Big THANKS to regular Reader Jim (that’ll be the prunes, mate) who gave me the idea for this Blog during an email discussion we were having. In essence we were discussing how I go about timing my Buy Trades (please note, this Blog doesn’t really address Sell Trades although at the nub of it they will be partly the opposite in practice), and it struck me that this was a great subject for me to drone on about and that many Readers might find it helpful (especially if insomnia is your particular affliction).
Breaking with my recent lazy tradition of just ripping into my Blogs and hitting the keyboard from a blank sheet of Microsoft Word, I have actually done a Plan for this one and as a consequence you might notice a little more structure. This is exemplified by me having a section that talks about the Principles behind my Buys and then a section that goes into the Practice of actually doing it.
I have been meaning to get on with writing this Blog for quite some time now but for various reasons (mostly good old-fashioned procrastination and farting about), I have been putting it off but at last I have to bite the bullet and get it done.
My interest here is to look at the Charting (Technical Analysis) factors which surrounded the eventual Bottom when the Markets floored out in 2009 before that monster Rally of 11 years or whatever it was. Of course we will struggle to find Signals and Indicators that point to precisely where the Bottom is (I may use the term ‘Proper Bottom’ for this because I am sure we will have lots of little Bottoms on the way to actually reaching the final one), but I think many Readers will be surprised by what I dig up here and the implication is that we can use some pretty basic Technical Indicators and Tools to help us ascertain the Proper Bottom.
I am sure that in much of my scribbles over the years I have touched on the subject of ‘Over-thinking’ but perhaps not really brought it all together in one blog that hopefully puts the subject nicely to bed. The essence is that I get a strong sense that I have spent many many years learning things about Stocks and Markets and Investing and Trading, and all the related stuff, but it is only in more recent years that I have been actively trying to ‘un-learn’ much of the stuff I know and be a lot more basic and elemental in my approach.
Less is More.
Keep it simple.
Complex is bad.
As always, if you have not endured Part 1 yet, you really should read it first or none of this will make any sense (I am not guaranteeing that it will make much more sense even if you do read Part 1 but at least you might have a fighting chance) and you can find Part 1 here:
In Part 1 I outlined why “You can’t time the Markets” comes about, but what are its flaws?
I strongly recommend that you read Part 1 of these Blogs before attacking this chunk - otherwise it probably won’t make a whole lot of sense and it is really key that you understand what is meant by Upside Breakouts and Consolidations in particular. You can find Part 1 here:
The Stages of the ‘Trading Bases’ Approach
Right, you need to concentrate for this bit. If you are a bit jaded - you know, big night on the Fevertree and Gin last night or ‘too many beers’ (yeah, I know that is impossible but I‘m sure that never stops you trying to find the limit) - then go and get a stiff Black Coffee and take some deep breaths to get mentally and emotionally focused.
I must have had this Blog in mind for the best part of three years and the simple concepts within it I have explained to various people in the Pub many a time since I first figured out what Jason @Stealthsurf was up to. What had stopped me writing it up until now was an inability to figure out how to ‘draw’ it and it was only after mucking around with Microsoft Paint to do those ‘Mechanics of a Trade’ Blogs that I realised I had found a tool to enable me to create what was needed here.
OK, I have to admit that despite my truly remarkable MS Paint talents, some of these pictures can hardly be called a Rembrandt or Van Gogh (and I have both my ears thank you very much !! …….or I did last time I looked in the mirror…..) but hopefully they are clear enough and simple enough to get the key points across and to provide Readers with either an entirely new way to go about doing things or at least to give a lot more appreciation of ‘Break-outs’ and how this could help boost their Trading/Investing Returns.
This Blog Series covers some pretty complicated stuff and I recommend that you read Parts 1 and 2 before you attack this one - you can find them here:
Example 3 - You want to buy 3 Shares in Company XYZ - a ‘Tree-Shake’
This next situation only tends to happen on Small Stocks which are illiquid and where the actions of one Market Maker can affect the Price - on a large and liquid Stock, this kind of thing simply cannot happen as in effect it can throw up an arbitrage opportunity where another Market Maker can take advantage of the artificial Price move and in addition such big Stocks are watched by Traders in general for every tiny move and any mis-pricings would be quickly bought or sold away.
This subject is quite complicated so if you have not read the first Part then it is probably best to look at that first - you can find it here:
Example 2 - You want to buy 3 Shares in Company XYZ but this time you use a ‘Limit Order’
The basic Assumptions are as I listed at the start of Example 1. This time you still want your 3 Shares in XYZ but because it got kicked back at you in Example 1, you have decided to use a Limit Order through your Broker, where you indicate a maximum Price you are prepared to pay for the Shares. For this one, here are the steps as your Order flows through the various Processes:
This is such a strange time for me on the Markets - I guess maybe all Summers are a bit like this but I seem to be doing less with regards to my Stocks and my Investing stuff in general than I have done for a long time. The reason behind this is really that I have no interest in buying anything at the moment and I am happy to just let my Stocks do what they are going to do and in the meantime I will get out and make use of the Sunshine (when I can because obviously in mid-afternoon it is crazy hot some days and it is hard to do anything) particularly with regards to sorting out my BMW‘s paintwork.
Fortunately I have made great progress on the Car and now I have just a bit of Lacquering to do and then I have to wait for about a Week before some areas I have painted and lacquered can be T-Cutted and Polished to get them nice. I had a bit of a result today because I did some painting on the Front Bumper a few years ago (the opposite ‘end’ to what I have been repainting lately) and it has looked very rubbish for a long time. I was looking at it and it occurred to me that if I got the T-Cut out and put some work into it (and my goodness it is really hard work when you are polishing by hand in this heat !!) then maybe it would look better. Anyway, I got stuck in and now it looks really good - it is about 9/10 and I am so pleased. Why the hell didn’t I do this a few Years ago instead of just looking at it and thinking “Flippin’ ‘eck, that Bumper looks cr*p”? - classic ‘Learned Helplessness’ psychology !!
I often get ideas for Blogs from various chats on Twitter and this one has come about in this way, and it also has the added bonus of being sort of linked to the recent lengthy Blog Series I wrote on ‘Wheelie’s New Improved Index Trading System’.
We were having a debate about what drives Indexes in terms of Price Rises and Falls etc. (I think it was with @Old_Man_Trading who is really hot on the TA stuff and well worth following on the Tweetster) and I put forth the idea that to a large extent we cannot know what is driving them as there are simply too many factors involved. To illustrate this, let me start off by listing things that might be drivers, and note they can probably be broken down into a few Headings:
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