Stock prices are moved by catalysts. There are four major types of catalysts.

1)      Liquidity: low cost of borrowing makes the investment in most asset classes quite alluring. An inflow of money makes price to go up. Rising prices bring joy and confidence to the soul of the masses. Higher confidence leads to higher risk appetite, which usually brings even more money into the stock market. This is a catalyst based on greed and vanity.

2)      Earnings’ related catalysts. If it is not about current earnings (beating estimates), then it is about future earnings (raising outlook above street’s expectations) or potential for future earnings (FDA approval, collaboration with another company, takeover rumors, announcement of new product, regulatory changes that could affect the whole industry). This is a catalyst based on momentum. The key here is market reaction. Reaction no news is more important than news itself.

3)      Valuation: I am simply not smart enough to define the intrinsic value of a stock; therefore I leave that job to the Warren Buffets of the world – people, which pocket is deep enough to survive prolonged periods of market irrationality. Who am I to say that certain stock should be traded at 18 times next year earnings or 28 times next year cash flows? Don’t get me wrong. There are plenty of smart people, who are constantly able to find stocks, trading below their intrinsic value and know how to profit from them. A big bow to them. For me their work is 50% science and 50%s art and gut feeling (experience). This is a catalyst based on common sense, but don’t forget that in trading the obvious rarely happens, the unexpected constantly occurs.

4)      Fear: of missing out on a big move or fear of getting short squeezed; fear of losing more than can afford to lose; fear of accepting that you were wrong.

I often look at the charts of stocks that make big moves in short time frame. How often? Every day, hoping that I will find out as many common patters in the beginning of those moves as I can. In hindsight, everything looks so easy. “I should’ve bought here and sold here and I would’ve made quick 10-15%”, but taking the proper decision in real time is always much harder than expected. Such fast moving stocks often experience violent corrections along their climb higher. Only the few with strong stomachs, enough experience and sound risk management behavior survive. How to overcome the fear of losing and act quickly when an opportunity presents itself? Risk smaller portion of your capital. A portion that wouldn’t hurt your confidence or sound judgment if you actually lose it. If you are risking 1% of your capital and it happens that you lose it, you only need to make 1.01% on the next trade to break-even. Can you do that? Absolutely. Then why you are afraid to take on new trading ideas, produced by your method? If you’re not able to sleep, then you are risking too much. If you are trading too often, then you are not risking enough. And one more thing. No one can buy at the bottom and sell at the top. If it happens, it is due to pure luck, not skill. Gradually build positions in equity that you like and gradually take profits when you exit.

Garlic – the hottest commodity in 2009

Garlic prices in China are skyrocketing. One vendor in a vegetable market in Beijing’s Chongwen district says that the price of garlic has gone from 0.8 yuan per kilogram in February to 8 yuan now. In Shandong’s Jinxiang county, China’s largest garlic production and trading base, the price has jumped forty-fold from March.

At first, some people attributed the astonishing price surge to H1N1. Throughout the ages, residents of north China have eaten garlic to ward off flu.

Economists may have a better explanation. They believe that the garlic bubble is being inflated by massive bank lending designed to stimulate the economy, which is now leaking into speculative assets. At the same time, the amount of land under garlic cultivation has fallen sharply, leading to a demand-supply imbalance.

“Too much liquidity in any market can lead to speculation,” says Morgan Stanley in a research note, commenting on the garlic price boom.

After hours action


maldives-1After the market close, I like to spend about an hour filling my trading journal, take a last look at my screens to see if I need to add new stocks to my watch list. I try to analyze some basic questions:

How did I spend my day? (how can I be more productive and happier)

What did I trade and why? (the method behind the entry and the reason behind the exit)

What did I learn today? (for the market and for me as a trader and human being)

What will I do to improve my perceived strengths and eliminate perceived weaknesses? (create a specific plan how to do it and start implementing it the very next day)

A typical strength could be precise risk management due to which your portfolio has never experienced a significant drawdown. Think about how to become even better at it? Is it worth it to use different trading horizon or apply tighter stops?  Is that going to make you more profitable, without having to take on an excessive risk beyond your “sleep level”.

A typical weakness could be bad timing. You enter long position blindly on weakness, because you want to make 30-40 cents more, without realizing that by doing that, you are depreciating your odds of success. You buy when  a stock is entering in consolidation, effectively locking capital in an underperforming position. How could you overcome that weakness? You have two options:

– turn to someone who knows and is willing to share his/her knowledge;

– find the cure yourself by experimenting.

The first approach makes much more sense for me. You will be learning from other people’s mistakes in an attempt to shorten your learning curve. Unfortunately in trading you often have to experience it first hand in order to appreciate what your friends were trying to teach you.

There are 3 major trading (investing) skills that everyone should work on:

1. Equity selection methods (save time and improve the odds of success)

What is your entry criteria and is there a statistical edge behind it, based on research or experience); time horizon (find out your niche – is it intra-day trading, swing trading, value approach, momentum approach. There are thousands different ways to make money in the market, but you have to find yours)

2. Risk management (tight stops or wider stops, position sizing, how to exit)

3. Timing (know when to be long, when to be short, and when to stay on the sidelines; enter your position at the right time and the right spot, so if wrong, the damage is minimal)

Work on one core skill at a time.