Author: Lee TG
I have been doing a lot of reading on trading, charting, and watching youtube videos on technical analysis for the last few months. I have also observed closely many stocks from the mind and eye of a technician and fundamentalist in recent weeks. The learning experience resulted in some essential lessons that I would think important for active trader or active investor in the KLSE Stock Market. The importance of the lessons has no specific order, and not all the lessons apply to every trader.
Lesson 1: Know yourself
Decide what type of investor or trader you are and what trading style that you may want to adopt - day trader, swing trader, trend trader, or position trader. This decision may come after some time later in the stock market, but with this note, you may try to have an earlier decision. But some investors may not really know who they are or what trading style they want to adopt, thus they are not focused. The style of trading depends very much on individuals, the risk aversion, the financial capability and the time available for trading and information gathering.
Lesson 2: Acquire the essential knowledge
Technical analysis and fundamental analysis are important trading tools. For profitable trading, skills in technical analysis is a must to time entry and exit points, and financial and economic knowledge are useful to reduce stress of trading, but need not be in depth. Learn to acquire the knowledge and skills of technical analysis as the first priority. Having the skill in technical analysis will surely increase your confidence in trading as well as reducing fear and increasing greed to your advantage.
Identify the basics of technical analysis, and master only the basics. Do not get confused trying to learn every technical tool, or distracted by too many technical tools that some other experts may introduce. Know the fundamentals of the stock in the stocks your trade, and that includes forecast of likely short term development. Keep your technical system simple, as complicated systems will only confuse yourself.
Lesson 3: Focus only on a few at one time
That is the Pareto Principle on focus in managing anything. Do not over diversify - focus (stock in position) on not more than 3-5 stocks at one time even if you have large capital for trading, because you will not have the time to monitor your stocks both fundamentally and technically, and news that may have impact of the stock price. Put heavy positions on the stock identified for entry. Once in a position, monitor the fundamental changes from at least the quarterly results, and technical changes from char. Don’t make small investments, unless you are only testing on certain tools or technique or strategy. With limited capital, f you’re going to put money at risk, make sure the reward is high enough to justify your time. Be patient to sideline, if you have cash, but find no stock that you can pick for a low risk high probabality entry.
Lesson 4: Differentiate yourself from the herd
Do not let herd sentiment rules your emotions. Be one of the 5% winners, and not to join the herd as losers. If you are focused, having the skill of both fundamental and technical analysis, be confident and only trust yourself and not be influenced by others who may be experts. Do not follow the herd in panic selling on bad news or involved in chasing stocks during the time of euphoric buying. Take time to assess the fundamentals and the chart before taking an action on entry or exit in any stock you hold.
Lesson 5: Never use Broker's report in your buy or sell decision
Never follow analyst reports from brokers in making a trading decision, and do not trust tips from remisiers or from anyone, including insiders. Analyst reports are good sources of knowledge on a company fundamentals, as well as knowing the developments. But the timing is completely wrong in making an investing decision because it will reach you much later, while the big ones in the market already got the information much earlier. It often takes at least a few days or possibly a few weeks late when the reports come to ordinary retail investor. Remember brokers who feed you the information are market makers and market movers, and not all research companies are completely unbiased, and remisiers and brokers are often proxies in accumulation and distribution activities, and they may serve their big clients, but not the retail investors. Often a report suggesting a buy, the time probably coincides with the time of selling by those big boys, and the reverse is also true. Never completely believe an expert talking about fundamentals or technicals. but try to watch to check what they talk about really works.
Lesson 6: Never, under any circumstance, add to a losing position for a liquid stock
Don't test this lesson, or you will lose. Just take this lesson as a golden rule. Instead of adding to average down., always look for reasons to exit, and look for the volumes to give you the hint whether to hold on or exit a losing position. A good reason to exit or not to add a losing position is the principle of capital preservation. The chart should tell you the signals and help you to make the exit decision. The only exception of adding position to a losing position is when you have identified and holding an illiquid stock as a long term investment, and the volume is very low. Often these stocks are held by fund managers who do not trade their stocks based on technical, or these are the stocks firmly held by the major shareholders. Add position for strong fundamental stocks during low volume sideway range trading period, or during the beginning or breakout, or retracement to support after breakout.
Lesson 7: Execute a trading action plan that consists of entry set up, stop loss and exit target, and position size The plan should have at least the reason why you select the stock, the characteristic of the stock, what price of entry, and at what setup that you will enter, the size of trades, what to do if you are wrong, and when you would exit the position. When exit target is reached, review the target, and if necessary ride on the trend from the chart by setting a new higher stop loss, or even add your position on a retracement. It the market turns out differently from your expectation in the plan, look for reasons to exit even before the cut loss number, and exit earlier than your stop loss, because you know that the entry set up had not worked according to what you had earlier expected.
Lesson 8: Never look at a stock based on the price.
A RM10 stock can be of much more value than a 10 sen stock. The price is only relevant if you have small capital for trading. Note that are reasons why a stock at 10 sen par value turns out to be priced at RM10. Similarly there are reasons why a RM1 par value stock is priced only at 10 sen. The fundamentals and investors sentiments are already built into the price. Just look at the stock based on any change in fundamentals and investors sentiments on the stock.
Lesson 9: learn the rule of thumb in price and volume
High volume and big price bars at the uptrend is a signal of weakness in the stock, and very likely it is at the stage of distribution. Conversely high volume and big price bars in the downtrend is a signal of strength and an impending reversal of trend. Note that a stock will fall faster than it rises. You have more to lose than gaining if you do not follow this rule of thumb.
Lesson 10: Think like a fundamentalist; trade like a technician.
It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. Always act with technical signals, rather than fundamentals, as the price has already factored in any fundamentals. Many knowledgeable and institutional investors have taken early actions that make the chart look as what retail investors are seeing.
Lesson 11: Trading liquid stock, investing illiquid stock
Trade liquid stock based on fundamentals + technical, but technical analysis does not apply for illiquid stock because of the absence of volume. Once you have bought an illiquid stock, it will be long term investment, and therefore the consideration will have to be on dividend payout.
Lesson 12: Be intellectually competitive.
This involves doing constant research on stocks you pick to make you money. If you have no knowledge on fundamental analysis, learn some basics, or get the reports from reliable analysts. Note that past performance does not guarantee future performance. The skill of forecasting the future of a stock price can be acquired by knowing the stock price volume behaviours very well, as well and the potential in fundamental changes in the near future. The past performance has been already factored into the price chart, and what is really important to gain an advantage is your ability to look into the future from the limited information your get. When looking for data or information that may not be complete, try to sense a major change that may come in future before anyone else, and thus able to act before anyone else, and if you are right, you will be a big winner. Always find a lesson to learn a success or failure from the trades
Lesson 13: Never completely take wholeheartedly believe viewpoints from anyone even if the person is an expert. Learn a bit of essential knowledge and learn to use your own brain to analyse what you have read.
Different people have different trading rules, choose what are best for you. My 13 lessons are merely a guide for traders who are confused for them to learn something to clear their confusion. Perosnally I may also review and change the lesson content as I move on with more experiences of successes and failures in trades.
Sun Tzu says:
"If you know the enemy and know yourself, you need not fear the result of a hundred bttles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle."
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