OK, this is obviously not working. I manage to get a lucky hit here and there, but overall I’m losing a few percent here, a few percent there, and it’s “nickel and diming” me into broke-land.
I noted last night that this was also stressed in one of my favorite books on trading, Rule #1 by Phil Town, where he states the following regarding the idea of just using charts to trade successfully:
“In the long run I feel confident that you won’t make any money with [charts] unless you know the value of the business you’re buying. Remember that in the short run anything can happen to the price of a business, but Mr Market has a set of scales and will properly weigh each and every company and give it its correct price at some point.
“If you ignore the Four Ms [essentially, Town's term for the fundamentals he feels are important] and accidentally buy businesses that are priced above their value, the prices of those businesses will eventually correct themselves downward toward the Sticker Price [Town's valuation formula that seems very similar to the PEG ratio].. So, in spite of short-term trends, momentum, and psychology to the contrary, the longer-term trend, momentum, and psychology are going to be downward, as sure as there’s gravity.
"People who buy and sell based solely on these types of [charts] find themselves losing a little here and there over and over as the price of the stock corrects downward toward its real value. Trying to use [charts] to trade a stock that’s headed down is like death by a thousand little cuts. You can lose half a percent or 1 percent or 2 percent only so many times before it starts to really add up to a shellacking."
This has very much been the case for me over the last two years of trying to trade using charting and timing techniques indicated in books like Invest Like a Shark and The Complete TurtleTrader over the last couple of years.
Although it’s possible it’s due to the high volatility of the market during this “learning period” of mine, the fact remains that much more often than not, once I find an entry point described by one of these systems, the rally has already had it’s run, and usually the price begins to drop as soon as I jump in. It has been happening over and over and over and over again.
I “only” put a couple of grand in the market to test the waters, but as if right now I’ve lost nearly all of it. I’m talking around 80% has gone down the toilet.
I really wanted to believe that you could make money hand over fist by just getting good at reading charts – these books and web sites swear it can be done, and there at least seem to be other people out there who are having success at it – but if they are, I’m sure as heck not able to figure out how.
As a result I’m considering large addendums to my strategies: I will start taking PEG ratios into account when deciding what to buy. I’ll try to stick to companies that I, or at least most other people, have actually heard of. The charts will still play a part, but primarily to help find good entry and (if needed) exit points, rather than simply the “if it goes over n SMA or n and n SMA cross over, it’s time to buy” type logic that I keep reading about all over the place even though it doesn’t seem to actually work in anything but a strongly positive market.
Oh, and until I can prove to myself that it actually works, I’m sticking to simulators rather than real money.
I think one of my strongest hurdles is probably going to be my impatience to get in there – always that feeling of “I’m potentially losing money by being out of the market right now!” that I always get when I’m not in. Right now I have about 30 companies on my watch list, and not a single one of them is at a good buy point. I’ve got 5 of those marked as ones to keep a near-term eye on because they could shift into a place where they’d be in a good entry point in the near future, but they may not.
It almost makes me wonder if my dad had the right idea in investing in nothing but CDs and federal savings bonds.
