Technical Analysis: A Letter to Mr. Luck

Dear Mr. Luck,

Hello there.  I hope you’re doing very well.

I get that the Heavens are capable of screwing me at times to allow me to hone my strength. Believe me, I’m grateful with things wonderful, but I want to be spared with misfortunes. So there must be someone I can blame, it must be your known enemy -I’ll call him Mr. Menace.  Yes, Mr. Menace mostly offers me unfavorable outcomes.  He has risks, uncertainties, fear, loss, sadness, inequalities and what have you.  While I also get your comfort at times, I’m wondering if you Mr. Luck could help us defy him.  Apart from carrying protective charms, stones, keys or burning incense or sage, what else should we do to reap your most precious gift- luck? Are there tools I can use?

I’m not so much into street gambling and casinos (because I rarely win), but I think luck is what I need while I do my stock trades.  I hated math so much so I resorted to charts.  Charts have been my friends, they’re like music to my ears. It gives me concise and clear picture without so much numbers and formulas. Believe me, they do work at times but he can be stubborn can drag me big time.

Before consulting back to you, I had some research, read some books and attended seminars conducted by know-it-all brokers and what not. All they can offer are tools and guides with their usual disclaimer “To use at my own risk”.  I’m very thankful to them though.

One said, Technical Analysis is a tool to forecast future financial price movements based on history. Like weather forecast, it uses wide variety of charts that show price over time.   They also introduced me to Chris Kacher (pronounced cocker)- the greatest technician so far.

technical analysis1

They say, charts have 3 types, the candle stick, Bar, and Line (Candle stick as the best).

type of charts

By using Charts, one must determine the Resistance and Support level.  Resistance level is the price range at which there is an increase in the supply of a stock.  The price at that brings on increased Selling.  While Support level is the price at which there is demand for a stock.  The price area that brings an increase in Buying.

types of trends

Using the Charts, there are 3 types of Trends.  One, Uptrend when the price movement of a financial asset when the overall direction is upward.  Downtrend is the price movement of a stock when the overall direction is downward. Many traders seek to avoid downtrends to cut some losses off.  Lastly, Side bars also known as Horizontal trend.  It describes the horizontal price movement that occurs when forces of supply and demand are nearly equal.

support and resistance final

Here are some technical tools we can use.

1.       Moving Average

moving average

2.       MAE (Moving Average Envelopes)

moving average 2

3.       Bollinger Bands

boliinger

4.       RSI (Relative Strength Index)

rsi

5.       Stochastic

stochastic

6.       MACD (Moving Average Convergence Divergence).  Most trader’s personal choice of chart.

macd

Volume can be a big part of technical analysis too.  This is the amount of shares that trade hands from seller to buyers as a measure of activity.  If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction.

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As Jim Cramer once said, “Once in a while, the market does something so stupid it takes your breath away”.  They say, in the world of investing, there are no sure bets, there are risks in everything.  Maybe even the premier traders using fundamentals and charts combined can be screwed and be cheated by Mr. Menace at some point in their investing life.

So what do you think Mr. Luck, Do I need those?  Should I stick to fundamentals? Or do I combine you and the above knowledge (which they also are not so perfect afterall)? Or maybe Mr. Menace is always there to stay, we just need to deal with him from time to time. I don’t know, but in the meantime, will you let me borrow some LUCK?  Let me know your thoughts.

Sincerely,

Palengkera

Reference materials courtesy of Carl David Cabrera of www.philstocks.ph

Fundamental Analysis: A view from a Palengkera

Recently, I have attended a seminar about Fundamental Analysis. At first, I wasn’t at all interested but it was free, so I took a chance (I’m a technician and might always be –I only use charts when trading). Not that I don’t have any idea about it, but it was the first time I heard thoughts from the industry experts. My background is on finance, so I thought I know it all. But hey, I was reminded of the basics in life, from the decisions I make every day to choosing the right stocks. As I was listening to the speaker, I can’t help but to associate Fundamentals of how I choose Mr. Right. Sounds lame? Let’s try.

The speaker tried his best to explain what Fundamental Analysis is. After all the brouhaha and occasional excerpts from Warren Buffet, it was explained “it all boils down to intrinsic value of a company” and that it uses basic tools such as Price to Earnings (P/E), Earnings Per Share (EPS), as well as macro/micro economic and industry specific factors, yada yada. Then  the disclaimer: It promises nothing but a GUIDE. My thoughts, “It makes sense”.

Why Use Fundamental Analysis?

This lesson got me thinking. It seems to me that there are certain fundamentals not only in the Stock market but also in choosing Mr. Right/boyfriend, that we should have under control before we make decisions. I was eying for the speaker as an example, he looked good (fair complexion and expressive eyes) and conventional wisdom often tells us that appearance is the sole parameter of our choices without considering their intrinsic value. Isn’t it always better to look at HIM on a macro level? Question is, “ How do I know if he is the right one for me”. If that’s the case, then I should find time to research other factors. For one, I have to consider his moral beliefs by the way he speaks and interacts with other people (in this case, the listeners).  His career (can be used to interpret his Financial Statements) can say so much. I also need to know about his family, Am I compatible with my soon to be in-laws?  I would have to study his friends, “will they lead him to the right directions?”.  And among other things like his Facebook and Twitter account which will give me an idea about his values. But again, a disclaimer, this will not precisely predict my happy ending relationship. As to my analysis with the speaker, he fared well.

fundamental analysis1Fundamental Analysis (The Speaker): Wedding ring-None (single); Long Sleeve shirt matched with blue jeans- with ragged fashion sense (far from gayish); Constant fiddling of nose while discussing means he is thinking/ smart person (or at times yucky); Taglish medium- came from a premier school (can be DLSU, UST, Ateneo or San Beda) which means he can be bankable (or maybe he can’t speak good English); Expensive watch- which means he can and might be bankable; Smile: amiable; Some Cheesy jokes- he can make me laugh;  Broker: a potential insider tip (hehe). Recommendation: Buy

In the world of Stock market, Fundamental Analysis is all about getting to know the company, the health of the business and its potentials. It includes reading financial reports (B/S and P&L), leverages, competitors and market environment.

What to look for?

  1. Before we invest in a company, we need to know if the company is making profits. A simplified view of the earnings is Earnings Per Share (EPS). It denotes the amount of earnings for each outstanding share. EPS= Earnings/Outstanding Shares.
  2. Price-to-Earnings (P/E). This is the current price divided by its earnings per share (EPS). Most says, this is the easiest way to get a quick look of a stock’s value. If P/E is high, the price therefore seems to be expensive since it indicates that the stock is priced relatively high to its earnings. But this needs to be compared to the industry where the company belongs to.
  3. Price-to-Book (P/B). A price-to-book (P/B) ratio is used to compare a stock’s market value to its book value. It can be calculated as the current share price divided to the book value per share, according to previous financial statement. This ratio gives certain idea of whether you are paying too high price for the stock as it denotes what would be the residual value if the company went bankrupt today. This is more accurate to use in the Banking/Financial Industry.
  4. Other Macro and Micro factors surrounding the industry and company.

From a Fundamentalist perspective (which I am not a fan aside from using it to choose Mr. Right), when determining whether a company’s stock is a great investment, Fundamental Analysis is a great means to reach a conclusion. Not perfect, but a good guide. It will always be up to us.

When it comes to choosing Mr .Right, the one who can be sure if you are choosing is you. We all come up with the idea of the right man and how we want our lives in the future, so we can use the fundamentals as a guide.

This is not in any way an advertisement to a broker, but if you are interested to learn about stock investing for free, you may contact:

Philstocks/ Accord Capital Equities Corp.

G/F Unit EC-05B East Tower
Philippine Stock Exchange Center
Exchange Road, Ortigas Center

Phone: +63 (2) 588 1900

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Watch out for my Technical Analysis post 🙂

Stock Market: How and Where to Start?

I’m pretty sure most of you have at some point experienced buying or selling something, might be for necessity, for fun, or for a cause.  Even kids at grade school might have also asked to sell lemonade or candies for a cause or for a special project.  Main goal of buying/selling is to gain something in return, be it in cash, in kind or a promise of anything.  Here’s my thought – If anyone can understand the fundamentals of a sale, anyone can also invest or trade in the Stock Market.

Around 2003 when I started to learn about investing and stock trading, only did I open an account with a stock broker on 2008. My first mistake- I wasted so much time. I didn’t know what a financial freedom means then, I only thought of finding something I am interested to do – controlled gambling.  Not that I was hooked up in casinos or street gambling.  I did not quit my day job, too risky for me. And mind you, I only started with an amount I was willing to lose, a small fraction of my buffer (enough to handle 6 months expenses without work).  This way, even if I had to lose all, I still felt secured.

My first attempt of trading was not so bad, I bought 1,000 worth of shares of a certain mining company, and then I sold it the following day for 5% gain net of commissions and taxes. I was overwhelmed and thrilled.  The rest is history.  At present, my portfolio is now 230% higher -a bank couldn’t and will not ever beat.  And best of all, to date, I already had a total of 4 recruits. It feels nice to educate others of what I already know, but again, I can’t claim to be an expert in this field. If I am, then I’d be glad to quit my day job (night actually) right away.

Let us know more what a stock means.  Stocks are shares of ownership in a corporation. When we buy stocks of a company, we become stockholder (part owner).  We can be entitled to vote in certain decisions or can be a member company board(large shares) however our ownership is relative to the number of stocks we own thus the more stocks we own the more the vote counts.  Relatively, if we have more shares, we will get more dividends (earnings) from the company.

Why do we invest or trade?

First, the stock price may appreciate in value (called Capital gains), which we can sell for a profit. Say, We bought 10 shares of PLDT for P100/share. Then couple of days later, the value of the stocks appreciates to P120/share.  So if we sell this, the calculation would look like this.

In Pesos
June 25- Buy (10*P100)           1,000.00
June 27- Sell (10*P120)           1,200.00
Gross Income              200.00
Less: Taxes/Commision (5% apx)                 10.00
Gain              190.00

Second, the company can pay you dividend (Cash or Stocks).

  • For Cash. Let’s say the company declares net income for the year worth P10,000 and you are 10 owners of the company with 100 shares each (total of 1000 outstanding shares).  If the company declares the P10,000 as dividend, you will receive P1,000 (calculated as 10share/100 outstanding share x P10,000 dividend).
  • If the company declared stock dividend 20% of each share.  Here is the calculation
Share Price Amount
June 25- Total Shares 1000                 10.00    10,000.00
June 26- Dividend Declared-20%(1000*.20) 200                 10.00      2,000.00
Total Amount of shares after dividend 1200 10    12,000.00

How to start?

Step 1. There are tons of materials available in the internet but I suggest that you visit the Philippine Stock Exchange official site.  They have also a gaming platform wherein you will get P1M virtual money and allow you to play/trade the live stock market.  You can practice trading on this platform and see if you can increase your portfolio using the virtual money. Read, read, read blogs, forums, etc.

Step 2. Find the right stock broker to be able to start investing/trading.  With starters, it is best to go with online Stock Brokers.  A stockbroker is a person or organization authorized and licensed by the PSE and SEC to trade stocks/securities.  I was loyal to Philstocks.com.ph as my broker. But here is a list of stock brokers you can choose from.  I refuse to recommend any of them, mainly because they have similar commissions/rates. Second, when you’re trading/investing, you are the driver, you choose what company to buy or sell.

Accord Capital Equities Corporation
Website: http://www.philstocks.ph

CitiSecurities, Inc.
Website: http://www.citiseconline.com

BPI Securities Corporation
Website: http://www.bpitrade.com

First Metro Securities Brokerage Corporation
Website: http://www.firstmetrosec.com.ph

RCBC Securities, Inc.
Website: http://www.rcbcsec.com

AB Capital Securities, Inc.
Website: http://www.abcapitalonline.com

Step 3. Open an account with your chosen broker.  Fill up the necessary documents and submit 2 valid ID’s.  The initial minimum investment you can open is usually P5,000. Once approved, you will be assigned your Log-in information (ID and Password). Log in to their portal and you can start trading. They usually have a user friendly application. Nowadays, they also have mobile applications so you can access them anytime using your smartphones or tablets.

Step 4.  By now, you should be ready trading/investing. My first tip, navigate the system/application first.  The broker will initially run down the system with you and teach you the basics.

With that you shall be all set.  A little heads-up, think twice, then think thrice before hitting the buy button.  Research more tips and strategies.  That my friend will be my next post “Palengkera Trade Tips and Strategies”.  Rest assure that I will not be very technical about it. J