Mike's 10 Must Follow Rules for Making Consistent Profits in the Stock Market

Rule 3: Trade Like a Technician

Once I have selected WHAT stocks I would like to own, the next step is to determine if the timing is right to buy one of those stocks.

In other words, I select what stocks I may want to own based on each stock's best-of-breed fundamentals, but I don't execute a buy on any of those stocks until my TECHNICAL ANALYSIS confirms a Buy Signal.

There are many ways to technically review a stock for buy/sell/short/cover signals. There's the Elliot Wave theory; the Candlestick theory; the Dow theory; and on-and-on-and-on...

Basically, performing a technical analysis on a stock can be defined as using a method of evaluating a stock by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered. The assumption is that by using a technical analysis on a stock, one can reasonably accurately predict the future price of a stock. This is done by looking at its historical prices and other trading variables.

TurnerTrends has its own, proprietary, technical analysis theory that I follow in my technical analysis of stocks. I also use a technical analysis for determining the appropriate stop loss to set for each stock.

The TurnerTrends technical analysis provides the following actionable 'triggers':

• Buy Signal - This is when the week ending closing price of a stock closes sufficiently above our moving average trend-line by a predetermined percentage.

• Stop Loss Calculations - This is a number below a long position that is calculated by incorporating a stock's historical volatility and a statistically accurate time-base formula to estimate the maximum expected movement in a stock's price over the upcoming week.
• Sell Signal - This is triggered when the price of the stock meets or falls below the stock's then current stop loss setting.
• Short Sell Signal - This is when the week ending closing price of a stock closes sufficiently below our moving average trend-line by a predetermined percentage.
• Cover Signal - This is triggered when the price of the stock meets or moves above the stock's then current stop loss setting.

But I go a step or two further in my technical analysis that I believe is crucial to timing when is the best time to get into and out of a stock.

In addition to performing a technical analysis on individual stocks, I also do a technical analysis on each stock's Industry and Sector.

This analysis must support the decision to buy a stock. If I buy a stock, my technical analysis of the stock's Industry must conclude that the Industry is in a technical "Bull-Mode".

I also want to see the stock's Sector showing a bullish tendency; again, by analyzing the Sector using the TurnerTrends technical analysis system.

But, as important as it is to know when to buy a stock; it is even more important to know when to sell that stock.

I use a negative change in a stock's Industry chart to provide me with a leading indicator of a potential future sell-off in the stock. When I see a stock's Industry begin to taper off or turn negative, I will move that stock's stop loss into what I call my "Aggressive Stop Loss Strategy". This is a strategy designed to capture the maximum amount of accumulated paper profit while letting the stock continue on its upward path, until such time as it does reverse and trigger my stop loss. Aggressive stop loss settings are nothing more than a stop loss set very close or tightly to the current price of the stock.

So... I select what stocks to buy on fundamentals and when to buy them based on technicals. And I only exit a position in a stock based on my technical analysis.

Continue to rule #4, The Money Rule.