Online Stock Investment

by Leslie Loh, Charlie Soh, Stephen Lai

Five Simple Steps Steps to Profit

Planning Your Investment
People invest according to their investment style, return expectation and risk appetite. Value investors buy fundamentally sound stocks that are selling below intrinsic value and hold them for years. Growth investors buy stocks with a good business model, and high sales and earnings growth. Traders on the other hand are more likely to be short-term speculators. For example, day traders tend to buy volatile stocks and sell them within a short period, from a few hours to a few days, for profit. They use simple rules such as price-volume breakout to make a quick trade. Some day traders do scalping by exploiting the bid and ask spread to make a small profit from each trade. Other day traders buy stocks based on rumors, hot tips and news like earnings announcement and contracts won. Technical traders rely on charts to guide them in buying stocks. They believe that everything is reflected in the stock price and use technical indicators to time purchase.

Whether you are a day or technical trader, value or growth investor, you need to have a 'game plan on what you intend to achieve. The plan describes your investment or trading goals and money management technique. The plan provides clear steps on how you select stocks, where to get relevant information about the stock, and when to buy or sell the stock. Exhibit 2.1 and 2.2 provide examples of a game plan.

Exhibit 2.2: Investment Plan
Goal:
To earn a return that is higher than one year fixed deposit rate.
How?
Identify a list of blue chip stocks with high dividend yield.
Where to get information?
Use NextVIEW to pick high dividend yield stocks and get fundamental information.
What to Buy?
High dividend yield stocks.
When to Buy?
Buy only if dividend yield of the stock is at least three percent higher than current fixed deposit rate.
Money Management
Each stock should not take up more than 10 percent of capital available for stock
investment.

Are you an investor or a trader? Well, the choice is yours. Most importantly, be very clear about what you are. Once you have decided what you are, come out with a one-page game plan to guide you through the investment or trading process. Review the plan periodically and make the necessary changes to improve your investment profit. For the trader, remember to "Plan your trade, and trade your plan."

Exhibit 2.2: Trading Plan
Goal :
To earn $500 a week.
How?
Identify a list of stocks with strong momentum.
Where to get Information?
Use NextVIEW screening function to select stocks with strong momentum and high trading volume.
What to Buy?
Two or three stocks with strong momentum and high volume.
When to Buy?
• Study the chart of stocks identified for trading.
• Establish the price support and resistance levels of the stocks.
• Establish strict trading entry and exit price levels.
• Use technical indicators such as MACD and RSI to support your trading decision.
Money Management
• Set aside $10,000 for trading.
• When trading, focus on at most 3 stocks each time.
• Sell when profit is at least 3 percent of amount invested or is equal to $500.
• Cut loss at 5 percent of purchase costs.

It is important to equip yourself with an online investment tool, such as NextVIEW, to support your trading. Use the powerful features found in NextVIEW, such as charting, time & sales statistic, queue track, and volume distribution, to help you in your trading. The time & sales statistic, queue track, and volume distribution provide a good gauge of the underlying demand and supply of a stock. For the investor, "Always invest like a business partner." Use NextVIEW to help you search for stocks, gather financial information, and do portfolio management.

Online Investment Plan — Five Easy Steps
Now you are ready to execute your plan with the help of an online investment tool, NextVIEW. The plan consists of five easy steps:

1. Identify potential stocks.
2. Select stocks with the best probability of success.
3. Study the chart of the stock to time purchase.
4. Determine demand/supply of stock to get better price.
5. Manage your portfolio to improve investment performance.

Step 1: Identify potential stocks
The first step is to identify a list of potential stocks. The stock screening feature in NextVIEW will be used to help you identify a list of potential stocks. Using NextVIEW to pick stocks takes the emotion out of investing. Stock screening using fundamental and technical criteria to pick stocks is discussed in Chapter 3. You will also learn how to create a watchlist to monitor potential stocks.

Step 2: Select stocks with the best probability of success
The second step is to pick stocks that have the best chance of making money for you. You will learn how to get financial information of stocks using NextVIEW. With this information, you can study the fundamental of each stock and pick the top three that have the best fundamental and thus, higher probability of success. This involves looking at the price earnings ratio, dividend yield, and other financial ratios. The fundamental study of stocks and financial ratios is discussed in Chapter 4. You will also learn how to get the latest news about the stock to support your investment decision.

Step 3: Study the chart of the stock to time your purchase
The third step is to study the chart to determine the current trend and use technical indicators to time your purchase. In Chapter 5, you will learn how to use NextVIEW to plot charts and use technical indicators to time your purchase.

Step 4: Determine demand/supply of stock to get a better price
The fourth step is to gauge the underlying demand/supply for the stock at time of purchase and get a better price entry. The time & sales statistic, queue track, and volume distribution are powerful features found in NextVIEW, which are used to determine the current demand/supply for a stock. In Chapter 6, you will learn how to use these features to buy a stock at a better price.

Step 5: Manage your stock portfolio to improve performance
After buying stocks, you need to track their return. Managing stock portfolio involves keeping record of trades, ensuring that you are not overexposed to a single stock, selling over-valued stocks and replacing them with under-valued stocks, balancing between holding cash and stocks, and reviewing investment performance. In Chapter 7, you will learn how to use NextVIEW portfolio management feature to manage stocks and improve investment performance. You will also learn how to set stock alert to notify you when the price reaches your profit target or cut loss level.

Your Winning Edge
When you invest in stocks you want to play a winning game of making money. To make money in stock investment, you must do four things right:
1. Avoid the mistakes of losers.
2. Develop the habits of successful investors.
3. Have an investment plan.
4. Use an online investment tool to give you the edge.

Avoid the Mistakes of Losers
Losers are highly emotional and irrational bunch of people. They buy stocks on impulse and hot tips. They do not have an investment plan or money management strategy. The end result is huge loss and broken dream. For example, retail investors chalked up contra losses of S$300 million in the first half of the 1999 bull market. Based on our experience, investors lose money because of the following reasons:
x Do not have an investment plan.
x Do not practice money management.
x Lack investment knowledge.
x Highly emotional.
X No discipline.
x Greedy.
x Gambler attitude.
x Do not learn from mistakes and repeat them instead.
x Do not cut losses when they are wrong and allow losses to get out of hand.
x Buy on tips and rumors without checking on the reliability of information source.
x Buy and sell on impulse.
x Too lazy to do basic research.
x Want to make money fast without any effort.

Develop the Habits of Successful Investors
Successful investors are willing to put some effort in studying the fundamental of the stock. They know the intrinsic value of the stock and will not chase or pay ridiculous price to own the stock. Warren Buffett, a well-know investment guru, listed six qualities of a successful investor:
• be animated by controlled greed and fascinated by the investment
process;
• must have patience;
• must be able to think independently;
• must have the security and self-confidence that comes from knowledge, without being rash or headstrong;
• must be able to accept it when one does not know something; and
• must be flexible to the types of business one invests, but never pay more than they are worth.

Develop the habits of successful investors by doing the following:
^ Have an investment plan.
^ Practice money management.
^ Be patient, realistic, and rational.
^ Do research before you buy the stock.
^ Buy fundamentally sound stocks at reasonable price.
^ Sell stocks when these stocks are over-valued or pushed up to exorbitant prices by speculators.

Have an Investment Plan
You must have a simple plan to guide you buy the right stocks that make money for you. In this book, you learn how to create a simple investment plan and do online stock investment in five easy steps. Now, you need to put into practice what you have learnt from the book. The five-step investment plan provides a rational, disciplined approach to investing online. If you follow the plan, you will not buy a stock based on impulse or tips. Instead, you will check out the stock first before making your investment decision. The five-step plan forces you to follow some simple money management techniques such as using stock alert and portfolio management. Start out your investment journey right. Try out the five-step investment plan on your next stock purchase. Use the portfolio management feature in NextVIEW
five-step investment plan to a "test" portfolio. Monitor the performance of the "test" portfolio to refine your investment plan.

Use an Online Investment Tool to Give You the Edge
You need to use an online investment tool for quick access to the latest financial information to check that you are on track in making the right investment decision. Having quick access to the latest financial information is critical to successful stock investment. In this book, you learn how to use an online investment tool, NextVIEW, to get the latest financial information. You were introduced to basic technical analysis and taught how to use charts for timing your purchase. You were also shown how to use many of the powerful features in NextVIEW, such as watchlist, time & sales statistic, queue track, volume distribution, and stock alert. Make use of these powerful features to give you the edge in making money from investing online. Remember that the latest financial information is just a mouse click away. Use this information to make money for you!

APPENDIX 1
Words of Wisdom for Trading

Have a Game Plan for Trading
You must have a game plan for trading. The game plan must articulate your trading strategy, profit target, cut loss level, risks to avoid, and money management guidelines. Review the plan on a periodic basis and make the necessary changes to improve performance.

Make Sure You Have a Money Management System in Place
You must have a money management system in place to ensure that you do not risk all your capital on one single trading idea. For example, if you have $100,000 and you used the whole amount to buy 10,000 shares of one stock at $10. If the stock dropped to $2, you would have lost $80,000. On the other hand, if you set a limit of 20 percent of your capital for each trading idea, you can only buy 2,000 shares at $10. Using the same example, your loss would only be limited to $16,000.

Practice "Positive” and "Proactive" Mental Attitude
Very often, a trader becomes very negative when the price plummeted after he buys the stock or goes up after he sells, the stock. He starts to doubt his trading ability, feels upset, and makes negative statements about himself. This is a natural reaction to a bad trade, especially when money is lost. A more positive and proactive attitude is to learn from your trading mistakes, avoid them in future, and recognize that your trading system needs improvement. Make sure you have a positive mental attitude before you trade. Otherwise, stay out of the market until you regain your composure. Remember the market is always around and does not miss your presence.

Only Trade Stocks You Know Well
Only trade stocks that you know well. You must have a good understanding of the stock trading range, liquidity, latest news flow, and recent important announcements.

Only Trade in Liquid Stocks
Only trade in stocks that have good liquidity. Liquidity refers to the existence of a large number of buyers and sellers and large trading volume. If the trading volume of the stock is low, you may not be able to ;ell when you decide to cut loss.

Establish a "Risk/Reward" Outcome
Before entering a trade, make sure you have an idea of the expected risk/reward" outcome. Are you trading on a "risk/reward" ratio of 1:1, 1: or 1:5? For a "risk/reward" ratio of 1:1, your upside gain is equal to your ownside loss. Try to set a "risk/reward" ratio of at least 1:2. For example, uying a stock with a downside of five cents and an upside of ten cents.

Understand the Trend of the Stock Well and Trade the Trend
Experts have advised that the "the trend is your friend" and "never go gainst the tide." If the chart shows that a stock is trending down (sharp drops and weak rallies), do not buy because there are more sellers an buyers. You will lose money if you buy against the downtrend. The exception is if you are trading for a technical rebound because the stock is deeply oversold. Even then, you must have very tight loss control and get it if what you expect did not happen.

Rcognize a "Hidden" Change in Trend
Very often a stock will go through very bad periods of poor earnings and negative news flow. The stock price will drop and continue to drop to discount the current bad results and future poor earnings visibility. There comes a time when any bad news or poor results do not cause the stock drop very much. Recognize that the trend has changed as there is underlying strong support for the stock. Change your trading strategy to recognize the "hidden" change in trend. Check around for divergent views out the stock. There may be some development that is not known to the market.

Wait for the Price of a Stock to Stabilize Before Buying it
Experts have always advised never to catch a falling knife, which means never to buy a stock that is going through a major price correction as what looks cheap today will get cheaper tomorrow. For example, a stock price that is coming down very quickly (10 percent correction or a gap down in price) implies that the seller has a large quantity to sell. Usually, the selling is because of some bad news about the company such as profit warning, slowdown in earnings growth, or major bad debts. If you still like the stock because of its fundamentals, wait for its price to stabilize before buying it.

Test Out Your "Price Discovery" Ability
Do hypothetical trades to test out your "price discovery" ability. Study how you react to events and news flow in relation to your trades. Are you buying or selling too quickly in reaction to an event or news flow? Are you taking profit too early or cutting your losses too slowly? Put aside five percent of your capital to do real trade and understand your price discovery behavior. You will be surprised with the results. Some of you may be stuck at a profit range of two percent or a loss of 20 percent. In other words, you take your profit too early and losses too slowly. There is a need to improve your price discovery ability as this impairment can cause serious damage to your capital. Keep a trade journal to help you gain insight on your "price discovery" ability.

Break Trade into Smaller Sizes to Hone in "Price Discovery" Ability
Divide your trade by half, one-third or one-quarter portion and wait for two conditions to happen. First, the price must be at the level that triggers a purchase. Second, you buy during each window period. If you divide your purchase into two portions and your window period is one day, then, you have only two opportunities to buy the share in the day. For example, you bought the stock in the morning. You cannot purchase additional stocks as the next window period to buy the stock is in the afternoon.

Get Your Entry Price Right
If you have got your entry price right, the stock should be making money for you almost immediately. Always be disciplined by plotting a chart of the stock you are trading. Use short-term moving averages and other indicators to help you determine the right entry price. Cut your loss immediately the moment you find that you have made a mistake. If you get the entry price correct, then the stock should not go down more than 5 percent on the day you buy the stock.

Practice Trading Discipline by Giving "Limit” Order
A "market" order is buying or selling the stock at the current market price. A "limit" order buys or sells the stock at the price you specify. For example, the buying price of SIA is $10 and selling price is $10.10. If you give a market order to buy SIA, your broker will buy SIA at $10.10 (the current selling price). Try to practice your trading discipline by buying the stock at the price you specify (i.e. "limit" order). The "limit" price is specified at a level based on some buying criteria or technical indicators.

Have a Cut Loss Strategy and Cut Your Losses Quickly
For trading, it is recommended to set the cut loss level at between three to eight percent. For example, if the stock is one dollar. At three percent, your cut loss level is 97 cents (3% of $1 is 3 cents). At eight percent, your cut loss level will be 92 cents. Make sure that you stick to your cut loss level. Otherwise, your losses will become so painful that your trade becomes a long-term investment mistake that stays in your portfolio report, reminding you year after year of your folly.

Cut Your Loss Quickly Before it Damages You Permanently
If you buy a stock at $1 and it drops in price to 50 cents because you did not cut your loss, the stock has to go up by 100 percent for you to breakeven. Assuming you trade $100,000 worth of share. The end result is that you have loss $50,000 or half your trading capital of $100,000. You need to make $50,000 profit to get back your capital of $100,000. However, if you have a tight loss control of 5 percent, you would have sold the stock when it hits 95 cents. Your loss is $5,000 (5% of $100,000) and you are still in the game.

Cut Your Loss When the Events You Bet on Did Not Materialize
You buy a stock betting on some events to happen: a technical breakout, surprise announcement, or syndicate play. The stock did not move up as expected. Cut your loss at the level you set. If what you expect to happen is actually happening, your trade should make money for you very quickly. If it does not, you have to be very discipline to stick to your loss control plan.

Keep a Trade Journal
Keeping a journal of your trade history is important as it clarifies your trading decisions and helps you understand your price discovery behavior.
the reasons for the trade, you reading of the market in relation to the trade, your profit/loss levels, frequency of trade, and returns achieved. The journal helps you to manage your emotion, improve your price discovery judgement, focus on the quantitative part of trade, and make rational adjustment on your risk level and return target. By reviewing trades done over a year, you should be able to see your performance and pattern in taking profit and cutting loss. The journal should help you answer the following questions: Are you taking profit too early? Are you cutting losses too slowly. Are you trading in a reckless manner? Are you preserving your capital? Do you follow your plan? Do you need to adjust your plan?

Use an Online Investment Tool to Give You the Edge
To be a successful trader, you must have access to real-time charts, trading statistics (e.g. time & sales statistic), and latest news to help you make profitable trade. Use an online investment tool such as NextVIEW
Advisor (www.thenextview.com) to do charting and get access to critical trading statistics real-time.