This post continues the story of my foray into the world of individual stock investing and what I’ve learned from it so far. If you haven’t read part 1, click here to view it. Todays’ post might get a bit technical as I’ve been reading and practicing some of the stock techniques I’ve learned for a few weeks now and I’m used to these terms. If you guys need clarification on anything I go over, please let me know in the comments and I will be more than happy to expand.

So to quickly recap my story: I had invested in individual weed stocks as well as a weed ETF and they had all dropped in value. I had lost some money on paper but I was determined to try to figure out how to beat the “pros” at this game called stock trading. The way I look at it, any money I lose or more accurately appear to lose is the price I am paying for my education. Unlike the procs, I don’t have hours upon hours to pour over stock data to do my research. I needed a better and more efficient way to do day trading. Enter technical analysis! Technical analysis is the use of charts to figure out what direction a stock is heading for. It always works, until it doesn’t! What this means is that sometimes things happen that are totally unforseen like a report is released that shows the company has made questionable purchases or a CEO smokes weed on the air that affect the price of a stock. This is something you have to always keep in mind if you go this route since charts don’t account for these random occurrences that can pop up at any time. Before I start describing the method I am currently using for my technical analysis, I need to define a few terms:

• Stop-Loss - This is where you will exit out of your position (sell all your shares) when the value of your stock has dropped to a number you have arbitrarily decided upon. Factors that help you choose this number are usually a percent. In my case, I use a drop value between 6-10 percent depending on how confident I feel the stock can come back. This number is non-negotiable. You take emotions out when coming up with it, and ALWAYS exit when it is reached. Staying in a position past your stop-loss could mean locking your money into a stock that won’t recover and any money you could’ve made with it won’t be realized.
• Exponential Moving Average (EMA) - The exponential moving average displays the moving average (average price of a stock) over a certain time period. Two popular ones are the 12-period EMA (period = days) and 26 period EMA. The formula for an EMA gives more weight to recent price changes.
• MACD - This stands for: moving average convergence divergence. This is a technical analysis graph that can be used to signal when a stock should be bought and sold. The MACD line is calculated by subtracting the 26-period EMA from the 12 period EMA. Next, a 9-day EMA is placed on the chart and is called the “signal line”. Whenever you see the MACD line cross above the signal line this could be a buy signal; when you see the MACD line cross below the signal line it could be a sell signal.
• Volume - How much of a stock has been bought/sold
• Relative Strength Index (RSI) - The relative strength index is a graph that shows whether a stock has possibly been oversold or overbought. If the stock has been oversold this is a possible buy signal; if it has been overbought this is a possible sell signal. I’m not going to try to explain the formula because truthfully I don’t 100% understand it, but for my purposes just understanding how the chart can indicate a buy/sell trend is enough.

Now we are hopefully on the same page with the definitions! So what I’ve been doing is going into TD’s Web Broker and using the charts they have available there. There are all sorts of interesting charts available in the screener tab, but I’m only interested in a handful of these charts, and I use them as screeners for the data that I want to see. The way I have my filters set up is like the following:

1. Only want to see stocks whose value is between $5 and $20. This is so I can buy enough of the stock to turnover a healthy profit. And I exclude penny stocks since they are the most volatile out of the available stocks (penny stocks cost less than $5)
2. Only show stocks who gained at least 4% in value. I only want to see stocks whose value rose from the previous day and are in a potential uptrend.
3. Only show stocks who had a volume of at least 200,000. I only want to see stocks where people are buying/selling them. A stock that doesn’t have any action is not a stock you are concerned about when you are day/intraday trading.

When I apply these filters to my available stocks, I usually get back a list between 6-12 stocks. I now go through each stock and display the charts I mentioned above: MACD and RSI. I start off inspecting the MACD: does it cross above the signal line indicating a buy signal? If yes, I continue to the RSI chart: does the RSI show that it has been oversold? If that passes I examine the actual chart of the stock and see if truly is in an uptrend by looking at how it’s been doing the last few days. If it looks like it’s in an uptrend, I add it to my list of stocks of potential buys. There are a few other small things I do at this point, like seeing if the chart matches any patterns I am familiar with (which are very few) but this is the gist of what I do. Sometimes, I don’t add any stocks to my list if none of them match my criteria.

The next day, I examine the stock and see how will my picks did an hour after the market opened (market opens are very volatile so a good plan is to wait till things calm down after open) . So far, I’ve had 2 days where my picks were correct: one was right 80% of the time while the other was right 60% of the time. I need a few more days of “paper trading” before I practice this with real money, but for now my technique looks good! Actually applying it will be another challenge, especially with a super busy work day, but I’ll let you know my plan for that in a future post.

Sorry for the delay with this post! I’ve been working on the self-authoring program by Dr. Jordan B Peterson and busy fulfilling a contract with a billion dollar company (IKEA!). I’ll try to make up the 2nd post this week. Thanks for coming by and have a great day!