Monday, 22 August 2011

So you want to be a stock trader

Business Mirror

There are two types of people in the stock market: those who buy and sell to make quick profits or traders, and those who buy and hold for longer-term appreciation or investors.

Few start off as “traders” as most people are aware that the stock market can be very unforgiving to the novice and inexperienced. However, even the most prudent and conservative “investor” has felt a wave of envy and greed wash over them while looking at their blue-chip investment going no place while some unheard-of issue goes up 40 percent in one day. That’s normal.

The next day, the “investor” suddenly becomes a “player” or “punter.” They saw how easy it was to make a huge profit in three hours and want to get onboard. We have all been there.

Short-term stock trading might mean a few hours or a few days. I must admit there is probably no greater financial high than seeing that stock you just bought explode to the upside.

While I will continue to explain with the highest degree of concern for your financial safety that short- term trading is not for the amateur, nonetheless, I will share with you some of the techniques you might want to use to avoid getting bloodied and broken. So fasten your seat belt and hang on.

Let me start by saying that the dominant emotions of the stock market—greed and fear—are what drain the life out of most beginning “traders.” Greed keeps them in the stock after it has reached the daily high and starts the trip down. Fear is what takes them out at the bottom just before the stock price shoots up.

The way to overcome the greed and fear syndrome is to write yourself a note and put it in front of your face: “Prices do not go in one direction forever.”

We are fortunate on the Philippine Stock Exchange to have a proportionally large number of issues that offer very large trading opportunities. It is not that the market is manipulated. It is not a conspiracy by the “Old Boys Club.” It is because there are thousands of active traders in the market going after stocks that have a relatively small public float or number of shares outstanding.

If you want to trade the market this way, you need to devote time, which means setting up an online stockbrokerage account and sitting in front of your computer from 9 to 12 noon. Otherwise, you are going to spend all your time on the cell phone with your stockbroker. Besides, day trading is a profession, not a hobby.

Usually these issues have a three- or four-day run of excitement and you need to see how the issue trades for one day to learn its rhythm before you get into the action. If it turns out that the issue you watched flying yesterday and bought today suddenly goes back to sleep, get out of it quickly. Otherwise you might be sitting on, not a high flyer, but a dead duck. I know. I am famous for finding the ducks.

During the pre-open phase of the market from 9 to 9:30, buyers and sellers begin posting their orders but the real action takes place around 20 minutes after 9. You will suddenly see that 50-centavo priced stock ready to open at P0.60. Note this about the opening price.

If the price rises 5 percent or more during early trading and it will generally fall off or stabilize after about 30 minutes or so. Usually though, the price falls back a little after the initial run higher and that is when to get in. You want to buy during the “quiet” times.

Each issue has its own rhythm. Remember that. You need to identify how the stock moves up and down during the three hours of trading. At some point the price will rise high enough to bring in sellers that might take the price significantly lower than the day’s high.

After the major profit-taking period, there will be a time when things slow to a crawl. Another buying opportunity.

The last hour of trading is when things get tricky. Two scenarios will unfold. First is another run to a daily high, then a sell-off followed by a strong close that you can sell into. The second is a move to a new high followed by a sell-off that does not recover to a last push higher. That second event is why you do not get greedy.

Do you hold for day two? Probably not. You want to sleep tonight don’t you?

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