Why This Book?
I write this book because I am disheartened by the general lack of investment common sense and because it hurts me that so much money has been lost when it could easily have been kept. As one who has practiced on Wall Street for more than 47 years, has taught technical analysis at the graduate-school level, and has been awarded many honors by my peers, I describe in this book, point-by-point, the best investment methods for profitable investing and trading stock trends I have found over a lifetime of professional study. People often ask me about the stock market, with questions such as the following:
- “I have lost a lot of money in the stock market. Should I quit and just buy mutual funds, ETFs, or government bonds?”
- “What should I do?”
- “How do I compete with the professionals in selecting stocks?”
- “How do I know when it is time to sell?”
This book examines in detail an investment system of stock selection for investors and several indicators as well as a system for traders. As in any serious pursuit, it takes some work by the participant, but once the system is set up, the work should take an hour each week at most. It may require a subscription to a data service or charting service, though many are now free on the Internet. I also include several trading systems that are short-term and use hourly price data. They require more work, more information, more time, better execution of trades, and the ability to sell short.
The meat of this book is described in easily understood terms for anyone familiar with the technical aspects of the stock market. Not one to just describe what to do, I test with modern statistical tests to show the best combination of indicators to use. The results of these tests fully demonstrate how you can successfully apply them.
Recent times in the stock market have been difficult for amateur and professional alike. Investors have been burned in the stock market and are distrustful of “methods” or “systems.” They are also skeptical of new books on investment methods, suspecting that those methods are suppositions or unsubstantiated promises by the author to sell books or an advisory service. This book is different, as are my previous books, because I actually test the methods I describe. Very few books do this, and those that do often suffer from flawed techniques. I test methods because I want readers to understand that these work. This book is not, however, a treatise on the follies of conventional investment analysis. Instead, it is a book that describes the logic and particulars of how to invest and trade successfully in stocks using statistically demonstrated systems.
I often use the term system. As a term, it may have negative connotations in other endeavors, but in the context of investing and trading, a system is a set of rules for buying and selling that is uninhibited by discretionary decisions and has been backtested for verity and robustness (that is, stability). Usually, systems are technical, in that they only utilize prices and configurations of trading statistics, but not always. Many successful systems use fundamental, economic data, or a combination of both fundamental and technical. The O’Neil CANSLIM method, for example, is a combined system as is the Value Line method of ranking stocks. When a system is purely technical, however, it may turn off people who don’t believe in technical analysis.
During the time I worked as an institutional salesman, I met many institutional investment managers who did not trust technical analysis. Because of this, they mistrusted the relative strength method I was selling, continuing to do so even after I had demonstrated its success in real time with their own portfolio and investment lists. The managers seemed to reject technical analysis based on advice they had heard from contemporary managers and courses they had taken at their business schools. It was at that time I decided to focus on teaching and introducing technical analysis to business school curricula where most of these portfolio managers had gained their misinformation and bias against technical analysis. This book uses a few technical indicators, those that I have found to be excellent when used properly. I describe them and their use in detail, as well as test their validity in selecting and discarding stocks.