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Trading in the Swing of Things
By Darrell
Jobman
This science teacher-turned-trader is still learning and still
teaching, but these days, about the science of trading.
When he was a science teacher in Warwick, R.I., back in the
mid-1970s, speculating was a spectator sport for Sam Jones. It
wasn't a case of not being interested in trading but, as a
schoolteacher, he did not receive the kind of salary that would
enable him to participate in the exciting, nut capital-intense,
world of trading. One thing Jones did have as a teacher was
the knowledge of how to take notes and to study As it turned out,
those were valuable skills to have.
About 20 years ago, he quit teaching and moved away from the
defined-benefit pension plan he could have had. Ha became an
information technology professional, finally able to apply those
note-taking and studying skills to trading. In fact, he still has
notes he wrote about trading back then. Today, he is fully involved
in the financial markets and still lives near the ocean in Rhode
Island, where he can satisfy his salt water fly fishing habit. Along
the way, Jones decided his future and his retirement needed to hinge
on his ability to navigate the markets and not on someone else’s
investment decisions.
Getting into the swing
Jones is not a daytrader or an advocate of the buy &hold strategy
that clearly has not worked since the dotcom bubble burst. “With
very few exceptions, buy and hold just doesn’t cut it any more,” he
contends. Instead, he is a swing trader in exchange-traded funds,
ProFunds, equities and options. On average, he closes out about 20
trades a month.
He uses fundamentals to help determine the long-term trend and then
relies on technical indicators and tools almost exclusively to time
his trades within the larger cyclical trends, either up or down.
For example, precious metals and the energy sectors are in
long-term cyclical bull trends with consolidations several times per
year, " Jones observes. "These consolidations provide opportunities
to maximize profit by selling before or buying during the move. I
may try to reduce a position before a consolidation phase and add
toward the end. Timing obviously becomes critical with this
strategy. Housing and real estate may be entering a long-term
consolidation, which I am shorting now, so I trade both long and
short.”
An ideal trading opportunity for Jones occurs when a sector bases.
He will leg into a market with a small position, then once the trend
has been established, he will add to the position. If the trend does
not materialize, he gets out as soon as he can. Using a number of
technical indicators as well as support and resistance levels, he is
able to detect trend changes more often than not.
Primary tools
“The most basic tools I use include moving averages of various time
frames, money flow indicators, volume, relative price and Bollinger
Bands," Jones says. "Fibonacci levels also have a place because so
many other traders use them and it is helpful to understand them.”
Once in a position, he evaluates his position continually and waits
for notification of a potential trend change.
Being human, Jones admits to sometimes having a tendency to hang on
to a losing trade too long because “I am convinced that I am right
and the market is wrong.” Winning positions can be just as tricky,
he warns, noting that if you’re not careful, you can get too
emotional about a position.
After a 30% gain, I increase the amount of attention I give to the
position and start to plan my exit," he advises. "That doesn’t mean
I get out; it just means that I become more observant. It also
depends on other investment opportunities as well and my cash
position at the time. I do not have a clear-cut rule because of all
the dependencies.” He also begins to reduce his position when
indicators become less positive.
Managing his money
Jones has learned a lot about money management over the last 25
years and always keeps at least 10% cash flow for flexibility. “If I
get close to that level, then I may reduce one or two of my weaker
holdings,” he says, adding that capital preservation is the most
important objective of trading. The amount he invests in any one
sector is based on trend strength relative to other sectors.
He believes this is a great time for investors because of the "great
amount if information on the Internet. But he also cautions
traders about getting information overload. He subscribes to several
websites, including www.Stockcharts.com and
www.MorningStar.com, and also frequents free sites such
as Yahoo! Finance and www.TradingEducation.com. In addition, he has
found that the more expensive information isn’t necessarily better
information and encourages traders to check out free resources as
viable sources of information.
“The problem is evaluating the available services that aid in
turning the vast amount of data into usable information,” Jones
comments. “I enjoy [technician] John Murphy’s market message and
have found www.Stockcharts.com, Stocks & Commodities magazine
and www.TradingEducation.com to have a wealth of knowledge and novel
investment ideas.”
Just as he did when he was a teacher, he studies the information and
articles on these sites daily to create and modify his own trading
style and to more closely follow sectors that interest him such as
the basic market indexes, metals and energy. His advice to other
traders? “Start small and make your mistakes early, as we all do,
but never quit. Trading is a lifelong learning endeavor.”
Darrell Jobman is Editor-in-Chief of
www.TradingEducation.com, which provides free daily and weekly
commentaries for traders. He is an acknowledged authority
on the financial markets and has been writing about them for more
than 35 years.
Source:
TradingEducation.com |
