Developing a judgement of your own rather than using an adviser is wise. The more you use others for advice the more you are dependent upon them. When you accept someone else’s opinion, how do you know that they may change their opinion within the hour. Brokers are reluctant to put out sell orders especially when they just made a buy recommendation.
When you last talked to your adviser, perhaps he was bullish, but now he has a reason to be a bear. Either position may be right, perhaps he has been wrong 4 out of 5 times yet he has made a lot of money for his clients. How do you know that you will get the right advice, the money making advice. Unless your adviser communicates with you throughout the investment cycle, how will you know his true worth.
Selecting the Best Opportunities
Initially you’ll want to explore whether your investment has a good reward to risk ratio. A stock with a projected price target 20 points above it’s current price would provide you with a 10:1 reward to risk ratio if you put a stop loss 2 points below your purchase price. Now that’s something to get excited about!
Then you’ll want to determine the trend of the market. We’ve been in a bull market for going on 8 years and the market is fairly extended so caution is warranted.
The next step is to scan the markets for opportunities:
I choose to use a scan that looks for stocks that have hit 120 day new highs. I’ll use Home Depot as an example of this selection process. Home Depot broke out to a new high in early 2012 after having been in a trading range for over a year and a half. This was the second phase in the accumulation of Home Depot stock, the stock had traded down to the 18 in 2009 and traded as high as 26 before moving up to 36 in 2010. The stock then traded between 26 and 39 before entering the markup phase.
If we look at the point and figure chart for Home Depot you find the 2nd accumulation phase at the price point of 31.
If you count the boxes of x’s and o’s you will get a count of 13 (at the 31 price level) and that gets multiplied by 3 since it is a 3 point reversal chart (you can find out more about point and figure charts by clicking here). From the breakout point of 34 you get a target of 34 + 39 or $73 a share. You could have put a stop loss at 29 and if you bought at 32 you would have a 39/3 reward to risk ratio.
That first accumulation phase began in 2008 at the $18. If you count the boxes which there are 8 and multiple times 3 you get 24 and adding that to the bottom price at 15 and you get a price target of 39. These targets just give you something to shoot for but they often prove to be eye popping close!
At $18 a share most everyone was down on Home Depot the news was terrible. The Mortgage mess was creating a lot of concern, and the housing market is what Home Depot relied so heavily on. The public usually sells on bad news and buys on good news………insiders and professionals do the opposite. Would you have been looking at Home Depot to add to your investment portfolio?
In June of 2013 Home Depot reached it’s target price. It then traded in a range for about a year. This additional accumulation phase gave a price target of 153. If you chose to sell, you could have re entered a year later or if you were a long term investor you could have just stayed the course.
Here is the point and figure chart:
It is so important to have a method, a way of approaching the markets and making good investment decisions. Hopefully, you can learn these methods with me over time. It is important that you test drive your approach to using these techniques before you actually invest your hard earned money.