to fluctuations in the market.
Disadvantages:Losses can be much larger due to much more liberal stops, tendency to miss out on short term opportunities, requires great patience to allow trade to develop, capital tied up for long periods of time.