Stock Trading Techniques

Tuesday, April 29, CXZ hit our sell stop of $0.69 and we were sold out at that price. Uranium stocks are in a long downtrend due to uranium prices dropping from almost $150.00/pound last year to $65.00/pound today.

We have a rule that says if we are stopped out of a stock we cannot buy it for 30 days, but I think we’ll put uranium stocks aside until we see a clear upside change in long-term trend, and I believe that will take longer than 30 days.

Making money in the markets has almost nothing to do with how often you win, but everything to do with how you manage your risk. Remember this whenever you invest in the market. It should become part of your thought process.

So, how can you make money in a market if you’re wrong more than you’re right? Let me show you with some simple mathematics.

Trader #1 makes 10 trades, but nine are losers and only one trade is a winner. I know this sounds bad because he’s wrong 90% of the time! However, before you close your browser on this web page, consider this. Making money in the markets has almost nothing to do with winning all the time, but rather it’s the magnitude of the winnings when you are right that counts.

If our trader lost $300 on each of those nine trades (including all costs and commissions), his net loss on the nine losers would be $2,700. But, he let his one winning trade run, ultimately netting a profit of $5,000.

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We came close to being stopped out of CXZ while I was out of town this week, but we’re safe for now. Uranium is in the doldrums with its price declining to $65 a pound over the last month or so from $75 a pound. That has driven uranium exploration company stock prices down, way down.

Gold has broken below $900 an ounce. It may stay in a $880-$950 trading range for a few months as it normally just drifts in the summer, but I still believe it will hit $1,500 this year. However, it has dropped the price of CMIN down to close to a dollar a share.

Our China and food commodity stock exchange traded funds (ETF) are doing OK.

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Alistair Darling, the British Chancellor of the Exchequer who is responsible for economic and financial matters, speaking at the G7 meeting last weekend highlighted the global nature of the problem. “For the first time in a generation we are seeing inflationary pressures that are not home-grown but are being imported,” he said. “Food prices are rising. Energy prices are rising. Commodity prices are rising.”

Global grain stocks are now at record lows. Energy prices are at record highs. The world’s demand for both will only increase. As prices soar, supply will not increase. The economies of China (11% annual growth rate) and India (9%) are still exploding and their masses want more of the life-style we have in the U.S. All available supply is being sucked up by these two economic giants and they are demanding still more.

This is causing a secular bull market in commodities in general, but especially in agriculture, energy and metals. This trend presents us with an opportunity to make massive profits. We’ll do this with individual stocks and exchange traded funds (ETFs).

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Back in January we bought Crosshair Exploration and Mining Corp. (CXZ) with great anticipation when it seemed that the price of uranium had bottomed and finally turned around. The next day Crosshair announced a winter drill campaign and the stock seemed ready to soar. Then the Nunatsiavut Government announced plans for a three-year moratorium on uranium mining within the Nunatsiavut’s self-governed Labrador Inuit Lands (LIL), which went into effect this week. That announcement crushed CXZ’s price. However this moratorium does not affect CXZ to any extent (see yesterday’s Crosshair press release).  Earlier in the week CXZ hit a 52-week low. It now appears to have reversed trend and it poised for a run up as this chart shows:

Click here to see a larger image.

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This is a catch up post. Although I made several purchases for the portfolio last week, taxes and family obligations prevented me from making a timely post.

Two areas we haven’t talked much about are agricultural commodities and energy.  I do not have to tell anyone what’s happened to the prices for both. Last week we bought FXI, which is an Exchange Traded Fund (ETF) of China stocks. The four rapidly growing countries are Brazil, Russia, India and China, known as BRIC. The BRIC countries have huge economic growth, tons of excess US dollars, adn are rapidly raising the living standard of their citizens, which in turn dramatically increases demand for base metals, building materials, food and energy.

We will take advantage of this growth with the two purchases I made last week: PowerShares Agricultural Fund (DBA) and Market Vectors Alternative Energy Fund (GEX). Both are ETFs and can be bought and sold on US exchanges like any other stock. We bought DBA last Wednesday and GEX last Thursday, following our Trading Rules to compute the number of shares. Here are charts of both stocks:

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Since peaking in October of last year, the Shanghai Composite index has lost a little over 40% of its value. If the Dow Jones Industrial Average had a similar percentage-sized decline, it would have to fall all the way to 8,500. This is a possibility with all the negative factors the U.S. market is facing: tumbling real estate prices, $100-a-barrel oil, massive budget and trade deficits, a severe credit crunch, and a stumbling economy that is bordering on, if not already in, a  recession.

Meanwhile, after its 40% decline, the Chinese stock market may have most of the downside risk already wrung out.

Chinese Premier Wen Jiabao said the Chinese government will make efforts to promote its stock market by protecting the interests of small investors by maintaining a stable market without sharp fluctuations. That’s easy for them to do, because not only do they make all the rules, but they are sitting on a $1.4 trillion war chest of cash. And as Wen pointed out, “the fundamentals of China’s economy are good.”

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Sometime others can say things better than I could ever express them. The title of this post is taken from a post on another site where the Arden sisters, who are internationally know as some of the most accurate precious metals forecasters around, wrote a post with the same title. It expresses some powerful views that I agree with. Please click here to read it.

This blog was quiet all week. I tend not to post if I have nothing to say. This coming week, however, I plan to start filling in our portfolio. It appears I was early predicting the next up-leg of the uranium market. A significant rise in uranium prices is inevitable, but not in the immediate future, so I will be concentrating on precious metals and agricultural commodities, using Electronically Traded Funds (ETFs). ETFs are baskets of stocks in a given industry, somewhat like sector mutual funds, but they are traded like stocks on the regular stock exchanges. There are ETFs for virtually any industry or commodity sector you can think of.

Some ETFs are leveraged, allowing them to rise (and fall) faster (usually a multiple of 1.5 to 2.5, see each individual ETF’s prospective to learn more) than an index of the same components that make up the ETF. Some are bear market ETFs that go up when the market they represent gos down allowing, in essence, short selling in a non-margin account like an Individual Retirement Account (IRA).

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Yesterday the price of FVI hit our $2.19 sell stop and was sold at $2.17 for $650 loss. This is really a shame because FVI.TO is going to be a huge winner, but we use stops for a reason. Look at CXZ. It hit $.81 today. We were stopped out at $1.40 and saved ourselves a lot of money. Most of the time stops are a wonderful tool.

Per our Trading Rules, we cannot trade FVI.TO again for 10 trading days, meaning we cannot buy FVI until April 4 at the earliest. This rule (Rule #7) is to protect us from emotionally jumping back into a stock. The 10 day “cooling off” period allows us to rationally evaluate the reasons the stock was sold out from under us. Sometimes this costs us a little money, but most of the time it saves us a lot of money. If we are to be successful, we must have a trading plan and we must follow it.

This has been a crazy market! Since November 1, 2007, the average stock on US listed exchanges is down 32%. Most Canadian exchange listed stocks have even a larger declines. Yet we, because we stringently follow our trading rules with very few minor exceptions (like when we bought CMIN even though the trading volume was a little below our requirements, but because we know the Chairman of the Board personally, we allowed this truly minor variance and, so far, have been rewarded), we are up in our portfolio. Yes, it’s only a little, but it sure beats being down 32%. Yes, we were stopped out of two stocks, but that’s OK. In one case it saved us a bundle and in the other it’s price is still below the stop price.

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