Monday, January 16, 2012

Some fallen stars...

The vast majority of investors operate solely on the long side of the market, looking for good growth stocks, with promising fundamentals. After a while though, those stocks plateau before drifting downwards, or alternatively there is a sharp plunge when the company announce a sea change in the fundamental picture (think Enron). Just looking through a number of charts and there have been quite a number of stocks that shot up massively during the last year or two in percentage terms, only to have fallen right back down to earth.

Just three of those one time big winners in the UK, with the signals indicated by my longer term system:

Pursuit Dynamics - buy at 74p, exit at 407p - currently at 95.5p;
Beowulf Mining - buy at 3.2p, exit at 44.5p - currently at 10.4p;
Arian Silver - buy at 8.2p, exit at 37.5p - currently at 15.4p.

I can also think of plenty of US stocks that I have traded myself in the past that have done this, only to fall dramatically - just look at charts of stocks such as First Solar, DryShips, and James River Coal back in 2007 - 2009 to name just three.

Other stocks that are no longer with us, such as Southern Cross Healthcare and SMC Group also exhibited the same characteristics.

There are other stocks such as Google, Apple, Baidu and the like where a sound trend following method would have allowed you to capture significant chunks of the upwards move in price, and neatly sidestep the sharp downtrend in late 2008/early 2009.

Of course, if you have the ability to go short (perhaps trading via spreadbetting or CFD's) you can also profit from the often violent downtrends. One only has to think of Northern Rock and RBS (or pretty much any bank) as examples in 2008, together with countless others.

Investors are often wary of playing the short side of the market, because of the possibility of a sharp reversal, and the fear of having unlimited risk. The fact is, stocks do not always go up. As I've said before, even the strongest stocks fundamentally are likely to get hit in a bear market. Quite often, you can make more money in a shorter period of time if there is a pronounced downtrend in the general market, such as 2008, or the end of the dot com boom in the US. If you are a UK resident, trading via spreadbetting on a platform such as IG Index (who offer guaranteed stops on the majority of stocks) means you can profit from the down times while being able to fully quantify your maximum risk at any time. And spreadbetting carries the added bonus that, under current UK legislation, any profits made are exempt from Capital Gains Tax.

There are always stocks exhibiting these types of moves - as I have said before, the trick for investors is to have a clear plan as to when to sell, and maybe even looking at trading the short side. The thing is, no one knows when the music will stop and the party will end. You need to ensure that you avoid being caught in a downtrend wondering when to sell, or whether to hang on.

Think of it as going to visit the hallowed area called 'Profits' on the top floor of a building. You get in the escalator at the bottom. The escalator travels slowly upwards, until you reach your destination. The bell rings to signify you've reached your exit point, and you get out - it would be a bit silly not to. It is exactly the same in trading and investing - you need to get out when you get a signal. You've been patient on the way up - make sure you've got out before the escalator starts going down again.

Utilising a sound trend following method such as described in my e-book or which is discussed in the members area gives you the best opportunity to maximise your profits in these stocks in either direction, giving the share price space to wiggle around and ensure you are not kicked out on a minor reaction, but not too much so that you lose the vast majority of your profits.

To learn more about spreadbetting with IG Index, click here.

No comments:

Post a comment