a year's difference

What a difference a year makes

At the end of March one year ago, Trader Paul's account was down 22% YTD, and Trader Paul was a gloomy Gus. With the opposite outcome this year, Trader Paul is one happy fella. What accounts for the difference?

I think there are four main factors that contribute to this year's much better results than last year.

Better market. Although the Bush economy hasn't been kind to working Joes and Janes, Wall Street has enjoyed a roaring bull market. The Nasdaq composite index is at a five-year high, and the Dow Jones Industrial Average is at an all-time high.

DJIA
Dow Jones Industrial Average — all-time high

Nasdaq — 5-year high, but a long way from all-time high

It is certainly easier to make money in a bull market than in a bear market!

Longer look. I am watching stocks much longer before jumping in. A stock may sit in my "prospects" list for several weeks before I actually buy. There's a much better chance of distinguishing between the stocks with "legs" and the one-day wonders when you follow them for a while. Looking back, I see that I had gotten into the habit of immediately jumping on a stock when it showed up in a screen, and that proved a costly habit, indeed.

Target stocks. I used to look for stocks in a new uptrend. The trouble was, that uptrend may have just been a short-term up in a long-term downtrend. And by jumping in quickly, I didn't have the opportunity to find that out until it had cost me some money. By contrast, I now screen for stocks trying to reverse long downward trend. Advanced Analyzer (Ameritrade's screening tool) defines these as "near the middle of their 52-week trend and have moved up at least 5% over the past five days." That means there's a lot of room to move up.

Smarter. By going back over my trades to see which ones resulted in a profit versus a loss, I've come to see that the money-makers share certain technical characteristics:

  • Trading near or above a rising 50-day moving average; the stock is at least going in the right direction
  • Percentage price oscillator (PPO) is trending up; the stock is building some momentum
  • Average directional index (ADX) is above the threshhold of 20 and buying pressure (+DI) is above selling pressure (-DI); the trend is gathering strength
  • Chaikin money flow (CMF) is neutral or positive; money is flowing into the stock rather than out
  • Relative strength (RSI) is rising; recent gains are bigger than recent losses
  • Stochastic RSI is crossing out of oversold (.20); it's best to buy just at the end of a "sale" before the price goes back up again

I'd like to say I have the discipline to buy only stocks that display these characteristics. The fact is I don't. I sometimes make allowances: "Well, it's not above the threshhold yet, but it's clearly heading that way" or "Five out of six ain't bad." Some times this works out, some times it doesn't.