EQUITIES:

LESSON ONE
Strong and Weak Stocks, Identifying Key Price Levels,
Intro to Risk Management

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TERMS TO
KNOW:

• Strong Stock– Stocks that despite overall market performance continue to be well
bid/bought
• Weak Stock– Stock that underperforms the market in a bull market, fails in rallies,
and market players have intentions to continue selling
• Relative Strength - Not to be confused with the Relative Strength Index Indicator,
this a measure of how a stock performs compared to an index. Equity return / Index
or Sector return
• Beta – Capital Asset Pricing Model Coefficient that is a past indication of how volatile
a single stocks returns are to an index. A beta of 1 is similar to an index return while
above offers “potentially” more volatility and reward.
• Indexes – A collection of stocks (S&P 500, DJIA, Nasdaq, Rus 2K)
• Bid – Price at which you can immediately sell
• Offer – Price at which you can immediately buy
• “Hit the Bid” – Selling at bid using a market order in hopes of immediate execution
• “Paying the Offer” – Buying at the offer
• Limit Orders – Placing a bid equates to using a limit order to buy at the current bid
price and take the other side of those using market orders
• Adding “Liquidity” - Using buy and sell limit orders you add liquidity and with some
ECN’s can receive a rebate.

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WHAT MAKES A STRONG OR SPY (Index ETF) and GS (Goldman
WEAK STOCK:
Sachs)
A STRONG EXAMPLE

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WHAT MAKES A STRONG OR SPY and BAC
WEAK STOCK:

A WEAK EXAMPLE

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 Volume is important on large price moves.
IS VOLUME IMPORTANT? Explains Accumulation/Distribution and how
aggressive moves are.
Thinly traded markets are often full of reversion

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 Markets are not random, and
WHAT MAKES STOCKS patterns do exist. People make up a
MOVE.. WE DON’T BELIEVE market and buy and sell according to
IN BROWNIAN MOTION their systems/models even if they
have no clear rules.

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SIMULATION 1 Steps:
Finding the Key Levels
Are there any inflection points?
STOCK - CREE
Buy Strength and Sell Weakness

JULY 22TH 2010

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KEY POINTS Broke above 2 key resistance levels
FROM and held. Giving great places to add
SIMULATION 1 more size with very little risk.

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TRADERS • Ed Seykota in Market Wizards
PSYCHOLOGY
When asked “What are the trading rules
you live by?”
• A. Cut Losses
• B. Ride Winners
• C. Keep bets small
• D. Follow the rules without question
• E. Know when to break the rules

“Everybody gets what they want out of

the market”

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 Buying Strong Stocks and
Selling Weak Stocks over a several day period
SECOND 2 Step Process: Finding Stocks and placing positions
SIMULATION Dollar Neutral.
January 20th, 2010

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KEY POINTS One Week Later
SIMULATION 2

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RISK
MANAGEMENT

• Keeping your bet sizes small,

Drawdown
1% Risk Percent 5% Percent
• No more than 1 – 2% of your account if
Return to Risk Return to you attempt to actively trade.
Even Even
0 100000 0.00% 100000 0.00% • Large drawdowns make it incredibly
1 99000 1.01% 95000 5.26%
2 98010 2.03% 90250 10.80% hard to comeback.
3 97029.9 3.06% 85737. 16.64%
5 • Gamblers Risk of Ruin
4 96059.601 4.10% 81450. 22.77%
63
5 95099.0049 5.15% 77378. 29.24%
9 09
6 94148.0149 6.22% 73509. 36.04%
4 19
7 93206.5347 7.29% 69833. 43.20%
9 73
8 92274.4694 8.37% 66342. 50.73%
4 04
9 91351.7247 9.47% 63024. 58.67%
5 94
10 90438.2075 10.57% 59873. 67.02%
69
11 89533.8254 11.69% 56880. 75.81%
3 01
12 88638.4871 12.82% 54036. 85.06%
7 01
13 87752.1023 13.96% 51334. 94.80%
21

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ANALYSIS, • How did your somewhat small “hedge”
COMMENTS, fund work?
QUESTIONS? • Best stocks?

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WHAT TO • Australian Unemployment Just came
LOOK OUT out 8:30 EST
FOR THIS – Look at AUD/USD and AUD/JPY
WEEK: • Canadian Unemployment Friday 7:00
AM EST
– USD/CAD go to 1.00 or 1.04?
• US Non-Farm Payrolls
– ADP Today came in below
expectations
– Expected to add 75K
• Oil, Gold, Stocks, Currencies is going to
move Friday Morning.

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