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Ideas and Strategies on Investing.

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Inverted Analysis

9/12/2013

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 In order to be a successful investor in the stock market an investor needs a plan. It’s nice to have a goal, but it’s absolutely critical to have a plan if you want any success at all. When I started investing I didn’t have a plan. No one does when they start investing. But I had a goal. It’s the same goal every new investor has - to make a million dollars by the age of 30 and retire to a nice sunny beach somewhere. For me that didn’t happen. What did happen was I took $100 down to a trading desk and bought stock in some company I can’t even remember any more and immediately lost all of my money. That day I was devastated but at the same time even more determined to learn how to successfully trade the market. Today you might not think that would be such a big deal but 40 years ago that was a large sum of money for a kid in college to lose.

 A few weeks and a few trades later I had experienced a couple of successful trades and a couple of unsuccessful trades. I thought about the successful ones and decided I now had a plan for getting rich. Even today it’s hard for me to believe how naive I was back then. Over all these years I’ve slowly gotten better at developing a strategy and figuring out the ebb and flow of the stock market to the point that I actually have a strategy in place.

 In the eighties option trading finally took off and I spent most of my time trying to learn how to trade those. It took a few years to master the basics of options trading but looking back on it that was time well spent. Today options are an integral part of my overall strategy of trading and it wouldn’t be if I hadn’t had those years of trading and learning.

 In the nineties I discovered momentum indicators and oscillators. Learning how to successfully use those also took quite a while. The math behind the indicators is a rather simple exercise but learning to use these things to the point that they’re second nature and not a mathematical equation anymore takes quite a bit longer than most people would realize. It took years of success and failure to determine which indicators I had the most confidence using while trading.

 Along the line somewhere every trader learns methods that he feels comfortable with and confident using. People not familiar with trading would probably call these methods “tricks of the trade” but I very much dislike that phrase. They’re not tricks, they’re just things traders learn to rely on and check before they make a trading mistake. One of the things I learned early on was trading in multiple time frames. I’ve pointed this out in an earlier post. Another thing is the use of multiple moving average crossovers. While Daryl Guppy uses a dozen or more, I prefer just the 5, 10, and 20 day moving averages.

 Over the years I slowly became pretty good at determining when a stock had bottomed or found support but I got nowhere trying to figure out when a stock was topping out and starting to rollover or finding resistance. Today these things seem obvious but then it was something I just couldn’t seem to figure out. This occurs to a lot of young traders and I’ve never understood why but it happened to me. Traders that want to go long need to learn how to buy low and traders that want to short a stock need to learn how to sell high. The only thing I could come up with is that there’s an inherent aversion to shorting and that going long is a more natural way to approach the market. The problem with this type of investing is that an investor will be able to get in low as the stock begins to move up but without knowing how or when to sell the investor will lose all the gains as it falls. This is definitely not a successful plan.

 I had to come up with a novel idea for determining when to sell. Since I felt that I was fairly capable of determining when a stock was turning up I had to figure out a way of improving my ability of determining when a stock was turning down. But how? I eventually realized that everything I knew about a stock turning up would apply to a stock turning down if I thought of it as turning up rather than turning down. I had to fool my brain into thinking that turning down was really turning up. I had to think upside down. I came to realize that if I inverted the chart then I was looking at the stock upside down. Suddenly the fog lifted and the light came on. It all started to make sense. When I saw a chart turning up it was actually turning down. What a revelation!

 Below are two charts of the Dow Jones Industrials. The first chart is right side up and the second is upside down. For me it was easy to see the industrials turn up in late June and late September in the right side up chart even in real time. But I had trouble recognizing in real time the chart topping out and rolling over in early August. After inverting the chart it became obvious to me that the industrials were turning up in early August (which when turned back right side up is actually rolling over). Suddenly I could identify resistance levels as well as I could identify support levels.

 If other investors are having this same problem this may be the solution to their mental prejudice toward identifying support levels. In the Windows world this vertical flipping of images can be performed rather easily with the included MS Paint program. In the Mac world there’s no similar program but in both worlds there’s a number of third party photo editing software programs that will invert images quite easily. Just remember that these images have not been rotated, rather they have been vertically flipped.

 Good luck and good trading.
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DOW Industrials Right Side Up
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DOW Industrials Upside Down
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    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


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