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Step One: Market Analysis.
The first step that I take is to determine whether to be
in the market at all. Do I want to be on offense (capital appreciation)
or defense (capital preservation)?
My primary market indicators utilize the concept of
bullish percent which have been in use for more than 40 years. Bullish
Percent measures the overall risk in the market. The BP reading dictates
how long or how short I will go.
Step Two: Sector Analysis.
Step 2 deals with sectors. I then drill down into each of
the 12 major sectors (40 minor ones) to determine which, if any, offer
the best chance of success. Industry sectors, like the seasons, move in
and out of favor. I want to be long the most favored sectors and to
avoid (or short) the least favored ones.
Step Three: Fundamental Analysis.
I then look to find the best companies in each of the
favored sectors. I’ll readily admit that I am not a nuts and bolts guy.
I also am not enamored with a lot of the work that is peddled as
research on Wall Street. I get my “fundamental analysis” from sources
that are more than reliable. These folks are paid to make money first
and foremost. They aren’t paid to publish “pretty” research that might
lead to future banking business. They get paid to be right on the stock
– which means owning it when it goes up and getting out of it or
shorting it when it goes down.
I have put together a list of mutual funds that are time
tested and battle scarred. They cover large – mid – small cap names and
value and growth. I go to Morningstar each month and download their
portfolios. This gives me an idea as to what they are buying and
selling. These names are then placed on a watch list by sector.
Step Four: Technical Analysis.
I then apply technical analysis, specifically Point &
Figure charting to these fundamentally sound names. I am a technical
analyst and chartist by trade and have found that using P&F charting
eliminates most if not all of the noise surrounding stocks and indexes.
I’ll also add here that I am a position trader. I tend to hold positions
from a week to a year or more.
What I am looking for here are catalysts that are causing
investors to buy or sell.
I am looking for names that possess a positive Relative
Strength and show an above average probability of outperforming the
market. In other words, I am looking for investments where demand
exceeds supply.
Once found, I then determine each position's entry and
exit points. I do this in advance so as to not get caught up in an
emotional binge that might lead to mistakes. By also making these
decisions in advance, I know exactly how much risk I am dealing with.
Step Five: Risk Management.
The last step is managing the portfolio. I do this using
my proprietary state of the art risk management tools. Without going
into a lot of overkill, I am willing to risk 2% of the portfolio value
on any one trade and have a limit of somewhere between 6 and 10%
downside risk in any given month. I use stops and also put options to
create synthetic stops where appropriate.
I think this final step is what sets me apart from my
counterparts. Very few investors really work step 5. This to me is the
most important step. The getting in is easy, acting correctly when
exiting is more important.
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If you trade stocks and would like to trade along beside me, just send
me an email and put 'GCC' stock trader' in the subject line
rac@christyinvestments.com
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