Stocks

For those who might not be sure what a stock actually is, stocks represent a share in the ownership of a company. As an example, think about the restaurant chain McDonald’s.  If you wanted to own McDonald’s outright, you’d need about a $167 billion US Dollars in order to buy McDonald’s.  However, most people don’t have that sort of spare change lying around so, what you can do instead, is to buy a share or a small piece of McDonald’s.  As of July 2019, those shares were trading at around US$220 per share.  So, for every US$220 you’ve got, you can buy one small piece of McDonald’s.  That makes up a part of that US$167 billion value, just keep in mind that the words stock and share are actually interchangeable, they’re the same thing, so if I’m talking about trading some stocks or if I’m talking about trading some shares, just know that I’m meaning exactly the same thing.  Let’s look at some examples of stocks and then we’ll have a look at how we go about choosing some stocks to trade.

Every stock trades on a stock exchange, so here you can see the Australian Stock Exchange or the ASX in Australia and some examples of stocks that trade there are ANZ Bank and Rio Tinto.  In the United States, you’ve got the New York Stock Exchange or the NYC and on the New York Stock Exchange, you’ll find stocks like McDonald’s and like Walt Disney Corporation.  Also trading in the United States, we have the Nasdaq Index.  Now the Nasdaq Index is heavily geared towards technology stocks so that’s where you’re going to find stocks like Facebook and Amazon.  If you already know which stocks you want to trade or if you’ve been trading for a while and you have your set stocks and you’re just ready to go, obviously you can jump straight into the analysis part.  But if you’ve got no idea which stocks to choose there’s a simple process that you can walk yourself through in order to find some stocks to trade.

So the first thing that you need to do is select a country.  Remember this is the second C of Swing Trading, the first C was to choose your time frames. And the reason that we’re choosing time frames is so that we can make sure we’re trading a market that we can actually physically be there to trade at the appropriate time.

Let’s assume you’ve done your work and you’ve realised that the United States is the market that you’re going to trade, so you’ve chosen your country, the next thing to do would be to open up a quote list that contains some US stocks in it.  This is where some traders go a little bit overboard and they’ll open up a quote list of something like the Russell 3000 Index.  Now the Russell 3000 Index, as the name implies, is a list of 3,000 stocks and even if you can breeze through those stocks at one every minute it’s still going to take you 50 hours to go through the entire list, so I certainly wouldn’t recommend that you start there.  I’d encourage you to start on something like the top 100 stocks or the S&P100.

Once you’ve opened that quote list, just go through the stocks on the list one by one, and I’m going to show you how to do that using ProfitSource software in a moment, but go through those stocks one by one, just looking for one thing and that’s for stocks that have a history of trending nicely.  If it’s a stock that’s very choppy and sideways and doesn’t really have good runs either to the upside or the downside, it’s potentially going to be very hard for you to make money out of trading that stock.  So, look for stocks that trend nicely.  You don’t need to follow the whole S&P100, selecting 2 to 3 stocks to start with is a good number to begin with.  As you choose those stocks just do a quick check to ensure that there’s enough volume going through that stock for you to be able to trade it.  There’s no one set number of shares that need to go through that stock every single day to guarantee that you’ll be able to trade it or not, but just as a general rule imagine the kinds of orders that you’re going to place on this stock and just make sure that if you place those orders, you’re not going to be trading more than the entire volume that’s usually traded in a day.

For example, if a stock normally only trades 100,000 shares per day but you’re going to be placing orders of 100,000 shares or more you’re going to be seriously moving the price around as you take trades in and out of that market.  You’re also going to be experiencing something called slippage which is where you don’t get your orders filled at the prices that you want and that’s just going to cost you a lot of money over a period of time.

The first item on the list is to select a country.  Your goal here is to choose a country to trade that matches up with the time frames that you’re available.  This is a list of stock exchange opening hours.  You can access this list by typing in this link-up the top into your web browser.

https://en.wikipedia.org/wiki/List_of_stock_exchange_trading_hours.

As you move down that list, you’ll see a list of different countries such as the New Zealand Stock Market, Australian Securities Exchange, Tokyo Stock Exchange etc, as well as the time zones in which they’re open.  For example, the New Zealand stock market is open from 10:00 a.m. through till 4:45 p.m. New Zealand Standard Time.  Some of the stock exchanges you can see actually close for a lunch break, like the Tokyo Stock Exchange or the Singapore Exchange for example.  Your job here is to run through this list of countries and find one that is open during your availability.  Remember, you want to be able to access the open, in particular, and sometimes you’re going to want to be able to access the close of the market as well.  If you can only choose one or the other, I’d recommend that you’re there at the open so that you can place your orders.  That way those orders can sit on the market during the day and you don’t have to be there or watch the market all day.  So, this is one good resource for choosing a country to trade.

Another one is stockmarketclock.com https://www.stockmarketclock.com/exchanges stockmarketclock.com gives you real-time information as to which markets around the world are open right now.  If you want a little bit of a shortcut, what you can do is sit in front of your computer at the appropriate time that you’ve set aside, open up stockmarketclock.com and have a look at which markets are open.  You’ll see that each market has a status which is open or closed and then a countdown for the next open or close.

So, for example, you can see at the top of the screen the New York Stock Exchange is currently closed and there is a countdown of seven hours and nine minutes until it opens.

Just one final note on choosing a time frame to trade, remember that there is this thing called daylight savings which some states in Australia have and some countries around the world have.  Daylight savings is where we move our clocks forwards or backwards to take advantage of the daylight hours.  However, this actually creates a two-hour shift in the opening and closing times for some markets.  For example, if you’re trading in Sydney, we have Australian Daylight Savings Time, going on in October and coming off in April.  What that means is the time frames for the US are going to be adjusted by an hour either way.  But on the other hand, you’ve also got daylight savings going on in the US at a different time and off in the US at another different time.  There are four key times of the year if you’re in Sydney trading the US markets where daylight savings goes on in Sydney, daylight savings goes off in the US, daylight savings goes on in the US, daylight savings goes off in Sydney.

Now it does sound confusing but it’s really just a couple of times a year where the time frame is going to shift forward by an hour or backwards by an hour.  During the Wintertime, the New York Stock Exchange will open at 11:30 p.m. Sydney time but during the Summertime, it will open two hours later which is 1:30 a.m. Sydney time. However, due to the fact that the US and Australia go on and off daylight savings at different times, it’s not going to go straight from an 11:30 p.m. open to a 1:30 a.m. open.  There is a period there where it goes from 11:30 p.m. through to 12:30 a.m. and then later through to 1:30 a.m.   It sounds confusing but once you’ve been trading for a little while you won’t even blink when it happens.

Now that we’ve decided we’re going to be trading US stocks, we need to open up a Quote List and select a few stocks that are going to be our stocks to analyse.  If you’re using ProfitSource software which I use, you go up to the top left of your screen to Quotes and then open Quote List, and you can see Indices for the US and we’re going to choose the S&P100 Index.

Now as you can see at the top of this Quote List, some of these stocks have a zero value which means they’ve either been delisted or merged, or bottom line is they’re not tradable anymore, so we’re going to start down here.

The first stock is AVP – Avon Products. To open a chart of any of these stocks we can just click on the little blue chart icon at the far left here.

So here’s a chart of Avon Products – AVP.  Remember that there are two things we’re interested in here, we want to know, does this stock have a history of trending nicely, and is there enough volume going through this stock?  Now, given that we’ve chosen to look at the S&P100 there’s a pretty good chance there’s enough volume here, so if in doubt there’s probably going to be enough volume traded on this stock.  However, we do need to be clear regarding the trend of the market.  Does this market move enough for us to make money from it?  Because if the market doesn’t move, it’s very hard for us to make money with a trend following system.

So, I’m going to use these arrow keys at the bottom and I’m going to zoom out, and straight away you can see by looking at Avon that it really does like to move.  It’s either going up or it’s going down, there’s very few sideways periods in here.  Even some of these smaller moves when you get down to the bottom are still quite large in terms of percentage moves.  So there’s an October 2016 high at about $6.80 nearly $7.00, and then a couple of years later the market was down at around a $1.50, so it’s lost about 75% of its value.   These are just the smaller price moves, but as a percentage, they’re still pretty high.  So, Avon certainly ticks all the boxes when it comes to being a strongly trending market.

What we now need to check is, is there enough volume going through Avon for us to trade, and the way to do this is to put on the Volume Indicator and then to come up here and bring on your data window, and we move our cursor over to the last bar and then go back and take a look at the data window.  You can see that the volume on that last day was 2,553,167, that’s the second last line in that data window and the volume moving average is 7,991,000, basically, 8 million shares a day on average, going through this stock.  Now with the price of $4.00 per share, 8 million shares represents about $32 million dollars going through this stock every trading day.  Now if you’re looking at taking $30,000, $50,000, $100,000 dollar positions, that’s going to be a drop in the ocean for a typical trading day in Avon, which means this stock is completely fine for you to trade.

However, if you’re a big investment bank and you’re planning on trading $10 million position sizes or $50 million position sizes there’s a real risk that when you try and build those position sizes in Avon, you’re going to start pushing the price around a little bit.  So, you have to be a little bit careful of that.  Just take a moment and think what sort of position sizes you might be taking, and decide is this going to be a stock that you could potentially do some work on?  

Now, at this stage, we’re not actually committing to the stock.  We’re just putting it on a list of stocks that we might like to trade and then, later on, we’ll do some analysis on all of those stocks on our shortlist and then we’ll make a decision which stocks were going to follow.

So, I’m comfortable to put Avon Products onto that list and that’s it.  You can see that you could do this kind of analysis in about a minute maybe even less if you really knuckle down and just concentrate on what you’re doing.

Now let’s go back to the Quote List and we’ll see that the second stock on that list is actually Sprint.  Now we could again open a separate chart of this but if you just want to cycle through these really quickly, just stay on the Avon chart and then you can use these arrows down the bottom to move to the next symbol in the group, or you can hit the F4 key on your keyboard.

So the next chart that’s come up is Sprint, with a stock code of S and straight away you can see that at least in 2019 this market is not really what you would call a strongly trending market.  Yes, it made a little bit of a jump up here, but gaps like this in the middle of a move can often be hard to anticipate, which means there’s no guarantee you would have been on that move to take advantage of it.  But the rest of the year it basically it stuck in a sideways range and then down the bottom stuck in a sideways range as well. If we zoom out a little bit more, you can see that yes, there are periods that this market trends, but compared to Avon it certainly seems to have a lot more periods where it goes fairly sideways.  If we zoom out a little bit more, you can see more evidence of sideways movement.

Now if this was the only stock that was available to trade, it certainly still moves a lot and there’s plenty of opportunities there for us to make money.   I’m just comparing it to the stock Avon and I’m noting that Avon tends to move more frequently, so I’m thinking Avon might provide us with more trading opportunities than Sprint.  So, while I would put Avon on our shortlist, I’d probably leave Sprint alone for now knowing that there are going to be lots of other stocks out there that we can trade.  If you like the look of Sprint still, by all means, add it to your list and do a little bit of work on it later.  Let’s look at one more stock together.

Moving forward you can see the stock is Unisys UIS.  Now when you first look at Unisys you could be forgiven for thinking that this market has been going sideways as well, because it seems to have just been running in this small range here for the last 10 years or so. However, if you look at the price range, as you can see, these lows at the bottom were coming in at $3.60 and then a year later the market was up at $40.00, so while that may look like a sideways range, there’s actually a 10 times multiple of the share price going on during this period, so it’s actually quite an active stock.  If we zoom in a little bit closer, you can even see in the current market over the last couple of years, we’ve had a couple of double bottoms here and we may be approaching a third bottom there, so this is where it’s interesting in your trading, you can look for stocks that you’re going to permanently trade, and I would encourage you to do that.

David recommends that you get to know your market like a cow knows its calf.   You can’t get to know every market that well.  David only knew a few markets that well, but what you can do with markets like this if you see a potential setup coming somewhere down the line like a potential double or a triple top, is just note down the stock.  Maybe write it on your whiteboard or in your diary so that you can check it from time to time as a potential trading setup.  

Looking at Unisys again, it looks like a market that’s probably worth trading. It certainly moves around a lot so there’s plenty of price action.  If we take a look at the volume on Unisys though, you’ll notice that the volume is only showing as about 700,000 to 800,000 shares per day traded.   Now given a price of around $8 per share at the moment, you’re only looking at about $6-7 million dollars going through this share every day.  Again, if you’re only looking to trade $30,000, $50,000, $100,000 position sizes, that’s going to be fine.  You’ll be able to place those orders no problem.  But if you’re a bigger trader, that may become a problem for you down the line.  Particularly if you’re looking to compound your positions into some larger moves.  So, I might not put Unisys on my long-term list of stocks to follow, however, I would still keep an eye on this one for a potential double or triple bottom trading setup opportunity sometime down the track.  

So now it’s over to you.  You can go through as many of these stocks as you like.  I recommend looking at, at least 20 or 30 even though you’ll probably find enough stocks to trade before you get to the 20 or 30 mark. But look at, at least 20 to 30 so that you can start to make some of these comparisons.

As an example, Sprint looks like a stock that you could trade, but when you compare it to Avon Products, Avon Products is the better stock because it has more volume going through it and because it trends well.  However, later down the track, you might find several stocks that look far superior to Avon because they trend more cleanly or they make larger ranges, the volumes bigger. So, when you’re ready, jump into your software and start working through this list and come up with the stocks that you’re going to trade.

Once you’ve chosen some stocks to trade, you can trade them a number of ways.  You might buy outright shares, so you’re actually taking ownership in these stocks or you might use a product such as Contracts for Difference, which are explained in Appendix D of the Smarter Starter Pack.  A Contract for Difference is where you’re entering into a contract to settle the difference in the prices between the price at which you open and close your trade.  In other words, you’re basically buying and selling shares, you’re just not owning them.  You’re just entering into a contract to make or lose money on the price difference. Why would you do CFDs instead of shares, because of the leverage.

Now CFDs aren’t available in all countries, for example, they’re not legal in the United States.  If you’re a trader in the United States, you’re probably very familiar with Options contracts and these are discussed in Appendix C of the Smarter Starter Pack.

There are other vehicles out there that you can use such as warrants or single-stock futures, but for most traders in Australia you’re probably going to be using Contracts for Difference and for most traders in the US you would probably either trade the outright shares or trade using an options contract.

Just before we finish up, a few things to watch out for when it comes to stocks.

Gaps

The first of these is gaps.  You need to be aware that stock markets are generally only open for about six or so hours every day which means that there are 18 hours of the day that they’re closed.  Now you might think nobody is going to want to trade stocks while the market is closed, but the reality is things can happen in the world while the market is closed, and traders can panic and react to them.

For example, if a nuclear bomb goes off somewhere or if a trade war kicks off,  markets might panic and if your stock market is closed, other global markets around the world that are open are going to move and react to that event and then when your market opens it can gap open to catch up on all the action that it’s missed out on.  How will that affect you as a trader?  Let’s say you own shares at $30 and you’ve got a stop-loss order at say $29.50.  So, if the price drops to $29.50 you’re going to be out and you’re going to lose 50 cents per share.  However, the market may have closed at $30 but it may open at $27 the next day.  It’s gone straight through your stop-loss order and it hasn’t traded there, so you can’t get out at $29.50, you’re going to get out at $27 when the market opens up.

Now gaps don’t happen all that regularly on most stocks, but there is always that chance that a gap could happen and that’s one reason I predominantly trade currencies and indices.

Spreads  

The next thing to think about are spreads.  This is also referred to as the bid-ask spread.  You’ll notice when you look at stock prices there are two prices quoted.  A price that you can buy at and a price that you can sell at.  In a highly liquid market, you’re going to find that those prices are very close together, maybe just one cent apart.  However, if liquidity drops down, those numbers can spread further and further apart so a wide spread means that if you buy a stock at $10 but you can only sell it at $9.95 because it has a 5 cent spread, essentially you’ve already locked in a 5 cent loss and all you’ve done is open the trade.  So, keep an eye on spreads before you jump into a stock.

Trading Halts

Stocks can be subject to a trading halt on rare occasions.  If there’s something going on in the background of the company and things need to be sorted out before a report can be made to the stock exchange, the stock can be put in a trading halt which means that you can’t buy or sell those shares until that news is released to even up the playing field for everyone.  But what that can mean is you’re stuck holding a share and you can’t get rid of it, even if you suspect that bad news is coming up.

Dividends

When stocks pay dividends which usually happens two or four times per year, the price is going to move but it’s not going to move on the day that the dividend is deposited into people’s bank accounts.  It’s going to move on the day called the ex-dividend date. If a stock is due to pay a $2 dividend on the ex-dividend date, which is the date from which anyone buying the stock doesn’t get the dividend, the price of the share will normally go down by the amount of the dividend.  So, if a stock is trading at $50, and there’s a $2 dividend coming, the next day it’s going to open at $48 per share.  Not because there’s been any bad news, just because the people buying the stock no longer get the dividends.

Earnings Announcements and News

Also, keep an eye out for earnings announcements and news announcements that are going to come out because markets can be quite volatile around these times.  They can gap up or down.

Penny Stocks

Another thing to watch out for are penny stocks and I’d recommend that you stay clear of these.  The attraction of penny stocks is that if you buy a stock for a penny or for one cent all it has to do is go up to 2 cents and you’ve doubled your money.  While there are plenty of stories of people making money on penny stocks, what you don’t hear about are people who lose all of their money on penny stocks, because the stock becomes worthless.  Now if you’re a fundamental analyst and you think you’ve found a company that’s great, by all means if you want to trade penny stocks trade them, but for the Safety in the Market style of trading, which is trend trading, penny stocks, those very low priced stocks, don’t tend to work out very well.

Financial News

The final thing I’ll point out is to watch out for financial news and in general steer clear of it. It’s very rare that a fantastic trading opportunity is going to show up on the financial news channel before it actually happens.  You’ll often hear people say “look at this particular stock it’s a great company and it’s just gone up 100%” and that’s why it’s made the news because the big move has happened already.  When it comes time to choose a stock to trade, I’d probably steer clear of the financial news and just go through that five-step process that I’ve taken you through.  Look for stocks that trend nicely and have plenty of volume.

So that’s all for this video, just remember when it comes to choosing a stock, just focus on two things:

1. Make sure the stock has a history of trending.
2. Make sure there’s enough volume going through it.