Newsletter
April 28, 2007
Visualizing the Trade
Market & Sector Review
Using CANSLIM
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Visualizing the Trade
Before the opening bell rings do you have a clearly outlined plan or strategy for the day? Do you know where you will enter, and which signals will indicate the plan has gone sour? If you do not, in a few hours you may lose control of the trade to your emotions. Will you become stuck and frozen unable to execute or exit the plan? Try visualizing the trade beforehand. Visualization has been a known and useful tool in athletics for years to fine tune skills.
Visualization is based on the principle that a great deal of learning occurs in your mind, even if the activity is largely physical rather than mental. Your mind remembers pictures better than anything else. A basketball player for instance will visualize the shot and the ball swishing through the net. If repeated often enough, the subconscious mind remembers that picture, the ball going throw the basket and the net. A baseball player likewise will visualize his bat meeting the ball and a hit being attained. If repeated often enough the subconscious remembers that picture. The subconscious will then attempt to replicate that picture through actions; in the case of the ballplayer the actions required by the body to replicate the picture. When playing sports, for example, it's possible to actually improve your skills by mentally rehearsing each action. Is it possible with a mental activity such as trading?
Play and replay the trade in your mind, make it a picture, a moving picture. Visualize your screens and interpreting market action, experience the thoughts and emotions you'll feel as you watch market action. You can allow your mind to visualize the precise movements your body makes as you click the mouse. Your body and mind can learn just by going through the motions mentally. You can replay an action. You can imagine what you are thinking and feeling. You can practice over and over, and as you do, you'll hone your skills. Visualization is the next best thing to being there.
Visualization allows an athlete or a trader to prepare for how he or she might react to different scenarios. A football receiver, for example, can imagine trying to catch the ball as he is about to be tackled. A trader can similarly imagine what it feels like to execute a trade when the market is going against you, for example. You can pretend it is happening and feel the initial disappointment you might have. But rather than act impulsively, you can visualize acting calmly, and closing out the position.
In the heat of the moment, without practice, you may be stunned and paralyzed. With visualization, in contrast, you can practice what you would do over and over again. You can practice monitoring your internal dialog. You can practice thinking, "The loss is no big deal. I've used risk management to cover the loss. Losses are an everyday event when you're a trader. I'll just stay calm and follow my trading plan." It helps to practice a stressful trading event in your mind before it happens. You'll learn to control your muscles, your thinking, and your emotions. Why try to practice this complicated set of actions during the trading day when all you do is choke? Do it off hours to prepare for the trading day. By using visualization, you can hone your trading skills during off hours until you trade calmly, decisively, and profitably.
Market & Sector Review
Using CANSLIM
This past week I have started publishing watch lists based on various growth and growth plus value screens along with an easy to follow spreadsheet to follow the stock's daily progress and trends. Eventually I will have a dozen or two differing screens in a database allowing you to sort by your favorite criteria, i.e. growth, value, growth plus value, and many more. I will be discussing these screens in future newsletters to familiarize everyone with what we are uncovering. This first installment is Bill O'Neal's, of Investors Business Daily, CANSLIM screen. This newsletter will be a very brief overview, to learn more please visit the I.B.D. website or purchase one of O'Neal's books such as "The Successful Investor".
The CANSLIM approach seeks to identify companies with a proven record of quarterly and annual earnings and sales growth showing strong relative price strength and support from leading institutions.
C = Current Quarterly Earnings. This approach focuses on companies with proven records of earnings growth that are still in a stage of earnings acceleration. O'Neal's studies found that winning stocks generally had strong quarterly earnings growth prior to their significant price run-ups. This screen looks for stocks with a minimum increase in quarterly earnings of 18% to 20% over the same quarter a year ago. In addition to the earnings requirement we like to see same quarter growth in sales of at least 25%.
A = Annual Earnings Increases. O'Neal's primary screen for annual earnings increases requires that earnings per share show an increase in each of the last three years. This is revised from the original screen which looked at the previous five years. He also recommends screening for companies showing a strong annual growth rate of 25% over the last three years.
N = New Products, New Management, New Highs. O'Neal feels that a stock needs a catalyst to start a strong price advance. In his study of winning stocks, he found that 95% of the winning stocks had some sort of fundamental spark to push the stock price ahead. This could be a new product or service, a new management team employed after a period of poor performance or a fundamental change in the industry such as new technology.
These factors do not lend themselves very well to screening; however a second consideration is that investors should pursue stocks showing strong upward price movement. One way to screen for something going on is to screen for stocks within 10% of their trailing 52 week high.
S = Supply and Demand. No definitive screening technique comes out of the S element, however companies that are buying back their stock on the open market are preferred as are companies with management owning a good portion of stock.
L = Leader or Laggard. Not a patient value investor looking for out-of-favor companies and willing to wait, O'Neal prefers to identify rapidly growing companies that are market leaders in rapidly growing industries. He suggests using relative strength to identify market leaders. He recommends avoiding any stock with a relative strength rank below 70 and only seeking stocks with a rank of 80 or higher, that is stocks that have performed better than 80% of all stocks.
I = Institutional Sponsorship. O'Neal feels that a stock needs institutional sponsors for it to show above market performance. Ten institutional owners is suggested as a reasonable minimum.
M = Market Direction. The final aspect of the CANSLIM system looks at the overall market direction. While it does not impact the selection of specific stocks, the trend of the overall market will have a tremendous impact on the performance of your portfolio.
The performance of this screen has been stellar, to say the least. Courtesy of AAII here is a chart of CANSLIM and the 3rd revision discussed briefly above.
Screens, no matter the criteria, search for stocks that fit certain criteria, allowing you to concentrate your research. They are not, buy or sell recommendations, in and of themselves.
Largest Changes In Raw Numbers (21 Days)
[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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