My friends,
Thank you to all of my viewers for your continued support on the Diodato Investments blog.
I have recently been invited to move from the simple Google blog to an actual website by Mike Cichoki, an expert in other fields of technical analysis and web designing.
The website is,
TradersBase.com
This site is more user-friendly, has more features available for our viewers, and a forum to discuss trading topics. From this point forward, all of my posts will be on that site. Thank you again for your support, and I hope to see you on TradersBase!
Sincerely,
Christopher Diodato
April 29, 2011
A Unique Way to Interpret the Wilder RSI with NG
The Wilder Relative Strength Index, usually abbreviated RSI, measures the relative strength of a stock against its own price movement. It is generally accepted that a reading under 30 indicates an oversold condition while a reading above 70 indicates an overbought condition.
Please, please note that oversold and overbought are conditions, not trade signals. In addition, after I back tested selling an overbought DJI and buying an oversold DJI for the past ten years, I wound up with a catastrophic loss.
Now what we could do is try to find traditional price patterns in the RSI of a stock. This method was pioneered by Martin Pring and consistently gives favorable results. The most common patterns found in an RSI are the head and shoulders and the symmetrical triangle.
Take a look at our NG, which we are currently short. Click on the picture to enlarge.
In the lower column, is the chart of the NG 14-period RSI. There is a clear head and shoulders top, which has bearish implications. At the time of that breakout, the price also broke out through the bottom of its triangle formation. Add this to our fulcrum pattern that I explained in my original NG post, and we have a hefty weight of evidence that this stock is facing a major reversal.
Sorry I have not been actively posting in the blog as of late. I have my market analyst exam tomorrow, and I have been studying like a fiend. Wish me luck!
Happy trading!
~Christopher Diodato
Please, please note that oversold and overbought are conditions, not trade signals. In addition, after I back tested selling an overbought DJI and buying an oversold DJI for the past ten years, I wound up with a catastrophic loss.
Now what we could do is try to find traditional price patterns in the RSI of a stock. This method was pioneered by Martin Pring and consistently gives favorable results. The most common patterns found in an RSI are the head and shoulders and the symmetrical triangle.
Take a look at our NG, which we are currently short. Click on the picture to enlarge.
In the lower column, is the chart of the NG 14-period RSI. There is a clear head and shoulders top, which has bearish implications. At the time of that breakout, the price also broke out through the bottom of its triangle formation. Add this to our fulcrum pattern that I explained in my original NG post, and we have a hefty weight of evidence that this stock is facing a major reversal.
Sorry I have not been actively posting in the blog as of late. I have my market analyst exam tomorrow, and I have been studying like a fiend. Wish me luck!
Happy trading!
~Christopher Diodato
April 27, 2011
By User Request - Choosing Your Position Size
Before I start, I would like to note. Risk management is by far the most effective tool in a trader's portfolio. As you will notice, I am an "okay" stock picker, but I never let my losing trades run away. That is what makes me successful.
In yesterday's post, one viewer asked,
"What percent of your portfolio are you weighting to each of these trades?"
Well, we're here to all make money, so I would gladly share my go-to method. Now, I'll warn you in advance, there is math, so don't let your eyes glaze over.
Here we go! This is the method pioneered by Edwards & Magee, who published Technical Analysis of Stock Trends over sixty years ago, still considered to be the "bible" of technical analysis.
A trader has a general "rule" that they are not willing to risk more than a certain amount of their total capital on a single trade. Depending on your personal risk appetite, this percentage of total cash may vary. Most traders set this percentage between 1-3% per trade. Of course, if your trading capital is so low that you need to take large relative position sizes to offset commission costs, you may risk up to 5% per trade.
I tend to risk about $45 per trade (keeping my trading capital private). Of course after slippage, this may be slightly greater, but usually not enough to make a significant difference in your final loss.
So here's what I did for my Novagold Resources (NG) trade yesterday
Flaws
Inherently, with a fixed absolute risk, percentage risk increases as you buy cheaper stocks. I only lost, for instance, about 15 cents on XING, but that was over a 5% loss. For this reason, you may want to make a subjective judgement on position sizes when trading low priced stocks. Or, you could be like me, and avoid low priced stocks all together.
Also, on high probability trades, one should be willing to risk more for a higher return. Therefore, a fixed amount of risk may not be suitable.
Slippage
As we learned on BVN, our mental stop level can sometimes be blasted through and our actual "emergency" stop be triggered. While, at the beginning of the trade, we may have thought we were only risking $40, we may end up losing over $100
And even in normal situations, you must accept that you will rarely enter at the price you want to.
Finally, there are many other methods of position sizing that are probably better (whatever that means), but this is simple and effective enough for my needs. I hope this helps everyone! Of course, if you have a question, post it in the comment box.
Happy trading
~Christopher Diodato
In yesterday's post, one viewer asked,
"What percent of your portfolio are you weighting to each of these trades?"
Well, we're here to all make money, so I would gladly share my go-to method. Now, I'll warn you in advance, there is math, so don't let your eyes glaze over.
Here we go! This is the method pioneered by Edwards & Magee, who published Technical Analysis of Stock Trends over sixty years ago, still considered to be the "bible" of technical analysis.
A trader has a general "rule" that they are not willing to risk more than a certain amount of their total capital on a single trade. Depending on your personal risk appetite, this percentage of total cash may vary. Most traders set this percentage between 1-3% per trade. Of course, if your trading capital is so low that you need to take large relative position sizes to offset commission costs, you may risk up to 5% per trade.
I tend to risk about $45 per trade (keeping my trading capital private). Of course after slippage, this may be slightly greater, but usually not enough to make a significant difference in your final loss.
So here's what I did for my Novagold Resources (NG) trade yesterday
- I will enter at 12.88
- I will keep my stop at 13.25 in case the trade goes wrong
- That gives me a $0.37 risk per share bought
- I am willing to risk about $40
- I have a personal preference to buy 100 share lots rather than an "odd" number of shares
- I'll buy 100 shares
- 100* 0.37= $37 Risk
Flaws
Inherently, with a fixed absolute risk, percentage risk increases as you buy cheaper stocks. I only lost, for instance, about 15 cents on XING, but that was over a 5% loss. For this reason, you may want to make a subjective judgement on position sizes when trading low priced stocks. Or, you could be like me, and avoid low priced stocks all together.
Also, on high probability trades, one should be willing to risk more for a higher return. Therefore, a fixed amount of risk may not be suitable.
Slippage
As we learned on BVN, our mental stop level can sometimes be blasted through and our actual "emergency" stop be triggered. While, at the beginning of the trade, we may have thought we were only risking $40, we may end up losing over $100
And even in normal situations, you must accept that you will rarely enter at the price you want to.
Finally, there are many other methods of position sizing that are probably better (whatever that means), but this is simple and effective enough for my needs. I hope this helps everyone! Of course, if you have a question, post it in the comment box.
Happy trading
~Christopher Diodato
April 26, 2011
An Update on NG - Initiate Short at your Convenience
Just a short comment here. I want to let everyone know that NG made a downward breakout today, and that with the bearish fundamentals and point and figure sell signal, it should be safe to initiate a short tomorrow. I would prefer to place the order around 12.80, in case there is a throwback. I entered today at 12.88.
My stop level is at 13.25 on close, or an emergency stop at 13.37.
~Christopher Diodato
My stop level is at 13.25 on close, or an emergency stop at 13.37.
~Christopher Diodato
April 25, 2011
Prepare to Short NG - Symmetrical Triangle Breakdown
I have a lot of trades for this week. You'll get your third one by week's end. I just want to make sure to tell you as close to the actual breakout day as I can.
Novagold Resources (NG) has been coming across the ticker tape very often in the recent months. It is currently forming a symmetrical triangle, which gives us a clue that something is going to happen, but we have no clue what.
Now I hate indecisiveness, so I go to my other two analysis tools to get an idea of what direction the price is going to break out in.
First, understand the earnings. NG has had a constant negative earnings growth for the past several quarters. This is one of the main criteria in determining the fundamental strength of a company. This, therefore, favors a breakout to the downside.
Now, look at the point and figure chart. There is a very, very reliable pattern called a "catapult" that already broke out to the downside. If we had been looking at this chart, we would have opened up a short position long ago.
The evidence says that a downside breakout is very probable, so be prepared to open a short sale. The strategy and all of my analysis for trading this is outlined in this video below. I will be entering my position as soon as a breakout is confirmed. I believe the breakout will occur tomorrow morning.
Any questions are welcome as usual, and congratulations to those who entered GRMN with me this morning at the low of the day!
Happy trading,
~Christopher Diodato
Novagold Resources (NG) has been coming across the ticker tape very often in the recent months. It is currently forming a symmetrical triangle, which gives us a clue that something is going to happen, but we have no clue what.
Now I hate indecisiveness, so I go to my other two analysis tools to get an idea of what direction the price is going to break out in.
First, understand the earnings. NG has had a constant negative earnings growth for the past several quarters. This is one of the main criteria in determining the fundamental strength of a company. This, therefore, favors a breakout to the downside.
Now, look at the point and figure chart. There is a very, very reliable pattern called a "catapult" that already broke out to the downside. If we had been looking at this chart, we would have opened up a short position long ago.
The evidence says that a downside breakout is very probable, so be prepared to open a short sale. The strategy and all of my analysis for trading this is outlined in this video below. I will be entering my position as soon as a breakout is confirmed. I believe the breakout will occur tomorrow morning.
Any questions are welcome as usual, and congratulations to those who entered GRMN with me this morning at the low of the day!
Happy trading,
~Christopher Diodato
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