Ten Top Trading Tips

There’s three steps to heaven, seven deadly sins, and fifty ways to leave your lover. But according to Clem Chambers’s new book, there’s 101 Ways to Pick Stock Market Winners. He agreed to explain 10 trading ‘Ways’ -:

People have different ideas on trading. To some, trading is buying and selling within seconds or minutes. For the day trader, naturally enough, trades last up to a day. Spread betters will tell you successful traders tend to hold positions between weeks and two/ three months. Here, I have put together some ideas that cover ten ways to trade somewhere along this spectrum.

  • Dud IPOs

For years initial public offerings have been infrequent and variously over-priced. It’s a vicious circle: IPO launches onto the UK market; it falls and puts everyone off the next one. It’s a rare IPO that doesn’t fall badly after launch.

This is because the bank floating the company relies on its position as an important financial supplier to stuff pension funds with over-priced shares.

What is does mean is you can short a UK IPO and watch it fall away for a fat profit. The only thing to watch out for is a big pre-IPO cut in the IPO price. If this happens then perhaps the price will be right and there’ll be a post-IPO rise. An IPO that’s had its price cut back is likely to zoom, so make sure you check the pre-IPO story.

If the IPO has come to market peacefully the after-market is liable to sag. As soon as a new IPO starts to falter, it’s time to think about going short.

  • Dead Cat Bounces

A dead cat bounce is the temporary recovery of a share that has fallen heavily. It’s a technical recovery caused by too much panic selling. This bounce is packed with profit if you can time it right, but it’s notoriously tricky to trade.

Most trading courses tell you to avoid trading a dead cat bounce like the plague, saying: “why catch a falling knife?” Why indeed? The reason is simple: because no one does, there’s money to be had.

When a stock takes a big knock in the news, the share price very often falls off a cliff. It’ll then bounce back a bit because the panic of the news is often an overreaction

The idea is to catch the recovery. Don’t catch the falling knife. Let it hit the ground, then wait for a day or two, then buy in. However, judging when a stock or an index has hit bottom is a particularly hard task, even for professionals. Just mention the name Marconi to any spread better and watch the blood drain from their faces. Even with stop-losses in place, your remaining balance can be severely hurt by such sudden shocks and too many of these can leave you facing an unwelcome margin call.

The delay between fall and bounce changes with market conditions, so it’s a good idea to keep track of collapsing shares and measure the delay from slump to bump. With this in mind you can get in for the dead cat bounce. The key is bailing as soon as it’s bounced for two or three days. While some bounces keep going, many collapse again. Trade solid companies rather than inherently risky ones. However once you’ve tried the scheme on good companies you can stretch your reach a little. As a high risk/reward trade you should keep your position as a tiny proportion of your capital.

  • Boxing Clever

When shares really take off there’s a lot at stake: huge profits or lost opportunity. Without hindsight it’s hard to know when to hold or fold when a stock is rocketing.

In the 1950s, speculator Nicolas Darvas wrote a book called How I Made $2,000,000 in the Stock Market. His main trick was to put a box around a share’s trading level and use the top and bottom level to indicate whether the rise was over or not.

If the price broke through the upper bound of the box it was a buy signal, if it broke through the bottom it was a sell signal.

It’s primitive but effective and certainly helps traders hold on and have a stop loss system which is easy to follow.

  • The big W

The big W makes me a lot of money. It’s simple, powerful and very few people use it; which is why it probably works. If you think about fundamental patterns, the basic ‘down up’ move is a V shape. The next level of complexity is a W, down, up, down up. With any large fall you can imagine a little hesitation is often in order.

Look for the last leg of the W before jumping in. The bottoms of the W also give a nice steer on the bullish or bearishness of the long-term trend. A higher second V is bullish and a lower one bearish. When trading short-term moves, if you see a W forming you are presented with a good map of what happens next.

  • Read through

An airline just released its profits, they are way down. It doesn’t take a genius to guess other airlines are in trouble. Likewise an engineering company has a great year because the pound is weak and its products, which sell in dollars, are suddenly cheap, making fatter margins.
Again it doesn’t take much brainwork to realise other engineers might be going great guns. This is called ‘read through’.

There’s often a delay, sometimes seconds, sometimes days – depending on the news. However as soon as company A hares off, if you know the linked companies B and C, you can jump onboard.

  • Those Darn Wildcatters

Oil exploring companies have a cycle: Dormancy, price eruption, collapse, dormancy…

You can trade this cycle. The key is to find such a stock before its price has exploded, buying before it’s the next darling of the market. This involves ploughing through a lot of company information to find a candidate for the next rocketship; remembering that it will at some point re-enter the atmosphere in a flameout. Meanwhile you can try and catch the never-ending cycle of volatility oil and mining companies are doomed to follow. Don’t get hooked.

  • RNS Alert

Most RNS, the stock exchange’s news service which updates the market on company news, is released before market open or after market close. However sometimes it’s released during the day. This kind of news will move the market a long way. If you’re fast enough you
can jump on a rise before it’s finished. It’s therefore a good idea to keep your eye on it.

Conversely if a share suddenly takes off to the moon during the day and there’s no RNS, chances are a rumour has hit the market, something like a false takeover story. If the cat’s out of the bag, the company must respond. The longer the silence after the price spike, the more likely the rumour is false. As a trader you can sit and wait until enough time has elapsed to suggest the rumour is unlikely to be true. When the price starts to fall away you can short the share and ride the price down.

  • Constant Gainers

A company that keeps sneaking up every day is a no-brainer. Someone is clearly buying.

Constant Gainers is a particularly useful ‘Top list’ on ADVFN. This list contains companies that have been going up day after day, from three days in a row upwards. In a good market some companies can rise for two/three weeks in a row.

A good share to look for is one that’s inching up, rather than zooming. Zooming up isn’t bad, it’s just that a company that’s being snaffled up sneakily is more sexy than some skybound stock on its firework trajectory.

If, when you look at the stock’s chart, it’s going up steadily without much volatility this is a super candidate for you to examine further. A lack of volatility is a sign of certainty and purpose. You can of course turn this on its head and look for constant fallers.

  • Buy Rumour, Sell Fact

This is an old investing maxim. It’s good for traders.

A trader will latch onto the undertow of a rumour and sell out just before the confirmation or otherwise of it. Rumour drives the price up and news ends that trend. The price action is in the sizzle not the steak. So when you trade, for example, a company about to have good figures, you sell the day before or as soon as the news breaks. Even good news can make the price fall as the reality is unlikely to be as tasty as the imaginings of the rumour.

  • Use all Available Tools

There are over 2000 stocks in the UK. Their size ranges from a total value of £300,000 to £118 billion. You can make as much money from the tiddler as the giant.

When considering buying a stock, do not use a single signal to do so. Use your half dozen favourites. Make sure your selection process has as many cross references as possible.

I take my favourites, look at a list of prospects and mark each stock out of 10 for each criterion I’m looking for. I then add up the scores and pick the top stock.

You can’t have too many tricks to trade the market. To do well you need to build up a tool kit and apply the different parts to the right opportunities.

Trading is a tough game but the prize is great.

Clem Chambers is CEO of ADVFN, a leading financial information website for investors and traders.