Monitoring stock market activity and portfolio performance

This website is written with the beginning trader in mind, hence the stock market basics reference in the title. It occurs to me that anyone who really is wishing to learn the stock market basics, might like to know how a small trader, with positions in about 10 stock and options issues and trading for the short term, might approach the trading day. For myself, I rely a lot on the Finance Yahoo site for up-to-date information, as discussed below.

Trading for the short term
By trading for the short term, I mean that the selected stock or options positions are expected to achieve their price targets within about 4 months. By that time they would likely be sold. with some reaching their initial price target and beyond, which in my own approach is a 25 to 30% gain or more. Or they may have gained less than the target percentage or made a small loss but will be sold in keeping with a guideline I like to follow. One of those guidelines is that they should not be held through the next earnings announcement date — or in the case of options, they must be sold about one month before expiry date when there would probably be a little time value in them.

Earnings announcements
Perhaps earnings announcements season, that takes place every quarter, should be discussed elsewhere in stock market basics but my personal experience is that a good stock can plunge in price when earnings are announced because they may have missed the Wall street stock analyst’s earnings forecast by a cent or two. Or the price may go down because a different issue in the same sector or type of business has taken a hit for whatever reason — see the reference to JDSU, below.

But to return to the trading day possible routine. I like to know what is happening during the day and, as time and opportunity permits, I try to check the stock indexes, the DOW, Nasdaq, and S&P, once or twice a day, especially when things get volatile, as they have been in recent days after the earthquake and tsunami in Japan and when the market is taking a big hit to the downside — not that much can be done in these situations, other than stay on the sidelines and watch, knowing that in most cases there will be a partial or full recovery, sooner or later.

It may not be typical of what other non-professional and small traders (let’s call them “part timers”) do to keep up to date but I like to try to gain an understanding of what happens during those extreme events, knowing it will happen again on some other occasion in the future — and the experience might guide me when it does happen. And when things are less chaotic, I like to know anyway how my stocks and the market are performing.

Trading, as opposed to investing, involves a much shorter time horizon during which volatility in the daily market place can affect issues very quickly and for me, being aware of what is taking place is part of the necessary due diligence.

I usually wait to see the end of day closing prices to assess whether any action on my stocks is necessary — if they are in good shape and rising in price — or not falling in price — I need not worry, if they are falling in price I need to know how close they are getting to my mental 9% stop loss value, small fluctuations in price don’t matter. It’s the big and sudden drops such as that of JDSU and others that occurred last week that require a response — as described on last week’s post: What to Do When a Stock Falls in Price. Those are the times that require careful consideration — especially since my stop loss values are not left as instructions with the broker but self-actuated, meaning I have to process the sell instruction myself online.

The value of Yahoo portfolios — how I keep updated
It’s pretty simple really. For my stocks and my watch list, I check online by logging into Finance.Yahoo.com — where I can quickly review the lists of stocks (only about ten or so) that are stored on the Yahoo site, it’s quick and easy and more convenient than checking with my brokerage account. The individual stock activity taking place, and the  overall summaries of gain and loss, are constantly being updated. Also, easily accessed at the same time  on the Yahoo site are other relevant news items of interest.

How to set up a Yahoo Portfolio
In the next post to this website, I must provide instructions on how to set up a portfolio on Yahoo. Useful to anyone in the stock market basics learning stage who may wish to build a watch list or do some stock market paper trading to gain experience without actual trading for real.

“Rolling” refers to a way to initiate a change in an option position’s strike price, or its expiry date, or both. The usual purpose of doing this is to hold on to an option position that is reaching the date when it would normally be sold, which, under my own guidelines for trading mentioned elsewhere on this website, is about one month prior to its actual expiry date. This method of “rolling” is sometimes referred to as a continuation technique, obviously a way to continue to hold a position and allow participation in the entire range of movement that a stock may achieve.

There are at least 3 ways to roll a position depending on the objectives
There are various names applied to the rolling techniques, for instance, Roll Up and Roll Down are versions of a Vertical Roll — and a Roll Out is a Horizontal Roll. A Roll Out and Up or Roll Out and Down are versions of the Diagonal Roll.

• Roll up, or Vertical Roll refers to changing an option strike price to a higher strike price in the same month.
• Roll down, also a Vertical Roll, refers to changing an option strike price to a lower strike price in the same month.When implementing a Vertical Roll, the trader sells the contracts of the existing position and buys the same number of contracts for the same expiry date but at a different strike price, either higher or lower, depending on the direction that the underlying stock is moving.With a call position in a stock moving up, the trader closes the existing call and replaces it with a call at a higher strike price. With a put position in a stock that continues to move down, the existing put is sold and replaced by a put at a lower strike price.As stated, the vertical roll allows you to lock in profits and lower risk, while maintaining the same position size. By addressing the concerns of profit and risk, you’ll have a much easier and better opportunity to follow the full run of the stock without risking the profits already built up in the option.
• Roll Out, or Horizontal Roll refers to changing to an expiration at a later date while maintaining the same strike price.
• Roll Up and Out, or Diagonal Roll refers to a combination of the above, changing both the strike price and the expiry date. And a Roll Down and Out accomplishes the same to the downside.

An example paper trading play on this website, referring to rolling an option, can be found for reference at A Better Exit Strategy.

And a review of our paper trading stock positions and progress

In our earlier posts on paper trading for this series on stock market basics, we initiated a buy for ASYS on November 24 and we are also tracking our other candidates, QQQQ and F (Ford Motor Co.), awaiting to take positions if and when they meet our pre-established criteria, mainly that they break out in price above their previous highs. We also look at the S&P 500 as the main source for assessing how the market is performing.

Why use stock charts?
The purpose of frequently referring to stock charts, as I do on this website, is to encourage beginners who are learning the stock market basics to become familiar with them and use them as a tool to help in the decision making process. Many traders will not commit to action without first checking a relevant stock chart for reassurance and many traders depend on what the charts show at the end of each trading day.

In following the market action shown on these charts, and making decisions based on what I see, I am looking at them in my own individual way, trying to keep things as simple as possible from my own perspective — which is probably significantly different from the ways that others examine charts and analyze chart patterns.

The beginning trader or the person wishing to learn something about the basics of stock market trading, can benefit by developing their own approach to chart interpretation. For me, the simple and basic routine is to:

1. look at the chart pattern emerging after each day’s close, and determine whether it is maintaining the trend
2. look at the volume and check for any significant change, especially whether it is increasing
3. look at the lines of the moving averages and where the stock closes in relation to them
4. look for any apparent levels of resistance or support that the stock may need to break through
5. especially look for breakouts from existing constraining stock patterns, either up or down
6. look for any other well known patterns that may be developing, for instance a measured move or a saucer formation
7. check the MACD and the RSI mini charts that appear below and above the main stock chart to see whether they indicate a changing pattern

There are several other things to look for but the above list gives the general idea.

It takes only a minute or two to examine each chart of the stocks in play or the stocks of interest.

————————————————————————————————

Review of current paper trading stock candidates

ASYS
So now let us look at our stocks of interest shown on the charts below, we will see that we are making gains in our first paper trade choice of ASYS after our entry on November 24, 2010 at $18.84 per share. After Monday’s close we will review the ASYS position and its paper gains to date and suggest how to proceed from that point. The two option contracts we hold will show about 100% gains to date if there is no correction in the market.

We will check the charts below to see the progress of FORD and the Q’s that we are waiting to move into if and when the chart provides the confirmation we seek.

F, QQQQ, S&P 500
Both Ford (F) and the Q’s (QQQQ) are edging up to the breakout levels we established in our earlier posts in this series but until those are breeched we will hold back from entering a paper trade. The S&P 500 seems to be testing the previous high around 1225, we need to see it break through that level on good volume to confirm that we are at the start of the rally into the end of the year that we hope will materialize.

When a breakout occurs
Let us also look at a couple of other stock charts to show what can happen when a breakout above a resistance level does occur, for that let us examine CAM and HAL, showing recent breakouts to new highs, the gains are small so far, but it illustrates the point about breakouts.
The charts can be enlarged by clicking on them.

Stock Chart of ASYS Dec 03

Stock Chart FORD Dec 03

Stock Chart of QQQQ Dec 03

Stock Chart of S&P 500 Dec 03

Stock Chart of CAM Dec 0

Stock Chart of HAL Dec 03

Opinions differ on the merits of using a paper trading approach to learning the stock market basics. A frequent criticism is that paper trading lacks the emotional aspects connected to actually having real money at risk and having to deal with the need to make decisions under real stress when the market suddenly turns without warning.

Another criticism is that paper trading, also referred to as virtual trading or simulated trading or even just pretend trading, typically provides too large a trading stake to start out with, often tens of thousands of imaginary dollars. In doing so, that removes the need to learn discipline at the stock market basics level in how to carefully allocate proportions of the limited real-life trading stake that is likely to be available to the beginning trader who chooses to check into websites like this at Stock Market Basics Guide.

A common sense response
I do agree that real trading in the stock market has an emotional component for the beginner, especially when faced with a decision on what to do when the market moves without warning and it does require experience in learning how to deal with reverses and also, on the plus side, what to do when sudden and perhaps unexpected gains occur. The decision required in the latter case is whether to capture the quick gain by selling the stock or holding it through a peak and watch it fall-back, as it often does. This situation can occur when a flurry of additional buy orders (or sell orders) are prompted by some news release or other positive or negative information that becomes public knowledge. Earnings and pre-earnings announcements often cause such trading “spikes”  – and there are strategies, among our personal favorites, to take advantage of those typical reactions. Other episodes of quick moves in the stock market have occurred in recent times when international financial or political events have made the headlines.

Why paper trade?
Paper trading with real stocks in real time provides opportunities to practice making decisions based on the day-to-day activity of the stocks and the stock market in general. Decisions that require interpretation and assessment of data that comes to light over a period of time and that may require specific action on the part of the trader. It helps if many aspects of stock movement and what causes them are revealed when paper trading.

The system of paper trading is merely an opportunity to gain some experience and understanding of both the processes of obtaining quotes, placing orders and getting to know the requirements of the stockbroker, and then following the market action related to particular selected trades. Such trades require preliminary research and then decisions to commit to action followed by a period of monitoring and assessment of the performance of the stocks under consideration until the time to exit.

Trading usually involves a short-term approach to buying and selling that can be accomplished in a few months. By following several stocks at a time, up to about ten should be sufficient, the person learning stock market basics should be able to observe and react to a lot of typical patterns of stock market activity, gain some experience and perhaps identify the areas of weakness that need to be addressed. It does require effort and careful thought.

Have a plan. Follow the plan, trade according to the guidelines
You have to start somewhere, even with a small stake. This is when the serious learning begins and it will take many more trades to gain experience and develop a personal routine and slowly gain some experience and understanding. The objective is to avoid unnecessary risks – such as entering a trade too soon, before a confirmed technical stock-chart signal occurs or exiting a losing trade too late and taking too big a loss. Or on the winning side, exiting a trade too soon, leaving “money on the table” as they say. How often have you heard or read the advice to “cut the losses and let the profits run”? In the early days of trading, take small positions while still learning to trade, don’t worry about the commissions, which with on-line stockbrokers are modest anyway.

The paper trading approach establishes procedures to be followed that cope with the above eventualities. Maybe it’s an individual’s personal attitude and response to risk-taking that affects a trader in moments of decision-making, helpful to some but not to others. The advantage of building a set of rules and guidelines to follow is that it helps eliminate times of indecision and avoid costly delays or impetuous moves that can cause regret later in the day.

And real trading involves dozens of trades over the course of a year, and eventually possibly hundreds of trades, where each one requires a decision to buy and a decision to sell. There will be losing trades and my own experience is that with proper risk management and a general set of guidelines to follow, the trader accepts the losses without flinching and moves on to the next trade, accepting any loss that occurs and knowing that by following the guidelines, the loss is limited to the approximate amount that could be tolerated, established before entering the trade.

For an example of some of the guidelines that aided our earlier paper trade of a  stock and options, check out AGCO Paper Trade.

Also, some of the articles listed in the Related Posts, shown below, make reference to guidelines, for instance the post No. 2 titled Finding Stocks for Stock Market Basics Paper Trading.

Paper profit achieved as of October 26, 2010
The process of using a paper trade to help in learning some stock market basics seems to have served its purpose, providing us with several points for discussion in the future as we examine what happened over the past two month period.

As it turned out, the paper trade proposed almost two months ago has been shown to be profitable with a paper gain of 186% on the options and, as of today, a paper gain on the stock of between 17% and 20%, not bad for two months of involvement. And the stock did hit our forecast target of $45 that we set when first suggesting the trade.

The sale of the options was recorded in the follow up post of October 22, 2010. The underlying stock position is still being held because the stock has not yet triggered a sell signal. In earlier posts it was pointed out that earnings for AGCO were to be announced today, October 26, and the decision was made to hold the stock through earnings date because prior news of the company’s affairs sounded very promising for the future – otherwise the decision may have been made to exit.

Earnings indicate AGCO to be a stock worth holding for greater gains
The AGCO earnings showed good profits and were better than analyst’s expectations, and the future looks to be equally promising and profitable, suggesting it is worth continuing to hold – although we will keep a tight stop loss at about 8% maximum on any reversal that may occur, and that would initiate an order to immediately sell at the market. The stock did drop in price after earnings announcement, possibly due to profit taking or technical trading, but that is quite often the case when positive announcements are made, even for the major stocks like Apple usually encounter the immediate sell-off.

More to make note of in a post mortem of this AGCO short-term trade
But much more discussion needs to be added to point out various factors and alternatives that may or may not occur during a trade of this nature, and of course, that is the purpose of making the simulated trade, to enable an examination of what occurs in basic stock market trading over a short time period.

In looking back, it can be seen that the activity of a stock must be kept under observation and how, with the aid of the stock chart as a guide, decisions must be made based on the actions observed that are largely at the mercy of the general market, where we are guided also by the short term trend in which the trade is occurring.

The trader must attempt to understand and react to what is happening day to day in the marketplace and with the specific stock issue involved. Perhaps the decision will be to do nothing but just allow the stock to continue along its path but being ready to step in if anything signals a warning that it may be time to abandon and exit the position.

Follow-up summary to follow
A brief summary of the events and possibilities can be made in a follow-up post shortly. The options were sold, but there is a little more in the trade to watch regarding the underlying stock which has not yet triggered a sell signal.

The original paper trade details and stock charts for reference
For the original entries regarding the paper trade that was initiated in our post of September 07, 2010 on this site, please check out Simulated AGCO Trade, and for the follow-up interim progress report and for later follow-up comments see  AGCO Trade Follow Up dated October 11, 2010.

The first of the two earlier posts identified the trade with a stock chart showing the chosen stock’s trading patterns up to that time. The second post discussed the reasons for choosing that particular issues to use as an example in order to outline an approach that might be used by a trader to take a position in a specific stock. All of which helps illustrate and understand a stock trade’s possible progress. All part of learning the stock market basics.

The earlier posts established the profit targets for both a stock trade and an option trade, giving some reasons and pointing out the uncertainties and that appropriate action must be pre planned in case the anticipated gains did not occur.

To buy or sell a stock, an order must be placed with a stockbroker that gives instructions regarding the stock name or symbol, the number of shares, and the price.

There are three main types of order to learn about, and there are several other types of orders that are less frequently used, especially by the beginning trader who is in the early days of learning the stock market basics.

The three main orders types are the market order, the limit order, and the stop order. The most important being the last two, the limit order and the stop order, but all will be explained here. The other types of orders are referred to at the end of this article as subjects for discussion later.

The Limit Order

A limit order sets a specific price at which a trade is to be placed, it is the price at which the trader is wishing to buy, or sell, a stock. For example, using a limit order to buy, or sell, 100 shares of stock at $26.50 per share means that the order would not be executed until that stock reached the price of $26.50 in its normal trading.

While it is likely the order will be completed at the limit price, sometimes limit orders may not get executed even though the specified stock may reach the limit price on the way to trading at a higher or lower market price. This is because a limit order, when placed, joins the queue of orders already existing and the rule of “first come first served” applies. If all orders that have been placed before the specified limit order are executed and they cause the stock price to move through and beyond the limit price, and if the stock does not return to and again trade at the set limit price, the trade will not be executed.

The Stop Order

This is the safety net that can help manage risk. It is used to pre-establish an order to sell. The use of a stop order is a way to limit losses, or preserve profits, to a specified amount according to the trader’s risk tolerance or profit expectations should they occur. Experience teaches that stocks, after they are purchased or sold short, often do not trade as expected and losses are inevitable. For the person learning the stock market basics the stop order can be valuable tool to help avoid big losses, learn and use it well.

Important:
When deciding on a trade, the trader should always know:

1. the maximum amount of loss to accept if the stock does not perform as expected and

2. the target profit at which to consider selling if the stock does perform as expected
3. the approximate length of time to hold the position until those loss or profit levels are reached.

Stops can either be set as pre-determined instructions for the broker to execute or the trader can be just make the decision as the given stock price is reached during a trading session or shortly after as time permits.

There are several other useful ways to use stops, they can be also be used to set transaction prices for future executions of a trade for a stock at above, or below, a current price.

Trailing Stop
A trailing stop, used on a stock that is performing profitably, provides a way to sometimes capture a greater profit by allowing the pre-established stop price to be adjusted to a price or percentage below the changing price of the stock as it moves in the profitable direction.

For example, a trailing stop of, say, minus 5 percent, in the case of a stock rising in price steadily from $40, would not become a sell order until the stock at any time reversed by an amount of 5 percent from what ever new level it may reach. It will fluctuate during the day’s trading but may not quite change by 5 percent and will not be sold until it does. In other words, if the stock reached, say, $50 and fell back temporarily to $47.50 it would activate the sell order and be sold, otherwise the stock would be held to continue the gain in upward prices.

The Market Order

For a trade using a market order, there is no set price, the order is executed at whatever best price is available at the time, a situation affected by the “laws” of supply and demand. Unless the market is very volatile, involving widely varying prices up or down, the trade will usually be completed at a price close to the price in play when the order is requested according to the “asked” price at the time. The bid and ask price is always available and it is best when using a market order that the price range between the “bid and ask” prices be fairly small. A wider margin might be a time to set a bid price midway between the bid and ask prices.

Some other types of orders to be described later:
Buy Limit, Sell Stop, Market on Open, Market on Close, Good ‘til Cancelled, Day Only.

Setting up the tracking portfolio for paper trading

As part of learning stock market basics, it is necessary to know how to track the progress of the trades that have been implemented, even if they are simulated paper trades. The following lists the steps to do so.

This is what you should do for practice in setting up a free account with Yahoo. The suggested entries to create a portfolio are given below to take you through the process.

1. Go to http://finance.yahoo.com/,
2. click on Finance Home, that will bring up the Home page, you may have to register to set up a free account with a password of your choice.
3. From the Home page or any page, click on the “My Portfolios” tab at the top, this should take you to a page that allows you to “Create a New Portfolio”
4. Select the middle entry “Track Your Transaction History”
5. Enter a suitable short portfolio name where required, for example: Jim 2011, or Jim #2 2011, etc.
6. In the 5 boxes, tick the first 2 boxes and the last box
7. Click Continue and the following chart will appear in which to enter the details of any individual trade. There are some instructions above the table but it is fairly evident about what is needed.

You can now set up a sample portfolio on your own computer, as follows:

To do so, enter the required details in the form below, using the details from the example paper trade, described in full here.  For that specified trade, the selections and prices were as follows:

Paper trades initiated on September 07 — still active as of today, October 12, 2010 :

1. Bought 100 shares at $36.50 each for a total of $3650, not including fees.

2. Bought 2 long November call option contracts at $3.10, to control 200 shares of AGCO until November 10 at $310 per contract, $620 total, not including fees.

After the entries click “Save” at the bottom and the portfolio will now be established and can be seen by going to the “My Portfolios” tab at the top of most Finance Yahoo pages.

The progress of the trades can now be viewed any time you wish. Finance Yahoo constantly updates the values in the portfolio as they are affected by the actual trading that takes place in the market, just as if they were real transactions and not paper trades.

Here are the entries needed to create the sample portfolio under whatever name you choose to use:

The Stock Purchase

The major considerations (see comments on these below)

1.      Stock selections — find some stocks that can be traded profitably.

2.      Evaluating the selected stocks

3.      Open trading and watch-list portfolios at Yahoo Finance, they are free
How to construct a portfolio is described in the next post that can be accessed here

4.      Add stocks to the watch list

5.      Enter paper trade

6.      Add trade details to the Yahoo portfolio

There are many ways to learn the stock market basics. The purpose of this article is to suggest one approach for a beginning trader to become familiar with what is typically involved in the trading process. In this view, trading is not investing, it is more speculative than investing, trades occur more frequently and positions are held for shorter periods of time.

For someone who is in the early days of learning about how to trade in the stock market, it is helpful to follow a simulated trading procedure that introduces the necessary “steps” involved that lead up to opening a trade, tracking a trade, and closing a trade. Simulated trading, also called paper trading, is a way to execute the real actions of making trades but where no real money is used. Paper trading accounts can be set up with a stockbroker for a deeper experience in the mechanics of placing trades, obtaining quotes, and using a broker’s extensive research facilities – which is very good but not essential, the following procedure does not need a broker.

The major considerations

1. Stock selections — find some stocks that can be traded profitably.
2. Evaluating the selected stocks
3. Open portfolios of trading and watch-lists at Yahoo Finance, or any other free service
4. Add list of stocks to the watch list
5. Enter simulated paper trades, keep full record of details leading to the specific stock choices
6. Add traded stock symbols trade details to the portfolios to enable tracking

Comments on the major considerations listed at the opening

Picking the right stocks – a serious problem for the beginner
Success depends on knowing how to identify what stocks out of the thousands listed on the exchanges are promising candidates for speculation. At the beginner’s level, the knowledge and skills have not been acquired to make stock selections.

A major skill that a trader must acquire is to be able to evaluate a stock to determine whether it is a promising candidate for trading. For instance, a stock might need to meet certain criteria that makes it promising, or exhibits a recognized trading pattern that is known to often lead to positive gains, or the reverse, a pattern that looks to lead to bigger losses, both tradable characteristics.

There is a lot to be learned. Until the basics of stock market trading have been mastered, perhaps through a formal course of study, of which there are many available, at varying costs from free to expensive, my suggestion is to turn to an advisory service. There are many advisory services that provide tradable lists of stocks. Some of those services are free while others are through subscription. It is important that the service has a record of success. All stocks chosen as  candidates to trade should be checked independently by you the trader, that is why it is so important to acquire evaluation skills that can be learned through experience and study.

Personal note as an example
For any trade that I may wish to make, I consult a paid service that I have subscribed to for many years, as a lifetime member in fact. Any service such as should have a verifiable history of success and offer many more selections that are needed for any individual. On that point, I would suggest to start trading with 5 stocks and then build up to 10 maximum eventually. Trading, being a short-term process, does involve a lot of monitoring and the tracking of progress – winning or losing. Any trade candidates that my service identifies must pass my own selection criteria should I wish to trade them.

The stock chart is a very useful tool for use in assessing the merits of a stock and the way it is currently performing in relation to its prior patterns of trading. It is worth the effort to learn to recognize the main trading patterns exhibited by stocks and to become familiar with the patterns that often produce positive results for the trader. The expectation being that when a formerly winning pattern begins to develop, it may be an indicator or a signal to enter or exit a trade. Check out this link for more About Stock Charts.

General
Many traders will not trade low-priced or penny stocks or stocks that trade in low daily trading volumes. Higher priced stocks usually have more fundamental asset value and are less volatile. Stocks that trade at least several hundred shares daily provide greater liquidity. That’s essential when its time to sell.

Now go to the next post to set up a portfolio for tracking trades in real time, this is the link:  Constructing a Tracking Portfolio.