My analysis is pretty much influenced by books I have read (what else can it be?).
Initially, there was a lot of trial and errors in the previous market cycle, and in the end I paid the “school fees”.
Fundamental analysis seems like a cool concept for a novice like me. After all, companies with good fundamental will have good earnings and that will drive the price up.
How wrong was I! Market sentiments is such a powerful force that in a panic, everything will be sold down.
Luckily, I started to realise this before the Financial Meltdown. The Day of Enlightenment came during the China Aviation Oil saga. During the ride up from 50 cents to over $2 and then down back to less than $1, I basically saw my 5 digit profit turn into a $24 profit. My buy and hold strategy shows that I am seriously wrong when being in the market is all about making profits, and not about 2nd guessing which is the next big thing. Even “fundamentals” can be forged by creative accounting.
There were a couple of mistakes made along the way which relies on fundamental analysis, all of which are useless if there are no buyers to move the stock up. During then, my strategy is more pre-emptive rather than following the market.
It is then that my friend recommended books about Jesse Livermore to me that I begin to gain a better insight on how technical analysis can help fine tune my stock selection based on fundamental analysis. Usually price chart will be the first to reflect any changes in fundamentals. When the news reaches us, it will already be too late.
One very important thing to keep reminding ourselves is to remain humble because the market always win. Be ready to admit being wrong when the market moves against you.
Since the China Aviation Oil saga, I have been out of the market. I have started to apply trend following in my analysis from 2006 to 2008. During the 2008 downtrend, I constantly reminded myself of Livermore’s adage of “What goes lower will go lower”. Equipped with this “principle”, I was not fully into the market till Dec 2008.
Until recently, I have come across articles by Darryl Guppy in The Edge, and has taken a keen interest to GMMA. After seeking high and low for his book Trend Trading, I have begun to appreciate more what GMMA can offer. This has further helped me to fine tune by trend trading tremendously. Looking back, using GMMA, my entry in Dec 2008 is still considered too early. The signal came clearly in March. That could have saved me 3 months of risk of being in the market.
And now, in an uptrend the following is true. “What goes higher will go higher”.
Selection Criteria (Filtration order)
1. Look at indices on overall market movement to get a feel of market sentiment.
2. Go for hot sectors. Especially, in a recovering market, certain sectors will be the market leaders. It will be heart wrenching if the stock selected is in a laggard sector and you see the other sector stocks fly.
3. Go for stocks which are cash rich or are the big players in the sector. Such stocks usually will not give you a nasty surprise. This is evident from the recent host of rights issues at a discount by alot of cash strapped companies.
4. Stock must have reasonable volume. In a bullish market, stock should have high volume on up days, low volume on down days. The reverse is true.
5. Stock chart should display strong uptrend characteristics.
6. Use GMMA to further confirm trend. Especially useful if trendline is broken in a volatile market. GMMA will show whether the break in trend is only temporary. This will prevent false exit or entry.
7. Support lines can be used as a cut loss point. Likewise, resistance can provide a good exit point for short term trading. Look to re-enter or accumulate more if it closes above resistance.
8. In an extremely volatile market, CBL can be used to determine entry or exit.
9. 2% risk is used to position size and stop loss.
10. Ride the winners, cut the losers. What goes higher will go higher. What goes lower will go lower.