I read a comment by a forum member on another site earlier today that suggested that every investor should back test their system for at least twenty years. I disagree and will now tell you why. Back testing and paper trading seem to be the most over emphasized techniques offered by market theorists, educational elite, market novices and/or market fakes. While learning the pure basics, I can see why a novice investor may want to paper trade; to see the results of the developing system but I will warn that these results are completely false. The results will not contain the emotional decisions that go along with risking your own cash. Anyone and I mean anyone can paper trade successfully. It?s simple, place a trade and hope it goes up and if it doesn?t, you have no worries because you can?t lose. The emotional imbalance that occurs when you really start to lose money is not present. Don?t fool yourself by believing the results of your paper trading or virtual simulation portfolio. These things may give you some confidence in your system but they don?t prove a damn thing in the real world. The real world, specifically the stock market, is run by emotional human beings. People make decisions that are irrational and base their trading decisions on fear and greed. Paper trading lacks fear and greed because there is no gain and no loss; therefore there is no consequence to deal with.

Don?t worry about back testing for 20 years because historical back testing is never very accurate. The most accurate testing is real time. If you can back test real trades (actual trades that you have made in the past), then this would be just as good as real time testing (or forward testing). Back testing can get you somewhat of an idea of how your system will perform but there is no emotional attachments to this type of testing so it is not realistically accurate. We all know emotions are tied to our decisions in the markets so we can only get accurate results through real testing. Learn to ignore the talking heads and the people on TV and that internet chat room that claim they are up over 1000% trading a fake account. What really makes me laugh is the person that sets up a virtual trading scenario and then allows each participant to trade $500,000 or more in their account. If you are going to trade a fake account, at least keep it real so you try to learn something, maybe money management.

I setup one virtual trading competition a few years back and I only allowed each participant to start with $10,000, a reasonable amount, an amount that most people start trading with. The competition was fun but it was not real for me or the others. I didn?t care what risks I took and I never had a problem pulling the trigger which does happen in real life. I did try to keep my trades in line with my real life account but it varied slightly. I witnessed other traders making 20 trades per day or 20-50 trades per week. This is not real because the commissions alone, even with a discount broker will wipe you out. I did allow margin because I use margin in my account but I saw other investors abusing the fake power of margin in their virtual account, again, playing the game for fun instead of learning something valuable. As a fellow investor, keep testing your system in real time and you will know what works and what doesn?t based on real trades, not simulations. Professors and the like teach theories while investors actually do the trading! Back testing may convince some people but I am only convinced with what works now, in real time. Besides, why would I waste my time playing for fake money when I can learn and do for real? Back testing may be good for some people but I have been testing my systems in real time since the day I started investing seriously. Currently, I am testing the $60-$100 theory using options in my newest account. I will not have concrete data on this system for another year or two, most likely two years down the road. I could back test the system but how will that help me realistically going forward? It won?t, it may show me some probabilities and the possible expectancy of the system but it won?t guarantee anything until I place a position for real.

If you want to test a system, open an account with real money, even a minimal amount and give it a try. Make sure you use enough money to allow emotions to be attached to your decisions. Without the emotional attachment, you are cheating yourself and your potential system.

Chris Perruna – http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don\’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Writen By : Chris Perruna

Tags: invest, management, market, money, money management, stock, stocks, Wall Street

Stocks breakout from properly formed bases everyday but many investors don?t understand how to locate a pivot point or what patterns to study that may contain this very important buy signal. A pivot point can be described as the optimal buy point or the area at the end of a familiar base pattern where the stock breaks out into new high territory. William O?Neil, the founder of Investor?s Business Daily is considered the pioneer of the pivot point in modern times. As Jesse Livermore explains in his book (1941), the pivot point can also be described as the point of least resistance. When a stock breaks the point of least resistance, we are presented with an opportunity where a stock has the greatest chance of moving higher in a short period of time, especially when volume accompanies the breakout.

The pivot point can be calculated as the stock is forming the handle on a cup-with-handle base. The ideal buy price would be $0.10 higher than the highest spot during the handle, also know as the top of the right side of the base. The intraday high can qualify at the highest point and does not have to be the closing price of the stock. If the stock closes at the high for the day, then we will use this number as the high point.

The exact methods used for finding pivot points vary depending on the base pattern that is forming on a daily and/or weekly chart.

When a flat base occurs, an investor should look for a move $0.10 higher than the top point on the left side of the base or the start of the formation.

A saucer-with-handle follows the same rules as the cup-with-handle and is described in detail above.

A double-bottom formation triggers a pivot point that will be $0.10 higher than the middle peak in the ?W? shaped pattern.

Many investors will try to cheat the rules and place a position prematurely before the stock breaks out and passes the pivot point. I do not suggest buying until the stock triggers the pivot point on above average volume also known as qualifying volume. The area considered as the least amount of resistance is weighed so heavily because all overhead sellers are gone as we break into new high territory. The pivot point usually comes within 5% to 15% of the stock?s old high 52-week high.

Don?t chase a stock that is 5% or more above the proper pivot point. This does not mean that you can?t buy on normal corrections and pullbacks to support or moving averages, especially if the stock remains in an uptrend. This rule only applies to the pivot point area as the stock becomes extended. If you buy with the pivot point and sell when a stock falls 7-10% from the pivot point, I guarantee that your yearly performance will increase dramatically.

Chris Perruna – http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don\’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Writen By : Chris Perruna

Tags: invest, management, market, money, money management, stock, stocks, Wall Street

A PEG ratio cannot be used alone but is a very powerful tool when integrated with the basics (price, volume and chart reading). You must enjoy crunching numbers and have a calculator handy to estimate your own PEG ratio. Access to quality statistical information from the web such as past earnings and future earning estimates is essential to calculate this fundamental indicator. A variety of websites produce a PEG ratio but I have not found one site that has a reliable PEG ratio that I can use for my own research, so I calculate it myself, ensuring accuracy with the final number.

I am going to use the definition from investopedia.com as it makes complete sense and doesn?t get too confusing (below the definition is further explanation and a current real time example, using Apple Computer).:

The PEG Ratio:
?The PEG ratio compares a stock\’s price/earnings (\”P/E\”) ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock\’s EPS growth. This is \”normal\” in theory because, in a rational and efficient market, the P/E is supposed to reflect a stock\’s future earnings growth.

If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market expects future EPS growth to be greater than what is currently in the Street consensus number. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that is expected to grow rapidly (otherwise known as \”growth at any price\”). It could also be that the earnings forecasts have been lowered while the stock price remains relatively stable for other reasons.

If the PEG ratio is less than one, it is a sign of a possibly undervalued stock or that the market does not expect the company to achieve the earnings growth that is reflected in the Street estimates. Value stocks usually have a PEG ratio less than one because the stock\’s earnings expectations have risen and the market has not yet recognized the growth potential. On the other hand, it could also indicate that earnings expectations have fallen faster than the Street could issue new forecasts.?
– provided by www.Investopedia.com

PEG Ratio Example:
Using Apple Computer Inc., I will demonstrate how to calculate the PEG ratio without relying on other websites.

First, you will need to gather the past earnings numbers; going back at least 2 years and going forward two years. (All data is from Thursday, June 23, 2005)

AAPL:
2003: 0.09
2004: 0.36
2005: 1.31 (E)
2006: 1.52 (E)

Now we need to calculate the growth from year to year.
Subtract the earnings of 2004 by 2003 and then divide by 2003.
Repeat the process to determine the growth rate for the following years:

2004: (0.36-0.09)/0.09 x 100 = 300% growth rate

2005: (1.31-0.36)/0.36 x 100 = 264% growth rate

2006: (1.52-1.31)/1.31 x 100 = 16% growth rate

Now, take the current price (we will use the close from Thursday, June 23, 2005: $38.89) and divide it by 2004 earnings and then by the 2004 growth rate:

2004: 38.89/ 0.36 / 300 = .36 PEG Ratio
2005: 38.89/ 1.31 / 264 = .11 PEG Ratio
2006: 38.89/ 1.52 / 16 = 1.59 PEG Ratio

Using the definition from above, Investopedia states that a stock is evenly valued at a PEG ratio of 1 in a rational and efficient market. Please note that the stock market is not very rational or efficient so we only use this number as a secondary indicator and tool, after our fundamental and technical analysis is complete. Apple?s PEG Ratio of 0.11 for 2005 was discounted into the price when these estimates first hit the street, giving us the big run-up late last year. Going forward, the stock?s earning potential looks to slow considerably and the PEG ratio clearly shows us the tremendous jump in numbers from 2005 to 2006. A PEG ratio of 1.59 for 2006 is not the best rating going forward but still under the red flag ratio of 2.00.

Finally, once you determine the PEG ratio of the stock you are looking to buy, take the time to calculate the PEG ratio for the ?sister stocks? in the industry group to see if they have higher or lower PEG ratios. Keep in mind, PEG ratios don?t work for companies with negative or non-existent earnings numbers.

Chris Perruna – http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don\’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Writen By : Chris Perruna

Tags: invest, management, market, money, money management, stock, stocks, Wall Street

We all know that emotions control every decision that an investor makes in any type of money related vehicle. Whether is be the stock market, real estate, art work or antiques, emotions ultimately set the final price on both sides of the transaction. Some investors have greater control over their emotions while other investors are destroyed by their emotional reactions to certain events.

One common occurrence that I have seen many investors make, including myself, is placing a position in a stock at the wrong time. My last article detailed the importance of timing, while this article will concentrate on the importance of staying focused and emotionally stable when things don?t work out as expected. In the past, I would study a stock?s chart, the fundamentals, the general market health and everything else that I felt necessary before placing a large sum of cash behind my beliefs. When things went wrong and I was forced to sell for a small loss, I would drop the stock from my watch lists and remove it from my memory. This was one of the biggest mistakes that I was making during my earlier years of investing. The greatest investors study their mistakes and learn why they were wrong. If you don?t learn from your mistakes, you will continue to repeat them and never move to the next level.

I was usually correct with my analysis on the particular stock but many times I was too early with my entry point during a new up-trend. Months later, I would come across the same stock in my screens but it was now up 25%, 50% or more from my initial buy point and stop loss. I would be frustrated for selling my stock too soon and was getting tired of using rules and missing big winners that I sold for a loss. I knew money could be made in Wall Street by using the law of averages to my advantage and employing strong money management skills but I needed to employ the rules more consistently. I started to practice what I was taught by selling my losers quickly and allowing my stronger stocks to ride their trends. Over time, I was experiencing a few more losers than winners but my stake was growing because these losers were smaller in size than the winners. The words written in the books were true; Jesse Livermore, Gerald Loeb and William O?Neil were all accurate with their lessons about cutting losses quickly.

More importantly, I learned to keep strong stocks on my radar even if I bought too soon and was forced to sell for a loss. My timing was wrong and my ego was shot because I was wrong, so I typically decided to stay away from that specific stock because it had already taken my cash and my pride. Emotionally, I was burned by the stock even though this was not entirely true. Investing is a game of trial and error. It is okay to buy a stock at the wrong time and sell, only to buy it again because they timing may be better. If you cut the losses small and allow winners to grow, the averages will ALWAYS work out, I promise. You must be honest with yourself to allow the averages to work out. You cannot allow a stock to drop past your sell point and you must try to always hold the strongest stocks without selling them during a premature pullback. This all sounds so easy but it is not! If it was so easy, we would all be extremely rich and the stock market would be everyone?s full time job.

I kept using my system of trial and error and started to record every thought and transaction I made. With my revised philosophy in place; I continued to study the stocks that I was forced to sell and tried my best to re-purchase, even at higher prices than my original position if the time was right. Even now I have these issues, the greatest traders of all time always had these issues and every fund manager must decide if the time is right. My latest example, which can relate to almost everyone in the community is Paincare Holdings, a stock that was purchased solely as a ?test buy? that I was forced to sell. If things turn around and the general market starts to rally, I would have no problem buying the stock at a higher price than my original position if the opportunity presents itself.

LaBarge is another example, first showing up on the screens at $9.35 but during a down-trending market. The new pivot point and buy area was $14, over 50% higher than the original price but a solid entry point regardless of past gains or prices. Mentally it is always the toughest to buy a stock at a higher price than you were watching it at an earlier date but it can be the most rewarding strategy. Never look at a chart and toss away a candidate because it has moved up 50% or even doubled in recent months, the real move may just be beginning.

The moral of this article is to make you understand that timing may be your only issue when buying stocks so never throw away a possible superstar because you bought too soon. Keep it on your watch list and be prepared to initiate another position, even if it will cost you an extra point or two. If you buy again and it doesn?t work out, re-peat the process, there is always a chance that the stock was not meant to be or your analysis was slightly faulty. In either case, learn what you are doing right and wrong so you can be prepared to use those lessons with the next stock.

Chris Perruna – http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don\’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Writen By : Chris Perruna

Tags: invest, management, market, money, money management, stock, stocks, Wall Street

An investor can find and research the best stock on the market, one with huge potential but if the general market indices are negative, it will most likely be the wrong time to buy. A stock with tremendous accelerating earnings, rising sales, an up-trending chart pattern and a strong industry group may sound excellent to buy but will mean absolutely nothing if the market is positioned to move in the opposite direction of your expectations. As soon as a stock is purchased, the time comes for an investor to make a decision to hold or to sell. If the position shows a profit, hold as your judgment is correct. If the position shows a loss, cut it quickly and don?t rationalize the situation before it doubles in size. Timing will play an important role in determining if you are right or wrong.

Losers must be cut quickly, long before they materialize into enormous financial disasters. They company and stock may not be a loser but rather your timing may be premature to a strong movement, forcing you to sell on a pullback. After a stock is cut from your portfolio, the transaction must be forgotten about and eliminated from your subconscious mind and/or emotional bank. The trade must be studied to capture the true essence of your mistake but the specific security involved must be blocked from any sentimental attachments, allowing you to consider reinstating the position at a higher level. This repurchase may take place immediately or well into the future but the important fact is that you were wrong with the timing on the initial position. The timing, also known as the ?M? in CANSLIM by William O?Neil, may have been wrong even though all fundamental and technical criteria related to the individual stock seemed to be perfect.

A quote from the great Gerald Loeb:
?Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do.?

The wisdom shared by Loeb is easier said than done. Humans like to take profits and hate taking losses or admitting that they were wrong. Pride and ego distorts the clear thinking process that every investor must posses when following clear cut rules that provides insurance to their cash stake. Even tougher, humans refuse to repurchase anything at a higher price that they sold it previously. As Loeb states, only logic, reason, information and experience can be listened to if failure is to be avoided.

It is advisable to make a ?test buy? in a shaky or unstable market which allows the investor to assess the general conditions with minimal risk but still maintain an emotional attachment. If the position goes bad, a small loss will be realize but the damages will be limited and the investor?s pride and ego can be repaired rather quickly. In a sense, the investor was half right by only initiating a partial position also known as a ?test buy?. If the market was trending up, a ?test buy? would not have to be established as the market direction would have been clear from the beginning.

When it comes to timing, an uneducated investor may realize better gains during a solid bull market based on pure luck than a seasoned investor will return in a sideways or unstable market. Following the trend will be the most successful route to consistent profits over the long haul. By watching the general market indicators, such as price, volume and daily new highs, an investor should know exactly what type of environment they are trading. The most important factor weighing on the stock market is the presence of public psychology, even more so than any fundamentals that the most intelligent academic analyst can compute. Technical analysis along with confirmation of the market trend allows us to see the combined thought process of the general public and tells us if the timing is right to buy or short a specific stock, regardless of the fundamentals.

In conclusion, we must understand that certain situations are only applicable during specific times. Buying leading stocks during a down trend is a sure way to multiple losses that are cut quickly. Shorting stocks during a raging bull is another sure way to financial disaster and margin calls. Don?t get discouraged if you take a few small losses consecutively as this is your rules telling you to stay out of the market at this time. The timing may be off even though the stock and research is favorable. Why would you swim upstream to reach your destination if you could jump in a boat and row downstream with the current another day? Before you ever start to immerse yourself into researching a stock to purchase, make sure you know the exact environment of the market and determine if it coincides with your objective. If it doesn?t, get ready to get slaughtered, especially if you don?t follow strict rules to cut all losses quickly.

Chris Perruna – http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don\’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Writen By : Chris Perruna

Tags: invest, management, market, money, money management, stock, stocks, Wall Street