Quote from clambill:
How do you decide just using fundamentals when you're going to short? And how long you want to stay in then exit then trade?
For the housing price collapse, I started shorting several big mortgage players in Spring 2007 - it was just a little bit early but not by much. When I saw several high flying mortgage originators go belly up, I knew that it was near the end game for housing. I had been leery of housing since 2005 when I noticed a lot of exotic mortgages popping up - stuff that was excessively leveraging home buyers.
I started shorting Countrywide, Downey Savings & Loan, Indy Mac Bank and several home builders as they looked like the ones with the most profit potential. I did a ton of research, tearing apart company 10Ks, 10Qs, and other SEC filings. I used a combination of shorting the stock outright and buying longer term put options.
I suffered a decent amount of pain on my first shorts in March/April and closed out my positions - the companies were still cooking the books for Q1 earnings season. I moved back into the short positions in June 2007, well before the average Joe was aware of a housing crisis. Almost immediately, they turned positive for me.
I'm not a technician so I go strictly off of fundamentals. The reason why I'm not in the stock market right now is that the fundamentals and price movements are completely out of whack due to the massive liquidity that the Fed has dumped into the markets. It is distorting the equity, commodity, and credit markets. Since Forex is a much bigger market, it's harder to push it around and why I'm playing here now.
As for knowing when to exit a trade, that's an age old question. I like to let winners run so exiting trades can be difficult for me if I don't see the fundamentals improve.
One trade that I loved was my short of Countrywide from the mid-30s. I closed it out in the low teens. Once a stock gets to that level, it's tough to push it lower unless Chap 7 or 11 is imminent. There were too many moving parts with Countrywide and too much talk of a buyout. AIG, on the other hand, I rode from the 20s down to 2 because they were, for all intents, insolvent. While Countrywide was also insolvent, they had cash flow to keep the doors open longer than AIG.
On the other side of the fence, I got hammered starting spring 2009 as the market rose in spite of crappy fundamentals. I went long for short periods of time but that was only for trades, as I wasn't comfortable with the fundamentals. I finally walked completely away from the equity markets in fall 2009. I've got a nice fat cap loss from 2009 to write off for years in the future. On the other hand, I made more money in 2008 than I made in a decade of work. Too bad I gave so much of my gains back; I didn't fully understand what would happen with quantitative easing- I studied Japan's QE as a blueprint and things didn't happen that way for several reasons.
To summarize - I use fundamentals always; I use rudimentary TA to pick entry/exit points. A lot of times I'm thinking several months ahead of the movement and am always studying the news for any changes in my thesis.
I view every trade exit as unique. I don't have a preset exit point; I wait until I feel the price matches the fundamentals. For the Euro, I use parity with the dollar as my planned exit point, but that will either go up or down depending on how things progress.
I also shorted the GBP in Dec at ~1.60. I planned on riding it to parity also, but exited at ~1.51 when the Dubai problems started fading (UK banks have HUGE exposure to Dubai) along with a rebound in the UK's economy.
