This Week's Guidepost

1. In Dr. W. Edwards Deming's Theory of Profound Knowledge, he makes the point that true learning never takes place unless we place our credibility on the line. Or, unless we become a real part of the learning experience. That is, to find if a concept is true, or if an idea works, we must act as though it works, follow through and learn from both the successes and failures of that action. I like to use this concept in the investment world with paper trading. For instance, in paper trading we can look at a historical price chart and ooh and aah about where the price went, how good it would have been to have acted at this time, or how bad to have acted at that time, happy that we were or weren't in the market when that event took place. While this may be entertaining, very little, if any, learning will take place.
2. Consider a different script:
   
   1. Study a price chart, enlist all the tools we have learned how to use to help stack the odds in our favor, determine when to buy, at what price, and how much.
   
   
   2. Based on our study, take the action, pull the trigger, and buy (on paper) as planned. There is something valuable in writing this action down. This is equivalent to placing our credibility on the line. This step is important.
   
   
   3. Repeat these two steps on two to five different tickers. Too many can reduce the impact of lessons learned, too few is a waste of valuable time. We don't plan on paper trading forever!
   
   
   4. Follow the price patterns of each selected ticker, ready to execute a sell when the conditions are ripe. Remember, for each stock we buy we must have exit strategies in our plan. Under what conditions should we sell? This must all be part of our trading strategy (paper trade).
   
   
   5. As we move through the weeks with our paper trade portfolio, buying and selling according to our strategy, we will learn lessons that will come in no other way. We should expect to change our strategy as we learn the lessons. We can learn great truths by going back over our plan (again, the importance of writing it down). By studying what we did, by picking it apart, looking for inconsistencies, holes, obvious errors. That is how learning takes place.
   
   
   6. This experience is necessary because the market is not a mathematical equation that we just enter inputs and get the answers printed out. There are intangibles that avoid rational thought. Issues we need to pay close attention to include:
   • Is good news or bad news causing the action on the price chart?
   • Was that advance accompanied by increasing or decreasing volume?
   • What does the accompanying volume trend say about the future price trend?
   • Why is the price chart moving sideways?
   • What are other stocks in this sector doing?
   • Is the stock overbought or oversold?
   • Is there enough volume to make the indicators work well?
   • What does the upward (or downward) price trend say about indicator value?
   • Was the tip on MoneyLine worth consideration?
   • Etc., etc.

3. Paper trading is a lot of work! But the returns, the benefits, the lessons learned should get us all excited to the point that we spend "X" hours a day/week in this effort before we invest real money. How many tickers should we be working on? How much time should we spend? All questions we need to answer for ourselves.


4. Let's begin the new year with an exercise. Take a look at the price chart below, consider all the facts that you can find about this ticker, and put a stake in the ground. Cast your vote about whether this price chart will continue the roll it has begun, or whether it will remain at its present level. Cast your vote by explaining which way you think it will go and why with a message below. We will publish the results (anonomously) and follow this chart in the following weeks to help learn some lessons.



5. Next week we will begin a study on using VOLUME to help answer these questions. Stay tuned.
   
   

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