PSARman

Some Thoughts on Getting In and Getting Out

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We are bombarded with thoughts from all manner of media as to what to buy and why. Most cite fundamental reasons which I'm sure will try to seek out good companies given what is available to the public. But I want more than that. I want a good stock which I define as one whose direction has some predictability, be it up, down or sideways. They may or may not be good companies but who cares? We just want to make money.

Stocks in an uptrend tend to bounce off their lower Bollinger Band at the same time their MACD and stochastics are turning up preparing to give a "buy" signal. The PSAR dots will be getting close to changing direction from down to up. The DMI may be positive or negative. If positive, all the better. If negative, it must be at an extreme or show signs of heading in a positive direction. Be sure to check the ADX for strength, whether rising or waning.

What was all that gibberish, you say?

Go to www.stockcharts.com. It is an excellent free website that has a lot of good information and the ability to draw basic charts. At the top of the page is a tab labeled "Chart School." It contains a wealth of information and a glossary of all the terms I used.

If you have no interest in charting but would still like to get a feel for it, go to the "Tools and Charts" section at the left middle of the home page. The fifth item down is "Stock Scans." They will list all the stocks that come under several technical and fundamenal categories. It is updated daily a couple of hours after the markets close. I look at several of these categories daily and make a list of stocks I want to research further. It also is a good source for candlestick and point and figure charts, each adding value to your analysis.

To go short, do the opposite of going long and look for stocks that fit that criteria.

Buying seems to be easier than selling. I've been a student of many Strategy Labs and one thing I noticed is quite often a very good stock picker will not maintain his portfolio. That is, large gains will turn into small gains or even losses and small losses will turn into devastating losses. I've done it and I bet most investors have, too. I think the key is you have to take the emotion completely out of exiting a position, long or short.

A lot of technicians use J. Welles Wilder's Parabolic Stop and Reverse (PSAR) "dots" to do the job. I do, too, but maybe a little differently than most. The common thinking is that you place a sell stop with your broker at the last upward dot and follow it up on the daily chart until the dots catch up to the price or vice versa and the dots reverse. I don't do that. I put in an alert with my broker on the last dot and a sell stop order on the penultimate (yesterday's) dot. Too often, I've been whipsawed out of a good position because the first dot was taken out and the stock rebounded. It's probably because so many of us use this method.

This takes care of the most basic of needs of an investor--preserving capital, limiting losses and locking in gains. But what if we were wrong to get out? After all, aren't we unhappy if the rebounded stock goes even higher? Sure we are but we haven't lost our discipline and we can still get back in given low online brokerage commissions. Again, use an alert set just above the high before you got out. If it is triggered, reassess the technicals and make a decision to get back in or go elsewhere. The major thing I'm trying to stress is to have a plan in place to sell because you don't have any real money made until you do so and you cannot do it effectively when ruled by emotions.

For anyone wanting more information on technical trading, I have three books to recommend that have been helpful to me: Technical Analysis A to Z by Stephen B. Achelis, New Concepts in Technical Trading Systems by J. Welles Wilder Jr., and Technical Analysis for Dummies by Barbara Rockefeller. I use an online discount bookseller to get the best price. Happy trading!