Risk and Reward

• Most trading failures are the result of a trader never understanding that his expectations of return resulted in the implicit acknowledgment of more risk than the trader intended. Risk should be measured by back-testing under all market conditions under a variety of time periods using real data. Traders should consider that the greatest risk in a trade occurs at the beginning of a trade. Even if the chance of a stock rise or fall is a 50/50 wager once a protective stop is added, the chance of success necessarily falls because risk is no longer unlimited. That is fine as long as the trader goes on to understand that he or she can now absorb more losses than the trader who wants more wins, but will eventually fall prey to a single devastating loss. Thus, traders who make money are traders who can extract a maximum amount of gain from a winning trade adjusted for risk.
  
  

Earnings Growth, Technical Analysis

• Find companies that have at least three quarters of increasing growth, increasing earnings and increased ownership by mutual funds. Buy the stock of these companies when the 50-day moving average crosses above the 200-day moving average. Sell the stock when the stock drops below the 200-day moving average. This is called a dual moving average trading strategy. Moving average is the closing price of the stock averaged each day for the number of days in the moving average. Earnings are what drives stock prices for intermediate and long term trades. Back-test moving averages to explore different levels of success. Some traders employ a triple moving average strategy with the third moving average being a very long term measure.
  
  

Use Volume Explosions

• Choose stocks with a history of increasing earnings. Note if the stock is near or above the 50-day moving average. If trading volume increases by 300 percent, and the price increases, buy the stock. The volume increase indicates that a large institution has completed its buying program, and there is now less stock available for purchase. Volume and price gains will continue for a few days. Do not chase the stock as it will probably trade back down for a few days in reaction to the swift price move. Buy when the stock moves out of its price retrenchment. Sell when the stock falls below its 200-day moving average.