Catalysts that trigger stock price changes

Below is just a little information from my small unique book “The small stock trader”:

It is generally believed that about 50 percent of stock price movements are influenced by the market sentiment, about 25 percent by the industry, and only about 25 percent is the result of company-specific news (this percentage is higher with small caps). I am not sure about the exact percentages, but it is definitely true that non-company-specific news has a much more significant impact on stock prices than companyspecific news. One could argue that since about 75 percent of the stock price movement is the result of non-company-specific news, it would be wiser just to focus on the non-company-specific news and ignore the company-specific news. However, it is this company-specific news that you can somehow try to forecast. There may be over 100 different and unpredictable non-companyspecific catalysts that affect stock prices. So, you should focus your research on company-specific news and just scan macro news, especially if you are focusing on a few small caps. Some of the most frequent catalysts that may affect the stock prices of your focus stock are:

  • Market sentiment (GDP, inflation, monetary policy, fiscal policy, government regulations, unemployment, consumption, trade balance, other financial and commodity markets, political and international affairs, nuclear and climate change challenges, military wars, currency wars, cyber wars, natural disasters, conflicts in the Middle East, Asia, globalization issues, etc.)
  • Industry
  • Corporate results
  • Profit/loss taking
  • Institutional buying/selling
  • Analyst ratings
  • Dividends
  • Insider trading
  • Share buybacks
  • Promotion
  • Shareholder activism
  • New management, products, orders, or shareholders
  • Reorganizations
  • Right issues
  • Stock splits
  • Inclusion in an index
  • Calendar effects

I hope the above little information from my small unique book was a little helpful!

Mika (author of “The small stock trader”)

Short (stocks) selling tips

Below is just a little information on short selleing from my small unique book “The small stock trader”:

Short selling is an advanced stock trading tool with unique risks and rewards. It is primarily a short-term trading strategy of a technical nature, mostly done by small stock traders, market makers, and hedge funds. Most small stock traders mainly use short selling as a short-term speculation tool when they feel the stock price is a bit overvalued. Most long-term short positions are taken by fundamental-oriented long/short equity hedge funds that have identified some major weaknesses in the company. There a few things you should consider before shorting stocks:

  • First of all, you want to short stocks when the market sentiment is negative (in the bull market most stocks go up, and in the bear market most stocks go down);
  • You should also look for changes, besides an expected profit taking, that may trigger a stock price decline, such as massive insider selling, a lower-than-expected earnings report, profit warning,a dividend cut, etc.
  • Beware of short squeezes and takeover bids (small caps are more vurnerable);
  • Check the short interest (ratio) and its trend;
  • Be quick (stock prices decline several times faster than they rise);
  • Cut the losses short and don’t average down your losing short positions to avoid being caught up in a cross fire of a Volkswagen short-squuezelike scenario;
  • For longer tern short positions, one of the best candidates to short are the former leaders, big winners, close to the top of the bull market, as these same winners of the last bull market usually fall the hardest in the next bear market. Early–cyclical stocks are also good candidates to short in the beginning of bull/bear markets.

Despite all the mystique and blame surrounding short selling, especially during bear markets, I personally think regular short selling, not naked short selling, has a more positive impact on the stock market, as:

  • Short selling leads to better price discovery;
  • Short selling increases liquidity, which in turnnarrows the bid/ask spreads;
  • Short selling may also serve as a hedging tool or a pairs trading tool;
  • Short selling provides profit opportunities in bear markets;
  • Short sellers are a counterforce against upside-biased insiders, stock analysts, investment bankers, stockbrokers, stock investors, and creditors.

Lastly, small stock traders should not expect to make significant profits by short selling, as even most of the great stock traders (Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, William O’Neil, and Steven Cohen,) have hardly made significant money from their shorts. it is safe to say that odds are stacked against short sellers. Over the last century or so, Western large caps have returned an annual average of between 8 and 10 percent while the returns of small caps have been slightly higher.

I hope the above little information from my small unique book was a little helpful!

Mika (author of “The small stock trader”)

 

Best stock trading books

I have read around 100 stock market books, almost all the most recommended ones, and the best ones among them were:

  • The small stock trader by Mika
  • “Lessons from the greatest stock traders of all time” and “How legendary traders made millions” both by John Boik
  • “Reminiscences of a stock operator” and “How to trade in stocks” both by Jesse Livermore
  • How I made $2,000,000 in the stock market by Nicolas Darvas
  • How to make money in stocks by Willien O’Neil

I would also recommend that you study all the available materials (interviews, letters, etc.) about Steven Cohen and Edward Lampert.

Fundamental analysis and technical analysis tips

Below is just a little information on this topic from my small unique book “The small stock trader”:

The most significant non-company-specific factor affecting stock price is the market sentiment, while the most significant company-specific factor is the earning power of the company. Perhaps it would be safe to say that technical analysis is more related to psychology/emotions, while fundamental analysis is more related to reason – that is why it is said that fundamental analysis tells you what to trade and technical analysis tells you when to trade. Thus, many stock traders use technical analysis as a timing tool for their entry and exit points. Technical analysis is more suitable for short-term trading and works best with large caps, for stock prices of large caps are more correlated with the general market, while small caps are more affected by company-specific news and speculation…:

Fundamental analysis

Perhaps small stock traders should not waste a lot of time on fundamental analysis; avoid over analyzing the financial position, market position, and management of the focus companies. It is difficult to make wise trading decisions based only on fundamental analysis (company-specific news accounts for only about 25 percent of stock price fluctuations). There are only a few important figures and ratios to look at, such as:

  • EPS/Revenue
  • Cash/EBIT(TA)
  • Margins
  • Debt
  • Management
  • Products
  • Shareholders

perhaps also:

  • ROE
  • P/E
  • Dividend yield

Furthermore, single ratios and figures do not tell much, so it is wise to use a few ratios and figures in combination. You should look at their trends and also compare them with the company’s main competitors and the industry average. Preferably, you want to see trend improvements in these above-mentioned figures and ratios, or at least some stability when the times are tough.

Technical analysis

Despite all the exotic names found in technical analysis, simply put, it is the study of supply and demand for the stock, in order to predict and follow the trend. Many stock traders claim stock price just represents the current supply and demand for that stock and moves to the greater side of the forces of supply and demand.

If you focus on a few simple small caps, perhaps you should just use the basic principles of technical analysis, such as:

  • Price and volume
  • Support and resistance
  • Trends and moving averages

I have no doubt that there are different ways to make money in the stock market. Some may succeed purely on the basis of technical analysis, some purely due to fundamental analysis, and others from a combination of these two like most of the great stock traders have done (Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, William O’Neil, and Steven Cohen). It is just a matter of finding out what best fits your personality.

I hope the above little information from my small unique book was a little helpful!

Mika (author of “The small stock trader”)

Stock (day) trading mistakes that cause 90% of stock traders lose money

In my small unique book “The small stock trader” I also had more detailed overview of tens of stock trading mistakes:

  • EGO (thinking you are a walking think tank, not accepting and learning from you mistakes, etc.)
  • Lack of passion and entering into stock trading with unrealistic expectations about the learning time and performance, without realizing that it often takes 4-5 years to learn how it works and that even +50% annual performance in the long run is very good
  • Poor self-esteem/self-knowledge
  • Lack of focus
  • Not working hard enough and treating your stock trading as a hobby instead of a small business
  • Lack of knowledge and experience
  • Trying to imitate others instead of developing your unique stock trading philosophy that suits best to your personality
  • Listening to others instead of doing your own research
  • Lack of recordkeeping
  • Overanalyzing and overcomplicating things (Zen-like simplicity is the key)
  • Lack of flexibility to adapt to the always/quick-changing stock market
  • Lack of patience to learn stock trading properly, wait to enter into the positions and let the winners run (inpatience results in overtrading, which in turn results in high transaction costs)
  • Lack of stock trading plan that defines your goals, entry/exit points, etc.
  • Lack of risk management rules on stop losses, position sizing, leverage, diversification, etc.
  • Lack of discipline to stick to your stock trading plan and risk management rules
  • Getting emotional (fear, greed, hope, revenge, regret, bragging, getting overconfident after big wins, sheep-like crowd-following behavior, etc.)
  • Not knowing and understanding the competition
  • Not knowing the catalysts that trigger stock price changes
  • Averaging down (adding to losers instead of adding to winners)
  • Putting your stock trading capital in 1-2 or more than 6-7 stocks instead of diversifying into about 5 stocks
  • Bottom/top fishing
  • Not understanding the specifics of short selling
  • Missing this market/industry/stock connection, the big picture, and only focusing on the specific stocks
  • Trying to predict the market/economy instead of just listening to it and going against the trend instead of following it

I hope the above small article was a little helpful!

Mika (author of “The small stock trader”)

How much money do successful small stock (day) traders make and do 90% of stock (day) traders lose money?

Info from my small unique book “The small stock trader”:

“The successful small stock trader (a retail stock trader with a stock trading capital of no more than a few hundred thousand dollars) may make about +50% yearly net performance on the long run, after 4-5 years experience and spending at least 20 hours a week on his indie stock trading/investing “small business”… for even after over 5 years of stock trading experience, working 30 hours a week, I barely meet my +5% monthly performance target in my active months, excluding the bear markets. I say “excluding” the bear markets, because while shorting the bear market sounds easy in theory, in practice it is not an easy thing, even for some great stock traders with decades of experience. So, during the bear markets your first goal should be to protect your stock trading capital… Many studies claim that about 90 percent of the small stock traders eventually lose money and leave the stock market within their first year. Thus, only 1 out of 10 small stock traders survives to earn a consistent living in stock trading. The most important thing to remember is that the same winner often takes the gold year after year. This proves that stock trading is a skills game, one in which luck plays a small role… It is indeed rare for a small stock trader to consistently make over 5% a month, even if they work 70 hours a week. If you consistently make 100% annually, perhaps you will be one of the best stock traders in the world- and one like none I have ever heard of, though I have heard of a few derivatives traders who consistently make around 100% per annum. However, in the derivative market, the leverage can sometimes be 1:10, while in stock trading, the leverage for swing trading may be around 1:2.5.”

So, it is wise to be realistic and do not waste your little time, money, and skill/abilities on books/websites/newsletters/”gurus” that promise doubling/tripling your stock trading capital each year, for even the few great stock traders such as Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, William O’Neil, and Steve Cohen had an average annual return of +35-40 percent in the long run. However, generally speaking the larger your stock trading capital, the less your performance, as a small stock trader is more flexible, focused and simple than a big stock trader. Even Warren Buffet once admitted that he could make +50% each year on small caps if he had to manage a small stock investing capital.

I hope the above small article was a little helpful!

Mika (author of “The small stock trader”)

What makes a successful stock trader?

About 6 years ago, when I was just starting trading stocks, I was always wondering what makes a successful / profitable small stock trader and whether I have most of those success traits – that is why I decided to make this small article that can be a little helpful for other beginning small stock traders, as the Internet is full of questions like “What makes a good / successful/ profitable stock trader?”, “How to become a good / successful/ profitable stock trader?”, “Characteristics / traits of a good / successful/ profitable stock trader”, etc. Even my small book, “The small stock trader”, starts with answering the above question, so I will just copy/paste below the 1st page of my small book:

Successful stock trading requires almost the same traits as most other creative and competitive endeavors. Stock trading is not about having a high IQ, an MBA, numerical or software skills, macroeconomics knowledge, or some magic technical indicators. It is more about managing your stock trading plan, mind, and capital with an efficient use of your little time, money, and abilities/skills. Even 300 Spartans cannot beat you if you have the following:

  • Passion
  • Understanding of psychology
  • Focus
  • Hard work
  • Unique stock trading plan
  • Independent thinking
  • Zen-like simplicity
  • Open-minded flexibility
  • Patience and timing
  • Discipline
  • Risk management
  • A little luck

If you look carefully at these items, you will also notice that a successful small stock trader is more of a personality and practice than just some technical knowledge. However, even if you have all of the above traits, humility is also important. Do not allow your ego get overconfident, as anything can happen in the stock market. As in poker, in relationships, or in life, you may follow all the rules and do all the right things but still lose some battles. Nevertheless, you can still win the war if you have the above-mentioned traits. Furthermore, there are also a few more items that we could add to the above list, such as having a super self-knowledge and self-esteem, knowing and respecting the other players, secrecy, knowing what you want and never giving up as you strive to achieve it, focus on a single activity/market without multitasking, creativity, an analytical mind to calculate the risks and probabilities, taking a few parts of the best strategies, learning from your mistakes and from a few best players, honesty, good observational skills and intuition to act quickly, confident courage to take well-calculated risks, Zen-like inner peace and continuous self-improvement, being a unique individual, and eventually efficiently using your little time, money and abilities/skills.

I hope the above small article was a little helpful!

Mika (author of “The small stock trader”)