Not too long ago, we had the pleasure of sitting down with a prominent trading professional, who shared some investment tips gleaned from a pretty atypical background.
Well, we mentioned at the time that it was a wide-ranging conversation—indeed, we covered so much ground that we decided to split our conversation into two. So today, we're delivering a second dose of trading wisdom.
The Tea
Trading ain't easy.
"The success rate for making a living from day trading is 4%," professional trader and author Steve Burns tells MoneyShow. "This is the actual rate I witnessed while trading at a proprietary trading firm for many years and in conversations with other firm operators. Making some money from day trading (side hustle), about 10%-15% prop firm trainees could do that."
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That's not to say you should never trade stocks—but if you do, you should have realistic ideas about the returns you can expect, the amount of time it takes to make significant money, and how much knowledge you'll need to be competitive.
On that last point, one of the best things you can do is absorb wisdom from people who have already put in the time. Enter this week's returning guest.
The Take
Steve Chappell is Global Head of Trading Systems Development at VectorVest, an investment service that helps investors find opportunities by combining fundamental and technical analysis. And Chappell has a technological foundation you don't find in all traders, having earned MCP, MCSE, Net+, and A+ computer certifications from Advanced Computer Technology Training.
As the title suggests, he now leads the development for VectorVest's trading systems, but he also provides education through webcasts, investment workshops, and trade shows worldwide.
We personally enjoy his unorthodox background, which enables him to view trading from a different perspective. And when you're trying to get a trading edge, different (experienced!) perspectives are invaluable.
So today, Chappell is going to follow up on his previous investment tips with three insightful trading tips that aspiring traders might want to put to use:
1. Technical Analysis + Fundamental Analysis: They're Better Together
Many traders are content to let the stock charts say what they're going to say, and trade based on that alone. But Chappell insists that using technical analysis (TA, the use of stock charts in making trades) alone is a flawed approach. Conversely, fundamental investors—those concerned with company finances and valuations—could do well to keep their eyes on TA to help them better time their entries into a position.
"We combine fundamental analysis—looking for safe, undervalued stocks—combined with a technical indicator for timing," Chappell says.
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"No matter how good a stock is, there's always still a wrong and a right time to buy that stock," he explains. "Even if you're catching value, investors and traders should look at the full picture. Even if you have the strongest technical indicator, I would feel much more comfortable if I know that the corporate earnings for that company are marching in the right direction, too."
2. Pay Attention to Market Breadth
Market breadth measures how many (or how few) stocks are participating in a broader market move. It's usually expressed as a ratio of advancing stocks versus declining stocks.
"Market breadth is extraordinarily important for a couple of reasons," Chappell says. "For one, Warren Buffett, one of the greatest if not the best investors of all time, says the best time to buy stocks is when there's blood in the streets. And market breadth allows you to see when blood is in the streets."
Chappell mentions that VectorVest's market breadth indicator (BSR, or buy-to-sell ratio) looks at the participation rate of stocks, whether they're rising or falling. And historically, when that indicator gets low, that's the time to buy.
"When almost every stock in the stock market is going down, there's a point where investors see opportunity. No matter how bad earnings are in the tank, at some point, investors are willing to place a bet on the future," Chappell says. "And so we found some of the best buying opportunities is when [the indicator] gets to levels it's only achieved on a few occasions."
This is a rarity, mind you—the level it needs to plumb happens less than twice per year on average. Also, not everyone wants to get into that game, and for good reason.
"If you get it wrong, you're going to get hurt," Chappell says. "You're buying into the teeth of the fall."
Conversely, the more stocks that are running higher, the stronger the rally actually is.
"When more stocks are rallying then aren't, your odds at picking winning stocks go way up," Chappell says. Thus, if you're looking to improve your chances of making winning trades, wait to make those trades in the midst of a broad move higher.
3. Know the Difference Between Market Timing and Trend Following
Market timing is effectively waiting for the perfect moment to trade or invest. Of course, every study out there will tell you that your average investor is horrible at market timing, which is why most every investing expert will warn you against doing it.
After all: No one has a crystal ball. No one knows what tomorrow is going to hold.
Trend following, on the other hand, feels similar but isn't quite the same. With trend following, you try to identify trends in markets, then determine the likelihood that the trend will continue based on historical market data.
"We look for a trend that has already developed," Chappell says. "We don't say 'The market is going to do this for the next few months.' We say 'The market has done this for the past two weeks, and based on 25 years of history, it is likely to continue.'"
Even then, Chappell says, the economic and fundamental backdrops still matter.
"You want a conducive market climate—when earnings are going up, that's when you have the longer [market] runs," Chappell says. "Even people who are good at using TA, that's where they miss the boat. They jump with both feet into a declining economy. That's when you're going to become more susceptible to false bullish trends that are going to fail."
As always, thank you for reading, and we'll see you next week!
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.