Building Minds. For. Building Wealth v2.2. A Background Paper for IBD MeetUp Tucson. John T. Hershey. Adobe Llamingos 20 MAY PDF

Building Minds For Building Wealth v2.2 A Background Paper for IBD MeetUp Tucson By John T. Hershey Adobe Llamingos 20 MAY 2006 CONTENTS Summary 4 Part I The Macro: Game Plans, Incentives and Confidence
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Building Minds For Building Wealth v2.2 A Background Paper for IBD MeetUp Tucson By John T. Hershey Adobe Llamingos 20 MAY 2006 CONTENTS Summary 4 Part I The Macro: Game Plans, Incentives and Confidence 5 A. The Trading Business Plan 7 1. Position Trading Stocks 9 Initial Analysis Sheet 13 Daily Analysis Sheet 19 Possible Buys Check Sheet SCT Trading Commodities (ES) 24 B. Health Well Being and Maintenance 35 Part II The Local: Routine and Discipline 38 A. Trading Plans 39 Position Trading and SCT Capital Application 40 Time Allocation between Position Trading and SCT 41 Key Market Characteristics 42 Prediction s Alternative 43 Sharing Responsibilities with the Market 45 B. Mental Growth and Body Language 49 Part III The Micro: Coarse, Medium and Fine 52 A. Effectiveness and Efficiency Act to Make Money and Worry if it was Correct Later Not Acting When You Make a Decision Discipline 57 B. Iterative Refinement 59 1 Conclusions 62 Appendices 64 A. Achieving an Effective Money Making Program 64 Summary Markets People Just Doing it Iterative Refinement Be, Do, Have Results 66 B. Business Plan Outline Introduction Funding Requested Organization Chart 68 4.History Assets and Liabilities Pro Forma Trading Paradigms Applications of Wealth Effectiveness and Efficiency through Iterative Refinement Downside Risks 72 Common Mistakes 73 IQ and EQ Summary 77 2 C. The 8 Doublings The PV Relationship 78 PV Relationship Synopsis 82 A Few More Looks At the PV Relationship Channels Market Operating Point 91 A Matrix Sequences Scoring 99 Scoring Variables 100 Trading Cycle The Big 4: Monitoring, Analysis, Decision Making, and Taking Timely Actions 103 Monitoring 103 Analysis 104 Decision Making 105 Taking Timely Actions Physiological and Psychological Conduct Sufficiency 108 D. SCT Synopsis 110 SWEEPS Chart 113 SCT Chart 118 3 Summary This paper is an abbreviated presentation of what it takes, pragmatically, for a person to make money by position trading stocks and Seamless Continuous Trading (SCT) of the S&P 500 E-mini (ES) futures. It tells how a person can get to the point of making significant inroads on achieving their potential. Markets are there for anyone to use, and any person has the potential to enable themselves to perform by using obtainable knowledge, skills and experience. Some good choices are required. Then, with these choices made, a person must go through a holistic process of refinement to become an expert. It all boils down to defining and completing a process. The objective is to form a working partnership with the market. To do this, starting from an understood beginning point, it is necessary to become operational in several related areas concurrently. The process allows a person to realize a potential that is already there, by going from level to level towards an operational goal. Getting there is a process. It is more than just looking at what is. It is also a process of acquisition and a process of using learning tools to build structure and new processes. All the while, energy must be supplied to make the construct work, function, and refine it s self. This paper is organized to unwrap and place upon the table the opportunity and, then, to go about the business of systematically getting it to work, by an effort of transference. i.e. to make money as a consequence of taking the opportunity. The text of this paper is written in the vein of me, the author, talking to you, the recipient of the transference. 4 Part I The Macro: Game Plans, Incentives and Confidence If you don t know where you are going you don t need a map. We all are going, by transference, to a place where you make as much money as you want. This amount of money is much more than you need. The Game Plan, your map, is based upon your trading business plan which is THE incentive for going to the place to make money. The trading business plan starts with your present capital and includes 8 levels of doubling, the effectiveness of your performance as compared to your beginning performance level. There are two caveats you will have to include in your plan; how times will change in terms of the worth of money, and the possibility that you may have done some of these doublings already, if you are not a novice currently. There are two other parts to this Game Plan: the markets and YOU. The markets are there now, offering money, and YOU are reading this in your present state of existence. By connecting you to the markets and enabling you, your business plan (wealth building) will become a matter of record over time. Confidence will come to you during this endeavor. It comes from your mind as you build your mind, successfully, to take advantage of the opportunity. The markets operate in ways that are wholly documented. They are known quantities and they give money to those who use them, correctly, for such purposes. We all, as users, take what we are able to as a direct consequence of our knowledge, skills and experience. The markets are there offering; we are here with given expertise. This paper deals with 5 clarifying the methods, by being effective and efficient, that can be used deliberatively to take the offered money out of the market and put it into your hands as a trader. Once the game plan is clear, an iterative refinement process ensues to afford you, a trader, the 8 doublings of performance for taking that money out of the market. The above, scopes and bounds the opportunity and the process necessary to go from the NOW to the place where you, as a trader, are able to realize what the market offers to you at all times. Acceptable stocks have price rates of change that are seen to be in the range of 5 percent per day. The ES typically moves in a range of 15 points a day. Any person can see this happen, have a plan to make money from these price changes, and carry out an approach to transfer this capital dynamic from the traded markets into a personal trading account. Public records that describe these three elements abound. This paper is a description of how to go about getting engaged in and carrying out that which is required to participate in this process. 6 A. The Trading Business Plan The overall game plan merges several factors. The trading business plan is more a commentary on how the money part of this plan works. Later in Part II there is an emphasis on trading plans and the trading methods used. In this section we will consider how all of the details relate in the formal package, outlined in appendix B. The trading business plan is designed and followed to achieve a critical path of building capital as fast as possible, with due consideration to both financial and non-financial aspects. Basically the critical path is determined by using all the knowledge, skills and experience available at the first opportunity to deploy them to making money without undue risk. It is especially important not to trade in those areas where knowledge and skills are lacking. The trading business plan develops around two learning stages. The first stage is related to position trading stocks, where there is no financial leverage and the pace of the market traded is relatively slow. Having a slow paced market, affords the beginning trader the time to get the job done successfully because the time needed is always available. By not leveraging capital, in stock trading, the impact of temporary failures or mistakes does not eat up prior successes. Position trading stocks builds a foundation for moving into faster paced markets where capital is ordinarily leveraged. The two markets that will be used are very different in one major respect. Position trading stocks is done in one general market (equities) where many instruments are traded concurrently. In contrast, the commodities futures index market contains instruments for trading and most traders focus on one instrument within that market. While neither market is 7 continuous, in mathematical terms, position trading stocks is a continuous day after day operation without end. Cycles of entries and exits are made over and over. In commodities trading, the activity of the market focuses primarily on the front contract whose life span is three months (a quarter) meaning that the front month is renewed quarterly with a fixed time horizon, that is initially three months out. Thus, the future contract term continually shortens after initiation until the term of the front contract is used up in a quarter of a year. The purposes of the stock instruments are entirely different than the purpose of the commodities futures index instruments. Stock instruments represent ownership in ongoing corporations, while commodities contracts are financial risk insurance-like protection instruments related to a limited value range in the future. Making money in position stock trading happens much more slowly (10% every 4 to 8 days) than in trading commodities futures indexes (up to 3 times the daily range, each day). On the other hand, the stock markets are much larger and diverse than the commodities future indexes. When a trader reaches a level of expertise in both markets and trades concurrently, the normal procedure is to limit the capital in commodities futures index trading. The limitation is set by giving regard to being able to trade in a very timely manner without a fear of not having orders filled promptly. In this way slippage is avoided. As profits accumulate through compounding, and capital surpluses occur, they are transferred periodically from the commodities future index trading accounts to the position stock trading program accounts. At some point financial trading limitations do occur in stock position trading. Because the traded universe is relatively broad, more and more streams of capital are added and are traded in parallel. 8 1. Position Trading Stocks Position trading stocks is an approach that involves carrying out the process shown in the chart on page 11. The left QA (Quality Assurance) part of the chart is designed to yield an up to date Universe which then can be traded as an EOD (End of Day) data oriented effort. The right side of the chart deals with the ROI (Return on Investment) performance characteristics of making money by using this Universe of stocks. 9 QUALITY ASSURANCE RETURN ON INVESTMENT S&P Reuters Blumberg Morningstar C EPS Daily download. STAGING Media News Investor s Business Daily A RS SELL SELL Print your GAINERS & SELL / HOLD N Buy lists. GAPPERS HOLD S B / H Slideshow, FIRST RISING BUY reviewing VOLUME BUY BUY charts. Sector Data L Hold DRY UP / LOW VOLUME FIRST Scoring A. (30 5) RISING DU / FRV I H / S monitored B. (3.6) VOLUME Daily Graphs stocks. C. (6.3) Internet M Sell CULLING GATHERING DATA EASY SCAN ANALYSIS MONITORING TRADES The basic principal is to trade a very high quality Universe as measured by earnings and price performance. Stocks are obtained nowadays from Stocktables.com and the default setup for getting a list of approximately 125 stocks is done by setting limits on the RS (Relative Strength) and EPS (Earnings per Share). The price range is arbitrarily set at 10 to 50. The list is sorted by increasing volume, to assure that the order of appearance of the stocks corresponds to three scoring values going down the list from top to bottom (7 s, 0 s and 1 s). Over time the stocks migrate up the list. The list can be pulled at the frequency of every 3 to 4 days. All stocks on the list are graded to determine their repeatability and reliability and consequently their Rank which is a measure of the daily money velocity in percent per day. An initial analysis sheet is used to do this, either manually (A good drill for getting to expert) or automatically by Excel. The chart of the stock is also annotated with formations and Initial Analysis Sheet (IAS) designations at this time. Stocks are then placed in a set of review portfolios according to their contemporary scores (7 s, 0 s, and 1 s), whether they are owned, and if they are being considered for purchase (a HOT list). Daily evaluations are made using logging sheets. The logging sheets represent monitoring, analysis, decision making and timely action as the 16 columns are traversed. Logging sheets are kept for each portfolio. Clearstation.com is an example of a place to keep portfolios that can be accessed to do the daily routine in convenient bulk viewing groups. All of the above is kept in three ring binders and, periodically, new annotated charts are pulled from the displays used on the PC monitoring platform. 11 The Hot list and the owned lists are given special attention on a daily basis. A log sheet is used to assess the HOT list and the daily analysis sheet is used to complete the monitoring, analysis, decision making and planned action for the next day on owned stocks. The progression of wealth building continually accelerates. There is no point where the effort becomes saturated (as mold would as it grew on a piece of bread). The progression is a consequence of the continuing acquisition of knowledge, skills and experience. At some point, while also holding a job, EOD trading becomes the principal source of acquired wealth. When this occurs it is time to consider trading full time. Monitoring stocks full time, instead of just in the evening as an EOD effort, changes the effectiveness and efficiency of making money by position trading. You move from EOD data to real time data in a more revealing fractal (usually the 15 or 30 minute fractal). This means two things: you get to see the actual peaks forming, and you can also consider changing the duration of the hold period to only incorporate the period of highest money velocities. Both considerations greatly increase the return on investment (ROI), and replacing the income of not working usually happens over a short interval. Coupling this with the real time commodities trading opportunity completes the full picture. Trading stocks only during their optimum price velocities is called cross trading. It involves emphasizing the money velocity of the hold period. As stocks are monitored in real time, it is possible to rough out their time rate of change in value. This applies to owned stocks as well as HOT list stocks. When an owned stock begins to wane in capital appreciation, it can be sold and the capital can then be used to buy and hold a stock whose capital appreciation is growing better than the just sold stock. 12 Initial Analysis Sheet Symbol Date : Name Reference date Average Return % RANK Point Shift Peak Price Base Price % gain # of days Projection Target Date Buy Date # of days Target Price Buy Price Target Gross Actual Buy date Sell date Actual days % of year Cost Sale Net profit % return RISK MINIMIZATION DECISION STRATEGY A B C Refererence buy price Times two commissions Breakeven price $ - $ - $ * Breakeven $ - $ - $ - Average Point Shift Av. Daily price range EXPECTED SELL PRICE Av. Daily change + - Daily + Hi-Lo - Chart Volume Factors Scale for volume K M Dry Up Volume First Rising Vol Recent Peak Vols Decision Max Max Cycle Totals Av. Daily Change in close Average Buy Date 50% Sell Indicators Expected days One day price shift to sell date Over time ADCC Twice # of days (Av daily close change) Sell Date Sell Date 2 x ADCC ABSOLUTE DOWNSIDE SELL PRICE (remaining 50%) Min expected profit (1.1*BE) less Av. Point Shift Equals ABSOLUTE Sell Price The Initial Analysis Sheet (IAS) Each time a new stock enters your world you go through the process of qualifying it for future money making. The Initial Analysis Sheet is used for this purpose, in five different ways: to obtain a ranking for the equity, to set up a buy sell cycle, to write a risk minimization decision strategy, to have on hand a sell strategy (50% of hold) that focuses on the passage of time and, lastly, to have a determination of the absolute downside sell price (last 50% of hold). Accordingly the attached Initial Analysis Sheet is divided vertically into 5 parts. Each part will be discussed below. Initial Analysis To Determine Stock Rank To determine the rank of the stock you need to use a current daily chart that contains EOD price and volume bars and the duration of this chart should be at least 6 months. With a ruler you quickly sketch in the last 5 cycles by lining out the trend lines (right channel line) of the last 5 cycles. At a minimum, 5 cycles are required for the last 6 months. Also, but not necessary, you can scale in the Intermediate Term (IT) trend(s) that form the envelope of the short term cycles on the chart. Next, number the cycles from left to right or pick and number 5 cycles that best demonstrate the price action. On the initial analysis sheet write in the beginning date of the cycles you have chosen, or simply write the numbers 1 through 5 since you now have those annotated on the chart. For each of the five columns note the following 3 items: The point shift of price, the point value from trough to peak, the base price where the cycle began (trough) and the number of 14 days in the cycle. To the right of these three rows calculate and write down the average value for each. In the next box to the right labeled Return write out the results of the calculation which represents the decimal equivalent of the point shift divided by the base price (the percent of the run). The final calculation you do is to determine the rank by dividing the Return decimal (percent) by the number of days, on average, it took to get that return. The rank that results is the average amount of price change as a decimal (percent) that occurs each day of the cycle. This is the potential of the stock to make money. Thus each time a new stock is added to your universe (list) you know its rank as compared to all the other stocks in your universe. To make more money, priority is given to high ranking stocks when it comes time to choose. What you have actually gained by carrying out this process by hand, is a simple working knowledge of how this stock can be used to make money. Trading Cycle Workout The second part of the Initial Analysis Sheet is getting oneself ready to actually carry out a trade. The upper half is used for targeting the time and price of the trading you are going to do. Fill in all six boxes. The target date is your sell date. The buy date, once entered, can be used as the sub-trend, to calculate the number of days of the hold. Be careful not to include weekend days. The making money part of this workout is on the right side. Pick a target sell price by determining the likely performance for the next cycle. Use the left channel line to find this value. If you do the same for the buy price, the target gross is determined by taking the difference of the two prices. The second half of this section is completed each time you do 15 a trade. Put in the actual information that occurs and then compare the results with the expectations from your initial calculations. Two additional boxes are used. Calculate the percent of the year that was used on the left and the percent return achieved on the right. Risk Minimization Decision Strategy Once a qualified stock is a part of your universe, you will be examining it periodically using charts to estimate how things can go. Chart ID; when you are charting, label the buy points on the chart A, B or C so that you can go back to it for the respective buy price location(s) you have entered on the IAS. Complete the break even price for each of the buy prices you selected by simply adding two commissions to that buy price. Multiply the break even price by 1.1 to determine a 10% profit value and enter this next to the break even price. Also enter the average trade swing points and the average daily price range (bar length) respectively. All of this puts you in the ballpark with respect to three buy prices labeled A, B and C on your chart. Next, on the left side of the IAS we note all of the chart volume factors. Enter the first rising volume (FRV). Enter the t
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