The One Strategy that might save your Money

All investors and traders alike knew Warren Buffet the Oracle of Omaha. This guy has been listed in Forbes billionaires list as one of the most wealthiest people in the world for 25 years. He could not do this without unique criteria that make him different than others who work with him in the same field. One of those criteria that made Warren buffet the man that we knew today is that he is capable to distinguish between the asset price and its value. For example, if he want to buy stocks in a company, he will first study the company to determine its value and how much cash this company are capable to generate in the coming 20 or more years. Once he end up his calculation and come up with a value for that company, he then see what is the price that value listed for (stock price). If the price is too high that cannot justify the value then he will pass this investment. But if the price of the stock was reasonable for the value or was so cheap he will ask himself another question before he invest and this question is the one that distinguish him form all other.

He will sit a side and ask himself this question: (If I – Warren Buffet – have only 20 investment chances in my life, would I loss one of them to invest in this company?). If the answer was yes he then will invest in this company, but if he see there is no chance to waste one of his 20 chances to invest in this company, he will stop right there and look for another opportunity to invest in it.

This question is telling us that how easy for Warren Buffet to skip an opportunity while it seems good investment for that time been and capable to control himself and his greed. That what make him skip investing in the dot com companies which was the reason for the financial crisis that hit the stocks markets at the end 1999 and the beginning of 2000. It is not an easy for investors and traders to pass an opportunity and did not take it once its arise which is the reason why there is no investors or trader make a fortune like the one Warren Buffet did.

This question that Warren Buffet used is working as filter for the good chances that he counter. When you dig deep and see how much investors and traders losing money chasing each chance appear in front of them looking for profit in short term you know why this question is so important.

To explain it clearly let assume that an investors who studied a company and went through its financial records and see everything is fine with it, then he decided immediately to invest in that company or may be wait for good technical indicator signal to buy its stock. This investors think only in one mind set which is buying this stock because its company has good financial records. He did not think in the other direction which is why I should not buy this stock even if its company shows good financial records and it is a good opportunity to invest. If she think carefully in this mind set – to not invest in a company where it seems good opportunity – she might end up with good reason or two or may be more why she should skip this investment and look for other opportunity.

The lesson form this for investors and traders is not to skip any opportunity they did due diligence about investing in it. The lesson is to think about any chance arise in front of them twice in different mind set, the first of which is why they should invest in it, and the second of which is why they should skip this investment even when it seems good one, as pros and cons for investing or trading this opportunity. Once pros is higher than cons then they are free to invest or trade this chance, but once the cons is greater than pros then they need to pass this opportunity and look for another one, to minimize their chances to end up in an investment that will make them little profit or even worst by wiping their money.

COVID-19 vs. S&P

Usually the stock market started its bear move as a result of financial crisis or unmanaged debt by financial institutes. That is not the case any more with fear of Corona virus (COVID-19) spreading all over the world so fast which made S&P 500 hit its lowest points since 2018 that was about 26%. This slump can be considered as a correction move if it maintain its level and did not go down more than that. But what appears to all investors that this down move will continue and no one knows where will be its next stop. All of that happen as a result of fear that made all investors started sell off process that made this drop.

That lead us to a conclusion that the bull movement of stock market which started in 2016 was based generally in greed only. Major companies at that time until now did not make any profit that justify the bull movement of their stocks. There were no new development in their products/services that can help investors bet on them. Despite that their stocks were soaring and going up without any correction except for some drops. Even the Forex market which considered the most liquidated market with around two trillion dollars per day, lack the momentum that it used to have because money has been shifted to stock market. The greed make a lot of traders who bet on prices rather than companies join the stock market and ignite the bull movement since 2016.

Now with fear factor the other part of the equation, the first part was the greed that made the bull market since 2016, we saw bloody markets with all major indices going red and drooping more than 25%. If this move continue with its momentum we will be the first to watch a financial crisis that caused by fear rather than bad debt or government money policy that never happened even in times of wars.

But this nonsense market that moving down driven by fear should be a good opportunity for wise investors who never bet on prices but good companies. What good investors should do as all previous ones did is to invest in market where people running out of it because of fear. This does not mean that an investor should jeopardize her capital and invest her money in the market right now. But she should pay attention to companies earning report and study its financial statement closely and notice any good oppurtinity for investment. Once she spot that opportunity, she should wait for the first sign of of bullish move when the price crossing up the simple moving average of (50) days and pullback. Once this happen she can then step in and invest as well as wait for her investment to be fruitful which might be one year from now where her capital might increase 100% or 200% or may be more than that.

Fundamental Analysis vs. Technical Analysis in Financial Markets

There are two types of analysis people using in the financial market and they are fundamental analysis and technical analysis. In the stock market, the fundamental analysis is different than these analyses used in Forex or commodities market. On the other hand, Technical analysis is the same for all markets. Because of that I am going to start with it and explain what is it and how can it be used.

Technical analysis is a set of tools traders used that built based on historical data to predict the future movement of a security. The most important tool or indicator used in this type of analysis is the price movement which can be recognized by identified the direction of movement if it is going up, down or sideways. Technical analysis tools divided into two types which are primary indicators and secondary indicators.

The primary indicator is price movement and volume. Volume is not recognized in Forex and commodities markets since they are decentralized markets but in the stock market, you can see the volume for each day and week clearly because it is a centralized market. This is what I believe the reason that a lot of traders failed to trade Forex and commodities and have success in trading in the stock market.

When I said primary indicators that means traders cannot go against them. Traders cannot buy when the price is going down and volume increasing with this movement, as well as they cannot short or sell when the price is going up and the volume is going up too. They might think of buying when the price is going down and stop making new lower lows with fading volume as well as they might think of shorting or selling when price stop making new higher highs with decreasing volume. But the actual trade cannot happen until the definition of up/down trend is fulfilled, and that when the price starts making new higher high and new higher low for uptrend where a trader can buy, and price start make new lower low and higher low for downtrend where trade can sell.

The other indicators in technical analysis which called secondary indicators can be used to confirm the primary one, and they are moving average, MACD, RSI, Stochastic and all other indicators that used price in its formula. Traders are allowed to go against these indicators since they are following the price and once trader makes sure that she is almost got the primary indicators in her favor. These indicators mainly used to confirm the direction of the price. Some of these indicators such as MACD and stochastic can be used by smart traders to measure the momentum of the movement and identify if this up movement is just a correction wave or exact wave and also can predict if there is a new up/down trend is about to happen.

Fundamental analysis for the stocks market is different than those for Forex, but the only thing that they share in common is that a stock or Forex pair will go up when demand increase than supply and they will go down when demand is decrease than supply. Since we are not an insider in the financial institutes and banks or stock exchange, we cannot know such things about those markets unless by trying to predict the next move by using indicators that we have in our hand correctly.

For stocks market the fundamental analysis based on the financial statement of the company, cash flow, income statement and/or the earning that company made. Also, it can be sales that the company achieved which can be used as a leading indicator to predict if there will be an increase in the company’s earning or not. Asset and liabilities also are good fundamental analyses that can be used to measure the capability of a company to transform its assets to make a profit. But the only indicator that can be used as main indicators in fundamental analysis is the earning per share (EPR). This indicator is the reason why there is an increase/decrease in demand in any stock. All other financial indicators or ratios need to support this indicator because if they are not, investors and traders alike need to know there is something wrong in this company and they should escape investing in it except for short term traders who only can trade stocks even if the fundamental was bad but only for not more than three months.

Forex market fundamental analysis is different than those used in stock markets. The main indicator in the Forex market is the interest rate. Whenever it goes up the currency will go up and whenever it went down the currency will fall. The interest rate in the Forex market is just like the earning of stock in the stock market. Other indicators used in fundamental analysis in the Forex market such as the unemployment rate, inflation, and debt to GDP. Those indicators can be used as a leading indicator to predict if there will be an increase in the interest rate that will happen by the federal bank or not. The increase/decrease in interest rate can take a while to affect the related currency and it can be year or two, but in the end it still the only indicator that affects the currency market.

Fundamental analysis can be used for investment. For example, if investor sees an opportunity in a company and she is willing to wait for 10 or 15 or maybe 20 years for her investment to be fruitful, then she can just invest in that stock with neglecting the technical analysis and she does not need to bother herself with moving average or price direction because she bet in company not price as I described before. But if she is a trader especially short-term trader, then she needs to think twice before making trade about the direction of the price and how does it react with the nearest moving average as well as other confirmation indicators such as MACD or stochastic. She needs to invest her time in technical analysis and ignore the fundamental analysis. But if she trades for mid to long term, then it’s good for her to combine the two approaches. It will be better for her to understand if the stock she is about to trade belongs to a good company or not, and then she needs to see if it is a good time for her to jump in that stock or should she wait until she sees that the price is start going in uptrend and that movement is confirmed by the other many indicators.

Sales: The leading indicator to pick winning Stocks

Sales is the amount of money that companies received for selling its products and/or services. This money is usually include (cost of products/services + profit ). The cost of products/services can be the raw materials that company used to produce its products/service and human recourse as well as other assets that company had to have in order to produce its products/services and make it available in the market. The profit is the amount of money that company added to the price of products/service that it produced in order to make profit form those items. Once the number or amount of sales has been increased then that the profit will increase and once the profit increase earning per share for the company will increase (EPS). Finally, when (EPS) of company’s share increase it will be under high demand and that will lead to increase in its price which will make it go up, or keep going up if it already was moving in uptrend.

Usually increasing in sales will be leading indicator for increasing in (EPS). Wise investors will screen for stocks that has increasing in its sales for three or more quarters but its (EPS) did not change except for some positive earning. But once the (EPS) of that company which its sales was increasing for a while, jump and increase 75% or 100% or more, then the investor has two indicators tell her that this stock will rise and move in strong bullish up trend, then and only then when the (EPS) increase and confirmed the sales, investors should bet on that company’s stocks and invest in it as long as its sales maintain the same records and (EPS) fluctuate within the range of increment.

Sales is one of the leading fundamental indicators that investors usually use to predict if there will be an increasing in (EPS) for stocks. Once they spot consecutive increasing in sales but no change in (EPS) they start to prepare for investing in that company once they got the green light which is an increase in (EPS).

Also investors can use sales to justify if the increase in (EPS) of company come from its sales or it just come from cutting cost.

Head and Shoulders Pattern: the complete guide

Head and Shoulders is one of the most known and successful pattern in money markets. It always appears where the price is reverse, means that when price move in uptrend and its about to go down, or the other way when price moving in down trend and the price want to reverse to up trend. It also appears in different time frame which means that you might not notice this pattern in daily time frame but when you go deep and search for it in lower time frame such as 4 hours, one hours or may be 15 minutes time frame you will notice it.

First I am going to put a picture for real chart of price movement in one of financial market that has the head and shoulder pattern, and then I am going to explain the philosophy and psychology behind this pattern and its formation and why it is so profitable.

As you can see from the above chart for Apple stock. The stock moved from almost May 2018 at price 141 $ to reach its top in March 2019 which was 230 $. It took the stock just three months or about to reach its starting price which was 141 $ and that after a successful formation of Head and Shoulder pattern. That means if someone was watching this stock closely and found that this pattern formed and short/sell Apple Stock at the right shoulder, she would make in three months as much as the one who bought this stock one year ago.

But in order to master this pattern and know where is the right moment to enter trade like this you have to know the psychology and the other traders emotions that helped the price to move that way and formed this pattern. And here we are:

  • The price moves in regular up trend where its formed higher lows and higher highs as the picture below.
  • The price moved from point 1 going up until it reach a resistance in point 2 and then drop in pull back movement. (as figure below shows)
  • When price reached point 3 which considered as support, price continue its movement upward until it reached point A.
  • When price reached point A it find a resistance there which was stronger than the resistance found in point 2 which made the price dropped in strong move down than the previous one that made price dropped from 2 to 3, and then point B formed which worked as support and helped price to move up.
  • In the price movement from (A to B), the price found strong sell momentum that made it drop strongly than the previous drop from 2 to 3, this momentum can consider as high sell volume but not greater than the volume that made price go up from point 3 to A.
  • Then price which found support in Point B go up slowly to point C, and when I said slowly I mean that this movement lack the momentum and/or high volume. Always this movement has MACD bearish diverging and/or RSI bearish diverging which means that the price in C is higher than A, while the two assigned points for A and C in MACD and/or RSI are going in down trend as shown below.

As you can see in the above figure the price of Apple stock made new high and uptrend while the MACD and RSI were making down-trend, and this is what I meant about bearish diverging which is a good sign but not the only one for Head and shoulder formation.

Back to our pattern explanation:

  • Once the price barley reached point C, it will drop with high momentum and strong volume to reach point D. This high momentum and strong volume helped the price to break the up-trend pattern and formed the first lower low in the pattern which is point D.
  • Once point D is formed, the wise trader who followed the trend will reconsider her positions, and think hard to either keep her position or exit this long position that she entered in point 1. But she still waits for good bargain and good price to sell her share. She does not trust this up trend pattern anymore specially when there was a contradiction in the main principle of uptrend which is forming higher highs and higher lows, and now there was new lower low which formed in point D. Even if she does not know any thing about volume or momentum or how to read it, but she only knew that this contradiction in the price movement that lead to form new lower low does not make her feel right and the market is going to do something else but not going up. At this point this wise trader will decide to exit her long position as I said that she entered in point 1, but she will wait for right moment to exit with maximizing her profit, and that will happen only when price move up and reached point E and failed to go more further than that.
  • At that time she will know that this price is either going to go sideways or down which will be no good for her, and she with other wise traders who think the same way decided to exit their long positions that they entered in point 1 when price reached to point E which is another contradiction for up trend when price formed lower high.
  • The price will reach point D with low volume and low momentum which prove this movement was just a reaction to the previous strong movement that made it drop from C to D. Once those wise trader exit this long move started in point (1) especially after they see price started forming lower highs and lower lows which is a sign for down trend, their exit will combined with the high momentum and volume of sellers who caused the up momentum of previous up-movement from 3 to A and from B to C to fade , and only then the price will drop in strong movement from D to reach the same level that it started with, which was point (1). This is exactly what happened in Apple’s stock movement in the previous figure. 

But how can trader make sure that the head and shoulder pattern has been formed and its good time for trading this pattern and making some money, this is what I am going to show in the coming points:

  1. First of all, the trader must make sure that the pattern has been formed and satisfied the following point with accuracy not less than 90% or more, if it is less than that she must not enter this trade as head and shoulder pattern formation. And these points are as following:
  2. The price should go down to point B in strong move, stronger than the movement that made it stop in point 3.As shown in the previous figure.
  3. The movement that took price up after that to pint C should be equal or less stronger than the previous movement that took price down to point B. That means the bearish has a strong power that equal to or greater than the bullish which made strong believe that they are able to take the price down.
  4. To make sure that point 3 is satisfied the next down movement for the price will make new support point which is lower than the support in point B, which is D and this point will make sure that those traders will have confusing and the long position they entered is no more valid and they should re-consider their position by exit it and take their profit.
  5. Those long traders who decided to exit their long positions will hold those position to get the maximum profit by waiting until the price reach point E. The price movement to point E will have lower and weak movement compared to movement from point C to D which means the price moved as consolidation or reaction to the bearish movement and the bearish just resting and willing to take the price down again to make new lows.
  6. Once the price barley reached point E with low momentum and weak volume the bearish will took the control and drive the price down again and the price will be ready to broke all down levels and reached to the place where all this was starting to the beginning of this up movement.

Here is some other considerations about point ( A, E) which consider the two shoulders of this pattern as well as points (B,D) which consider the Nick-line for this pattern:

  1. Point E (right shoulder) should reach the same level as point A (left Shoulder) which means that point A should work as Resistance for point E and prevent it from going higher than this level, and its totally recommended to have down trend between these two points. (as shown below between left and right shoulders).
  2. The same is true for point B and D, it’s totally recommended to have down trend between these two points as shown in the figure below:

Finally, head and shoulders is not that famous pattern as other patterns, but once this pattern started forming, trader should pay clear attention to it to make sure its completed all its characteristic explained above, because it will be completely profitable for traders of all markets types. This pattern can be found in revers way which called “Revers head and shoulders” pattern which make markets reversing from down-trend to up-trend. The same principle applied in head and shoulders pattern can be applied in Reverse head and shoulders pattern but instead of sellers taking controls in head and shoulders pattern, the buyers will take the control and will take the price from low prices to more higher prices in revers head and shoulders pattern.