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Resident trader
Secrets for Profiting in Bull and Bear Markets
Will Kraa, March 12, 2007
This classic was written twenty years ago but has lost none of its relevance in spite of the passage of time and still sells well now. Seeing you should have had time to read Van Tharp's book I thought it was time to tell you about another book that I think should be part of every trader's library.
I read this book many years ago and realized it described a way of trading that can lead to outstanding profits. I noticed there were many stocks that traced out the price action outlined in this book. The trouble was that it looked like I had missed out on too many of them. Looking at their charts led to much 'if only' type of thinking. It hardly seemed possible that I would find more of them to trade but as time went on I discovered that this kind of price action is fairly common.
My study of this book has given me the ideas to devise my favourite trading strategy, one which has produced excellent profits over the years.
One of the main concepts explained in this book is the cyclical nature of so many stocks and markets. Weinstein explains it as the stages markets go through. After a previous rise and fall the market forms a base which he calls ‘Stage 1’, followed by a rising ‘Stage 2’ and eventually the top of the cycle is reached.
It may be hard to accept but all good things must come to an end (in this universe anyway) and what goes up eventually comes down again.
For those whose trading career has been during the last few years’ bull market it may be a novel experience but the time comes when a market goes into ‘Stage 3’ where it levels out followed by ‘Stage 4’ which is usually characterised by a steeper (downward) slope than the Stage 2 upward slope. I have illustrated it with a weekly chart of BXB. The indicator is a 30 Week Moving Average as used by the author.
This chart goes from 1993 to 2003 and shows that it may take quite some time for the whole scenario to play out. The stock has since then staged another recovery and top formation. It is a good illustration for the Austalian market of the price action described by the author but of course not every time does it take so long for the whole cycle to be completed.
These stages are the basis for the trading strategy outlined in this book and their description forms the first section of the book. The rest of the book is devoted to a more detailed explanation of the way of putting this into practice.
The strategy relies for its success on finding the right stocks to buy and figuring out what stage of the cycle the stock is in and this is the subject of the next three chapters of the book.
This includes a number of ways to fine tune the buying process and further refinements to the selection and buying process including how to spot exceptional winners. Lots of examples are used to illustrate points made but unfortunately these are all based on US stocks from a long time ago and not likely ones you have heard of. Also the charts are small and somewhat hard to read. There is still a lot of very useful material here.
It is not much use to know what and when to buy if you don’t know about selling and so there is a good sized chapter dealing with the subject of selling to make sure profits are retained. One of the points he makes here is that tax considerations should have no influence on the selling process.
It reminded me of a conversation I had with someone I have known for some time. He told me he had bought SDL somewhere around 10 cents, watched it go all the way to over 80 cents and decided there would be too much tax to pay to sell it as it started to come down again. So he has held it to this day when it is back to less than 20 cents. At least there is not much tax to pay now and perhaps if he waits a little longer it will be quite safe to sell for the price he paid for it.
It is reassuring to know there will at least be no problem with tax then.
Weinstein here lists quite a number of very sensible rules to follow in making decisions about the selling process. The rest of the chapter deals with methods of selling suitable for both investors and traders and also about “learning how to win by learning how to lose.” An excellent thing to learn.
As the title indicates it deals with trading both sides of the market, long and short. There is a very good chapter about shorting the market, appropriately named ‘The Less Traveled Road to Profits.’ It is likely to be something we will have to get used to, going by the way things are developing at the moment. For many years the market has been rising so steadily that it seems almost contrary to the laws of nature to profit from things going down. I can assure you though that I am happy to have short trades on at the moment.
Since this book was written a long time ago and deals with the US market, there are some things which will be very unfamiliar but don’t be put off by this. He talks about stock going down from 15 1/2 to 75 cents for instance. This seems impossible until you realize that he is talking about a share going from $15.50 to 75 cents. The charts are of course all for US stocks and are very small and not always easy to see. He mentions the uptick rule for selling short and this does not apply to the ASX especially when trading CFDs. And of course online trading that we are used to today did not exist in the US market at the time.
A number of other terms and methods of doing things relate to the US market and don’t apply here but it is not difficult to disregard these.
Another feature of this book is the quiz and answers section at the end of each chapter. They are a useful way of checking that you understand the material presented as well as good revision.
This book is devoted to analysis based on price action and the author stresses that spending time reading about fundamentals of stocks is not necessary. The more I learn about the market the more I find out the truth of this.
I also agree with Weinstein that hanging on to losing trades simply because ‘it is a good stock’ is just a great way of losing money. Any time I have done this it has led to large and unnecessary losses. The market too often does not take notice of the quality of stocks and stocks which should be going up go down and vice versa.
This brings to mind my previous article and for those of you who read it you might be interested to learn that RCH is still trading steadily at 4 cents on very good volume while DGR is down from 14 to 12 cents on pathetic volume. If there was any glimmer of rationality about the way the market trades it should be the other way around.
If you learn nothing from this book other than that you should never, never hang on to a stock in the hope that the market will realize its true value then you will not have wasted your time reading it. But it has much more to offer than just that.
The last chapter deals with the best long term indicators to spot the market stages and some of these may not be available for the Australian market. It should also be noted that when he mentions the Relative Strength indicator he is talking about the one that compares the price of a stock with an index.
At the end there is a section dealing briefly with other markets including options and futures.
I will finish this review with a chart of the XJO (S&P ASX 200 Index) as it is today. Can you tell which stage it is in?
More articles from this edition of CompareShares:
Broker Watch: What brokers think about media stocks
Investing: Measures to work out if your share portfolio is a success or a failure
Resident Trader: Secrets for Profiting in Bull and Bear Markets
CFDs: How to trade CFDs without losing your shirt
Expert Panel (Futures): Using futures to pick the market direction
Rates: More banks go for big rate increases
Market: ASIC launches probe into market rumours
Markets: US stocks surge to biggest gain in 5 years
Property: House prices rise 12 per cent nationally
Takeovers: Incitec makes friendly bid for Dyno
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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