The Pillars of The Plan
- Diversification - Don't own just one stock.
- Indexing - BE the market. Don't try to pick individual stocks (please don't act on your friend's "hot tip," if she knows it so does Wall Street)
- Reversion to the Mean - Stocks get over-bought and over-sold; usually they bounce between the two (ish) and this is what we capitalize on.
- Volume drives predictability - This is not trading volume by day, it is the concept that you need very large quantities of decision makers to create reliable patterns.
- Active Index Trading - We move in and out of index ETFs when the market bias is strongly in one direction.
The Tools You Need
- The Internet - duh.
- Trading Account - I like TD Ameritrade, but you can use whatever you want, but make sure there is an option for a "Trailing Stop." If you don't know what that is, see tool #3 below.
- Investopedia.com - Great reference for all things stock market and more.
- Kahnacademy.org - Great reference and learning site with very watchable video instruction.
- Simple Moving Average - An imaginary line drawn on a stock chart that represents the average price for the last X number of days (X being a number you chose, my favorite is the 20 day simple moving average.)
- Over Bought - A condition where the price of a stock is significantly above the simple moving average
- Over Sold - A condition where the price of a stock is significantly below the simple moving average.
- ETF - Exchange Traded Fund. Buying a share of an ETF is like buying all of the shares of the index it seeks to emulate. For example, if I buy one share of ticker symbol "DIA" I am buying a share (think stock, here) of a trading instrument that seeks to mirror the movements of the Dow Jones Industrial Average. If the Dow goes up 1% that day, the ETF goes up 1% as well. You can buy ETFs for any major index, and even specific sectors in an index (like oil, technology, healthcare, etc.) however I stick with the major averages because I want the massively large scale of decision makers that move the prices in a somewhat predictable manner.
- Leveraged ETF (also called 2x or 3x) - This is an ETF that seeks to return two or three times their benchmark index. For example, if the Dow goes up 1%, the leveraged ETF tries to return 3%. Note that I say "tries." It usually doesn't hit exactly 3x… usually more like 2.6%, but hey, that ain't too shabby. Here's the rub. You also loose 3x if it goes the other way. One of the hidden dangers of (and very often the most vocal criticism of) leveraged ETFs is that they "reset" each day. Meaning, they don't hold positions overnight and long term gains (I'm talking about holding them for years) won't work out. That's fine. I don't hold them for more than a couple months at the longest. How do they do it? Generally a mixture of stock holdings, futures contracts, and swaps.
- Bullish - Wall Street jargon for "I think the price of the security in question is going higher."
- Bearish - Wall Street jargon for "I think the price of the security in question is going lower."
- Long - Wall Street jargon for "I'm entering a trade that is profitable if the price of the security in question goes higher."
- Short - Wall Street jargon for "I'm entering a trade that is profitable if the price of the security in question goes lower."