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Winning With Nothing But The Basics

Before entering the level 10 in a game, the player needs to start at level 1. Before even the famous Shakey’s or Mang Inasal have started, they have started small too! And just like any other investor or trader, everyone starts with the foundation of the basics in technical and fundamental analysis.

Winning in the stock market is a process. It is never just a one-step win or even a trade with 80,000 pesos gain. Everything starts with a good foundation of financial literacy, and this starts with the basics in technical and fundamental analysis.

Now, what’s in it for you to understand the basics? Understanding each concept of technical and fundamental analysis will help you assess the stock you are about to pick. It helps you gain more wisdom on how you should understand the stock market and the company on various perspective, just like how you would choose between wearing a casual or formal attire. Analysis provides information that will help you interpret the structure of the company or even understanding the figures on the financial statements.

As an investor, you must know the intrinsic and true value of a stock. You must be able to determine if the value reflects on the stock prices. Of course, who would like to buy a 500 pesos worth of ground coffee without knowing its history, background, and components! This is the reason that you should invest in knowledge on analyzing the stock market.

Fundamental Analysis

Fundamental analysis is not just defined to be any fundamental, basic, or elementary education. Understanding the component of fundamental analysis would help you asses the quality, profitability, sustainability, and growth of the company.

Start from a top-down approach, in which you would start analyzing information from general to specific. Now, how are you supposed to win the basics in fundamental analysis? Remember the acronym FLIGHT! And now we are boarding to our destination, the fundamental analysis

F stands for Financial as your Language

English and Tagalog are not enough in understanding the stock market. Make finance as your language.

Why? So that you can understand the financial characteristics and financial statements of the company you are about to invest into. Now, making finance as your language does not solely mean accounting or computing. It also helps you understand underlying factors and signals such the news and press releases of the company. Assess the valuation, earnings, and growth, of the company to know the financial health in terms of assets, obligation, ratios, and cash flows.

L stands for the Law of Demand and Supply

Math? Stock Market? And now Economics? Yes! You see, if there are sellers and buyers, there is a demand and supply in the market, and this makes the stock prices rise and fall. Take note that when the stock goes uptrend, there are many buyers. Otherwise, there are many sellers.

I stands for Intrinsic Value 

Always keep it in mind that you would want to buy a stock which reflects its value on the stock price. To know this, you must check the Price-Earnings ratio of the company and compare it among its peers or company of the same industry.

G stands for Growth and Good Investment

The relationship of the price and value also leads to quality of growth and goodness of the investments. In order to know the quality of the company, you must check on the high-quality rate of the company’s value on the financial statements (balance sheet, income statement, cash flow) and financial ratios (liquidity, operating, valuation, common size, solvency).

Never just check on one part of the structure! You must check the signals and be able to determine if the company is under too much debt or is it well operating on its finances.

H stands for Historical Performance

It is a must to check on the historical performance of the company to check whether or not they are growing. Ask yourself if it is the company you are willing to place your money into for a certain period.

T stands for Think not Trend

Never invest on a stock just because it goes trending or your friends tells you so. Think wisely and analyze the company’s stability and development. Remember being famous or big does not necessarily mean it is good investment.

And now we are unto our next destination, technical analysis. Now, let’s READ!

Technical Analysis

R stands for Reading Charts, Lines, and Patterns: Market Structure

Understanding the different charts, trend lines, and candlestick patterns will help you understand the market structure. With these visual representations, you can slowly begin to determine if the stocks are going uptrend, downtrend, reversal, or sideways.

E stands for Evaluation with Indicators

Now, in technical analysis there are various indicators. However, you must begin with learning the concepts then applying each and checking which one would fit your strategy as a scalper, day trader, position, or swing trader.

You must first understand the concept of floor price and the floor ceiling, also know as the support and resistance. Why? Because this will help you understand the breakouts and breakdown with the candlesticks,

You can also use the RSI, to know if the stocks is overbought or oversold, or the moving average to know the buy signal. There are various purposes of indicators. But most importantly, this will help you enter and exit the market on a great time.

A stands for Assessing yourself 

Assessing chart movements is useless if you do not have risk management and control over your emotions. As Alexander Elder quoted, “the markets are unforgiving, and emotional trading always results in losses”, and I guess you wouldn’t want that either!

D stands for Don’t forget to read and do a strategic application

After all these points to remember, always enjoy learning and re-learning over and over again.

Charlie Munger: The game of life is the game of everlasting learning. At least it is if you want to win.

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Featured Trader of the Week: Potato a.k.a @lazypotato

For this week, we would like to congratulate our featured trader: Potato a.k.a. @lazypotato!

This trader was able to spot one of the market leaders of the local market – $CHP or CEMEX Holdings Philippines Inc. Potato a.k.a. @lazypotato is a new and active member of the Investagrams community, yet already ceaseless in providing his analysis and insights focusing on the local market.

Along with his analysis of his stock selections, he also highlighted that a trader must take things with a grain of salt. When it comes to grasping ideas of other market participants, he said that a trader must be careful in following or absorbing their ideas. We will never know if other’s analysis were made purely because of goodwill or because of hyping/bashing. Thus, it is always important to trade at your own risk (TAYOR) and with caveat.

As the said stock rose from its initial base, the stock consolidated for more than a month. The consolidation phase was also supported by below-average volume. Moreover, he also shared that the recent breakout of the said stock was in confluence with heavy volume, RSI (14) breakout of its trendline channel, MACD bullish crossover, and alignment of the stars (AOTS) in the form of moving averages.

Having multiple indicators confirm a buying signal indicates better chances that the move will continue its ascendancy. However, let us not forget that anything can happen in the markets. As traders, we should respect our stops if any unforeseen event occurs.

Moreover, there was a bullish divergence in the RSI (14) in its initial base prior to its rise. If you missed out on this trade during its rise last August 5, 2020, an opportunity reemerged when the stock was able to hover above the previous resistance which turned to the new support at the 1.4-peso levels.

The ideal buy point was the 1.4 (support) or the 1.5 (trendline breakout) peso levels. It is a low-risk, high-reward trade, as the stop loss levels for the said breakout point could be below 1.42 (-5.5%) if you bought it on its trendline channel pattern. On the other hand, the stop-loss levels for the said structural support levels could be below 1.34 (-4.4%). Take profit areas could be the structural resistance at 1.9-2-peso area (30%-40%).

In the bigger picture, the monthly chart also exhibits a bullish divergence along with a triangle breakout. $CHP must sustain and consolidate above the 2-peso levels to further assert its dominance.

Market participants should not feel lonely when they miss a trade. Given that the financial markets offer a multitude of names from various asset classes that are operating in different timeframes, the markets are bound to give an endless stream of trading opportunities to those individuals who make themselves available for whatever the market is offering at any given moment.

Congratulations to those who were able to maximize the reversal play of $CHP. Lastly, kudos again to Potato a.k.a. @lazypotato for sharing his trade analysis. Your FREE 1-Month InvestaPRO Access is on its way!

Are you up to the Challenge of Investa Cup 2020? Registration is STILL OPEN UNTIL OCTOBER 4.

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Should You Become an Independent Operator?

Being an Independent Operator is a skill that seems difficult to do for most aspiring traders. The ability to cancel the noise regarding various opinions from fellow market participants is essential to being profitable in the years to come. Craving for the insights of other traders towards your trade selection is not an ideal way of amassing consistency in the long run.

The late Jesse Livermore, one of the best traders in the world, also succumbed to the opinions of others back in the day. This shortly led him to financial ruin. As he exclaims, the markets are never wrong, only opinions are. Furthermore, the late Nicolas Darvas also experienced something similar.

After developing the Darvas Box system, there was a phase in his life where he moved next to the office of one of his brokers. This led him to jive in with rumors, opinions, and insights with regards to his stock selection. After both critically acclaimed traders experienced turmoil, they started to commit to the golden rule of deciding their stock selections by themselves.

Source: QuotesonFinance.com

Even if these events happened sixty to eighty years ago, it is still relevant up to this day. These events still happen in the trading community today. People pushing their thoughts in social media, people debating about their stock picks, people telling the community to ride in the stock as it reaches the moon. Unfortunately, this is inevitable.

The financial markets will never change so long as human nature never changes. Given that it is predominantly humans who trade the markets, the behavior of which will always be in accordance with human nature.

Source: Steve Burns’ Twitter Post

If you crave and rely on another person’s bias towards a stock or any asset class, how can you become an independent operator? It is a fact that everyone is unique. We have different perceptions regarding a subject matter.

Avoid being succumbed to rumors and opinions about the markets. I am not saying that we should not seek individuals who are better than us to guide us in our journey, what I am trying to say is that you have to learn how to take things with a grain of salt. Seek knowledge and insights on HOW TO DO IT ON YOUR OWN. Just as in life, you cannot long for your parents’ guidance forever.

You still have the chance to be the Champion of the Biggest Trading Competition in the Philippines! Trading Cup 2020’s Registration is open until OCTOBER 4. Join now!

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Mastering The Trendline: A Guide to the Most Basic Charting Tool

If you are a technical trader, chances are, the trendline is one of the first charting tools that you have learned to use. Its elegance comes from its simplicity: just trace the line and either follow the trend or wait for a breakout. However, like supports and resistances, trendlines are prone to both fakeouts and shakeouts. If you find yourself a constant victim to these fakeouts and shakeouts, then maybe your trendline strategy is missing the most important component: confluence.

In the world of trading, confluence refers to the convergence of different trading strategies. An example would be a set of moving averages, structural supports, and fibonacci retracements all indicating the same critical level for a certain stock. This critical level is often referred to as an area of high confluence. The idea behind the importance of an area of high confluence banks on the fact that different traders use different trading strategies.

From time to time, a high number of traders will consider a price level critical in accordance with their strategy. Once the price reaches this level, there will be a surge in the number of buyers/sellers since a lot of traders consider the price as a critical level. In a nutshell, areas of high confluences often equate to higher probabilities.

Incorporating areas of high confluences with your trendline strategy is as easy as making sure that the price touched an area of high confluence before approaching a trendline. This removes the small errors from mistakes in drawing your trendline as well as irregular market behavior.

Essentially, the key takeaway is that trendline breakouts and breakdowns are invalid if the price did not come from an area of high confluence prior to the breakout/breakdown. This strategy goes well with both breakout trading and trend following since a breakdown from the trendline without a bounce from an area of high confluence is probably a shakeout and not a trend reversal.

Fakeout vs Breakout
Shakeout vs Breakdown

Areas of High Confluence can be composed of (but not limited to) any of the following:

  1. Chart patterns
  2. Range support and resistance levels
  3. Moving Averages
  4. Bollinger Bands
  5. Ichimoku Clouds
  6. Fibonacci Retracement Levels

It is important to note that for your trendline strategy to be effective, you should not only consider areas of high confluences but also the plotting of the trendline itself. The price should touch the trendline at least two times, the more touches, the better. Including the wicks depends entirely on your judgement as a trader as well as the “DNA” of the historical behaviour of the stock. With all this said, let’s head on to some examples.

$ALI [DAILY][2016]

In the photo above, there is a defined trendline on the daily chart of $ALI. We can see that the 40 price level is an area of high confluence because of the following factors: (1) it is a psychological resistance, (2) it is the high of the previous uptrend, (3) the price is already at the top of the Bollinger bands, (4) the RSI is near overbought levels.

Because the price bounced from an area of high confluence before breaking the trendline, there is a high probability that the price action is a breakdown and not just a shakeout. As we can see through what happens next, the move is in fact a breakdown of the trendline. 

$SMPH [WEEKLY][2016-2018]
In the case of $SMPH, the 40 price level serves as a psychological resistance which the stock tried to break prior to the breakdown from the trendline. Aside from a trendline break, we can see that the chart actually looks like a normal bearish RSI divergence. This validates our initial hypothesis that the move is a breakdown and not a shakeout. Aside from this we can see that the MACD is showing bearish signs with the histogram expanding below zero. 

This trendline strategy shows us that although we should develop a trading system that is tailored to our specific needs, we should also be familiar with tools and indicators outside of our system. This helps us widen our understanding of where the market might be headed since we are not only tapping into one strategy, but to multiple ones at the same time.

The stock market is basically a psychological battle between traders of different niches after all. Normal trading rules (take profit, position sizing, and stop loss) still apply. All of these strategies will help you trade the confluence and hopefully take you one step closer to financial freedom.

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InvesTHINK! Who are you?

Never just invest, but invest with a clear mind, invesTHINK!

A good and great trader and investor must refrain from having a prejudice or biased preference. Lots of mistakes can also be rooted from a common mistake, which is then again, having a fallacious and biased concept about the stock market. Exhibiting and executing decisions based on emotions, peer influences, or your confidence towards the market, may happen at times. However, it is a sign of poor financial literacy towards the stock market.

What are your signals and indicators when you begin to enter and exit from the stock market? Were you just hyped among your peers? Have you monitored and checked the 20-day moving average and 50-day average? Here are the common biases you might encounter while creating decisions and analyzing your stocks. Who are you among these?

The Hyped: Social proof 

One of the most common biases and errors occur are due to being hyped with the decision of peers and trends in the community. People tend to be under peer pressure and follow the idea of the majority. Which on the latter, we deem it to be true. Now, the wrong thing about this is that we overlook on the importance and essence of doing our own analysis. It’s just like eating the same flavor of ice cream with your barkada, not knowing that it contains peanuts, which you are allergic too! Do you now realize the danger?

The Follower: Confirmation bias and Groupthink

“Ano gagawin mo? Bibilhin mo na ba ngayon?

Down market diba, mag-aaverage down ka na ba ng stock mo?”
This type of thinking shows a flaw, a misconception. Now following and agreeing turns out to be a bias if you try to prove and justify your decision based on the actions of someone else. You try to seek out the support and the same thinking among your peers. 

Now with groupthink, just because everyone else says that “babagsak na yan, benta mo na” does not always mean they are right. Once you set foot in this bias, you lose the discipline and creativity of solving your own problems.

The Madame Auring, Manghuhula: Hindsight bias

Regrets and disappointments run fast, once you begin to suffer. Some investors and traders try to predict the movement, value, and the future of the stock based on their indicators. “All time low siya noong 2020, 10 pesos na lang siya. Ngayon 11 pesos na lang, bilhin ko na ulit!” The misleading factor on this is that, you tend to look for a similar cause that would make you react whenever the market crashes. You try to create your own predictions and make poor decisions whenever a certain event have occurred. To avoid this, always examine, record, and journal your outcomes.

The Blind: Clustering Illusion

In order to analyze charts, we use several indicators such as candlestick patterns, moving averages, RSI, volumes, and support and resistance. It is also necessary to check on the historical performance of the stock, may it be a daily, weekly, monthly, or yearly basis. However, clustering illusion happens when people tend to become oversensitive and seeing patterns where actually none have existed. Is it possible? Yes. If a trader or investor sees that the market structure repetitively illustrates higher highs, higher lows, higher highs, higher lows, the investor or trader may think that the market is going uptrend. It may seem like it, but always be cautious on the movement. Never create assumptions based on seeking certainty on your own perception.

Conclusion

Always be grounded with a strong foundation of principles and rules, in dealing with the stock market. Decision making will always be difficult, and that should be recognized. However, to be able to create a sound decision takes a lot of learning and re-learning. Always have a discipline in your study routines. And one day, you will achieve success too.

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Featured Trader for the Week: Hisuka (@b0yipit)

Even if the local index may look like it is consolidating from here given its current price structure, various names have emerged. Hisuka (@b0yipit) was able to depart the world of HunterxHunter to further solidify the use of his Nen to spot potential market leaders such as $CNPF or Century Pacific Food, Inc. Hisuka a.k.a. @b0yipit is an active member of the Investagrams community who endlessly spreads his knowledge on the local market with the use of Technical Analysis.

Even if this stock is quite illiquid, it still presented opportunities on the daily chart. Moreover, this stock is nearing all-time high levels. During its consolidation phase, the sideways movement was supported with dried-up volume. Upon its breakout of the underlying base, the move was supported with above-average volume. 

A breakout of the 15-peso area was an ideal buy point as it was the breakout of the parallel channel line supported with above-average volume. It is a low-risk, high-reward trade, as the stop loss levels for the said breakout point could be below 14.5 (-4%), and the take profit areas could be the structural resistance at 17.5 (17%). Another tranche opportunity also emerged when the stock formed a small base ranging from 16 to 16.5-peso area. The breakout of the said mini base was also a good opportunity to add to your position as the stop loss levels for the said pivot area could be below 15.8 (-4.5%).

Looking at the bigger picture, the monthly chart of this stock is also pleasing. The previous breakout of the 15-peso area proved to be significant as it broke out of the long-term parallel channel line along with immense volume. 

It is best for $CNPF to consolidate below the All-Time high levels with dried-up volume to form a constructive base. A break above the 19-peso area in confluence with massive volume is superlative for this stock to continue its dominance. 

As Hisuka (@b0yipit) stated in his post, everyone is indeed entitled to their own opinion. Everyone may view a chart differently from that of the latter. If you have formulated and followed your concise trading plan, then there should not be any problem. Take it with a grain of salt, the decision, in the end, must come from your own bias. Relying on the opinions of other individuals will lead you to financial ruin. Great traders such as Jesse Livermore and Nicolas Darvas have experienced this the hard way. 

Congratulations to those who were able to maximize the up move of $CNPF. Lastly, kudos again to Hisuka a.k.a. @b0yipit for sharing his trade analysis. Your FREE 1- Month InvestaPRO access is on its way!

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TEST YOUR LIMITS: Discover How Competitions Can Give You an Edge

With the increasing number of competitions available to the public, newbie traders might be wondering whether or not joining a competition may offer significant advantages as opposed to sticking to virtual trade. With Investagrams, the platforms for virtual trade and competitions offer similar features. They both offer a way to trade with virtual cash while using real time data which simulates real time scenarios without the risk of losing capital. Obviously, competitions give you the chance to win prizes. But the advantages of joining competitions extend beyond monetary value. 

Thinking Long Term

The advantages you can get from joining competitions mostly revolve around your discipline as a trader. When joining a competition, you are encouraged to look beyond short term gains and onto sustainable growth. This forces you to protect your capital through proper position sizing and appropriate exits. Although you can do this through virtual trade, it is very easy to just reset your account or to lose interest in your virtual trade portfolio if you get a losing streak. It is important to note that competitions are marathons, not sprints because local competitions usually last for around 4 months. This means that no matter how much gains you get with one trade, if you can’t sustain this growth then you’ll most probably get overtaken by your competitors. 

Beating the Market

Competitions also encourage you to push yourself beyond merely being profitable to actually being more profitable than the rest of the market. Of course, there are ways to do this through virtual trading such as setting a monthly goal or using the index to track your performance. However, these goals are not as dynamic as directly comparing yourself to similar traders at the same level. Having the ability to compare your performance to other traders in real time will have you constantly searching for high probability trades instead of passively riding on trending stocks. 

Being Part of a Community

Aside from prizes and technical benefits, you also get a better sense of community. For example, Investagrams’ group feature offers a way for Trading Cup 2020 participants to share their learnings and insights throughout the whole competition. Because competitions let people have the same initial capital as well as the same restrictions on the number of trades per day and lock in periods, all participants effectively start on the same level which makes it easier for participants to relate to each other. Ideally, this behaviour will spillover to the whole trading community even after the competitions end.   

Overall, joining a competition offers a good benchmark on whether or not your strategy is optimal. If you find yourself underperforming compared to your competitors, then you may want to realign your learnings and backtest your strategies in order to find the optimal system for you. However, if you find yourself performing better than others, then maybe you should think about transitioning to using a real portfolio with real cash or maybe even consider a career in professional fund managing. Joining a competition is truly a great opportunity that newbies and intermediate traders alike should not pass on. 

It’s time to challenge yourself.

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