Interesting Technique for Shorting and Setting Stops

J

jaylane777

I am a technical based trader but here is one instance where I do take a look at the fundamentals of a stock, and here is why:

People who trade based on a chart will buy and sell on price and volume pattern, areas of support and resistance, and technical indicators like stochastics and bollinger bands. However fundies based traders will look for good P/E ratios, growth, etc - the chart doesn’t mean much to them.

Therefore, when a stock breaks support, or has patterns or indicators indicators are bearish, you can safely assume that the technical traders are either selling or shorting the stock. Conversely, when a stock has strong fundamental data, you can safely assume that there are some fundies based investors waiting in the wings for a good price.

So we can generally draw the conclusion that:

A. When a stock has weak fundamentals, and a weak chart, the selling will probably continue.
B. When a stock has strong fundies, but a weak chart, it will probably be bought on dips, making the stock go up again.

I have used this technique for buying long on dips, selling short, and setting stops and have had good results with it. Basically this is how I use it:

If I am in a long position, and looking for a place to put my stop, I generally look to areas of price support. These are usually in the form of a moving average, trendline, or specific price where the stock has either met with support or resistance in the recent past. I will then look at the fundamentals as a gauge for how far below said support I will look to exit if the trade turns against me.

If the fundamental info is weak, I can assume that there are mainly technical traders in the trade, and they will more likely than not be looking to dump their shares on a break of support also, so I will set my stop close to support with the assumption that selling will pick up on the resistance break, sending the stock proce down pretty fast. This allows me to exit a position gone bad with minimal losses. However if the fundies are fairly strong, I will generally give it a little more wiggle room with the assumption that at a low enough price a fundamental trader will be attracted to pick some up, and hopefully start a buying rally.

The same technique can be applied to short sale candidates, identify a weak looking stock just above support with weak fundamental info, and set an alert for just under the support. Generally a break down of support on some volume will give you a fairly high chance of catching a nice drop in the stock.

All that said, it is an illogical market, so sometimes to win you have to be slightly illogical too.




Happy trading!
 
Quote from jaylane777:



All that said, it is an illogical market, so sometimes to win you have to be slightly illogical too.


Happy trading!
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What is so illogical about the market? It goes up and it goes down.
 
No, not saying to buy when things look good and not when things look bad. What I'm saying is that when you're trading going by technicals that you often times do not look at fundamental data of a company, because waiting for everything to be perfect will surely keep you out of a good trade.

However, by looking at a quick overview of the fundies, you can understand the type of traders that are in the trade, which can help you to know when to exit your long position, or enter your short position by anticipating what they will do and where.

Not exactly groundbreaking but in 10 years of trading and studying the markets I have yet to hear anyone mention it, so I thought I'd be nice and share it... maybe you should think about and understand what someone is saying before you come out and criticize them.

And regarding the market being illogical... yes it goes up and goes down... the fact that it often goes up when all the signs point to down, and vice versa... makes it illogical in my book.

Thanks for being so receptive and understanding of someone who tries to share a new idea. Nice, intelligent people on this board.
 
BY definition if you’re a technical trader then the fundamentals are not part of your equation, and vice versa.

Looking at technical’s and/or fundamentals is usually a good idea depending on your strategy. Either way looking at those wont tell you who is in what trade and when.

I was not criticizing anyone I just posed the question if there was any new ground broken there?

Suggesting that if you’re a technical trader you also consider the fundamentals or if you’re a fundamental investor you then also consider the charts is not new ground in my book. But that’s just me, I am not criticizing .
 
Quote from jaylane777:



And regarding the market being illogical... yes it goes up and goes down... the fact that it often goes up when all the signs point to down, and vice versa... makes it illogical in my book.
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Maybe your thinking about all signs pointing to it going down is illogical? What are all these signs that point that the market should go down? What are the signs that the market should go up? Just trying to find out why you are thinking what you are.
 
Quote from jaylane777:

No, not saying to buy when things look good and not when things look bad. What I'm saying is that when you're trading going by technicals that you often times do not look at fundamental data of a company, because waiting for everything to be perfect will surely keep you out of a good trade.

However, by looking at a quick overview of the fundies, you can understand the type of traders that are in the trade, which can help you to know when to exit your long position, or enter your short position by anticipating what they will do and where.

Not exactly groundbreaking but in 10 years of trading and studying the markets I have yet to hear anyone mention it, so I thought I'd be nice and share it... maybe you should think about and understand what someone is saying before you come out and criticize them.

And regarding the market being illogical... yes it goes up and goes down... the fact that it often goes up when all the signs point to down, and vice versa... makes it illogical in my book.

Thanks for being so receptive and understanding of someone who tries to share a new idea. Nice, intelligent people on this board.
More...

You make a very cogent point for why those who swing or position trade individual equities on technicals should not entirely ignore fundamentals. Intraday traders can probably continue to ignore fundamentals with impunity. Or can they?
 
Illogical - Major financial institutions announce multi-billion dollar write downs and the market rallies big.

Market rallies big, breaks through resistance points on chart on big volume, then shows absolutely no follow through.

Company announces it beats earnings estimates, stock gets clobbered... or company announces that it lost money, stock skyrockets...

All these seem to happen all the time, and seem very illogical to me.


Regarding looking at fundies and technicals, you're right, you can never tell for sure when and who is in the trade, but I was just trying to make a point that it was a way to get a better idea of it... it's a game of incomplete information and educated guesses, and I thought that was a pretty good way of putting together some incomplete information in order to make a better educated guess, and since I have never heard anyone else talking about it I thought I'd share so others could benefit from and/or add to my theory.

Sorry if it was simple minded, wasn't trying to re-invent the wheel, just trying to add a helpful thought for anyone who may have been interested. Good luck to both of ya.
 
Quote from jaylane777:

Illogical - Major financial institutions announce multi-billion dollar write downs and the market rallies big.

Market rallies big, breaks through resistance points on chart on big volume, then shows absolutely no follow through.

Company announces it beats earnings estimates, stock gets clobbered... or company announces that it lost money, stock skyrockets...

All these seem to happen all the time, and seem very illogical to me.


Regarding looking at fundies and technicals, you're right, you can never tell for sure when and who is in the trade, but I was just trying to make a point that it was a way to get a better idea of it... it's a game of incomplete information and educated guesses, and I thought that was a pretty good way of putting together some incomplete information in order to make a better educated guess, and since I have never heard anyone else talking about it I thought I'd share so others could benefit from and/or add to my theory.

Sorry if it was simple minded, wasn't trying to re-invent the wheel, just trying to add a helpful thought for anyone who may have been interested. Good luck to both of ya.
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I guess I just don't get where you're coming from. You are saying that it is illogical for a stock to go up when they report terrible earnings. You then say that it is a game of incomplete information. So if the information is incomplete or not accurate as you are implying, then why use that information? And why is it illogical for the price to go up if the information might not be complete as you say?
 
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