Successful Ratio InvestingSuccessful long term investing as well as short term and day trading depend on basic information about how stocks can be expected to perform in the near and long term. The long term investor is interested in such things as the price to earnings ratio or cash flow ratios as measures of intrinsic stock value. The day trader is interested in these same factors as they can tell him where the stock price might go next, up or down. Successful ratio investing requires that traders as well as investors routinely look a quarterly reports showing how a company is doing. Successful ratio investing depends to a large degree on fundamental analysis. However, ultimate success in picking stocks with the right qualities for long term investing or short term trading requires a combination of fundamental and technical analysis.
Understanding the various ratios that describe a stock’s performance is important. Understanding how the market is interpreting these ratios requires technical analysis tools such as Candlestick analysis with Candlestick pattern formations. Successful execution when buying stock or selling stock often comes out the best with the use of Candlestick trading tactics
Successful ratio investing takes into account cash flow ratios, the price to earnings ratio, the price to sales ratio, the quick ratio, the debt to asset ratio and various risk reward ratios. Successful ratio investing takes into account just what each ratio is capable of telling us and when its information might be misleading. For example, a low price to sales ratio might mean that a stock is underpriced even though its products are selling well. However, the company might have such high expenses that it is not making a profit. In this case a better measure of how well a company is doing might be the price to earnings ratio. In this case both sales/earnings and expenses are taken into account. In either case the point of successful ratio investing is to compare a stock with others in its market sector. Successful ratio investing is picking stocks that are making money but are still under priced. If the earnings can be expected to continue then the intrinsic stock value (a measure of forward looking earnings) is high and the stock may well be a good buy.Successful ratio investing also looks at debt versus company assets. This ratio gives the investor a clear view of how a company will be able to weather an economic downturn or the time it takes to get a new, potentially profitable, product to market. A low debt to asset ratio means good financial health. A high debt to asset ratio is a good reason to avoid a stock as a long term investment. However, it may be a good reason to consider selling puts on the stock in case of a big drop in stock price. Whereas a low debt to asset ratio is part of the margin of safety of long term investing a high ratio is a big warning sign for long term investors. Finding a high debt to asset ratio and following the stock price with Candlestick charting techniques can put the day trader in a position to make substantial profits in short selling just as the larger market catches on and starts to sell the stock.
Market Direction: Where do most investors buy? They usually buy exuberantly at the top. What does that mean for the candlestick investor? It allows for the preparation of taking profits. The Dow demonstrates how the tee line was an effective tool for keeping long positions in place. As long as the bears could not close the markets below the T-line, it had to be assumed the uptrend was still in progress. This past week has demonstrated that the bears could not keep the selling below the T-line going into the close.
Using the T-line as a support level created two advantageous analytical tools for maintaining long positions. It produced the confidence to maintain long positions that had not shown candlestick reversal signals but may have been trading down. It becomes easier to sell a position that has good profits and is now starting to show some weakness. This is the trap most investors find themselves falling into. This cuts their profits. They sell at the first signs of selling, not waiting for a confirmed sell signal. Utilizing the knowledge that an individual stock might be selling off while the market indexes are demonstrating they are not closing below the T-line is more apt to keep an investor in stock positions that have not necessarily reversed.
Understanding the simple fact that the uptrend is still in progress if the market indexes can not close below the tee line also allows for the holding of positions where the pattern breakout is still in progress. The past six weeks have produced excellent profits. Not because the market trend has merely been moving up, but because the steady upward trend has allowed for strong price moves to breakout from specific patterns.
While the average investor may have gains 3%, 4%, 5% over the past three months stocks rising in a rising market, the candlestick investor has been participating in price moves up 15%, 25%, 35%, or greater because the market conditions allowed for patterns to explode to the upside.
It does not take much intelligence to realize that recognizing price pattern moves allows for a high probability profitable exportation. If stocks are moving in a manner that can be highly predictive, options can be applied with a fairly high degree of accuracy. Most investors have a difficult time analyzing which direction price moves are going to occur. The candlestick investor has the advantage of not only knowing the direction but the magnitude of price moves. This becomes highly profitable for trading option spreads.
Chat session tonight at 8 PM ET. We would discuss a logical method for taking profits in these market conditions.
Fall 2010 E-Learning Online Training Schedule
November 6 & 7, 2010
November 20 & 21, 2010