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09-06-2006, 06:19 PM
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An anatomy of the Stock Market! - Bull & Bear Market Cycles
In financial markets, the “majority is always wrong.” When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets work in this ironic way because not everyone can win in the market.
The Start of a Bull Market
The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the “smart money”, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise.
The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.
Rising stocks eventually gain the respect of institutional investors, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.
As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.
At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as investors think “the old rules don’t apply”.
The Start of a Bear Market
After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.
When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.
The Cycle Starts Again
It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”. After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”. In reality, however, the stock market is only risky if you trade like the mindless majority!
How does one know that the market is topping. Though I am no expert, these are my observations(nifty/sensex):-
1) Monthly charts at all time high
2) Momentum indicators in weekly charts showing overbought levels or prices falling below 30 week average
3) Prices falling below the 200 day moving average or below the two-thirds fibonnacci retracement of the primary market trend
I don’t know how much fibonacci applies to weekly charts in this respect
Following the ripple, wave, tide syndrome, you probably identify the tide change by looking at the monthly/weekly charts and look for intraday turnarounds beginning with looking for bearish reversal patternos on 30 min charts?
I should add that When the market peaks and one wants to sell, one can apply a 20day moving average as a trailing stop loss.?
One can always get further intellectual satisfaction by tracking US interest rates, FII and mutual activity etc.
For identifying market bottoms, it would be reverse of the above. I have always been fascinated by how investors use technical analysis and traderji has come with a really good post. However unless we have specific and correct pinpointed information, such posts cannot stop trailing losses to us small,little,tiny investors. Its David v/s Goliath and you gotta support the underdog.
I am not much of an expert at all this and so any corrections would be as welcome as corrections to primary trends are to detect a new trend. Weekly specifications of stochastics/RSI and others applicable also would be appreciated.
Come to think of it, I have not seen any monthly chart attachment on any of the posts and weekly chart also comes in once in a blue moon. Anybody wants to criticize what I have written or contribute anything on Techincal analysis for investing, please do so. Sometimes, TA seems better at timing investment profits then following the short term hocus pocus. However TA itself is a conglomerate of indicators and so the more precise and clear the info, the better. Lets create a new trend for the small guy. If we create understanding, the small guy will no longer remain a puppy between the bulls and the bears.
Smallguys may or may not have metastock but those who do can try the negative and positive voulme index for showing smart money affiliation. File pn2.doc attached. Comments welcome
HOT STOCKS
CONFIDENTIAL ESSAY
By George Chelekis
NOTE: I believe this may be one of the most important essays on the financial markets which you will ever read. This essay will be
the lead article in Hot Stocks Review, (Part Two). Up until recently, I knew that I was missing something, but I could not
quite put my finger on it. Now I know what it is. The data which follows is only as good as you can actually use it. These are the cold, savage and ruthless facts of market manipulation. I have not made these up, but have dug them up out of out-dated, generally unavailable books on Canadian market manipulations, and pieced the rest together from observations, personal experiences and conversations with market professionals and insiders. While the books are out of date, the manipulations have been passed down from one generation to another. The only thing missing was someone to supply you with what those tricks were so you can become a more educated speculator. Many thanks to Robert Short and Vern Flannery, of Market News Publishing, for finding and sending me a copy of the book, "The Story Behind Canadian Mining Speculation" by T. H. Mitchell, first published in 1957 by George J. McLeod Limited; also Ivan Shaffer's book, "The Stock Promotion Game." I have been told that many of these tricks are now illegal. If so, would someone please tell that to the market manipulators.
THE DEADLY ART OF STOCK MANIPULATION....
In every profession, there are probably a dozen or two major rules. Knowing them cold is what separates the professional from the
amateur. Not knowing them at all? Well, let's put it this way: How safe would you feel if you suddenly found yourself piloting (solo) a Boeing 747 as it were landing on an airstrip? Unless you are a professional pilot, you would probably be frightened out of your wits and would soil your underwear. Hold that thought as you read this essay because I will explain to you how market manipulation works.
In order to successfully speculate, one should presume the following: THE SMALL CAP STOCK MARKETS PRIMARILY EXIST TO FLEECE YOU! I'm talking about Vancouver, Alberta, the Canadian Dealing Network and the US Over-the Counter markets (Pink Sheets, Bulletin Board, etc.). One could also stretch this, with many stocks, to include the world's senior stock markets, including Toronto, New York, NASDAQ, London, etc. The average investor or speculator is not very likely to have much success in the small cap crapshoots. I guess that is what attracted ME to these markets. I have been trying, for quite some time, to answer this question, "How come?" Now, I know. And you should, too!
By the way, the premise of these books is uniformly: "While these speculative companies do not actually make any money, one can profit by speculating in these companies." THAT is the premise on how these markets are run, by both the stock promoters, insiders, brokers, analysts and others in this industry. That logic is flawed in that it presumes "someone else" is going to end up holding the dirty bag. Follow this premise all the way through and you will realize the insane conclusion: For these markets to continue along that route, new suckers have to continue coming into the marketplace. The conclusion is insane in that such mad activity can only be short-lived. I disagree with this premise and propose another solution (see my earlier essay: A Modest Proposal) at the end of this essay.
What the professionals and the securities regulators know and understand, which the rest of us do not, is this.
"RULE NUMBER ONE: ALL SHARP PRICE MOVEMENTS -- WHETHER UP OR DOWN -- ARE THE RESULT OF ONE OR MORE (USUALLY A GROUP OF) PROFESSIONALS MANIPULATING THE SHARE PRICE."
This should explain why a mining company finds something good and "nothing happens" or the stock goes down. At the same
time, for NO apparent reason, a stock suddenly takes off for the sky! On little volume! Someone is manipulating that stock, often with an unfounded rumor.
In order to make these market manipulations work, the professionals assume: (a) The Public is STUPID and (b) The Public
will mainly buy at the HIGH and (c) The Public will sell at the LOW.
Therefore, as long as the market manipulator can run crowd control, he can be successful.
Let's face it: The reason you speculate in such markets is that you are greedy AND optimistic. You believe in a better tomorrow and NEED to make money quickly. It is this sentiment which is exploited by the market manipulator. He controls YOUR greed and fear about a particular stock. If he wants you to buy, the company's prospects look like the next Microsoft. If the manipulator wants you to desert the sinking ship, he suddenly becomes very guarded in his remarks about the company, isn't around to glowingly answer questions about the company and/or GETS issued very bad news about the company. Which brings us to the next important rule.
"RULE NUMBER TWO: IF THE MARKET MANIPULATOR WANTS TO DISTRIBUTE (DUMP) HIS SHARES, HE WILL START A GOOD NEWS PROMOTIONAL CAMPAIGN."
Ever wonder why a particular company is made to look like the greatest thing since sliced bread? That sentiment is manufactured.
Newsletter writers are hired -- either secretly or not -- to cheerlead a stock. PR firms are hired and let loose upon an unsuspecting public. Contracts to appear on radio talk shows are signed and implemented. Stockbrokers get "cheap" stock to recommend the company to their "book" (that means YOU, the client in his book). An advertising campaign is rolled out (television ads, newspaper ads, card deck mailings). The company signs up to exhibit at "investment conferences" and "gold shows" (mainly so they can get a little "podium time" to hype you on their stock and tell you how "their company is really different" and "not a stock promotion.") Funny little "hype" messages are posted on Internet newsgroups by the same cast of usual suspects. The more, the merrier. And a little "juice" can go a long way toward running up the stock price.
The HYPE is on. The more clever a stock promoter, the better his knowledge of the advertising business. Little gimmicks like
"positioning" are used. Example: Make a completely unknown company look warm and fuzzy and appealing to you by comparing it
to a recent success story, Diamond Fields or Bre-X Minerals. That is the POSITIONING gospel, authored by Ries and Trout (famous for "Avis: We Want To Be #1" and "We Try Harder" and other such slogans). These advertising/PR executives must have stumbled onto this formula after losing their shirts speculating in a few Canadian stock promotions! The only reason you have been invited to this seemingly incredible banquet is that YOU are the main course. After the market manipulator has suckered you into "his investment," exchanging HIS paper for YOUR cash, the walls begin to close in on you. Why is that?
"RULE NUMBER THREE: AS SOON AS THE MARKET MANIPULATOR HAS COMPLETED HIS DISTRIBUTION (DUMPING) OF SHARES, HE WILL START A BAD NEWS OR NO NEWS CAMPAIGN."
Your favorite home-run stock has just stalled or retreated a bit from its high. Suddenly, there is a news VACUUM. Either NO news or BAD rumors. I discovered this with quite a few stocks. I would get LOADS of information and "hot tips." All of a sudden, my pipeline was shut-off. Some companies would even issue a news release CONDEMNING me ("We don't need 'that kind of hype' referring to me!). Cute, huh? When the company wanted fantastic hype circulated hither and yon, there would be someone there to spoon-feed me. The second the distribution phase was DONE....ooops! Sorry, no more news. Or, "I'm sorry. He's not in the office." Or, "He won't be back until Monday."
The really slick market manipulators would even seed the Internet news groups or other journalists to plant negative stories
about that company. Or start a propaganda campaign of negative rumors on all available communication vehicles. Even hiring a
"contrarian" or "special PR firm" to drive down the price. Even hiring someone to attack the guy who had earlier written glowingly about the company. (This is not a game for the faint-hearted!)
You'll also see the stock drifting endlessly. You may even experience a helpless feeling, as if you were floating in outer space
without a lifeline. That is exactly HOW the market manipulator wants you to feel. See Rule Number Five below. He may also be doing this to avoid the severe disappointment of a "dry hole" or a "failed deal." You'll hear that oft-cried refrain, "Oh well, that's the junior minerals exploration business... very risky!" Or the oft-quoted statistic, "Nine out of 10 businesses fail each year and this IS a Venture Capital Startup stock exchange." Don't think it wasn't contrived. If a geologist at a junior mining company wasn't optimistic and rosy in his promise of exploration success, he would be replaced by someone who was! Ditto for the high-tech deal, in a world awash with PhD's.
So, how do you know when you are being taken? Look again at
Rule #1. Inside that rule, a few other rules unfold which explain how
a stock price is manipulated.
"RULE NUMBER FOUR: ANY STOCK THAT TRADES HUGE VOLUME AT HIGHER PRICES SIGNALS THE DISTRIBUTION PHASE."
When there was less volume, the price was lower. Professionals were accumulating. After the price runs, the volume increases. The professionals bought low and sold high. The amateurs bought high (and will soon enough sell low). In older books about market manipulation and stock promotion, which I've recently studied, the markup price referred to THREE times higher than the floor. The floor is the launchpad for the stock. For example, if one looks at the stock price and finds a steady flatline on the stock's chart of around 10 cents, then that range is the FLOOR. Basically, the markup phase can go as high as the market manipulator is capable of taking it. From my observations, a good markup should be able to run about five to ten times higher than the floor, with six to seven being common. The market manipulator will do everything in his power to keep you OUT OF THE STOCK until the share price has been marked up by at least two-three times, sometimes resorting to "shaking you out" until after he has accumulated enough shares. Once the markup has begun, the stock chart will show you one or more spikes in the
volume -- all at much higher prices (marked up by the manipulator, of course). That is DISTRIBUTION and nothing else.
Example: Look at Software Control Systems (Alberta:XVN), in which I purchased shares after it had been marked up five times.
There were eight days of 500,000 (plus) shares trading hands, with one day of 750,000 shares trading hands. Market manipulator(s) dumping shares into the volume at higher prices. WHENEVER you see HUGE volume after the stock has risen on a 75 degree angle, the distribution phase has started and you are likely to be buying in -- at or near the stock's peak price.
Example: Look at Diamond Fields (TSE FR), which never increased at a 75 degree angle and did not have abnormal volume
spikes, yet in less than two years ran from C$4 to C$160/share.
Example: Look at Bre-X Minerals (Alberta:BXM), which did not experience its first 75 degree angle, with huge volume until July
14th, 1995. The next two trading days, BXM went down and stayed around C$12/share for two weeks. The volume had been 60% higher nearly a month earlier, with only a slight price increase. Each high volume and spectacular increase in BXM's share price was met with a price retreat and leveling off. "Suddenly," BXM wasn't trading at C$2/share; it was at C$170/share.... up 8500% in less than a year!
In both of the above cases, major Canadian newspapers ran extremely negative stories about both companies, at one time or
another. In each instance, just before another share price run up, retail investors fled the stock! Just before both began yet another
run up! Successful short-term speculators generally exit any stock run up when the volume soars; amateurs get greedy and buy at those points.
"RULE NUMBER FIVE: THE MARKET MANIPULATOR WILL ALWAYS TRY TO GET YOU TO BUY AT THE HIGHEST, AND SELL AT THE LOWEST PRICE
POSSIBLE."
Just as the manipulator will use every available means to invite you to "the party," he will savagely and brutally drive you away from "his stock" when he has fleeced you. The first falsehood you assume is that the stock promoter WANTS you to make a bundle by investing in his company. So begins a string of lies that run for as long as your stomach can take it.
You will get the first clue that "you have been had" when the stock stalls at the higher level. Somehow, it ran out of steam and you
are not sure why. Well, it ran out of steam because the market manipulator stopped running it up. It's over inflated and he can't
convince more people to buy. The volume dries up while the share price seems to stall. LOOK AT THE TRADING VOLUME, NOT THE SHARE PRICE! When earlier, there may have been 500,000 shares trading each day for eight out of 12 trading days (as in the case of Software Control Systems), now the volume has slipped to 100,000 shares (or so) daily. There are some buyers there, enough for the manipulator to continue dumping his paper, but only so long as he can enlist one or more individuals/services to bang his drum.
He may continue feeding the promo guys a string of "promises" and "good news down the road." (Believe me, this HAS happened to me!) But, when the news finally arrives, the stock price goes THUD! This is entirely orchestrated by a market manipulator. You'll see it in the trading volume, most of which is CONTRIVED. A market manipulator will have various brokers buying and selling the stock to give the APPEARANCE of increasing volume and price so that YOU do start chasing it higher.
At some point during the stall stage, investors get fed up with the non-performance of the stock. It drifts for a while, in a steady retreat, with perhaps a short-lived spike in price and volume (the final signal that the manipulator has finally offloaded ALL of his
paper). Then, the stock comes tumbling down -- having lost ALL of the earlier share appreciation.
Sometimes, with the more cruel manipulators, they will throw in a little false hope... giving you a little more rope so they can better
hang you. Just after a severe drop, there will be a "bottom fishing" announcement which sends the share price up a bit on high volume, rises a little more after that and then continues to drift. Meanwhile, you keep getting "shaken out" through a cruel drip-drip water torture of the share price's slow retreat. Again, virtually every movement is completely orchestrated.
"RULE NUMBER SIX: IF THIS IS A REAL DEAL, THEN YOU ARE LIKELY TO BE THE LAST PERSON TO BE NOTIFIED OR WILL BE DRIVEN OUT AT THE LOWER PRICES."
Like Jesse Livermore wrote, "If there's some easy money lying around, no one is going to force it into your pocket." The same
concept can be more clearly understood by watching the tape. When a market manipulator wants you into his stock, you will hear LOUD noises of stock promotion and hype. If you are "in the loop," you will be bombarded from many directions. Similarly, if he wants you out of the stock, then there will be orchestrated rumors being circulated, rapid-fired at you again from many directions. Just as good news may come to you in waves, so will bad news.
You will see evidence of a VERY sharp drop in the share price with HUGE volume. That is you and your buddies running for the
exits. If the deal is really for real, the market manipulator wants to get ALL OF YOUR SHARES or as many as he can... and at the lowest price he can. Whereas before, he wanted you IN his market, so he could dump his shares to you at a higher price, NOW when he sees that this deal IS for real, he wants to pay as little as possible for those same shares... YOUR shares which he wants to you part with, as quickly as possible.
The market manipulator will shake you out by DRIVING the price as low as he can. Just as in the "accumulation" stage, he wants
to keep everything as quiet as possible so he can snap up as many of the shares for himself, he will NOW turn down, or even turn off, the volume so he can repeat the accumulation phase.
In the mining business, there seems to always be another "area play" around the corner. Just as Voisey's Bay drifted into oblivion,
during the fourth quarter of 1995 and early into 1996, the same Voisey Bay "wannabees" began striking deals in Indonesia. Some
even used new corporate entities. Same crooks, different shingles. The accumulation phase was TOP SECRET. The noise level was deadingly silent. As soon as the insiders accumulated all their shares, they let YOU in on the secret.
"RULE NUMBER SEVEN: CONVERSELY, YOU WILL OFTEN BE THE LAST TO KNOW WHEN THIS DEAL SHOWS SIGNS OF FAILURE."
Twenty-twenty hindsight will often show you that there was a "little stumble" in the share price, just as the "assays were delayed"
or the "deal didn't go through." Manipulators were peeling off their paper to START the downslide. And ACCELERATE it. The quick slide down makes it improbable for your getting out at more than what you originally paid for the stock... and gives you a better reason for holding onto it "a little longer" in case the price rebounds. Then, the drifting stage begins and fear takes over. And unless you have serves of steel and can afford to wait out the manipulator, you will more than likely end up selling out at a cheap price.
For the insider, marketmaker or underwriter is obliged to buy back all of your paper in order to keep his company alive and maintain control of it. The less he has to pay for your paper, the lower his cost will be to commence his stock promotion again... at some future date. Even if his company has no prospects AT ALL, his "shell" of a company has some value (only in that others might want to use that structure so they can run their own stock promotion). So, the manipulator WILL buy back his paper. He just wants to make sure that he pays as little for those shares as possible.
"RULE NUMBER EIGHT: THE MARKET MANIPULATOR WILL COMPEL YOU INTO THE STOCK SO THAT YOU DRIVE UP ITS PRICE SHARES."
Placing a Market Order or Pre-Market Order is an amateur's mistake, typifying the US investor -- one who assumes that thinly
traded issues are the same as blue chip stocks, to which they are accustomed. A market manipulator (traders included here) can jack up the share price during your market order and bring you back a confirmation at some preposterous level. The Market Manipulator will use the "tape" against you. He will keep buying up his own paper to keep you reaching for a higher price. He will get in line ahead of you to buy all the shares at the current price and force you to pay MORE for those shares. He will tease you and MAKE you reach for the higher price so you "won't miss out." Miss out on what? Getting your head chopped off, that's what!
One can avoid market manipulation by not buying during the huge price spikes and abnormal trading volumes, also known as
chasing the stock to a higher price.
"RULE NUMBER NINE: THE MARKET MANIPULATOR IS WELL AWARE OF THE EMOTIONS YOU ARE EXPERIENCING DURING A RUN UP AND A COLLAPSE AND WILL PLAY YOUR EMOTIONS LIKE A PIANO."
During the run up, you WILL have a rush of greed which compels you to run into the stock. During the collapse, you WILL
have a fear that you will lose everything... so you will rush to exit. See how simple it is and how clear a bell it strikes? Don't think this formula isn't tattooed inside the mind of every manipulator. The market manipulator will play you on the way up and play you on the way down. If he does it very well, he will make it look like someone else's fault that you lost money! Promise to fill up your wallet? You'll rush into the stock. Scare you into losing every penny you have in that stock? You'll run away screaming with horror! And vow to NEVER, ever speculate in such stocks again. But many of you still do.... The manipulator even knows how to bring you back for yet another play.
What actors! No wonder Vancouver is sometimes called
"Hollywood North."
"FINAL RULE: A NEW BATCH OF SUCKERS ARE BORN WITH EVERY NEW PLAY."
The Financial Markets are a Cruel, Unkind and Dangerous Playing Field, one place where the newest amateurs are generally
fleeced the most brutally.... usually by those who KNOW the above rules.
Just as I have a duty to ensure that each of you understand how this game is played, YOU now have that same duty to guarantee
that your fellow speculator understands these rules. Just as I would be a criminal for not making this data known to you, YOU would be just as criminal to keep it a secret. There will always be an unsuspecting, trusting fool whom the rabid dogs will tear to shreds, but it does NOT have to be this way.
IF every subscriber made this essay broadly known to his friends, acquaintances and family, and they passed it on to their
friends, word of mouth could cause many of these market manipulators to pause. IF this effort were done strenuously by many,
then perhaps the financial markets could weed out the crooked manipulators and the promoters could bring us more legitimate
plays.
The stock markets are a financing tool. The companies BORROW money from you, when you invest or speculate in their companies. They want their share price going higher so they can finance their deal with less dilution of their shares... if they are good guys. But, how would you feel about a friend or family member who kept borrowing money from you and never repaid it? That would be theft, plain and simple. So, a market manipulator is STEALING your money. Don't let him do it anymore. Insist that the company in which you invest be honest or straight... or find another company in which to
speculate. Your money talks in LOUDER volumes than any stock promotion scheme. ALWAYS refuse any deal which smells wrong.
Refuse to tolerate the scams prevalent in the financial markets. This can ONLY be accomplished by KNOWING and USING the above rules. Thoroughly COMPLETE your due diligence on a company before risking a dime. Dig up the Insider Reports to find out who is blowing out their paper, how often they are blowing out their paper and whatever happened to their "last play."
Begin to use this as YOUR rule of thumb: If the insider's paper is really worthless, then avoid it. Find another's whose paper DOES
hold promise and honest possibilities. In these small cap stock markets, you are investing more in the INDIVIDUAL behind the play, than the "possibility" of the play itself. Ask yourself before speculating: Could I lend this person $5,000 for a year and hope to
get it back? If not, then don't! Do it for your own good and the good of everyone else who is so foolish as to speculate in these financial markets!
The truly sane and only somewhat safe solution to all of this: FIND GOOD COMPANIES IN WHICH TO SPECULATE AND GET INTO THEM AT THE GROUND FLOOR LEVEL. Anything else is criminal or stupid. This is a case where there really isn't a gray area. It's either
Black or it's White. The company and its management are scamsters
or they really intend to bring value to their shareholders.
Although Tape reading seems antiquated, it combined with charts would still form a lethal combination. I was reading Richard Wycoff's bible when I came across this. Traderji and senior members in experience, please comment.
The Art of Tape Reading
By Clif Droke
Posted: 06/09/2002 Sun 00:52 / ©2002 Publishing Concepts
Tape reading is neither a science nor purely an art, but containing elements of both, we have styled it a "scientific art." Its advantages are numerous, and a knowledge of this lost practice promises to confer upon the trader a marvelous trading tool guaranteed to improve trading performance. Strictly defined, tape reading is the practice of interpreting price-to-volume configurations of listed securities on the various stock exchanges. Since trading volume is an extremely important (and frequently overlooked) element of stock trading, a major premise of tape reading is that buying and selling interest can most readily be identified and measured by looking at a stock's volume at any given time in relation to its trading range. In classical tape reading, price and volume are given equal weighting and each element can never be analyzed without the other.
An old Wall Street axiom, which you are no doubt familiar with, is that "the tape tells all." It simply means that any available information that will have an impact on the outlook for stocks, and for the economy as a whole, will be reflected in advance in the tape. This is because the people who have the greatest insight into "inside events" are sure to try to profit from their advanced knowledge by buying or selling stocks before such information trickles down to the public. By the time news of an important financial or political event reaches the trading public, the insiders who are savvy to the ways of the market, have already taken their profits, leaving the public holding the "bag." Most of us will never have the advantage of being insiders; however, with a firm knowledge of tape reading this isn't necessary to profit from the market. In fact, being able to read the tape means that you can trade right along with the insiders and participate in big moves before the trading public catches wind of what is going on. In order to provide you with a better idea of the basics of tape reading, we have excerpted below several paragraphs from the all-time classic book on tape reading, "Studies in Tape Reading," written in 1910 by Richard D. Wyckoff. Don't let the date discourage you from reading it - it is just as timely today as it was nearly 100 years ago:
What is Tape Reading?
This question may be answered by first deciding what it is not.
Tape Reading is not merely looking at the tape to ascertain how prices are running.
It is not reading the news and then buying or selling "if the stock acts right."
It is not trading on tips, opinions, or information.
It is not buying "because they are going up," or selling "because they look weak."
It is not trading on chart indications or by other mechanical methods. It is not "buying on dips and selling on bulges."
Nor is it any of the hundred other foolish things practiced by the millions of people without method, forethought or calculation.
Tape Reading seems to us: The science of determining from the tape the immediate trend of prices.
It is a method of forecasting, from what appears on the tape now, what is likely to appear in the future.
Tape Reading is rapid-fire horse sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are neglected by the large interests. The Tape Reader aims to make deductions from each succeeding transaction - every shift of the market kaleidoscope to grasp a new situation, force it, lightning-like, through the weighing machine of the brain, and to reach a decision which can be acted with coolness and precision.
It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all.
The Tape Reader is like the manager of a department store; into his office are poured hundreds of reports of sales made by the various departments. He notes the general trend of business, whether demand is heavy or light throughout the store, but lends special attention to the lines in which demand is abnormally strong or weak. When he finds difficulty in keeping his shelves full in a certain department, he instructs his buyers, and they increase their buying orders; when certain goods do not move he knows there is little demand (market) for them; therefore, he lowers his prices as an inducement to possible purchases.
A floor trader who stands in one crowd all day is like the buyer for one department - he sees more quickly than anyone else the demand for that class of goods, but has no way of comparing it to that prevailing in other parts of the store.
He may be trading on the long side of Union Pacific, which has a strong upward trend, when suddenly a break in another stock will demoralize the market in Union Pacific, and he will be forced to compete with others who have stocks to sell.
The Tape Reader, on the other hand, from his perch at the ticker, enjoys a bird's eye view of the whole field. When serious weakness develops in any quarter, he is quick to note, weigh and act.
Another advantage in favor of the Tape Reader: The tape tells the news minutes, hours and days before the news tickers, or newspapers, and before it can become gossip. Everything, from a foreign war to the passing of a dividend; from a Supreme Court decision to the ravages of the boll-weevil is reflected primarily upon the tape.
The insider who knows a dividend is to be jumped from 6 percent to 10 percent shows his hand on the tape when he starts to accumulate the stock, and the investor with 100 shares to sell makes his fractional impress upon the market price.
The market is like a slowly revolving wheel: Whether the wheel will continue to revolve in the same direction, stand still or reverse depends entirely upon the forces which come in contact with its hub and tread. Even when the contact is broken, and nothing remains to affect its course, the wheel retains a certain impulse from the most recent dominating force, and revolves until it comes to a standstill or is subjected to other influences.
The element of manipulation need not discourage any one. Manipulators are giant traders, wearing seven-leagued boots. The trained ear can detect the steady "clump, clump," as they progress, and the footprints are recognized in the fluctuations and the quantities of stock appearing on the tape. Little fellows are at liberty to tiptoe wherever the footprints lead, but they must be careful that the giants do not turn quickly.
The Tape Reader has many advantages over the long swing operator. He never ventures far from the shore; that is, he plays with a close stop, never laying himself open to a large loss. Accidents or catastrophes cannot seriously injure him because he can reverse his position in an instant, and follow the newly-formed stream from source to mouth. As his position on either the long or short side is confirmed and emphasized, he increases his line, thus following up the advantage gained."
This is the objective of the Tape Reader - to make an average profit. In a month's operations he may make $4,000 and lose $3,000 - a net profit of $1,000 to show for his work. If he can keep this average up, trading in 100-share lots, throughout a year, he has only to increase his unit to 200, 300, and 500 shares or more, and the results will be tremendous.
The amount of capital or the size of the order is of secondary importance to this question: Can you trade in and out of all kinds of markets and show an average profit over losses, commissions, etc.? If so, you are proficient in the art. If you can trade with only a small average loss per day, or come out even, you are rapidly getting there.
A Tape Reader abhors information and follows a definite and thoroughly tested plan, which, after months and years of practice, becomes second nature to him. His mind forms habits which operate automatically in guiding his market ventures.
Long practice will make the Tape Reader just as proficient in forecasting stock market events, but his intuition will be reinforced by logic, reason, and analysis.
Here we find the characteristics which distinguish the Tape Reader from the Scalper. The latter is essentially one who tries to grab a point or two profit "without rhyme or reason" - he don't care how, so long as he gets it. A Scalper will trade on a tip, a look, a guess, a hearsay, on what he thinks or what a friend of a friend of Morgan's says.
The Tape Reader evolves himself into an automaton which takes note of a situation, weighs it, decides upon a course and gives an order. There is no quickening of the pulse, no nerves, no hopes or fears. The result produces neither.
He must study the various swings and know where the market and the various stocks stand: must recognize the inherent weakness or strength in prices; understand the basis or logic of movements. He should recognize the turning points of themarket; see in his mind's eye what is happening on the floor. He must have the nerve to stand a series of losses: persistence to keep him at the work during adverse periods; self-control to avoid overtrading; a phlegmatic disposition to ballast and balance him at all times.
For perfect concentration as a protection from the tips, gossip and other influences which abound in a broker's office, he should, if possible, seclude himself. A small room with a ticker, a desk and private telephone connection with his broker's office are all the facilities required. The work requires such delicate balance of the faculties that the slightest influence either way may throw the result against the trader. He may say: "Nothing influences me," but unconsciously it does affect his judgment to know that another man is bearish at a point when he thinks stocks should be bought. The mere thought, "He may be right," has a deterrent influence upon him; he hesitates; the opportunity is lost. No matter how the market goes from that point, he has missed a cog and his mental machinery is thrown out of gear."
Having thus described our ideal Tape Reader in a general way, let us inquire into some of the requisite qualifications.
First, he must be absolutely self-reliant. A dependent person, whose judgment hangs upon that of others, will find himself swayed by a thousand outside influences. At critical points his judgment will be useless. He must be able to say: "The facts are these; the resulting indications are these; therefore I will do thus and so."
Next, he must be familiar with the technicalities of the market, so that every little incident affecting prices will be given due weight. He should know the history, earnings and financial condition of the companies in whose stock he is trading; the ways of the manipulators; the different kinds of markets; be able to measure the effect of news and rumors; know when and in what stocks it is best to trade; measure the forces behind them; know when to cut a loss and take a profit. Silence, therefore, is a much-needed lubricant to the Tape Readers mind.
The advisability of having even a news ticker in the room is a subject for discussion. The tape tells the present and future of the market. On the other hand, the news ticker records what has happened. It announces the cause for the effect which has already been more or less felt in the market.
Money is made in Tape Reading by anticipating what is coming - not by waiting till it happens and going with the crowd.
The effect of news is an entirely different proposition. Considerable light is thrown on the technical strength or weakness of the market and special stocks by their action in the face of important news. For the moment it seems to us that a news ticker might be admitted to the sanctum, provided its whispering are given only the weight to which they are entitled.
To evolve a practical method - one which any trader may use in his daily operations and which those with varying proficiency in the art of Tape Reading will find of value of assistance - such is the task we have set before us in this series.
13 things your stock broker won't tell you
With the markets touching record highs, you ought to be on your guard. Don’t go by tips. Do your own analyses, says chartered accountant Kanu Doshi.
Don’t go by tips from your freindly neighbourhood broker. Do your own analyses, says chartered accountant Kanu Doshi in conversation with an investor.
Investor: Hi, what’s up?
Advisor: Nothing, except the stock market is rangebound, with Sensex hovering around 8,500.
Investor: Can we review the entire approach to equity investment at these levels of boom market.
Advisor: Fine. We may jot down some broad principles and we may call them Axioms. As you know, these axioms are all my work but based on several excellent books on the vast and fascinating subject of stock market investment like “One Up the Wall Street”; “Beating the Street”; both by Peter Lynch; “Zulu Principle” by Jim Slater; “The Warren Buffet Way”; to name only a few of them.
Axiom One:
Where there is profit, there is always risk. Greater the opportunity of profit, greater the possibility of loss:
There is a close direct relationship between the risk and the reward. Higher the reward, greater the risk. Though this is fairly simple, it is always observed in breach.
Axiom Two:
Gentlemen who prefer BONDS, don’t know what they are missing. On Bonds, there is no return ON our money; there is only return OF our money:
Bonds being Debt instruments unlike equity, yield only fixed return and with inflation and income tax factored in, there is often no return at all.
Axiom Three:
Equity Investment is “risk” investment:
Investing in equity shares of companies is risk related because returns are linked to the company’s profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the company’s profits.
Axiom Four:
Stock market behaviour is unpredictable:
Stock market behaviour is dependent on human behaviour and since times immemorial, it has been established that human behaviour can never be predicted with any reasonable accuracy; and hence we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams resulting in opportunities of making money out of such fluctuations!
Axiom Five:
Not all common stocks are common:
Though equity shares as an investment class is one, each company has a distinct identity and performs differently and therefore rewards its investors also differently.
Axiom Six:
Investing is nothing but arbitrage of ignorance:
Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time. Stock market is one place where the buyer and the seller both think that they are smart in their decision.
Axiom Seven:
Elephants don’t gallop, zebras do:
Stock prices of big companies with large capitalizations move up or down rather slowly compared to smaller companies because there is not much of market ignorance on big companies to capitalize on. Hence smaller companies tend to reward its investors more handsomely.
Axiom Eight:
Equity investment is not for everyone, nor for all times of a person’s life:
One needs not only “cash” but also “courage” to be an equity investor. There has to be a positive mental temperament and willingness to absorb occasional losses. Those prone to panic at losses should remain invested in fixed deposits with banks and Government Bonds. If you don’t know who you are, stock market is too expensive a place to find it out! Even for a risk loving investor, there is no single static investment strategy valid from his “cradle” to “crematorium”.
Axiom Nine:
Investors make mistake in buying not good stocks at high prices but in buying bad stocks at low prices.
A lay investor tends to buy unsound companies at cheap prices instead of solid companies at high prices.
Axiom Ten:
Equity investment can’t maximize your “income”; but it can maximize your “wealth”.
Actual yield by way of dividends on equity shares with reference to their market value is often as low as 1 percent on our investment. But capital appreciation in equity values can be mind blowingly high. Ask initial investors of Infosys, Pantaloon to name only two companies.
Axiom Eleven:
Saving for investment is not a punishment.
Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich. It is about how you want you and your dear ones should live during your lifetime and thereafter.
Axiom Twelve:
On Stock Prices:
(i) There is no “high” price or “low” price of a stock. There is only the “market” price of the stock nor any price too “high” for you to buy or too “low” for you to sell.
(ii) In isolation, price of a stock is not relevant. What is important is whether a share is “underpriced” or “overpriced”, overvalued or undervalued.
(iii) We do not invest in Stock Market Index; nor in Stock Market; nor in individual companies. We invest in a stock at a price at the correct “time”.
(iv) You can’t control the “market” nor the individual stock prices; but you can control your “reaction” to the market.
(v) Intelligent investing is knowing “what” to buy; smart investing is knowing “when” to buy.
(vi) Your profit is determined by your purchase price and not your sale price. Timing your purchase is important.
(vii) Don’t ask the price of the stock, ask what is the worth of the entire company to know whether the stock is worth investing.
Axiom Thirteen:
On Share Brokers:
(i) Don’t expect your broker to help you to earn “for” you. He is there to earn “from” you.
(ii) The sub-broker made money and the main broker made money and two out of three making money in a single transaction is not a bad bargain.
(iii) Never ask a broker whether you should buy a particular stock, it is like asking a barber if you needed a haircut.
Investor: This was great education!
25 Golden Rules:
1 Plan your trades. Trade your plan.
2 Keep records of your trading results.
3 Keep a positive attitude, no matter how much you lose.
4 Don't take the market home.
5 Forget your College degree and trust your instincts.
6 Successful traders buy into bad news and sell into good news.
7 Successful traders are not afraid to buy high and sell low.
8 Continually strive for patience, perseverance, determination, and rational action.
9 Limit your losses - use stops!
10 Never cancel a stop loss order after you have placed it!
11 Place the stop at the time you make your trade.
12 Never get into the market because you are anxious because of waiting.
13 Avoid getting in or out of the market too often.
14 The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
15 Always discipline yourself by following a pre-determined set of rules.
16 Remember that a bear market will give back in one month what a bull market has taken three months to build.
17 Don't ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
18 Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
19 Split your profits right down the middle and never risk more than 50% of them again in the market.
20 The key to successful trading is knowing yourself and your stress point.
21 The difference between winners and losers isn't so much native ability as it is discipline exercised in avoiding mistakes.
22 Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
23 Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
24 Accept failure as a step towards victory.
25 Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker!
20 GOLDEN RULES FOR TRADERS
These rules were forwarded to me. Still trying to master them...
Hope they can help you all!
1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.
2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.
3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.
4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
5. Don't buy up into a major moving average or sell down into one. See #3.
6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.
7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.
8. Trends test the point of last support/resistance. Enter here even if it hurts.
9. Trade with the TICK not against it. Don't be a hero. Go with the money flow.
10. If you have to look, it isn't there. Forget your college degree and trust your instincts.
11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.
12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel.
13. Avoid the open. They see YOU coming sucker
14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.
15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.
16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.
17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.
18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.
19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.
20. Beat the crowd in and out the door. You have to take their money before they take yours, period.
An anatomy of the Stock Market! - Bull & Bear Market Cycles
In financial markets, the “majority is always wrong.” When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets work in this ironic way because not everyone can win in the market.
The Start of a Bull Market
The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the “smart money”, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise.
The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.
Rising stocks eventually gain the respect of institutional investors, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.
As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.
At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as investors think “the old rules don’t apply”.
The Start of a Bear Market
After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.
When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.
The Cycle Starts Again
It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”. After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”. In reality, however, the stock market is only risky if you trade like the mindless majority!
How does one know that the market is topping. Though I am no expert, these are my observations(nifty/sensex):-
1) Monthly charts at all time high
2) Momentum indicators in weekly charts showing overbought levels or prices falling below 30 week average
3) Prices falling below the 200 day moving average or below the two-thirds fibonnacci retracement of the primary market trend
I don’t know how much fibonacci applies to weekly charts in this respect
Following the ripple, wave, tide syndrome, you probably identify the tide change by looking at the monthly/weekly charts and look for intraday turnarounds beginning with looking for bearish reversal patternos on 30 min charts?
I should add that When the market peaks and one wants to sell, one can apply a 20day moving average as a trailing stop loss.?
One can always get further intellectual satisfaction by tracking US interest rates, FII and mutual activity etc.
For identifying market bottoms, it would be reverse of the above. I have always been fascinated by how investors use technical analysis and traderji has come with a really good post. However unless we have specific and correct pinpointed information, such posts cannot stop trailing losses to us small,little,tiny investors. Its David v/s Goliath and you gotta support the underdog.
I am not much of an expert at all this and so any corrections would be as welcome as corrections to primary trends are to detect a new trend. Weekly specifications of stochastics/RSI and others applicable also would be appreciated.
Come to think of it, I have not seen any monthly chart attachment on any of the posts and weekly chart also comes in once in a blue moon. Anybody wants to criticize what I have written or contribute anything on Techincal analysis for investing, please do so. Sometimes, TA seems better at timing investment profits then following the short term hocus pocus. However TA itself is a conglomerate of indicators and so the more precise and clear the info, the better. Lets create a new trend for the small guy. If we create understanding, the small guy will no longer remain a puppy between the bulls and the bears.
Smallguys may or may not have metastock but those who do can try the negative and positive voulme index for showing smart money affiliation. File pn2.doc attached. Comments welcome
HOT STOCKS
CONFIDENTIAL ESSAY
By George Chelekis
NOTE: I believe this may be one of the most important essays on the financial markets which you will ever read. This essay will be
the lead article in Hot Stocks Review, (Part Two). Up until recently, I knew that I was missing something, but I could not
quite put my finger on it. Now I know what it is. The data which follows is only as good as you can actually use it. These are the cold, savage and ruthless facts of market manipulation. I have not made these up, but have dug them up out of out-dated, generally unavailable books on Canadian market manipulations, and pieced the rest together from observations, personal experiences and conversations with market professionals and insiders. While the books are out of date, the manipulations have been passed down from one generation to another. The only thing missing was someone to supply you with what those tricks were so you can become a more educated speculator. Many thanks to Robert Short and Vern Flannery, of Market News Publishing, for finding and sending me a copy of the book, "The Story Behind Canadian Mining Speculation" by T. H. Mitchell, first published in 1957 by George J. McLeod Limited; also Ivan Shaffer's book, "The Stock Promotion Game." I have been told that many of these tricks are now illegal. If so, would someone please tell that to the market manipulators.
THE DEADLY ART OF STOCK MANIPULATION....
In every profession, there are probably a dozen or two major rules. Knowing them cold is what separates the professional from the
amateur. Not knowing them at all? Well, let's put it this way: How safe would you feel if you suddenly found yourself piloting (solo) a Boeing 747 as it were landing on an airstrip? Unless you are a professional pilot, you would probably be frightened out of your wits and would soil your underwear. Hold that thought as you read this essay because I will explain to you how market manipulation works.
In order to successfully speculate, one should presume the following: THE SMALL CAP STOCK MARKETS PRIMARILY EXIST TO FLEECE YOU! I'm talking about Vancouver, Alberta, the Canadian Dealing Network and the US Over-the Counter markets (Pink Sheets, Bulletin Board, etc.). One could also stretch this, with many stocks, to include the world's senior stock markets, including Toronto, New York, NASDAQ, London, etc. The average investor or speculator is not very likely to have much success in the small cap crapshoots. I guess that is what attracted ME to these markets. I have been trying, for quite some time, to answer this question, "How come?" Now, I know. And you should, too!
By the way, the premise of these books is uniformly: "While these speculative companies do not actually make any money, one can profit by speculating in these companies." THAT is the premise on how these markets are run, by both the stock promoters, insiders, brokers, analysts and others in this industry. That logic is flawed in that it presumes "someone else" is going to end up holding the dirty bag. Follow this premise all the way through and you will realize the insane conclusion: For these markets to continue along that route, new suckers have to continue coming into the marketplace. The conclusion is insane in that such mad activity can only be short-lived. I disagree with this premise and propose another solution (see my earlier essay: A Modest Proposal) at the end of this essay.
What the professionals and the securities regulators know and understand, which the rest of us do not, is this.
"RULE NUMBER ONE: ALL SHARP PRICE MOVEMENTS -- WHETHER UP OR DOWN -- ARE THE RESULT OF ONE OR MORE (USUALLY A GROUP OF) PROFESSIONALS MANIPULATING THE SHARE PRICE."
This should explain why a mining company finds something good and "nothing happens" or the stock goes down. At the same
time, for NO apparent reason, a stock suddenly takes off for the sky! On little volume! Someone is manipulating that stock, often with an unfounded rumor.
In order to make these market manipulations work, the professionals assume: (a) The Public is STUPID and (b) The Public
will mainly buy at the HIGH and (c) The Public will sell at the LOW.
Therefore, as long as the market manipulator can run crowd control, he can be successful.
Let's face it: The reason you speculate in such markets is that you are greedy AND optimistic. You believe in a better tomorrow and NEED to make money quickly. It is this sentiment which is exploited by the market manipulator. He controls YOUR greed and fear about a particular stock. If he wants you to buy, the company's prospects look like the next Microsoft. If the manipulator wants you to desert the sinking ship, he suddenly becomes very guarded in his remarks about the company, isn't around to glowingly answer questions about the company and/or GETS issued very bad news about the company. Which brings us to the next important rule.
"RULE NUMBER TWO: IF THE MARKET MANIPULATOR WANTS TO DISTRIBUTE (DUMP) HIS SHARES, HE WILL START A GOOD NEWS PROMOTIONAL CAMPAIGN."
Ever wonder why a particular company is made to look like the greatest thing since sliced bread? That sentiment is manufactured.
Newsletter writers are hired -- either secretly or not -- to cheerlead a stock. PR firms are hired and let loose upon an unsuspecting public. Contracts to appear on radio talk shows are signed and implemented. Stockbrokers get "cheap" stock to recommend the company to their "book" (that means YOU, the client in his book). An advertising campaign is rolled out (television ads, newspaper ads, card deck mailings). The company signs up to exhibit at "investment conferences" and "gold shows" (mainly so they can get a little "podium time" to hype you on their stock and tell you how "their company is really different" and "not a stock promotion.") Funny little "hype" messages are posted on Internet newsgroups by the same cast of usual suspects. The more, the merrier. And a little "juice" can go a long way toward running up the stock price.
The HYPE is on. The more clever a stock promoter, the better his knowledge of the advertising business. Little gimmicks like
"positioning" are used. Example: Make a completely unknown company look warm and fuzzy and appealing to you by comparing it
to a recent success story, Diamond Fields or Bre-X Minerals. That is the POSITIONING gospel, authored by Ries and Trout (famous for "Avis: We Want To Be #1" and "We Try Harder" and other such slogans). These advertising/PR executives must have stumbled onto this formula after losing their shirts speculating in a few Canadian stock promotions! The only reason you have been invited to this seemingly incredible banquet is that YOU are the main course. After the market manipulator has suckered you into "his investment," exchanging HIS paper for YOUR cash, the walls begin to close in on you. Why is that?
"RULE NUMBER THREE: AS SOON AS THE MARKET MANIPULATOR HAS COMPLETED HIS DISTRIBUTION (DUMPING) OF SHARES, HE WILL START A BAD NEWS OR NO NEWS CAMPAIGN."
Your favorite home-run stock has just stalled or retreated a bit from its high. Suddenly, there is a news VACUUM. Either NO news or BAD rumors. I discovered this with quite a few stocks. I would get LOADS of information and "hot tips." All of a sudden, my pipeline was shut-off. Some companies would even issue a news release CONDEMNING me ("We don't need 'that kind of hype' referring to me!). Cute, huh? When the company wanted fantastic hype circulated hither and yon, there would be someone there to spoon-feed me. The second the distribution phase was DONE....ooops! Sorry, no more news. Or, "I'm sorry. He's not in the office." Or, "He won't be back until Monday."
The really slick market manipulators would even seed the Internet news groups or other journalists to plant negative stories
about that company. Or start a propaganda campaign of negative rumors on all available communication vehicles. Even hiring a
"contrarian" or "special PR firm" to drive down the price. Even hiring someone to attack the guy who had earlier written glowingly about the company. (This is not a game for the faint-hearted!)
You'll also see the stock drifting endlessly. You may even experience a helpless feeling, as if you were floating in outer space
without a lifeline. That is exactly HOW the market manipulator wants you to feel. See Rule Number Five below. He may also be doing this to avoid the severe disappointment of a "dry hole" or a "failed deal." You'll hear that oft-cried refrain, "Oh well, that's the junior minerals exploration business... very risky!" Or the oft-quoted statistic, "Nine out of 10 businesses fail each year and this IS a Venture Capital Startup stock exchange." Don't think it wasn't contrived. If a geologist at a junior mining company wasn't optimistic and rosy in his promise of exploration success, he would be replaced by someone who was! Ditto for the high-tech deal, in a world awash with PhD's.
So, how do you know when you are being taken? Look again at
Rule #1. Inside that rule, a few other rules unfold which explain how
a stock price is manipulated.
"RULE NUMBER FOUR: ANY STOCK THAT TRADES HUGE VOLUME AT HIGHER PRICES SIGNALS THE DISTRIBUTION PHASE."
When there was less volume, the price was lower. Professionals were accumulating. After the price runs, the volume increases. The professionals bought low and sold high. The amateurs bought high (and will soon enough sell low). In older books about market manipulation and stock promotion, which I've recently studied, the markup price referred to THREE times higher than the floor. The floor is the launchpad for the stock. For example, if one looks at the stock price and finds a steady flatline on the stock's chart of around 10 cents, then that range is the FLOOR. Basically, the markup phase can go as high as the market manipulator is capable of taking it. From my observations, a good markup should be able to run about five to ten times higher than the floor, with six to seven being common. The market manipulator will do everything in his power to keep you OUT OF THE STOCK until the share price has been marked up by at least two-three times, sometimes resorting to "shaking you out" until after he has accumulated enough shares. Once the markup has begun, the stock chart will show you one or more spikes in the
volume -- all at much higher prices (marked up by the manipulator, of course). That is DISTRIBUTION and nothing else.
Example: Look at Software Control Systems (Alberta:XVN), in which I purchased shares after it had been marked up five times.
There were eight days of 500,000 (plus) shares trading hands, with one day of 750,000 shares trading hands. Market manipulator(s) dumping shares into the volume at higher prices. WHENEVER you see HUGE volume after the stock has risen on a 75 degree angle, the distribution phase has started and you are likely to be buying in -- at or near the stock's peak price.
Example: Look at Diamond Fields (TSE FR), which never increased at a 75 degree angle and did not have abnormal volume
spikes, yet in less than two years ran from C$4 to C$160/share.
Example: Look at Bre-X Minerals (Alberta:BXM), which did not experience its first 75 degree angle, with huge volume until July
14th, 1995. The next two trading days, BXM went down and stayed around C$12/share for two weeks. The volume had been 60% higher nearly a month earlier, with only a slight price increase. Each high volume and spectacular increase in BXM's share price was met with a price retreat and leveling off. "Suddenly," BXM wasn't trading at C$2/share; it was at C$170/share.... up 8500% in less than a year!
In both of the above cases, major Canadian newspapers ran extremely negative stories about both companies, at one time or
another. In each instance, just before another share price run up, retail investors fled the stock! Just before both began yet another
run up! Successful short-term speculators generally exit any stock run up when the volume soars; amateurs get greedy and buy at those points.
"RULE NUMBER FIVE: THE MARKET MANIPULATOR WILL ALWAYS TRY TO GET YOU TO BUY AT THE HIGHEST, AND SELL AT THE LOWEST PRICE
POSSIBLE."
Just as the manipulator will use every available means to invite you to "the party," he will savagely and brutally drive you away from "his stock" when he has fleeced you. The first falsehood you assume is that the stock promoter WANTS you to make a bundle by investing in his company. So begins a string of lies that run for as long as your stomach can take it.
You will get the first clue that "you have been had" when the stock stalls at the higher level. Somehow, it ran out of steam and you
are not sure why. Well, it ran out of steam because the market manipulator stopped running it up. It's over inflated and he can't
convince more people to buy. The volume dries up while the share price seems to stall. LOOK AT THE TRADING VOLUME, NOT THE SHARE PRICE! When earlier, there may have been 500,000 shares trading each day for eight out of 12 trading days (as in the case of Software Control Systems), now the volume has slipped to 100,000 shares (or so) daily. There are some buyers there, enough for the manipulator to continue dumping his paper, but only so long as he can enlist one or more individuals/services to bang his drum.
He may continue feeding the promo guys a string of "promises" and "good news down the road." (Believe me, this HAS happened to me!) But, when the news finally arrives, the stock price goes THUD! This is entirely orchestrated by a market manipulator. You'll see it in the trading volume, most of which is CONTRIVED. A market manipulator will have various brokers buying and selling the stock to give the APPEARANCE of increasing volume and price so that YOU do start chasing it higher.
At some point during the stall stage, investors get fed up with the non-performance of the stock. It drifts for a while, in a steady retreat, with perhaps a short-lived spike in price and volume (the final signal that the manipulator has finally offloaded ALL of his
paper). Then, the stock comes tumbling down -- having lost ALL of the earlier share appreciation.
Sometimes, with the more cruel manipulators, they will throw in a little false hope... giving you a little more rope so they can better
hang you. Just after a severe drop, there will be a "bottom fishing" announcement which sends the share price up a bit on high volume, rises a little more after that and then continues to drift. Meanwhile, you keep getting "shaken out" through a cruel drip-drip water torture of the share price's slow retreat. Again, virtually every movement is completely orchestrated.
"RULE NUMBER SIX: IF THIS IS A REAL DEAL, THEN YOU ARE LIKELY TO BE THE LAST PERSON TO BE NOTIFIED OR WILL BE DRIVEN OUT AT THE LOWER PRICES."
Like Jesse Livermore wrote, "If there's some easy money lying around, no one is going to force it into your pocket." The same
concept can be more clearly understood by watching the tape. When a market manipulator wants you into his stock, you will hear LOUD noises of stock promotion and hype. If you are "in the loop," you will be bombarded from many directions. Similarly, if he wants you out of the stock, then there will be orchestrated rumors being circulated, rapid-fired at you again from many directions. Just as good news may come to you in waves, so will bad news.
You will see evidence of a VERY sharp drop in the share price with HUGE volume. That is you and your buddies running for the
exits. If the deal is really for real, the market manipulator wants to get ALL OF YOUR SHARES or as many as he can... and at the lowest price he can. Whereas before, he wanted you IN his market, so he could dump his shares to you at a higher price, NOW when he sees that this deal IS for real, he wants to pay as little as possible for those same shares... YOUR shares which he wants to you part with, as quickly as possible.
The market manipulator will shake you out by DRIVING the price as low as he can. Just as in the "accumulation" stage, he wants
to keep everything as quiet as possible so he can snap up as many of the shares for himself, he will NOW turn down, or even turn off, the volume so he can repeat the accumulation phase.
In the mining business, there seems to always be another "area play" around the corner. Just as Voisey's Bay drifted into oblivion,
during the fourth quarter of 1995 and early into 1996, the same Voisey Bay "wannabees" began striking deals in Indonesia. Some
even used new corporate entities. Same crooks, different shingles. The accumulation phase was TOP SECRET. The noise level was deadingly silent. As soon as the insiders accumulated all their shares, they let YOU in on the secret.
"RULE NUMBER SEVEN: CONVERSELY, YOU WILL OFTEN BE THE LAST TO KNOW WHEN THIS DEAL SHOWS SIGNS OF FAILURE."
Twenty-twenty hindsight will often show you that there was a "little stumble" in the share price, just as the "assays were delayed"
or the "deal didn't go through." Manipulators were peeling off their paper to START the downslide. And ACCELERATE it. The quick slide down makes it improbable for your getting out at more than what you originally paid for the stock... and gives you a better reason for holding onto it "a little longer" in case the price rebounds. Then, the drifting stage begins and fear takes over. And unless you have serves of steel and can afford to wait out the manipulator, you will more than likely end up selling out at a cheap price.
For the insider, marketmaker or underwriter is obliged to buy back all of your paper in order to keep his company alive and maintain control of it. The less he has to pay for your paper, the lower his cost will be to commence his stock promotion again... at some future date. Even if his company has no prospects AT ALL, his "shell" of a company has some value (only in that others might want to use that structure so they can run their own stock promotion). So, the manipulator WILL buy back his paper. He just wants to make sure that he pays as little for those shares as possible.
"RULE NUMBER EIGHT: THE MARKET MANIPULATOR WILL COMPEL YOU INTO THE STOCK SO THAT YOU DRIVE UP ITS PRICE SHARES."
Placing a Market Order or Pre-Market Order is an amateur's mistake, typifying the US investor -- one who assumes that thinly
traded issues are the same as blue chip stocks, to which they are accustomed. A market manipulator (traders included here) can jack up the share price during your market order and bring you back a confirmation at some preposterous level. The Market Manipulator will use the "tape" against you. He will keep buying up his own paper to keep you reaching for a higher price. He will get in line ahead of you to buy all the shares at the current price and force you to pay MORE for those shares. He will tease you and MAKE you reach for the higher price so you "won't miss out." Miss out on what? Getting your head chopped off, that's what!
One can avoid market manipulation by not buying during the huge price spikes and abnormal trading volumes, also known as
chasing the stock to a higher price.
"RULE NUMBER NINE: THE MARKET MANIPULATOR IS WELL AWARE OF THE EMOTIONS YOU ARE EXPERIENCING DURING A RUN UP AND A COLLAPSE AND WILL PLAY YOUR EMOTIONS LIKE A PIANO."
During the run up, you WILL have a rush of greed which compels you to run into the stock. During the collapse, you WILL
have a fear that you will lose everything... so you will rush to exit. See how simple it is and how clear a bell it strikes? Don't think this formula isn't tattooed inside the mind of every manipulator. The market manipulator will play you on the way up and play you on the way down. If he does it very well, he will make it look like someone else's fault that you lost money! Promise to fill up your wallet? You'll rush into the stock. Scare you into losing every penny you have in that stock? You'll run away screaming with horror! And vow to NEVER, ever speculate in such stocks again. But many of you still do.... The manipulator even knows how to bring you back for yet another play.
What actors! No wonder Vancouver is sometimes called
"Hollywood North."
"FINAL RULE: A NEW BATCH OF SUCKERS ARE BORN WITH EVERY NEW PLAY."
The Financial Markets are a Cruel, Unkind and Dangerous Playing Field, one place where the newest amateurs are generally
fleeced the most brutally.... usually by those who KNOW the above rules.
Just as I have a duty to ensure that each of you understand how this game is played, YOU now have that same duty to guarantee
that your fellow speculator understands these rules. Just as I would be a criminal for not making this data known to you, YOU would be just as criminal to keep it a secret. There will always be an unsuspecting, trusting fool whom the rabid dogs will tear to shreds, but it does NOT have to be this way.
IF every subscriber made this essay broadly known to his friends, acquaintances and family, and they passed it on to their
friends, word of mouth could cause many of these market manipulators to pause. IF this effort were done strenuously by many,
then perhaps the financial markets could weed out the crooked manipulators and the promoters could bring us more legitimate
plays.
The stock markets are a financing tool. The companies BORROW money from you, when you invest or speculate in their companies. They want their share price going higher so they can finance their deal with less dilution of their shares... if they are good guys. But, how would you feel about a friend or family member who kept borrowing money from you and never repaid it? That would be theft, plain and simple. So, a market manipulator is STEALING your money. Don't let him do it anymore. Insist that the company in which you invest be honest or straight... or find another company in which to
speculate. Your money talks in LOUDER volumes than any stock promotion scheme. ALWAYS refuse any deal which smells wrong.
Refuse to tolerate the scams prevalent in the financial markets. This can ONLY be accomplished by KNOWING and USING the above rules. Thoroughly COMPLETE your due diligence on a company before risking a dime. Dig up the Insider Reports to find out who is blowing out their paper, how often they are blowing out their paper and whatever happened to their "last play."
Begin to use this as YOUR rule of thumb: If the insider's paper is really worthless, then avoid it. Find another's whose paper DOES
hold promise and honest possibilities. In these small cap stock markets, you are investing more in the INDIVIDUAL behind the play, than the "possibility" of the play itself. Ask yourself before speculating: Could I lend this person $5,000 for a year and hope to
get it back? If not, then don't! Do it for your own good and the good of everyone else who is so foolish as to speculate in these financial markets!
The truly sane and only somewhat safe solution to all of this: FIND GOOD COMPANIES IN WHICH TO SPECULATE AND GET INTO THEM AT THE GROUND FLOOR LEVEL. Anything else is criminal or stupid. This is a case where there really isn't a gray area. It's either
Black or it's White. The company and its management are scamsters
or they really intend to bring value to their shareholders.
Although Tape reading seems antiquated, it combined with charts would still form a lethal combination. I was reading Richard Wycoff's bible when I came across this. Traderji and senior members in experience, please comment.
The Art of Tape Reading
By Clif Droke
Posted: 06/09/2002 Sun 00:52 / ©2002 Publishing Concepts
Tape reading is neither a science nor purely an art, but containing elements of both, we have styled it a "scientific art." Its advantages are numerous, and a knowledge of this lost practice promises to confer upon the trader a marvelous trading tool guaranteed to improve trading performance. Strictly defined, tape reading is the practice of interpreting price-to-volume configurations of listed securities on the various stock exchanges. Since trading volume is an extremely important (and frequently overlooked) element of stock trading, a major premise of tape reading is that buying and selling interest can most readily be identified and measured by looking at a stock's volume at any given time in relation to its trading range. In classical tape reading, price and volume are given equal weighting and each element can never be analyzed without the other.
An old Wall Street axiom, which you are no doubt familiar with, is that "the tape tells all." It simply means that any available information that will have an impact on the outlook for stocks, and for the economy as a whole, will be reflected in advance in the tape. This is because the people who have the greatest insight into "inside events" are sure to try to profit from their advanced knowledge by buying or selling stocks before such information trickles down to the public. By the time news of an important financial or political event reaches the trading public, the insiders who are savvy to the ways of the market, have already taken their profits, leaving the public holding the "bag." Most of us will never have the advantage of being insiders; however, with a firm knowledge of tape reading this isn't necessary to profit from the market. In fact, being able to read the tape means that you can trade right along with the insiders and participate in big moves before the trading public catches wind of what is going on. In order to provide you with a better idea of the basics of tape reading, we have excerpted below several paragraphs from the all-time classic book on tape reading, "Studies in Tape Reading," written in 1910 by Richard D. Wyckoff. Don't let the date discourage you from reading it - it is just as timely today as it was nearly 100 years ago:
What is Tape Reading?
This question may be answered by first deciding what it is not.
Tape Reading is not merely looking at the tape to ascertain how prices are running.
It is not reading the news and then buying or selling "if the stock acts right."
It is not trading on tips, opinions, or information.
It is not buying "because they are going up," or selling "because they look weak."
It is not trading on chart indications or by other mechanical methods. It is not "buying on dips and selling on bulges."
Nor is it any of the hundred other foolish things practiced by the millions of people without method, forethought or calculation.
Tape Reading seems to us: The science of determining from the tape the immediate trend of prices.
It is a method of forecasting, from what appears on the tape now, what is likely to appear in the future.
Tape Reading is rapid-fire horse sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are neglected by the large interests. The Tape Reader aims to make deductions from each succeeding transaction - every shift of the market kaleidoscope to grasp a new situation, force it, lightning-like, through the weighing machine of the brain, and to reach a decision which can be acted with coolness and precision.
It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all.
The Tape Reader is like the manager of a department store; into his office are poured hundreds of reports of sales made by the various departments. He notes the general trend of business, whether demand is heavy or light throughout the store, but lends special attention to the lines in which demand is abnormally strong or weak. When he finds difficulty in keeping his shelves full in a certain department, he instructs his buyers, and they increase their buying orders; when certain goods do not move he knows there is little demand (market) for them; therefore, he lowers his prices as an inducement to possible purchases.
A floor trader who stands in one crowd all day is like the buyer for one department - he sees more quickly than anyone else the demand for that class of goods, but has no way of comparing it to that prevailing in other parts of the store.
He may be trading on the long side of Union Pacific, which has a strong upward trend, when suddenly a break in another stock will demoralize the market in Union Pacific, and he will be forced to compete with others who have stocks to sell.
The Tape Reader, on the other hand, from his perch at the ticker, enjoys a bird's eye view of the whole field. When serious weakness develops in any quarter, he is quick to note, weigh and act.
Another advantage in favor of the Tape Reader: The tape tells the news minutes, hours and days before the news tickers, or newspapers, and before it can become gossip. Everything, from a foreign war to the passing of a dividend; from a Supreme Court decision to the ravages of the boll-weevil is reflected primarily upon the tape.
The insider who knows a dividend is to be jumped from 6 percent to 10 percent shows his hand on the tape when he starts to accumulate the stock, and the investor with 100 shares to sell makes his fractional impress upon the market price.
The market is like a slowly revolving wheel: Whether the wheel will continue to revolve in the same direction, stand still or reverse depends entirely upon the forces which come in contact with its hub and tread. Even when the contact is broken, and nothing remains to affect its course, the wheel retains a certain impulse from the most recent dominating force, and revolves until it comes to a standstill or is subjected to other influences.
The element of manipulation need not discourage any one. Manipulators are giant traders, wearing seven-leagued boots. The trained ear can detect the steady "clump, clump," as they progress, and the footprints are recognized in the fluctuations and the quantities of stock appearing on the tape. Little fellows are at liberty to tiptoe wherever the footprints lead, but they must be careful that the giants do not turn quickly.
The Tape Reader has many advantages over the long swing operator. He never ventures far from the shore; that is, he plays with a close stop, never laying himself open to a large loss. Accidents or catastrophes cannot seriously injure him because he can reverse his position in an instant, and follow the newly-formed stream from source to mouth. As his position on either the long or short side is confirmed and emphasized, he increases his line, thus following up the advantage gained."
This is the objective of the Tape Reader - to make an average profit. In a month's operations he may make $4,000 and lose $3,000 - a net profit of $1,000 to show for his work. If he can keep this average up, trading in 100-share lots, throughout a year, he has only to increase his unit to 200, 300, and 500 shares or more, and the results will be tremendous.
The amount of capital or the size of the order is of secondary importance to this question: Can you trade in and out of all kinds of markets and show an average profit over losses, commissions, etc.? If so, you are proficient in the art. If you can trade with only a small average loss per day, or come out even, you are rapidly getting there.
A Tape Reader abhors information and follows a definite and thoroughly tested plan, which, after months and years of practice, becomes second nature to him. His mind forms habits which operate automatically in guiding his market ventures.
Long practice will make the Tape Reader just as proficient in forecasting stock market events, but his intuition will be reinforced by logic, reason, and analysis.
Here we find the characteristics which distinguish the Tape Reader from the Scalper. The latter is essentially one who tries to grab a point or two profit "without rhyme or reason" - he don't care how, so long as he gets it. A Scalper will trade on a tip, a look, a guess, a hearsay, on what he thinks or what a friend of a friend of Morgan's says.
The Tape Reader evolves himself into an automaton which takes note of a situation, weighs it, decides upon a course and gives an order. There is no quickening of the pulse, no nerves, no hopes or fears. The result produces neither.
He must study the various swings and know where the market and the various stocks stand: must recognize the inherent weakness or strength in prices; understand the basis or logic of movements. He should recognize the turning points of themarket; see in his mind's eye what is happening on the floor. He must have the nerve to stand a series of losses: persistence to keep him at the work during adverse periods; self-control to avoid overtrading; a phlegmatic disposition to ballast and balance him at all times.
For perfect concentration as a protection from the tips, gossip and other influences which abound in a broker's office, he should, if possible, seclude himself. A small room with a ticker, a desk and private telephone connection with his broker's office are all the facilities required. The work requires such delicate balance of the faculties that the slightest influence either way may throw the result against the trader. He may say: "Nothing influences me," but unconsciously it does affect his judgment to know that another man is bearish at a point when he thinks stocks should be bought. The mere thought, "He may be right," has a deterrent influence upon him; he hesitates; the opportunity is lost. No matter how the market goes from that point, he has missed a cog and his mental machinery is thrown out of gear."
Having thus described our ideal Tape Reader in a general way, let us inquire into some of the requisite qualifications.
First, he must be absolutely self-reliant. A dependent person, whose judgment hangs upon that of others, will find himself swayed by a thousand outside influences. At critical points his judgment will be useless. He must be able to say: "The facts are these; the resulting indications are these; therefore I will do thus and so."
Next, he must be familiar with the technicalities of the market, so that every little incident affecting prices will be given due weight. He should know the history, earnings and financial condition of the companies in whose stock he is trading; the ways of the manipulators; the different kinds of markets; be able to measure the effect of news and rumors; know when and in what stocks it is best to trade; measure the forces behind them; know when to cut a loss and take a profit. Silence, therefore, is a much-needed lubricant to the Tape Readers mind.
The advisability of having even a news ticker in the room is a subject for discussion. The tape tells the present and future of the market. On the other hand, the news ticker records what has happened. It announces the cause for the effect which has already been more or less felt in the market.
Money is made in Tape Reading by anticipating what is coming - not by waiting till it happens and going with the crowd.
The effect of news is an entirely different proposition. Considerable light is thrown on the technical strength or weakness of the market and special stocks by their action in the face of important news. For the moment it seems to us that a news ticker might be admitted to the sanctum, provided its whispering are given only the weight to which they are entitled.
To evolve a practical method - one which any trader may use in his daily operations and which those with varying proficiency in the art of Tape Reading will find of value of assistance - such is the task we have set before us in this series.
13 things your stock broker won't tell you
With the markets touching record highs, you ought to be on your guard. Don’t go by tips. Do your own analyses, says chartered accountant Kanu Doshi.
Don’t go by tips from your freindly neighbourhood broker. Do your own analyses, says chartered accountant Kanu Doshi in conversation with an investor.
Investor: Hi, what’s up?
Advisor: Nothing, except the stock market is rangebound, with Sensex hovering around 8,500.
Investor: Can we review the entire approach to equity investment at these levels of boom market.
Advisor: Fine. We may jot down some broad principles and we may call them Axioms. As you know, these axioms are all my work but based on several excellent books on the vast and fascinating subject of stock market investment like “One Up the Wall Street”; “Beating the Street”; both by Peter Lynch; “Zulu Principle” by Jim Slater; “The Warren Buffet Way”; to name only a few of them.
Axiom One:
Where there is profit, there is always risk. Greater the opportunity of profit, greater the possibility of loss:
There is a close direct relationship between the risk and the reward. Higher the reward, greater the risk. Though this is fairly simple, it is always observed in breach.
Axiom Two:
Gentlemen who prefer BONDS, don’t know what they are missing. On Bonds, there is no return ON our money; there is only return OF our money:
Bonds being Debt instruments unlike equity, yield only fixed return and with inflation and income tax factored in, there is often no return at all.
Axiom Three:
Equity Investment is “risk” investment:
Investing in equity shares of companies is risk related because returns are linked to the company’s profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the company’s profits.
Axiom Four:
Stock market behaviour is unpredictable:
Stock market behaviour is dependent on human behaviour and since times immemorial, it has been established that human behaviour can never be predicted with any reasonable accuracy; and hence we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams resulting in opportunities of making money out of such fluctuations!
Axiom Five:
Not all common stocks are common:
Though equity shares as an investment class is one, each company has a distinct identity and performs differently and therefore rewards its investors also differently.
Axiom Six:
Investing is nothing but arbitrage of ignorance:
Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time. Stock market is one place where the buyer and the seller both think that they are smart in their decision.
Axiom Seven:
Elephants don’t gallop, zebras do:
Stock prices of big companies with large capitalizations move up or down rather slowly compared to smaller companies because there is not much of market ignorance on big companies to capitalize on. Hence smaller companies tend to reward its investors more handsomely.
Axiom Eight:
Equity investment is not for everyone, nor for all times of a person’s life:
One needs not only “cash” but also “courage” to be an equity investor. There has to be a positive mental temperament and willingness to absorb occasional losses. Those prone to panic at losses should remain invested in fixed deposits with banks and Government Bonds. If you don’t know who you are, stock market is too expensive a place to find it out! Even for a risk loving investor, there is no single static investment strategy valid from his “cradle” to “crematorium”.
Axiom Nine:
Investors make mistake in buying not good stocks at high prices but in buying bad stocks at low prices.
A lay investor tends to buy unsound companies at cheap prices instead of solid companies at high prices.
Axiom Ten:
Equity investment can’t maximize your “income”; but it can maximize your “wealth”.
Actual yield by way of dividends on equity shares with reference to their market value is often as low as 1 percent on our investment. But capital appreciation in equity values can be mind blowingly high. Ask initial investors of Infosys, Pantaloon to name only two companies.
Axiom Eleven:
Saving for investment is not a punishment.
Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich. It is about how you want you and your dear ones should live during your lifetime and thereafter.
Axiom Twelve:
On Stock Prices:
(i) There is no “high” price or “low” price of a stock. There is only the “market” price of the stock nor any price too “high” for you to buy or too “low” for you to sell.
(ii) In isolation, price of a stock is not relevant. What is important is whether a share is “underpriced” or “overpriced”, overvalued or undervalued.
(iii) We do not invest in Stock Market Index; nor in Stock Market; nor in individual companies. We invest in a stock at a price at the correct “time”.
(iv) You can’t control the “market” nor the individual stock prices; but you can control your “reaction” to the market.
(v) Intelligent investing is knowing “what” to buy; smart investing is knowing “when” to buy.
(vi) Your profit is determined by your purchase price and not your sale price. Timing your purchase is important.
(vii) Don’t ask the price of the stock, ask what is the worth of the entire company to know whether the stock is worth investing.
Axiom Thirteen:
On Share Brokers:
(i) Don’t expect your broker to help you to earn “for” you. He is there to earn “from” you.
(ii) The sub-broker made money and the main broker made money and two out of three making money in a single transaction is not a bad bargain.
(iii) Never ask a broker whether you should buy a particular stock, it is like asking a barber if you needed a haircut.
Investor: This was great education!
25 Golden Rules:
1 Plan your trades. Trade your plan.
2 Keep records of your trading results.
3 Keep a positive attitude, no matter how much you lose.
4 Don't take the market home.
5 Forget your College degree and trust your instincts.
6 Successful traders buy into bad news and sell into good news.
7 Successful traders are not afraid to buy high and sell low.
8 Continually strive for patience, perseverance, determination, and rational action.
9 Limit your losses - use stops!
10 Never cancel a stop loss order after you have placed it!
11 Place the stop at the time you make your trade.
12 Never get into the market because you are anxious because of waiting.
13 Avoid getting in or out of the market too often.
14 The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
15 Always discipline yourself by following a pre-determined set of rules.
16 Remember that a bear market will give back in one month what a bull market has taken three months to build.
17 Don't ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
18 Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
19 Split your profits right down the middle and never risk more than 50% of them again in the market.
20 The key to successful trading is knowing yourself and your stress point.
21 The difference between winners and losers isn't so much native ability as it is discipline exercised in avoiding mistakes.
22 Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
23 Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
24 Accept failure as a step towards victory.
25 Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker!
20 GOLDEN RULES FOR TRADERS
These rules were forwarded to me. Still trying to master them...
Hope they can help you all!
1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.
2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.
3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.
4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
5. Don't buy up into a major moving average or sell down into one. See #3.
6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.
7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.
8. Trends test the point of last support/resistance. Enter here even if it hurts.
9. Trade with the TICK not against it. Don't be a hero. Go with the money flow.
10. If you have to look, it isn't there. Forget your college degree and trust your instincts.
11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.
12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel.
13. Avoid the open. They see YOU coming sucker
14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.
15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.
16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.
17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.
18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.
19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.
20. Beat the crowd in and out the door. You have to take their money before they take yours, period.