How To Select a Stock The Easy Way

Stock selection for buying is relatively easy. The experts will do all the hard work involved in the fundamental analysis for you, free of charge. You can enter the stock you want in Google Finance or The Star Online, and it will give you the information that you require. If you have a trading account, then your broker will provide you with the necessary information. You don't have to go through the gazillion pages in the company's financial report. Your broker will do that for you. What you need to know is the name of the stock that you would like to look at.

The stock selection strategy you are about to read ONLY applies to stocks that make up a major index. In Malaysia, it's the Composite Index (KLCI). The trading syndicates and market-markers (both are professional money) will actively trade these stocks.

All stocks making up a major index will have a professional interest. This is good news for us because we can usually see the results of their activity. This is the key to stock selection. It's not necessary for you to go into detailed fundamental analysis of these stocks: We assume that the value of the fundamentals is already reflected in the price quoted. Keep in mind that what you're looking for is it's 'perceived value' - its value to the professional traders that are active in the stock. To select this stock you need a benchmark, something to compare it with - the Parent Index is your benchmark.

I tend to look at the industry's indices first. If the KLCI falls, I look at the industry that doesn't fall as much as KLCI, or industry that move up when KLCI is down. When KLCI is moving up, I look at the leading industry, that is, the one that move the most. After finding the potential industry, I looked at the stock in that industry that made up the KLCI. But sometimes there are special cases, like E&O counter that I've mentioned in my previous post. This counter is not a component of KLCI, but nevertheless, it's on a Main Board, and is one of an active counter. So sometimes you don't have to look at KLCI. Just look at the the industry, and find the stock within the industry that outperformed the industry benchmark. Just make sure it is an actively traded counter.

As the Parent Index reacts (i.e. falls), most stocks will fall with the Index to some extent. However, you will notice that some of the stocks are reluctant to fall, resisting the decline, especially near the lows of the market. This hints that these stocks are potentially bullish. Professional money that is active in the stock is telling you directly "yes, this is a good stock because we are not selling it - in fact, we are buying it". This is the reason why the stock is refusing to fall with the Index. Weak stocks will have no support from the major players and they will fall easily; they will also be reluctant to go up with the index. You'll see this principle at work constantly.

You need to select stocks that are active. It is no good being caught with an inactive stock waiting for something to happen. Any stock that has history of moving in tradable swings has a potential for making money by trading it. Stocks will rally up or down, following the Parent Index, so it will be logical to assume that when a stock normally goes up or down with the Index suddenly starts to resists, or is reluctant to move with the Index, it is doing so for a good reason. It would also be logical to think that if a stock is refusing to fall while the Index is falling, it is doing so because the professional interest in that stock is buying. The buying is making the stock reluctant to all. You can also reverse this concept to select stocks acting weaker than the Index for the bearish side of the trade.

p/s: The image above is for illustration purposes only. It's not a recommendation to buy the book, as I've never read it.

My Favourite Counter

Click on the image to enlarge

Ok so now let me introduce you the tool that I and most analyst used to analyse the movement of stock price. I'm using a charting software from ChartNexus. Even for most professional, this is a powerful charting software. And it's free!! Well, there are couple of features where you need to pay if you want to use them, but almost all that you need to do your analysis are free. Your stock broker may also provide you with their own charting software. RHB Invest and Jupiter used NextView. I don't know about others.

In the chart shown above, I've used several indicators to help me making the right decision. There are Moving Average (MA), Stochastic Oscillator, Moving Average Convergence Divergence (MACD), Volumes, Japanese Candlestick, and Bollinger Band. I'll try to break them into single item in the next couple of posts. In the meanwhile, I would like to give you a very brief information on how do I analyze this counter, and how I made my decision on when to buy and sell.

As I said in my previous post, I'm pretty much a 'rojak'. I looked at the fundamental of the companies when choosing which counter I would like to trade. I listed down each counter with the fundamentals that meeting my criteria, for easy reference. That way, I don't have to waste my time looking for good counter each time I want to trade. I only trade the counters in my list, and E&O is one of the counter in my list. I won't bother disclosing this company's financial report, as you can find it easily on the Internet. Just go to Google Finance and type 'eastern oriental' in the search box.

Well anyway, I've been monitoring this stock for couple of days before I bought it. Let me first introduce you to two indicators in the chart. One is called Moving Average Convergence Divergence (MACD). This is the one with green and red histograms, and a blue and red line, where sometime these lines will overlay the histograms. There is 'MACD (26d, 12d)' and 'Signal (9)' written at the top left of this indicator. The rule is, buy when the blue line is crossing above the red line. But, most of the time, if you're based your decision solely on this indicator, you will lose money. Trust me, because I've lost few times already when using this indicator by itself.

But the main reason I bought it was because the stock price has been in the range of 0.40-0.44 for couple of days, following the downtrend from the high of 0.80. The price did not went down any further than 0.40. One plausible explanation is that while the sellers were selling their holding, someone was buying. Yes I know, with every selling, someone must be buying. During the downtrend, the sellers will offer the price that he/she willing to take for him/her to sell his stocks. If no one want it at the price quoted, maybe because the price is still high, or there are another sellers offering lower prices, he/she has to lower it price too. The result is, the price will go lower, and lower, until someone find it attractive to get the stocks at the quoted price. Hence the downtrend. But when the price reached the range of 0.40-0.44, someone was buying at whatever price quoted at between that range. When the price reached 0.40, that 'person (or maybe persons)' bought as many as he can, thus cutting the supply and stopping the price from going down further. When other sellers saw this, they'll increase their price, until it reach 0.44. At this price, the 'person' 's bought less of this counter. When the demand is less, sellers will decrease their price again, thus explain why the price were trading between 0.40-0.44. The date at which the price was trading within this range is from 4/12/2008 to 31/12/2008.

At the start of the rally (indicated by the first white candle after the range trading), the volume surged to a very high level, relative to the volumes for the past couple of days. The date was 31/12/2008. Someone was buying, and he/she was buying a large amount of this stock. This dried up the supply of this counter for that day, which allow the price to close higher compare to the previous day. One of a very strong signal of market strength is that the volume suddenly jumps, and there is a white candle with wide body, especially after a downtrend, or after the stock trading in a small price range.

And as the chart shows, the stock really did went up, until it reached a high at around 0.80, which is almost similar to the previous high. Oh and did you noticed the white candle with the widest body, with the volume almost similar to the volume when the rally started? The date for that day is 9/1/2009, and this is when there was a headline in business section of The Star saying that Goldman Sachs has acquired 10 millions of E&O shares. And this is the day where the price shoot up the most, in terms of percentage. This is the day where you'll find retail investors buying this counter. Lots of them will come out and start bidding, thus shooting up the price. Most of them are investors who buy on a good news from newspaper, without doing their homework. They bought because they don't want to miss out the ride. If you want to be professional, or at least making more money than the crowds, you must not follow the herds. Follow where the professional money goes, not the crowds.

The next day volume was even higher. There are still lots of buying activity, and the price reached the high of 0.80, similar to the previous high. But, when the trading session is closed, the price did not close at the high. This is the sign of weakness, but not a strong sign, because the body of white candle is still wide. Nevertheless, professional money will pay close attention to this sign. To confirm the market is overheated, I turned into my stochastic indicator (the one below MACD). The region above 80% is an overbought region, and the region below 20% is and oversold region. When all the lines are in the overbought region, consider selling your stock, and vice versa. Look out for crossover for the timing. Sell your stock when the black dotted line (called %K) crosses below the red or blue line in the overbought region.

As expected, the price went down the following day, and there is black candle registered on the chart. I managed to sell my stock at somewhere near the peak. How do I managed to sell at the right spot? Well, I have another powerful tool in my arsenal. Did you see the blue horizontal lines in my chart? The one with weird percentage numbers? That is called Fibonacci retracement, and it serves me as my support and resistance. Each line will either act as a support, or a resistance. Whenever the price reaches the line, it has the tendency to retrace, or in other word, to move to the opposite direction.

So how much profit would you get if you happen to trade like what I mentioned above? If you managed to bought it at 0.40-0.44, and sell near the peak, that's roughly about 80%-90% profits, in only 3 weeks!! Imagine if you bought RM10,000 worth of shares at price 0.40-0.44, that's RM9000-9500 in profit, and after the comission, you will end up with RM8900-9400 profit. That's more than 2 months salary of most fresh graduate. And the good thing is you don't have to pay tax on your gain! How wonderful is that? Well of course there are risks involve, but as long as you manage those risks WELL, the benefits definitely outweight the costs. I've loss couple of times too, and there is one time where I loss almost RM1000 in just a week. But I've learned from my mistake, and improve myself by seeking more knowledge. So the key here is knowledge. Knowledge of money management, risk management, and reading charts. Once you mastered them, you will have more winning streak.

That's all for today. If you want to learn about chart, such as what is candlestick, MACD, Stochastic, and etc., you can visit StockCharts.com. I relied on this website the most when I started to learn how to read chart.

Ciao

p/s: I just realised that I said this is supposedly a 'very brief' explanation. I guess it's not so brief anymore! haha..... :P

How To Get Into The Market

I won't get into the details of what you should learn before you get into the stock market. You can get all the knowledge that you need from websites or books available throughout major bookstores.

Assuming that you have what it takes to survive in the market, there are couple of things that you need to do before you can start trading or investing.

1. You need to select your stockbroker. Most major banks have their own stockbroking house, and most of them will allow you to open a trial account. Sign up for 3-4 accounts with different house, and try to get familiar with their system. See what they offer. Read 2-3 of their research reports, if they have any. Find out how much they charge. The cheapest one I could find now is from Jupiter Securities. They offered 0.05% or minimum RM8. Low brokerage fee is very important is you're going to trade alot! I just opened a trading account with them. Before this I was trading with RHB Invest,  and heck, they charged me 0.7%! The different is so big. But RHB has very good research reports, so I guess maybe that's why they're expensive. So maybe you would like to open 2 account, one with good research, and one that offer cheap fees.

2. Well, that's it! I do have couple of things to write, but I seem to forget what it is. Oh well, below are the list of stockbroking house in Malaysia.

RHB Invest

CIMB iTrade (They have 'Zero Brokerage' promotion now.)

Aseambankers

JF Apex

Kenanga

OSK118

HwangDBS

...I think there are few more, but that's for you to find out. Maybe you could start from Bursa Malaysia.

Ok that's it for tonight. I'm off to Sabah tomorrow, so I won't be posting for couple of days. But you can call or sms if you have anything to ask. So, have fun to me! :P

Ciao

About Me

I would like to tell you a bit about myself, before I go further.

I'm not an expert in stock markets, as I'm just an average student, just like most of my friends who probably reading this blog. I've been trading real money for only about a month and half. So I'll say that I'm still a baby in this field.

But, even though I've only been trading for a month and half, I had been practising on how to trade by using paper money, for almost a year and half already. It's only after 1 year and 6 months of practise that I feel comfortable, and confidence to enter into stock market. So I would say, for those who are interested to trade stock market, I recommend that you practise for AT LEAST 6 months. DO NOT enter the stock market, unless you're feel confidence about your skills.

Another important thing is, find a good mentor. I was lucky that my father is a professional trader, so I learn a lot from him. But, I also have few other professionals as my mentor, one who will guide me if I made any foolish mistakes. Without mentor, you might not realize the mistake that you have made, and you might continue to repeat that mistakes. Mentor helps you to recognizes those mistakes, and work out from there. You mentor could be a book about stock trading, or a website from a professional trader that you admire. But I suggest you to find a real person, the one you could talk to face to face. How to find? Well, maybe your dealer or remisier, or maybe someone you know from any stock trading seminar that you've attended. If you have a friend trading stock market, maybe he can be your mentor, provided that he is a professional. If you want to find a mentor, I would suggest you to go to ChartNexus. Find and attend any seminar in your area, and try to get to know and be in touch with their speakers. Oh, I'm currently using Chart Nexus as my main tool in my trading activities. The software are free for you to download. Another excellent software is WinChart, but this one you have to pay.

Mentors will not tell you which counter to buy, as that is against their oath as a professional trader. They might give you an opinion in which counter or sectors that you might want to look at, and occasionally maybe give you a buying opinion. But when they give you buying opinion, it does not necessarily mean they will also buy that counter. Every professional trader have their own strategy, and they won't let anyone know. It seems that they also won't tell you which counter they bought, and how much capital they put in. So don't bother asking this to them.

We can place people who are in the stock market into 3 categories:

Fundamental Analyst (FA), Technical Analyst (TA), and 'Rojak' Analyst (RA).

Well, for FA, they believe in value investing. Warren Buffet is a fundamentalist. Usually FA are looking for long term invesment. They usually apply 'Buy and Hold' strategy. To be this guy, you need to have a HIGH level of patience, as it would take a long time to see your money in the stock market grow. They usually buy into companies that have excellent records. They usually don't buy speculative stocks.

TA guy, also called Chartist. As the name suggests, they believe that fundamental data can be deceiving, because financial reports are release by companies, so they can manipulate the reports, and they have the incentives to do that. But charts do not lie. It tells them what's actually happening with the companies that they are trading. Being able to read charts is like having an X-Ray vision, where there can view something that normal person cannot see.

RA, hmm.....I consider myself a RA guy. Why? Because, I choose stock with strong fundamentals. Companies with strong fundamentals have higher probability to be around for another 5 to 10 years time. They also are more able to ride any economic downturn , and get out from it without severe damage. So, by choosing only strong fundamental companies, I don't have to worry that the company might go bust in the short to medium term, or in case of economic downturn.

I use technical analysis, or chart, after I pick the counters that I'm interested to buy. If you're pure fundamentalist, your timing usually not really important. As long as the price is less than the value, FA guy will buy the stock. I use technical analysis because I think the timing is quite important. You don't want to buy a stock, just to find out that it only moves sideway for couple of days, or maybe even weeks. You want to buy at the right time, just before the counter start moving up, and exit at the right time, just before it start to go down again. I've experienced both situation, where I bought the stock, only to find out that the stock only move sideways for 6 weeks. I got pissed off, and I decided I closed my position after six weeks, and only made RM150. But I've also hit the jackpot in another counter, where I bought just at the start of rallies, and sold when the rallies came to the end. I've made 83% profits in just slightly more than a week. So you see, timing is quite important. I'll get more into this two counter in my future posting.

Most professional traders that I've met, told that this is the time if you want to get into the stock market. Most stocks have cheap valuation. Some become cheap because they are really not doing well. Some are just being driven by fear. Some people regret that they did not take the opportunity during 97/98 Asian Financial Crisis, where KLCI was at around 300 points. Now the opportunity has come again, so why don't we take this advantage. I'm not saying that we are at the bottom now. But we are at the process of bottoming. So while the market is in the process of finding the bottom, why don't we learn something about how to trade stock market, and get ready when the time comes.

That's all for today. For those who are just into the stock market, I wish you good luck. To those who are interested to learn, please contact me by dropping an email at ciahcra@gmail.com. Please note that I'm not a professional, so maybe sometimes I will not be able to answer your questions. If you want professional opinion, I strongly recommend that you attend any of ChartNexus seminar. Most of them are free.

Ciao

Getting Started

First of all, there are couple of things that I would like to bring in to your attention:

1. Everything that I wrote, is only a personal opinion. Don't EVER take it as a 'Buy' or 'Sell' recommendation. I or everyone that I mentioned in this blog should not be held responsible if you make loss in whatever market that you're involved.

2. I'm not a professional. So don't expect me to be able to answer any questions that you have. I'm not saying that I will not answer it, as I will try my best to get the answer for your inquiries, by asking my mentor, or by asking the experts in this industry. So, please bear with me if it's taking so long for me to answer any inquiries.

3. Well, that's all I can think of at the moment. More on this later.