Stocks & Bondage


If you give a man a fish, you feed him for a day.  If you teach a man to fish, you feed him for life.

I dabble a bit in the stock market.  I do OK.  You can too.  Here is some advice, pointers and words of wisdom. This is all theory, as is most of what we use in science (or life for that matter.) Theories may be wrong, but still useable.  Look at Newtonian physics.  Does not quite work out, but it is close enough for most things.  So the theory may not be correct, but it is still useable if we can draw conclusions from it that will match our observations and make predictions.  Ahhh, predictions:  that is the key to the stock market.

An old friend of mine that I lost touch with told me that the stock market is like an airplane (he had over 10K hours flight time.)  It takes power to keep it level.  Cut the power and it will come down all by itself.  That means that there is an underlying force pulling the market down.  Remember that.

There are technical people and fundamental people.  The fundamental people look at a company and say, humm, good PE, solid product, good management, on time shipping, etc.  I think I will invest in this company.  Then they buy the stock and sit around waiting for it to go up.  Technical people (like me) look at the charts of the stock price, volume and technical indicators and say, humm, looks like this stock is going up.  Think I will buy some.  Right now, the popular trend seems to be fundamentalists (as far as the market goes.)  Personally, I much prefer the technical aspect.  Look at it like this:  Using technical indicators, you can identify trends that all the fundamentalists have thought of and convinced themselves of, then use those trends.  And it really does not matter if the fundamentalists have chosen right or not.  What matters is that you make the right call and make money, right?  Who cares if the company is weak or has delayed shipping if you ride it from $5 to $20, right?  The key is to look at the chart and say, hey, that $5 stock is going up, then when it gets to $20 say, bail out time.

Here are some links: You need to learn to read stock charts. 

Herm's page.  You need to download his free WINS tutorial and memorize it.  Read it and read it again until you thoroughly understand it.  Herm deals primarily in covered calls, which are a nice solid safe way to make at least 4% per month (not per year like the bank gives you.)  Once you understand the indicators, pay particular attention to "side shows."

Silicon Investor Here is a chart of GM with the settings I like to use.  You can bookmark this chart, then just change the symbol at the bottom and look at other stocks.  SI also has real time quotes and historical data, as well as message boards.  The real time chart service is very nice, but it costs you about $35 a month.  I think it is well worth it.

You need a source of real time stock quotes.  I use Raging Bull.  Real time quotes are free, but you have to register.  When a stock price moves, it moves before the suckers, er, rest of the world without real time data can find out.  If you are looking at 20 minute old data, it is ancient history.  

Another good tool is Datek's real time streamer.  It is free, but requires registration.

You will need an online brokerage account.  I use Dreyfus.  They will trade stocks for $15 each way, and options for $1.75 a contract, $15 minumum.  But, you say, the other ones advertise $6 trades.  Well, yes, they will trade for $6, but only a sucker would do that.  Their $6 trade is only for a "market" order.  That means you tell them "buy me 100 shares of XYZ" and they buy you 100 shares, at whatever the price is when they buy it for you.  What you want is a "limit" order, which says "buy me 100 shares of XYZ at a price of 5-1/2 or better," otherwise you can get seriously burned.  The $6 trade people charge you a lot extra for a limit order.  You also want an account set up to trade options, so when you set up your account, make sure that they give you option privileges.  

When you trade, trade in 100 share sizes.  Don't trade odd size lots.  See, the guys on the floor doing the trading have one thing in their head:  How can they rip you off and put your money in their pocket.  If you understand this, you are already one step ahead of everyone else.  You have to work around this or with it.  So, they have two orders in front of them:  Buy 100 shares xyz at 5-1/2 and buy 87 shares of XYZ at 5-1/2.  They look and see an order to sell 100 shares of XYZ.  Guess what order gets filled?  The no brainer.  The order to buy 87 shares will have to wait until someone wants to sell some odd lot sizes, and/or the price is moving against you so the floor guy can put the other shares in his pocket and make money on you.

Here is an example of what not to do:  A good friend of mine looks in the Sunday paper.  Big Drug Company is listed prominently in the financial section for having a good PE, new drug coming out, well run business, etc.  Humm, he says, think I will buy me some.  The stock was trading Friday at $45.  So, he goes to his computer and puts an order in:  Buy 65 shares of Big Drug Company.  Well, the next morning, guess what happened?  Everyone in the country read that newspaper article and decided to buy them some too.  Big Drug Company stock goes up to $80 first thing, and the floor traders look at my friends buy order and laugh, Sucker!! and sell him 65 shares at $80.  The stock promptly drops to $60 within a half hour or less, and my friend is out $2300. 

What went wrong?
1. He entered a market order because it was only $6 and limit orders cost more.  $2300 buys a whole lot of extra commission to make sure you get what you want and to protect you incase something goes wrong.
2. His order was for an odd lot size.  This further raised the "sucker" flag for the floor traders.  Combine this with the market order and you are just asking for it.
3. He read the newspaper and believed what they told him.  By the time it gets in the Wall Street Journal, it is beyond ancient history.  By the time it gets to the regular papers, forget it or think seriously about doing the opposite.
All this put together is a sure looser play.  The smart thing would have been to look at the stock charts, watch it open at $80, sell it short, buy it back 30 minutes later for $60 and make $20 a share in 30 minutes.  Of course, hind site is 20-20, but you can count on the fact that somebody did just that.  Why not you?

It is important for you to realize that you can call the stock price/move correct and still lose.  Timing comes into play.  After you learn to read charts, you need to practice trading with paper money.  Look at a stock and ID a trend.  Look at the bid/ask price on Raging Bull and place your paper trades at whichever is most against you (buy at the ask, sell at the bid).  Keep a close record of your plays and analyze errors.  Do this until you are comfortable, then start playing with real money.  Start small with the real stuff.  All the paper trading in the world is not the same as looking at real money.

OK, that is enough for today.