My Trading Philosophy and Why I Use Technical Analysis

As a tribute to the Thanksgiving Holiday, I thought I would share with my readers the trading philosophy I have developed over the years.   It is based on my 40+ years of experience in the market and the insights achieved from my voracious reading about the market during that period. My philosophy is based on my interpretation of   such great market seers as Darvas, Weinstein, O’Neil, The Turtles, and of course, the greatest trader, Jesse Livermore. (The books written by or about these persons appear in the lower section of my blog).   Anyway, I hope you find these propositions useful and would value your additions and comments. A version of these remarks was published under the pseudonym Sir Silent Knight, as part of the Worden TC2007 daily journal.

Dr. Wish’s (Sir Silent Knight’s) Trading Philosophy

Proposition 1. The stock market and stocks are unpredictable

No one can consistently predict changes in the market or stocks. Human behavior is largely unpredictable and no one can predict world and economic events or the reactions to them. Similarly, corporate events and news can be inaccurate or intentionally misleading.

Proposition 2. However, stocks and markets often continue in trends that can last weeks or months or longer.

Trends form identifiable patterns, probably because humans react to trend patterns in repeatable ways. For example, people often trade off of support or resistance levels or at new highs or lows. While trends can be discerned once started, their length and continuation are also unpredictable.

Proposition 3. Given Propositions 1 and 2, one’s success in the market depends on identifying trends once they have begun and staying with them until they end.

But if the length and size of trends are unpredictable, each trade may or may not work out; the likelihood that any given trade will be profitable is unknown. Some successful traders have asserted that only about 50% of their trades are profitable.

Proposition 4. If only 50% of trades will be profitable, then to prosper, the profits from winning trades must be considerably larger than the losses from losing trades.

One can accomplish this goal by limiting the losses on losing trades and by maximizing the profits on winning trades. One can limit losses by setting stop losses and by making small initial trades. One can increase profits by riding the trend as long as possible AND by systematically increasing one’s position as the trend continues.

Proposition 5. Given Propositions 1-4, trading success is mostly determined by one’s strategy for exiting the trade rather than the strategy for entry.

Since one does not know at entry whether a trade will be profitable, one could probably select stocks at random as long as losses are kept at a minimum and profits are maximized. However, systematic entry and exit rules based on technical analysis can improve the likelihood of a profitable trade. For example, most stocks follow the general market’s trend, and trading consistent with that trend can enhance one’s likelihood of success. Nevertheless, given the considerable uncertainty accompanying all trades, the highest priority must be given to the rules for exiting the trade. If one enters each trade assuming that it will fail, one will be better prepared to handle losses.

It is the trader’s job to use technical analysis to develop trading rules that function consistent with these propositions. My blog, wishingwealthblog.com, documents my pursuit of this goal.

Happy Thanksgiving!

Why search for individual stocks when we can ride the ultra ETF’s?

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It is rare that I complete an analysis whose findings totally surprise me, but take a look at this one.   A lot of the pundits claim that the ultra ETF’s,   leveraged baskets of stocks that try to double or triple the performance of their underlying indexes or sectors, fail to achieve their goals.   So, just to satisfy my curiosity, I compared the performance of the primary index ETF’s, SPY (S&P500) , DIA (Dow 30)   and QQQQ (Nasdaq 100) with those of the leveraged ETF’s.   There were exact comparisons for these indexes for   the 2X ETF’s, but I had to choose other, more general   indexes for the 3X ETF’s. The results blew me away…

The 2X and 3X Ultra ETF’s absolutely outperformed the standard index ETF’s in the period since the March bottom.   For example, while the QQQQ (Nasdax 100) index ETF rose 42.9% in this period, the QLD (2x QQQQ ETF) rose 99.2% and the TYH (technology bull 3X ETF) rose 179.4%.   In comparison, the top five individual stock performers in the Nasdaq 100 stocks rose from 138.8% (JAVA) to 180.57% ( STX).   In fact, only 16 stocks (16%) in the Nasdaq100 (and 23% in the S&P500) rose 80% or more.   So, the choice before us is to   search for the needle in the ultraetfperohaystack individual stock that might do really well in a bull rise, or to buy one of these 2X or 3X ultra long ETF’s and ride a basket of stocks with a lot more diversification and probably less risk than owning individual stocks.   The key is to discern the trend accurately and to then ride the ultra ETF with the most potential for following that trend.   Some ultra ETF’s also trade options…..

Read moreWhy search for individual stocks when we can ride the ultra ETF’s?