Mike,
The way to learn charting is by charting. Forget “the rules”. Instead, as Stan advises in a video I linked in another post, develop “a feel” for what looks like a ‘long’, what’s an obvious ‘short’, and what’s of marginal interest or none at all.
The easiest way to see a lot of charts fast is to go to FinViz and to hover the mouse cursor over the ticker. A three-month chart will pop up in a separate window. If the stock is coming off a bottom, then write it down and head over to BarChart and plot it using a one or more of the templates you built.
So, let’s do a run- though. At FinViz, select ‘Stocks only’ from the menu boxes and then sort them by their ticker (A to Z). Pick a letter, any letter, and look at just the stocks whose ticker begins with that letter. For the sake of this exercise, let’s select the letter ‘G’. These are some of the stocks that should have caught your eye: G, GATX, GBDC, GBTG, GCTK, GDEN. (There are plenty more that come later in the list. But this enough to make my point. )
In an ideal world where the politicos aren’t leaning on the Fed/Treasury cartel to goose financial markets, “fundamentals” would matter. But that’s not the market we’ve had since at least '88 when the bailouts began. Therefore, it doesn’t matter what the company does, nor what its financials might look like, nor the hype (or pans) from the talking heads on the business channels or blogs. The only thing that matters is whether a price-volume chart says it’s being bid up or sold down.
Given that you’ve selected the candidates to be vetted off a three-month chart, you already know what the intermediate trend seems to be. (The long-term trend is irrelevant, given that the world is 90 seconds away from Armageddon on the nuclear clock.) What we’re trying to do in the vetting process is to determine what the short-term trend might be, so we can make some quick money before the world goes to war yet again.
Here’s one of my templates applied to GDEN.
Here’s another.
Here’s a third.
OK. That trio is enough to suggest that, maybe, just maybe, the stock is breaking out. This becomes more believable if a stock isn’t highly correlated to whatever the broad market is doing. (In which case, why not just bet on the broad market?)
Now come the hassles of setting up the trade. #1, you’re likely to find more things to buy than you have the time/energy/discipline to track. #2, many of them will be priced beyond what is responsible to bet on given your account size. Fortunately, there are workarounds. One is to pick some aribitarily small amount and to buy only as many whole shares as that amount per share permits. A second is to buy equally-sized, fractional shares and to trade those shares in a basket.
The general rule of thumb is to limit risk per position to no more than 2% of AUM. But I’d suggest keeping it even smaller. Thus, if you running a small PDT account of $25k plus 20% reserves, then $20 to $30 bets done in whole shares will give you access to 60% of the stocks traded on the major exchanges. If, for whatever reason, such as not wanting to fund the project with more than $100 or so, then buy in fractional shares and gain access to the whole market. (Each method as its advantages/disadvantages and will be covered a separate post.)
Meanwhile, pick a letter, any letter, and see if you can find some stocks that seem to be breaking out. Do NOT paper-trade them. Put real money on the line, no matter how small, and don’t be hesitate to yank them if they don’t perform as you project they might from your chart reading. If they do work out, light a candle and thank the Market Goddess for being kind, this time.
Charlie
NB ‘Exposure’ isn’t equal to ‘risk’ unless you’re trading without a stop, mental or actually in the market. But it feels like it.
