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Greetings, Pro-fundity team members -
08-08-03

At the bottom of the Guidepost, a full listing of this weeks picks are shown, in addition to the Charts via the Pick-link.

As a benefit of membership, you have access to all Guideposts (including Archived GP's) and Picks. If you miss a week or two for whatever reason, you will be able to go into the Historical Guidepost link to catch up with both the weekly guidepost and the 30 picks made for the week.

Greetings, fellow Pro-fundity team members.

1. The first three sessions in our Beginning Investing course constitute Unit 1, a discussion of the basics; a) why we should invest in the stock market, b) an introductory primer on what risk means and the importance of risk management, and c) in its most basic terms, “What is a stock?” Hopefully, you’ve had enough time now to answer questions posed at the end of session 3 as well as to complete the suggested exercises. Your understanding of coming lessons will be heightened if you do. The very act of writing answers out, either on a PC or with pen & ink, provides a critical link between the material and understanding (or, theory & application). When we hear about a new concept, sometimes it takes and sometimes it doesn’t. That is not bad nor unusual. We understand that and will continually re-visit concepts throughout this course, reinforcing critical elements required for investing success.

2. Last week’s lesson, Session 4 Unit II, provided a dose of reality considering the costs of making market trades. These costs included:
   Commissions
   ”Invisible eighth”
   Taxes
   Exchange fees

   Utilizing the Personal Investment Planner (PIP) we were able to see important factors when entering a trade, such as “Breakeven sell price,” or how much must the price increase for us to pay for the costs. This PIP is about as basic as it gets, but lets us track performance and at this point is a good training tool. As we progress to more weighty principles, the PIP will change as well.

3. Some have questioned the pace, the “quickness” of the delivery of this course. Our response lies in the pedagogy, or teaching style we’ve adopted. Success in this business depends largely on the personality of the trader, less on technique or methodology. In fact, matching these two, personality and technique, is far more important and difficult than mastery of any trading system. Since our target audience remains the beginner, the novice, the uninitiated – those with a sincere desire to change that label - we do not promise a weekend seminar to learn in two days the magic market-success formula. So, stay with us, offer viewpoints and ask questions to get the most out of this effort.

4. Let’s pick up on last weeks assignment, to exercise the PIP trading tool by selecting three tickers from the main picks. Follow these steps to exercise your understanding of the PIP trading tool and market operation. Here was the task:
   1. Download the PIP into your own spreadsheet format.
      
   2. Select three tickers from the Main Picks list for 8/1/03 (included here): AMSG, ARJ, EQIX, GRIC, GYMB, HMY, MSN, PRXL, UDI, WON. Invest $2,000 paper money on these three tickers any way you wish.
      
   3. Commission cost for this trading task is $24 per trade.
      
   4. Select a Target % for increased price and a Stop % as protection on the down-side.
      
   5. Keep daily track of the price on each ticker for one week.
      
   6. Summarize your findings, problems, concerns and questions in an e-mail to info@pro-fundity.com during the weekend of 8/9/03.

   7. One participants response included the following: MSN, UDI, WON. The three charts are shown below, how they looked on that Friday (8/1/03).
      
      
      Fig. 1 Price chart for MSN on 8/1/03.

   8. He liked the "…order in the daily chart, with the price showing a bounce off support, although the 8/1 volume not so good.”
      
      
      Fig. 2 Price chart for UDI on 8/1/03.

   9. ”Going with that sharp increase on Friday with high volume provides a good choice.”
      
      
      Fig. 3 Price chart for WON on 8/1/03.

   10. ”On both daily and weekly, price seems to be at support, should go up!” Following are charts showing prices on these three the following week.
       
       
       Fig. 4 Price chart for MSN on 8/8/03.
       
       
       Fig. 5 Price chart for UDI on 8/8/03.
       
       
       Fig. 6 Price chart for WON on 8/8/03.
       
       
       Fig. 7 PIP for three tickers.

   11. We assume each ticker was purchased on the Friday’s close price (8/1/03) with the $2,000 divided equally. The number of shares entered into the fifth green column would be calculated thus: =(666 – 24)/share price. In this way, the Dollars Invested in the first white column includes both the (shares x price) plus commission. Further, assuming a 10% Target Sell and a –8% Stop Loss as shown, there would be no sells during the week, either at the Target or the Stop. For example, during the week, MSN did not rise above $7.65 or fall below $5.97.

   12. Now, consider your own selections and how the week played out. Seasoned investors played the game with hardly a thought, with many different reasons for their choices. Beginners displayed more concern, seeking a clear reason for any choice. This brought some anxiety as they considered the options. That is a good sign, even with no real money on the line. Had you all been given a real $2,000 to invest, the anxiety would have multiplied. Seasoned successful investors often reduce anxiety with a mechanical trading system, letting the system make some of the decisions. What is a trading system? A collection of rules that provides critical information and signals at what price levels traders should enter and exit a position. What a great idea, a system that tells me when to buy and when to sell. The routine outlined above on the PIP is a very basic system. That means I can step out of the way and bridle my emotions. Sounds easy enough. Why is it important? Because emotions get in our way as we try to make sound investment decisions. For example, we all want to feel good about ourselves (pride), causing us to sell our winners too soon. As we try to avoid regret (fear), we hold our losers too long. The result is we’re selling the good stocks and keeping the bad. Long term this seriously decreases our return.

   13. With a good trading system, we can reduce some of the pain that comes with anxiety. We can develop a feeling, a sense for the trades; when to enter, when to exit, and how often a trade will produce a profit. However, we must remember that NO system works so well that we can just relax and let the money roll in, week after week, month after month, or year after year. Okay, so the next question is “what systems are available,” and more basically, “what system should I trade?” There is no single answer to the question because we all look at money differently. Point: We use the terms “trader” and “investor” interchangeably, although there are differences. The IRS makes a clear distinction, but for our money the difference is often blurred so we accept the loose version.

   14. How do we look at money differently? Each trader has different time horizons and different risk/reward goals. Some are looking to invest for their retirement 20 years down the road while others just want to hide some cash for a couple of years to build equity for a house down payment. Risk preferences diverge where one has a voracious appetite for a risky system while another can’t stand a modest draw down. (Draw down is the decrease in an equity account as prices drop on open positions). A trader with confidence in his system may handle six losing trades in a row without a blink, while for another, three losing trades in a row & “he’s outa here!” And there’s trading style – day, swing or position trading?

   15. To obtain the best results with a system, traders should select a style that is compatible with who they are since personality will greatly impact performance. Thus, two criteria must be considered - the system’s performance and the trader’s compatibility with the system. To find success with a trading a system, it must become our own, knowing it’s ups and downs, it’s peculiar behaviors, it’s strengths and its weaknesses. We must be willing to risk the amount of capital required and, then, sit through the inevitable draw-downs or flat periods that occur in any trading system. Given all this, it may seem easier to just go with the flow. However, a tested, purely mechanical system is absolutely essential. This must be our never-ending quest, to find and become so comfortable with a trading system that we have the discipline to not override the system’s signals. Whenever we’re enticed by some piece of data to disregard one of our system’s signals, we are suddenly trading a different system. When that occurs, so much for our system!

   16. But, suppose we’ve found the perfect system, is that all there is? A good system without excellent money management is near useless. We must focus on money management for the system. Discipline becomes the common denominator for success. In its simplest terms, the essence of a winning system is not the steps, the techniques, the signals – that’s just the system. The key is the effectiveness and efficiency of the money management of the system. There are many examples of hot traders who suddenly had a horrendous loss that put them out of business. That usually has little to do with the system and everything to do with money management. Don’t confuse the two. For example, beginners usually have only half a plan, the easy half. They know how much a profit they’re willing to take, but they have no idea how much they‘re willing to lose. Since all trading systems must accommodate losing trades, the first role of money management is to control the losses. That is the function of the stop-loss.

   17. The purpose of money management is to protect investor capital. For example, a common recommendation (rule) is to risk no more than 2 percent of total equity on any one trade. A good rule. A $50,000 portfolio could then risk up to $1,000 on a single trade. Can you see the protection offered in this management tool? That means the account could invest $10,000 on a trade with a 10% stop-loss in place. In this manner, the risk would never be more than 2%. But what if all I have to invest is $1,000? Let’s see, a 2% risk means I can risk up to $20, or invest $200 with a 10% stop. We saw last week how the cost of a trade goes up as the amount invested goes down. The likelihood of a profitable trade becomes slim to none. To help a beginning investor get in the game with limited capital, we prepared a $1,000 portfolio with last week’s picks, choosing three tickers, two from the Main picks (AMI, NEM) and one from the Quick-pick list (PXD). The PIP for this group is shown:
       
       
       Fig. 8 PIP for $1,000 portfolio.

   18. NEM and PXD both increased in price during the week, yet AMI fell below the stop loss chosen. The price/volume chart for AMI is shown closing on Friday 8/8/03. The drop in price was not expected, however with the stop in place it remained a small loss. Money management…
       
       
       Fig. 9 AMI price chart.

   19. The next chart shows the price levels for action on this position.
       
       
       Fig. 10 AMI price chart showing stop loss levels.

   20. This chart shows the entry level at $16.80, with the stop level 10% below ($15.13). The stop level was almost violated on 8/6/03, but was finally picked up at the open on 8/7/03. Notice, the actual exit price was not that of the stop loss, $15.00 instead of $15.13. That is because a stop-loss order with the broker triggers when the loss level is reached, but at that time, the order becomes a market order and will be executed at the closes “best” price. If the price drops precipitously, we may actually sell much lower than the stop-loss. But that is a matter we will consider later on types of orders. The following PIP table shows how the sale was executed.
       
       
       Fig. 11 PIP showing sale of AMI when stop loss is executed.

   21. We will follow the progress of our $1,000 portfolio each week. Notice the purchases did not take place on Friday 8/1/03, but at more selective dates based on the price pattern. We will invest the money returned on the sale of AMI as we find another pick that looks good. This is a real example of money management in operation.

   22. What have we learned in this lesson?
       
       • The critical importance of finding a trading system that fits our own personality.
         
       • The necessity of using money management to supplement our trading system.

   23. Good systems are important, since the best money management won’t help a poor system. However, a good system will only become a great system with proper money management. So where do we find the good systems, how do we apply money management to support the system? That is what lies ahead in this Beginning Investing course. We will study specific systems during each lesson, giving you the chance to try them out with simulated trading exercises. You will have the opportunity to find a system you can find comfort with.

   24. Your task this week is to paper-trade the 10 Main picks, entering each ticker in the PIP and following their performance each day on a price chart. Execute stops at three different levels (of your choice) and make some conclusions at weeks end about what stop level feels best for you. Thank you for your response last week, please repeat your thoughtful comments this week to info@pro-fundity.com.
       08-08-03 Pick Selection:

       Main Picks:
       ANH,BBBY,ECSI,HLYW,IMH,INNO,ISRG,MESA,RCRC,WEDC
       Breakouts:
       ACO,ASML,AUGT,CLSR,FJC,KCS,KTO,PMTI,SPIL,TTMI
       QuickPicks:
       ALKS,CKFR,CNA,DCLK,DDS,HELE,KROL,NSC,NSM,VOD

       For detail and followup on Pro-fundity Tradescape,
       find the link on "Advanced Trading Tools" on the home page.

       Be Diligent
       Take Action!

       

       
       
       
       
       

       
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