Question: I like to trade small stocks, but you show so many expensive stocks. Why is that.
I would like to remind those that focus only on cheap stocks that investing or trading in
stocks should be seen as percent return on your total dollars invested on each trade or
investment. In other words putting $10,000 to work in a high priced stock and getting a
30% return is the same as putting $10,000 to work in a lower priced stock and getting a
30% return. After all 30% is 30%.
Answer:
I believe you will be far better off using this philosophy instead of using how many shares
you can buy. Remember 30% return on $10,000 is 30% of $10,000 whether you bought
100 shares of a $100 stock that moves 30% or 1000 shares of a $10 stock that moves
30% as you've still invested $10,000.
I would also like to mention that a 1 point stop on a $10 stock is a 10% loss whereas a 2
point stop on a $100 stock is only a 2% loss.
Personally I can say that my biggest gains consistently have been on the higher priced
stocks when they ran such as AMZN, AAPL, RIMM, GOOG, PCLN and numerous others
large movers over the past 12 years.
Question: What is a trendline?
Answer:
Trendlines run horizontal and at rising or descending angles and represent support and
resistance. Traders rely on these trendlines and often enter or exit a stock as a result of
which side of the trendline the stock is on.
Question: Dan, can you tell me about the SK-SD indicator you use?
Answer:
This indicator is the more classic version of George Lane’s formulation of stochastics, and
involves two components. The SK component is typically a 3-day moving average of the
stochastic ratio as defined by Lane’s basic Stochastic formula. SK is again averaged over
the same number of days to obtain a double smoothed average ratio called SD. AIQ has
modified the indicator, which Lane originally developed for futures trading, by lengthening
the default value for the moving average to a 10-day average to better reflect stock
trading. The SK component is always the upper line on up movements and the lower line
on down movements. The SD component is the lower line on up movements and the
upper line on down movements. With TradingExpert Pro’s default colors displayed, the
SK line is green and the SD line is purple. The simplest interpretation of this version of
the Stochastic is that price trends will reverse when the value of SK diverges from price.
For timing following a nonconfirmation, buy signals are generated when the SK line
moves above the SD, and sell signals occur when the SK moves below the SD. These
signals are enhanced if the second average, the SD, has already made the turn in the
direction of the signal. When these situations occur at extreme ranges, below 10 and
above 90, the SK-SD becomes less reliable as an indicator and should be used only with
confirmation of several other indicators in the system.
Question: What is a candlestick?
Answer:
This is a daily bar converted to a Japanese form of a daily bar, yet the bar has many
varying shapes. Some are very thin and short while other can be long and wide.
Question: What does the term "gap" refer to?
Answer:
If a stock closes at $20 one day and the next day the first trade of the day for that stock is
$22, then there is a $2 "gap" in price.
Question: What does it mean when you say "Daily Bar". Can I order a beer there?
Answer:
No. A daily bar refers to the total price movement of a stock for one day.
In picking a stock, you use the expression, "low number of shares that float" What does
Question: the term "float" mean?
Answer:
Float refers to the number of shares that the public can own and trade.
Question: What is a "stock split"?
Answer:
If a company has an expensive stock at say $80 and wants to make the shares more
attractive to the average person, the company will often double the shares outstanding by
two so it can now trade at $40 per share. This is called a 2 for 1 stock split.
Question: Can you please explain what you mean by Pivot Point?
Answer:
Pivot point is any consolidation of a week to two weeks after a move up or down.
I have seen time and time again, if I set a 10% sell stop I will be moved out of the stock
Question: right before a huge move. The 8% or 10% sell stop screws you out of great stocks so
many times. There is no way great traders live by this. Any feedback appreciated
Answer:
Reading the breakout is everything. For instance when MIPS broke out and was above
the buy point on the first day volume went ballistic yet the stock made no further gains
suggesting sellers were selling into strength and therefore you should've read this action
during the day and reduced or sold all at that time before the stock has the chance to
move back below the breakout point. Reading a stocks behavior and knowing it well is
key to avoid this.
BUYING QUESTIONS
In many of your commentaries you state that stock xyz is a buy when it moves above the
Question: trend line. My question is...do you mean that one should buy the stock during the same
day it crosses the line?
Answer:
You must buy as close to the trendline as possible. Buy the first 50% to 60% of the
amount you're going to buy 10 cents above the line. If the stock has the volume then add
the rest or the other 40% fractionally as the stock continues up on heavy volume.
I bought a stock that you listed as it went through the trendline with volume up 60% above
Question: recent trend on the day it went up. However on the second day the stock went nowhere.
Should I add more here?
Answer:
Doubt you should add more if the stock can't move up on the second day. Give this stock
more time to see if it can move horizontally a few days and then add if the stock moves
up above this horizontal area. Otherwise it might be best to move on to others.
How long are the recommendations you make good for if they don't hit the buy point or
Question: sell short point within a certain time frame?
Answer:
That depends on the pattern. Channel patterns last forever, while Cup and Handle
patterns last just a few days. Most are good from 2 to 4 days at most.
SELLING
My stock that I bought on a breakout a few weeks ago is having wild price swings. One
Question: day it's down $4 and the next day up $3 to $5 and then again down $5 or so. What does
this imply?
Answer:
This tells me that this stock is in hot demand by those that don't know the full story and is
being sold by those that do. Wild up and down price swings are a sell signal in my book.
My stock, which by the way has been a big winner for us here over the past 6 months,
Question: just spiked up 30% more in price over the past 3 days. I'm so excited about this strong
mover I want to add more. What do you think Dan?
Answer:
Sounds to me like this stock just had a blow off top and should be sold immediately. If the
stock can build out a new base for 6 weeks or more, I would then consider repurchasing
this stock when it breaks out again.
My stock was just upgraded by a leading analyst and my stock just sat there on the news
Question: and did nothing. Should I buy more based on what he said or should I just hold for now?
Answer:
A stock that fails to respond favorably to good news such as upgrades, earnings
surprises or stock split news has probably finished moving for now. And if its finished
moving then odds favor lower prices going forward for a considerable period of time.
Dan; My stock that you listed the other night went over the trendline and I bought it. The
Question: stock then quickly went back under the trendline. What should I do?
Answer:
Sell the stock as soon as the stock moves back under the line. Do not wait for the stock to
close the day below the line. Sell even if you bought the stock 10 minutes ago. You can
always buy the stock back later.
Question: My stock just gapped down $6 on news; do I really have to sell it?
Answer:
Yes, at the open without hesitation and without thinking about. If you think this price
discount is bad, just wait a few more weeks when it has dropped another 30% to 50%.
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