Short Selling

There are so many different ways to make money in the stock market. The most basic way with stock shares is to buy them low enough and then sell them at a higher price later.

Did you know that it’s possible to make money in the reverse? You can sell shares in the market at a higher price first and then buy them back at a lower price later. This is called short selling.

The concept of short selling had me confused at first. I’d only heard that it was something a lot of traders did when they anticipated a drop in stock prices. None of it made sense until I executed my first short sale.


My First Short 

Many years ago, a certain company messed up royally and was getting a lot of bad press. Shareholders were selling in a panic and the share price was dropping in high volumes. I saw that the price was at around $76 and I believed it would go down more. I lined up my order to sell 600 shares at the current market price and I hit, “Short.”

After that, the price fell considerably. In the order box I clicked on, “Cover,” and I bought back 600 shares at the new market price of $74.75. That is a share price difference of $1.25. With 600 shares, I made $750, excluding commissions.

Broken down, it looks like this:

  • I short sell 600 shares for $76 per share (600 x $76 = $45,600). By doing that, I’m borrowing the shares from my brokerage to sell in the market for that price;
  • The share price falls;
  • Then I buy back (or cover) 600 shares at the current price of $74.75 (600 x 74.75 = $44,850)
  • At the end of my trade, those borrowed shares are returned to my broker. I get to keep the difference in the short sale for a profit of $750;
  • $45,600 – $44,850 = $750.

Despite the order at which the transactions occurred, the concept of buying low (at $74.75) and selling higher (at $76) is still preserved.


The Downside of Short Selling

As great as it sounds to make money when share prices are heading down, short selling is a riskier practice. Here are some reasons to consider:

1.Many investors don’t short sell or even know what that is. This means you don’t always have the majority of the market on your side.

2. Shorting is made possible when your brokerage firm has the shares to loan you from its own inventory of stocks. These stocks are either from the firm’s own positions or from the positions of the firm’s clients. If your broker doesn’t have the shares to loan you, you cannot short sell the stock. You end up missing out.

3. The market is generally optimistic. This means the fear and panic don’t always last as long as you might hope to support your short sell. Price reversals can happen fast. You generally need to have a shorter time horizon for shorts and you need to be watching your positions more closely.

4. When you buy a stock in the standard fashion, the worst thing that can happen is that your share price drops to zero before you’re able to sell it. In this scenario, the most you can lose is the entire amount of your investment. When you short a stock, the share price can go up indefinitely — this means you can lose more than the entire amount of your original position. Potential unlimited losses is what makes shorting considered a high-risk practice.

5. Profits from short selling are normally taxed as income rather than as capital gains. This is not favourable taxation.

6. If the company that you’re short selling is paying out a dividend, you have to pay the dividends owing to your firm or to the client those shares are being borrowed from.


Why I Don’t Short Sell

The reasons above are enough to discourage me from shorting, though there are many more that I haven’t mentioned. Short selling is a more advanced way to make money in the stock market and is best left to the pros. I don’t short stocks anymore because I prefer to own them.

I normally don’t discuss short selling because it’s not for most people, not to mention it’s really confusing. I only feel like it’s relevant to discuss shorting in a market like the current one so that new investors can understand the additional reasons why the prices of their stocks might be going down so much. It’s not just from investors collecting profits or abandoning their stocks out of fear of losing more — it’s also from short sellers trying to profit.

After the short sellers have had their fun and after all the panic selling and pessimism have subsided, it usually takes a while for a stock to recover before going up again with more investor confidence. I’ve got my wish list of stocks to consider buying when all the selling is over, so I’m just waiting for good setups and a better market.


Alternatives to Short Selling

Even when the whole market is negative, I don’t always want to sell my stocks, nor do I short any stocks, as you already know. Sometimes to combat the downward funk, I will buy shares of inverse ETFs to make money in the interim.

Inverse ETFs are exchange-traded funds made up of more complex financial instruments that generate money when the market is moving down. Like a regular ETF, its movements mimic the market index ETF it is modelled after, however, it’s designed to go in the opposite direction. Basically, when the market index goes down, the inverse ETF goes up. 

Index ETFs are often created in a way to move up to 3 times more than the index performance or up to 3 times less. These differences in performance can either enhance your trade or really hurt it when you’re wrong.  You have to be careful and consider this when selecting ETFs.

I still regard buying an inverse ETF a very risky strategy as it’s still in theory ‘shorting’ the market. Also, inverse ETFs tend to have higher management fees because they consist of higher maintenance assets than most regular ETFs. Higher fees and MERs in funds diminish their value and overall returns. For this reason, I usually only buy and sell them for shorter-term swing trades.


Before investing in an inverse ETF or deciding to short sell anything, please consider the risks. At this point in time (it’s December 2018), I think the market will go up a bit more before it goes down again early in the new year. We’re so close to the year’s lowest trading levels of the US markets. I don’t think things will really start moving up again until we at least break below those 2018 levels first.

I know a lot of investors who have been feeling beat up and want to do something to save their portfolios. If you’ve been feeling this way for the last few months, the best thing to do at this point is to think of your future strategies for your portfolio and be ready for them once the market is more positive.

Remember that downswings and bear markets are a normal part of the cycle for stocks – nothing goes only in one direction forever. Going short now after the market has gone down so much is not only is riskier, the returns won’t be as great had you gone short in early fall.

The Transparent RRSP: Vacay

The week of November 27
  • I deposited $150 into the RRSP ahead of December. There is $351.89 cash in the RRSP account.

JP and I are going away for a week to Costa Rica (we’re going to the Pacific side). We decided to only bring our tablet and phones. Neither of us has plans to trade while we’re away. Our main focus is to relax, enjoy the warm weather, check out the real estate situation there, and read and swim at the beach. I might squeeze in some study time whenever I can. Derivatives and options have my brain turned in on itself – to take a week off could mean excruciating reviewing when I return.

The airfare was too hard to turn down: $770 CAD for both our tickets! Yes, we’re travelling at a time when the weather isn’t totally unbearable in Ontario yet. We do, however, plan to go to Florida in late February. That’s usually when the cabin fever is at its most intense and could use a warm disruption. Before I take off, I must, of course, look at the markets.


 

November markets

SPY, QQQ, DIA, XIU ETF charts on freestockcharts.com

 

I don’t know how the market will trade after the US Thanksgiving holiday. December could be positive because of a stronger retail sector around this time. The bearish correction in the fall that I was bracing/hoping for never came. (And that is why we trade the trend, even if we don’t believe it’s still there.)

The trade volume in the US markets seems to be coming down while the prices are going up. The confluence of those two factors often means that: 1) savvy investors start to take profits, and 2) the public starts asking those investors if it’s a good time to buy Apple. The best thing to do is wait for 3) to happen, which is an actual correction.

I was in the Caribbean on my first and last cruise in early 2015 when this happened:

Caribbean

XIC ETF on freestockcharts.com

When JP and I checked our email for the most expensive 10 minutes of our lives, we also checked the markets. At the time, we were only day trading, which meant we were holding no positions in our accounts. Although we weren’t losing money, we figured good opportunities would be short-lived. We were concerned about entering a more hostile trading environment in which small fish like us would get eaten by the bigger, well-funded fish.

After we returned and got our sea legs back, we looked at Canadian companies that traded on both Canadian and US stock exchanges. We discovered they were CHEAP. We bought just a few to hold long term and had a gangbuster year. I doubt the market will do that in the week that we’re gone. Perhaps next January?


I have some stock charts worth checking out:

  • FIRE.V (New and risky, but cheap. Take fewer shares.)
  • IMH.V (Same as above.)
  • TCW.TO
  • SSL.TO (I already have this in my RRSP.)
  • SMF.TO

Please check the company, the sector, the earnings, the market, and the fundamentals that you think are important. Always do your due diligence to trade with confidence while respecting your risk tolerance. I do think that the market could pull back early in the new year. You could wait until then before buying or take fewer shares now and more later.

The Transparent RRSP: Taking Some Action

The week of November 6
  • I didn’t do anything for the RRSP. There is currently $194.64 of cash in the account.

I did, however, pass my Technical Analysis exam. I certainly didn’t do as well as I wanted to though! I carried on by buying some shares of H.TO and ATZ.TO for my TFSA. I already own these stocks in the TFSA so I was just scaling into what looked like some (aggressive) buying opportunities. I also signed up for the Derivatives Fundamentals & Options Licensing Course and the Futures Licensing Course. (Talk about intense content!) I hope to finish these courses early in the new year.


I’m still not a fan of this market and entering any new positions makes me nervous. I am considering making a move this week, though, depending on how my idea performs alongside the market.

TA2

TA.TO price chart on freestockcharts.com

The daily and weekly charts aren’t great for TA.TO; however, the monthly is appealing to me. It’s making higher lows and demonstrating a trading range that is tightening. This could lead to a really good long-term trading opportunity with so much room to move into the upside. I wouldn’t mind owning more shares of this stock should this move actually occur.

Last Thursday and Friday experienced heavier selling in the U.S. and Canadian markets. If the selling continues and the market starts to correct this week, I’ll be watching this stock to see how it performs against the market. TA is in the energy sector which has been showing more strength than other sectors. If energy keeps going, scaling into this could be a good idea.

I would only scale in with a few shares (5 to 15) as I think the market will still endure a larger correction. I don’t know if energy’s strength will outlast or outperform the overall market correction. There are times when the right thing to do is sit on your hands and wait, while other times you should take full advantage of great opportunities. I feel that right now, I should find some balance in taking some action with little risk as opposed to doing nothing.

 

The Transparent RRSP: Portfolio Choices

The Week of Oct 2
  • Over the weekend, I deposited $150 into the RRSP. I will have $328.22 in cash in the account as it takes a couple of business days for the transfer to show up in the account.

September was a bit of hectic month for me. Other than scaling into THCX.V, a stock which I already owned in my TFSA, I didn’t do much in the portfolio department. Sometimes you just have to take care of other business before you can properly take care of the business.

Last week, I finished the Trader Training Course with the Canadian Securities Institute. The night I found out I passed, I immediately signed up for the Technical Analysis Course. Even though I read charts all the time and dream about them in my sleep, I always like to read up on the basics. The text and course have been recently updated and I must say, I’m pretty impressed so far with the really clear explanations. I’ve read a lot of other books on technical analysis and this one is the best one yet. It better be because it costs A LOT more!


Now that I will have more cash, I’m considering buying more shares of ZPR. Check it out.

ZPR

Price chart for the ZPR ETF on freestockcharts.com

In the summer, I was curious to see if this would continue trading sideways. It still is, but it could be starting to break out. The worst that could happen is that if the market turns, this one will too after I enter, but I don’t really care. They say you should never have a bias when it comes to your investments, but I can’t help but like this one. I have shares of this in my TFSA as well.

Since it’ll take a couple of days for me to have the other $150 in this account, I’ll put a limit order in for 15 shares on Monday (tomorrow). Once the other cash shows up, I’ll get more. We’ll see how it works out.


Some More Stock Picks

I like the monthly charts for the following stocks:

  • CPG.TO
  • WCP.TO
  • ERF.TO
  • EFN.TO (This one needs another week or so to set up better.)
  • ACB.TO (This could use another week or two to set up.)
  • EXE.TO (I already own shares of this. It needs to tighten up, but I’m watching this one closely.)
ACB

Price chart for ACB.TO on freestockcharts.com

ACB is interesting because it’s a young stock. When you don’t have much to go on for the longer term charts of the weekly, monthly, and yearly, then you have to look shorter term and rely on the daily, hourly, or even shorter intraday timeframes (30 min, 15 min). It becomes more of a risk when you have less historical information to make your decisions on. In these situations, you just manage your risk accordingly. Even though it’s a cheap stock, you might want to buy fewer shares. As time goes on and you have more information and encounter better setups, you can always buy more shares.

I say this because I normally wouldn’t enter a stock that has gone up for six straight weeks as seen on the weekly chart. It would have to have an amazing monthly chart, which this one doesn’t yet because it’s still new. However, the daily chart is great in that is has a lot of trade volume supporting its most recent uptrend. What’s also attractive about this uptrend is that it’s had four pullbacks testing the trendline since it started in late August.

I’m a little hesitant to buy a new weed stock for the RRSP, but I think I will take on a few shares of this for my TFSA.

As always, do your necessary research and only risk what you’re comfortable with!

 

 

 

 

 

 

 

The Transparent RRSP: Relative Strength

The Week of August 14
  • On Wednesday, August 16th, I bought 100 shares of Bombardier (BBD.B.TO) at $2.65 per share.
  • With $1 in commissions, the whole purchase was $266.00. I now have $18.47 in cash in the RRSP account.

I actually meant to buy the shares on Tuesday, but I totally forgot to put in an order! So, on Tuesday night, I put in a limit order to buy 100 shares at $2.68, a couple of cents above the current bid/ask price. I was peeved by my sloppiness, but I’d been stalking this stock all month, watching it against the market. I wanted it that badly that I was willing to pay more than I knew I should have.

Thankfully, on Wednesday, my order was filled at the lower price of $2.65! This happens sometimes; other times it can go the other way and your order will be filled at a much higher price. It’s called slippage when you get filled at a higher price than what you have on order. Slippage tends to happen more when stocks are lightly traded. Bombardier is a heavily traded stock, so slippage is less likely to happen.


Let’s do some chart analysis!

 

BBD analysis

Price charts for BBD.B and XIC on freestockcharts.com

On Chart #1, the pink arrow shows the day I bought BBD.B. No special day and it closed negative. On Chart #2, the pink arrow for the XIC market ETF shows the market on the day I bought BBD.B.

The blue arrows on both charts #1 and #2 show how they closed for the week. BBD.B closed more positive than the market did, showing relative strength. There’s been uncertainty in the overall markets in general with the possibility of war — and then you add violent protests and terrorist attacks to the mix and you get even more negativity. I hope this little stock, along with the rest of the RRSP portfolio (come on, LIQ!), will show resilience in the face of all this.

Chart #3 is the weekly chart for BBD.B. It’s a healthy looking chart with a very bullish setup. (If you’re not familiar with the market lingo, bullish means optimistic and positive because apparently, bulls look up when they’re in attack mode; bearish means negative and pessimistic because bears look down when they’re about to pummel you. There could be more to the meaning of these terms, but all that matters is that you get the picture.)

Chart #4 shows a lot of potential for BBD.B to move up if and when it gets past the previous price resistance points as seen on that pink dotted line.

Of course, all of this can go potty — regardless the relative strength and bullish setups — if the overall markets get really negative and there are more sellers than buyers. No matter what, just try to stay positive and strong!

 

The Transparent RRSP: Stock Picks

Action taken the week of May 29
  • I deposited $150.00 into the RRSP account. There is now $169.90 of available cash in the account.

I’m still waiting to see if the Canadian market will have a more definitive correction than what it gave in May. It could set up over the next few weeks/months for a new run, but I doubt it. The monthly chart looks like the market is inching downward. I still would like to see the market come down to the same level it was at in mid-November.

With the lower trading volume during the summer months, I put less emphasis on the market (as long as it’s not making any extreme moves that invite concern or attention) and I pay more attention to individual stocks that are getting a lot of action. I might casually pad my trading accounts now and then with extra cash so that should opportunities present themselves, I’m ready to take action.


Some Stock Picks

I found some stocks with nice charts, some of which are seeing a lot of recent action in price moves and trade volume. These have been trading better than the market – which doesn’t say much.

  • BBD.B.TO – I don’t like that Bombardier has gone straight up the last two weeks, but it’s been stronger than the market. I would prefer a correction on the daily time frame. It’s worth watching as the weekly chart is promising with a breakaway candle that held strong with increasing volume. I’ve owned this stock since early February 2016 and I can tell you that it’s not much of a mover. This can be a good thing when this stock experiences volatility because it’s less of a shock to your portfolio (unless you have a lot of shares and took on too much risk). While the monthly chart is very nice, the yearly chart is not inspiring.
  • BTO.TO
  • HGU.TO (This is a gold ETF.)
  • TD.TO
  • MG.TO
  • RY.TO
  • NA.TO
  • TA.TO – This is already in the RRSP. I was beyond busy this week and I wish I had a chance to look at the chart earlier this week. Depending on what it does next week, I might buy more shares.

If you’re not inspired to take on any risk, you can just watch these over the next few weeks and months and see how they do with or without the market. If you do feel inspired to trade, I’d recommend taking on less risk and buying fewer shares. I only say this because I still think the market will correct further and this could take down your stock and it could be a while before it starts to improve.

As always, please keep in mind the industry, sector, the company and its fundamentals, any recent news, upcoming earnings announcements, the amount of risk you’re taking, how it fits within your portfolio, your anticipated time horizon, etc. It’s always important that you look into what you need to in order to feel confident in your investments.

The Transparent RRSP: Post #7

Actions Taken the Week of February 13th
  • Bought 50 shares of Global Real Estate Dividend Growers (ticker: GRL.TO) at $7.74 per share on February 14th
  • This cost me $387.00 plus 0.50 cents commission

I now have $147.60 remaining in my RRSP left to invest. If I don’t find anything cheap enough to invest in, I’ll probably wait until my next regular deposit of $150 in the first week of March before I can afford to buy another stock.


 

grl

GRL’s Price History Chart on freestockcharts.com

 

I personally like the newness of this stock. The lowest it’s ever been is $7.30, so buying it 0.44 cents above that seemed like a good deal to me, especially if it goes up from here. It’s possible this can still go down to the $5 area. Stocks tend to test major price points of $5 multiples. If this doesn’t go down, then the first target area would be around $10 where there’ll be some profit-taking and then some more buying before going up even more.

I really liked this chart; although I will admit that my entry was aggressive and possibly premature. What I’d love to see this stock do is continue to trade in the $7.50 to $8.00 range. If this consolidates for another month or two in this area, you can bet I’ll be buying more shares before it breaks out. What’s also great is that this stock pays a monthly dividend of 0.05 cents per share.

Stock Picking 5: Selling

Before I discuss selling stocks, let’s do a recap of the Stock Picking posts up until now.

Part 1: Looking for Stocks

Here, I introduce my stock searching process for Canadian and US stocks. I feel more confident in stocks that have higher trading volume. I look for major Canadian stocks under $20 that trade over 10,000 shares a day. For US stocks, they must be over $5 and average at least 500,000 shares a day.

Part 2: Determine Your Investment Goals

I talk about the different reasons you might want to buy stocks. There are different stocks for different investment objectives better suited by shorter or longer-term time horizons. Whether the time horizon is short, medium, or long, I like to get in early before a stock’s price really starts to take off. To determine this, I look at a stock’s price history chart. For shorter-term trades, I seek additional information by looking at the charts of a stock’s corresponding sector and the market.

Part 3: Factoring in the Sectors and the Stock Market

I generally look for stocks in a sector that has been quiet for a while and is just starting to warm up. I’m not as concerned if a sector has been lagging the market, as long as it’s not going down the tubes, especially if the market isn’t. If I’m interested in several stocks in a sector that is starting to heat up, then I’ll pick the stocks that meet my criteria in volume, price, and charts.

No Stock Picking Here. Just Buy the Market Through ETFs

Stock picking is not for everyone as it’s hard to outperform the market. It’s a matter of strategy, research, and some luck. You can simplify the whole process if you ‘buy the market’ by buying the market index ETF. What’s great is that you can also get extra money from an ETF’s distributions or dividends. You can buy ETFs for the Canadian, US, or international markets, or even sector ETFs. You can have a whole portfolio of just ETFs to meet a variety of investment objectives!

Part 4: Investment Income

Here, I discuss my interest in stocks that pay dividends and how I invest in the blue chippy stocks for my retirement fund. What a great source of income as you can also enjoy a profit if you sell your shares later on at a higher price! For these income-generating stocks, I’m less concerned about their sectors.


Part 5: Selling Your Shares

Objective: To determine when to sell some or all of your stock.

Why Sell Your Shares?

Here are a few reasons to:

  • Bank profits
  • Rebalance your portfolio because you’re aging and you need to reduce your riskier assets
  • You need the money to spend or to invest in other things
  • Tax-loss selling (a capital loss can be subtracted from other capital gains, thus further reducing taxation on profits)
  • Play defense because there’s been an interest rate hike or a recession, so you want to lower your exposure and risk
  • Your stock stops paying a dividend
  • Your stock’s company or sector is in trouble and this is affecting the share price
  • Your stock is an underperforming dud
Banking Profits for Retirement

My retirement fund will consist mostly of investment income-producing assets. I’m optimistic to a fault. This means I sit back thinking that most of the dividend-paying stocks for my retirement fund will be worth a lot more in share price too. When I’m a spry elderly lady, livin’ large, and planning my next world adventure, I’ll sell some of those shares and use the massive profits to pay for my trip. If the markets reach exaggerated highs, I might sell some shares to buy a decent annuity.

Banking Profits for My Swing Trades

For my swing trades, I try to give a stock time as it moves within the profit zone, which is anywhere significantly higher than what I paid in share price. I look at the price charts to try to determine how far they’ll go before they experience a major selloff.

It’s a lot more realistic to expect a cheaper stock to double, triple, or increase multiple times in value. Once my investment has more than doubled in value, I usually sell half to 2/3rds of the shares and keep the rest of my shares in for the longer term. This way, I get back my principal investment and I can reinvest it along with the profits in another stock. If the remaining shares don’t keep going up in share price, I’ll sell them for a smaller profit — or break even at worst.

I’ve mentioned before that I like my Canadian stocks cheaper because my Canadian trading account is less funded. I also like them cheaper because I can buy more shares. I find that in general, Canadian stocks don’t move as quickly in price. I can still make money, even with smaller price moves, since I have a lot of shares. For my US swing trades, I use fewer shares than I do for Canadian stocks because they’re more expensive.

US stocks are good for swing trades mainly because they usually can move a lot more in price in a shorter amount of time than Canadian stocks. In other words, they get a lot of price action. I look for stocks that move on average at least $1 in share price in a day. The downside is, when stocks move faster, you have to act faster. If you’re not paying attention, it might get right into the profit zone and then sell off more quickly than it took to get there.

For more expensive stocks, it will take much longer for your total investment to double in its full value. This can take years. Sometimes you’ll have a jackpot situation where there’s a buyout; however, you can’t just wait and hope for these rare events to happen. So what swing traders do is decide how much of their investment they’re willing to risk losing (not all) and see if they stand to gain at least twice, three times or more that amount.

What…?

A lot of traders talk about ‘stops’ to minimize losses. A stop is basically your uncle point where you decide it’s better to take a calculated loss at a certain price than to lose more than that. Once a stop is determined, a trader will calculate how much he or she expects to gain and whether it’s realistic given the stock’s chart, its sector, the market, etc.


I’ll break down here how stops and setting targets work

lulu

  • Let’s say you bought 100 shares of a stock trading at $59.00 per share. Your investment is $5900. But there’s no way you want to lose an entire $5900 if things go south. And how long will it take for the stock to double in price to $118 a share? 
  • You might determine through analysis of its price history and other data that you will not accept a loss lower than $54 per share. You don’t want to lose more than $5 per share, which is $500. So of your $5900 investment, you’re only risking $500 of it. 
  • For this trade to be worth it, you want to at least get double the money you’re risking. Some traders want more, some are okay with less, it’s a personal thing for each person.
  • Take the $5 risk and to get double the reward would mean a $10 price increase at $69.00 ($1000 profit). Triple reward is a $15 increase at $74.00 ($1500 profit). All because you were willing to risk $500 of your investment.

This is a trade I actually took this week. It had a good earnings report (are see-through yoga pants back in style?) and it jumped close to the triple reward zone. It was good enough for me, so I sold 80% of my shares at $71.90.

For my remaining 20%, I’ll hang on to see if it’ll keep going up. Each time it surpasses another risk-reward multiple ($74, $79, $84, $89), I’ll move the stop up on that. If it breaches any of those multiples, I’ll sell the rest.


I use a very loose form of the stop method as I found it to be a pain to bother with stops. I found that with most of these trades if I’d waited a bit longer, I wouldn’t have taken a loss–instead, I would’ve ended up with a huge gain. I found that once I started to set more loosey goosey expectations as to what I’m willing to lose and what I expect to gain, my trading account started to flourish. Yes, I am a loosey goosey swing trader.

I find that if the stock is of a good company in a strong sector, even if you had to endure the discomfort of underperformance, the only thing you really lose is time. Because once the stock really starts to rock, it was totally worth the wait.

This is why sectors are important. If the sector is strong and your stock is strong or stronger than the sector, then you reduce the chance of sitting painfully through negative numbers. If, however, your stock is much weaker than its sector and is going down while the sector is going up, then there could be something else going on with the company that you might have to look into.

Having said all this, I’m not saying to ignore your threshold for losses. You must figure out what works best for you and trade responsibly out of respect for your money. For me, a good swing trade is more than just price action. It’s a combination of factors such as the company, its sector, and the market. Since I consider multiple reasons, I’m okay with waiting out the unforeseen downturns and I don’t totally wig out if the price gets a little out of whack.

Thanks to a diverse portfolio, I only ever have a small fraction of underperformers while the others do well. Sometimes these turn a corner and become the top performers in my portfolio.


Swing Trading is NOT for Everybody

Why do I swing trade? I don’t live much of a structured life (although I sometimes crave one) nor do I have dependents. I have a higher risk tolerance so I can endure the dry spells and downturns and patiently wait for the profits. I’m quite happy to aggressively grow my account in the mid-term while my more solid stocks grow for the long-term. It’s exciting, interesting, engaging, and I can go on about the fun I get out of being tapped into the markets.

Making money like this isn’t for everybody. I’m only sharing my strategies so that curious readers will have a better idea of what I do with my own money. All of what I write is only for information sharing purposes.

While there is a risk component to any kind of investing, there are many ways to reduce that risk with good diversification. To do this effectively, it’s good to be knowledgeable, even of the investment basics. Most working people, in my opinion, are better off saving regularly for their goals and investing their extra savings with a part of it in conservative stocks and ETFs that pay a dividend. No doubt, a lot of money can be made this way!

Stock Picking – Part 2: Determine Your Investment Goals

Part 2: Determine Your Investment Goals

Objective: Identify your investment objectives first, and then let them guide you when you’re choosing a stock.


The main objective for investing in anything is to make money. With stocks, you make money two ways by selling your shares at a higher price than you paid and from dividend payments. Additionally, your decision to invest in a stock could be supported by a number of other reasons. Such reasons will guide you in the selection process.

Here are some reasons to buy a stock:

  • To fund your retirement 
  • For faster portfolio growth
  • To generate dividend income
  • You see potential growth in a particular sector, so you want a good stock from that sector
  • The economy is looking to slow down, so you want to invest in a defensive stock
  • The economy has been in a slump for a while but now business activity is starting to pick up, so you want to buy stocks to get in on the action
  • You like a company for its products, services, or growth potential, so you want to be a shareholder.

My investment objectives vary as I want to invest for the long-term (a fun and comfy retirement life) and the short-term (concerts, trips, and buying a couple of properties in Canada and somewhere hot).

For my retirement portfolio, it’s all about the long game and I’m looking to invest in something that will do me well for years, even decades. So, I look for stocks that have ‘blue chip’ qualities: they pay dividends, they’re well-known, well-established and have been around for a long time, and they usually offer more than one type of product or service which allows them to adapt to various consumer demands and trends. It’s also a bonus when the stocks are in defensive sectors such as utilities and consumer staples. I don’t do much analysis here, I apply a very basic, rudimentary logic.

There is no guarantee these stocks won’t suffer when the economy is slow, but the idea is that even during tough times, they’ll do better or suffer less, and they’ll still likely pay you dividends. If their stock prices take a hit, I’ll likely buy more shares when they start to recover because they’ll be cheaper.

For my swing trades, I look for stocks that look like they’ll do well over the next few months to a year. I look for typically strong stocks that have been quiet for a while and haven’t seen much trading action. When this happens, it’s usually because their sectors have also been quiet. If all the stocks in a particular sector have been down for a while, I’ll narrow down my selection based on the stock price and volume. (See Stock Picking – Part 1.)

The selection process for my swing trades is more involved as I use a very basic form of technical analysis of a stock’s price history to help me decide on where I’m going to buy and where I’m likely going to sell. Technical analysis is about analyzing the price history of a stock in relation to its trading volume, sector, and market environment. 

Many people dispute the validity of technical analysis and prefer to examine the fundamentals of a company’s value in relation to its share price instead. They’re all valid to some degree and many financial pros analyze both the technical and fundamental information.

I prefer to analyze charts because I’d rather see if I’m paying much more than others who got in earlier than me. The lower the price I pay for a stock, the more confident I am in the trade. It’s not a guarantee that the price won’t go lower, but even if it does, I will suffer less by getting in at a lower price than if I bought a stock after it became hot and expensive. I never buy a stock after it makes the news because it’s usually too expensive by then.

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Above is a very basic chart of a stock that I actually own. I consider a stock to be ‘quiet’ if it’s trading sideways (the first horizontal line). Think of a stock’s price in terms of flying in an airplane; trading sideways is like starting on the runway. I try to buy either when it’s still on the runway or just as it’s taking off (no higher than where the airplane is). So I just have a quick glance at a stock’s chart to determine if it’s just taken off or if it’s gone far beyond the clouds. If it has long taken off already, I’ll just wait for another sideways setup. Sometimes this wait time could take months to years and I’ll just keep checking the charts every now and then.

For years, I’ve been using freestockcharts.com to look up charts for Canadian and U.S. stocks. It’s FREE and the features and tools for the charts are very similar to what you would use if you had a pro trading account with a brokerage. To look up a stock, you just type the company name and you can select it from the list of options it provides. Sometimes a company will trade on both the Canadian and US stock exchanges, so be sure you’re selecting the proper exchange for you. There are many short and informative tutorials available on its site and on YouTube.

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I look at the charts for everything I buy for both long-term buys and shorter-term swing trades as my goal is always to buy shares at lower prices. For the long-term trades, it’s more important that the stocks meet some ‘blue chip’ criteria. For the swing trades, I rely more on technical analysis, the sectors, and the markets.

Next time, I’ll get into how I analyze sectors and markets!

 

 

Stock Picking – Part 1: Looking for Stocks

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You can decide to buy a stock using very basic logic. It can be as simple as, “My bank is great. I’m going to buy its stock.” And there you go, you own a dividend-paying stock. Those who want to build a more diversified stock portfolio seek more information and try to pick stocks using some strategy.

My process for picking stocks is quite simple and involves less information than what is required by trained financial professionals. I don’t manage other people’s money, only my own, so I’m less stressed out about aligning a certain number of factors before buying or selling a stock.

I usually work with my man, JP, when it comes to selecting stocks, but sometimes we make decisions independently of each other. For this reason, JP and I each have our own investment accounts. My strategy is quite loose in form, but I feel that being rigid will lead to over-analyzing and worry. I’d rather be relaxed and let my trades work when they do because if I panic or get too excited, I’ll sell them too soon.

With stocks, I operate on different time frames. I sometimes day trade, and I always close the position within a day or less. My main thing has become swing trading, which means I’ll hold a position anywhere from over a day to a few weeks or even a few months. And then I’ll do real investing where I’m looking to hold a solid dividend-paying stock until I retire.

I don’t recommend that anyone day trades, it’s a far too risky way to handle your hard-earned money and it’s not investing at all. Many might argue that swing trading isn’t investing either, but it depends on how you look at it. I see it as shorter term investing. Your level of involvement can vary from being very active by watching stocks and the markets, and managing your trades all the time, or you can be more hands-off and just be willing to do such things occasionally. I’m very hands-off with my swing trades. Most of what I’m going to be talking about is related to how I pick stocks for swing trading.

I need to declare that when it comes to managing my money, I have a higher risk threshold than the average person. Over the years, I’ve enjoyed big wins and suffered abysmal losses. My confidence comes from years of experience, training, research, lessons, trade analysis, and self-examination. I’m finally in a place where I’m quite happy with my stocks and current strategy. I’m also happy accepting that if the markets change, I might have to adapt my strategy.

What I’m revealing here today is just to share my method among the curious, not to teach it or to say this is what you should do to make money. My only hope is that you’ll pick up some good ideas and know how to apply whatever is useful to your own decisions.

Just remember that there is no fail-proof way to invest, nor is there one way to make money from investing. Investing is just one aspect of personal finance, which is how you manage your money and make financial decisions. I feel that the other aspects related to personal finance — working, budgeting, managing debt, and saving — are just as important.

I’m going to break down my explanation into parts. Each part will be blogged separately over the next few weeks.


Part 1: Looking for Stocks

Objective: To find major stocks that have higher trading volume


Canadian Stocks: 

I look for stocks that trade a lot in the TSX. I narrow the search process down by looking at the larger stocks in the TSX that are listed in the S&P/TSX 60 Index or the S&P/TSX Composite Index. If you click on those links, you can see the index’s stocks under ‘Constituents.’ If you don’t know what an index is, it means you haven’t read my book yet! You can still refer to the Terminology page for quick reference.

I like stocks that have the higher daily trading volume which means the number of shares bought and sold in a day. So with TSX stocks, I’d like them to trade at least 10K shares a day; the more the stock trades, the more interested I am in it. My TFSA is less funded than my other trading account, so I tend to look for Canadian stocks that are under $20, preferably under $10 so that I can buy more shares.

Rarely do I buy stocks that trade on the TSX Venture Exchange, but if it’s for stocks in a relatively new industry (like cannabis), then I’ll buy the from the venture if it meets all my requirements.

US Stocks:

I use the amazing Screener feature on finviz.com to find US stocks. For free, you can customize different search requirements and save those settings. I’ve created different “presets” for finding current financial stocks, tech stocks, oil stocks, pharma, transports, etc., that suit my preferences. 

The one common feature I use in all my searches is “Average Volume,” so I usually prefer US stocks that trade over 500K shares a day. Some people look for stocks that trade much more, some are okay with less than 500K. If I have too big a list, I’ll also add “Current Volume” to the search criteria and I’ll select over 1M shares because it means it’s currently trading a lot more than its average volume and something unusual could be going on with those stocks.  

I usually look for US stocks that are over $5 in share price, mainly because the higher-priced stocks often, but not always, move more in price so I can make a decent profit in a shorter amount of time. I have more money available in my US trading account too, so I’m able to shoot for higher-priced stocks.

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So that’s basically how I find stocks. I try to select from more popular, higher-volume stocks from the major stock exchanges and I narrow down my selection using preferable price criteria. 

Next time I’ll discuss my process for narrowing down my choices. Stay tuned!