Page 414 - How to Make Money in Stocks Trilogy

284 BE SMART FROM THE START

Actually, if you looked at a longer time period, there were even more sell
signals. For example, Citigroup had dramatically underperformed on a rel-
ative strength basis for the prior three years, from 2004 through 2006, and
its earnings growth during that time slowed from its growth rate throughout
the 1990s. It pays to monitor your investments’ price and volume activity.
That’s how you stop losing and start winning.

Should You Day Trade?

One type of investing that I have always discouraged people from doing is
day trading, where you buy and sell stocks on the same day. Most investors
lose money doing this. The reason is simple: you are dealing predominantly
with minor daily fluctuations that are harder to read than basic trends over a
longer time period. Besides, there’s generally not enough profit potential in
day trading to offset the commissions you generate and the losses that will
inevitably occur. Don’t try to make money so fast. Rome wasn’t built in a day.
There is a new form of day trading that is more like short-term swing
trading (buying a stock on the upswing and selling before an inevitable pull-
back). It involves buying a stock at its exact pivot buy point off a chart (com-
ing out of a base or price consolidation area) and selling it five or so days
later after the breakout. Sometimes pivot points off patterns such as the
cup-with-handle pattern (see Chapter 2) identified on intraday charts of
five-minute intervals can reveal a stock that is breaking out from an intraday
pattern. If this is done with real skill in a positive market, it might work for
some people, but it requires lots of time, study, and experience.

Should You Use Margin?

In the first year or two, while you’re still learning to invest, it’s much safer to
invest on a cash basis. It usually takes most new investors at least two to three
years before they gain enough market experience (by making several bad
decisions, wasting time trying to reinvent the wheel, and experimenting with
unsound beliefs) to be able to make and keep significant profits. Once you
have a few years’ experience, a sound plan, and a strict set of both buy and
sell rules, you might consider buying on margin (using borrowed money
from your brokerage firm in order to purchase more stock). Generally, mar-
gin buying should be done by younger investors who are still working. Their
risk is somewhat less because they have more time to prepare for retirement.
The best time to use margin is generally during the first two years of a
new bull market. Once you recognize a new bear market, you should get off
margin immediately and raise as much cash as possible. You must under-