Going Long Versus Going Short Stocks

For the last 2 weeks, the stocks selected for this strategy performed quite well. On the average, the shorts continued their relentless slide downwards, and the longs inched higher as well. To be more specific, here is a view of the spreadsheet this week:



The gains so far represent an annualized yield of about 31%. Also, as you can see, some of the shorts have produced exceptionally enormous profits. It seems to me that the short positions are responsible for the bulk of the profits so far, in fact. In the stock market, there is always a lot of potential shorting stocks, and I think it is a shame that most investors only ever go long.

One misconception about short selling is that it is more risky than going long. There is some truth in that, as there technically is no limit to the amount you can lose short selling, but that risk can be taken care of with any sort of risk management system or investor discipline.

In my opinion, short selling is actually less risky than going long. This is because stocks always go down faster than they go up. There are many times during each year where there are small panics, and stocks sell off violently. The same is true in the commodity markets. Gold for example, will sometimes drop $30-40 in a single morning, yet it would never rise by that amount in such a short period of time.

This is a risk of being long in any market, and it is a risk that is difficult to eliminate. Stop loss orders cannot eliminate this risk, as the price can blow through a stop level. Protective puts work, but they cost money, and only have a limited life.

Thankfully, there are an increasing number of short or inverse ETFs being introduced that allow investors to go short different markets without actually literally shorting stocks.

DXD -2x the inverse of the Dow 30
QID - 2x the inverse of the Nasdaq 100
SDS - 2x the inverse of the S&P 500
HXD.to - 2x the inverse of the TSX 60

And, as always, here is this week's trending stock:

Making Money Without Predicting the Markets

For the past week, the stocks that have been selected produced incremental profits again. One stock in particular, SORC, which was shorted on August 3rd, has lost over 50% of its value since that time:


Two posts ago I mentioned a book I was reading called, "The Way of the Turtle". I'd like to touch on another theme presented in that book in this post. The author, Curtis Faith, makes the point that it is not necessary to know what a stock is going to do in the future to make money trading it.

Although Curtis Faith was not able to predict stock market fluctuations, he still made $35 million in profits trading. How did he achieve this? He did so by trading with an edge, by trading with the trend.

With the stocks posted on this blog, I have no idea if they will continue to fall, or continue to rise. All I know is that there is an inherent edge in trading with the trend, and if you trade enough trending stocks, you will come out ahead.

Think about how casinos make money. When a gambler puts a coin into a slot machine, does the casino know if they are going to lose or make money on that coin? They have no idea what is going to happen. But the odds are built in their favour, so that when enough coins are deposited into the slot machine, the casino will come out ahead.

The casino does not feel upset when a large payout is made, since it is simply the cost of doing business. The same applies for trading. Losses are unavoidable, and are merely the cost of doing business, which means that an experienced trader will not get emotional about losses.

Here is this week's trending stock (or ETF):

Trading with the Trend Stock #16

It's been 2 weeks since the last post, so it is definitely time for an update. I'll try to post on this blog every week, but that will not always be possible.

The stocks that this system has generated performed very well during this time. Here is an update on the performance:


It has been 4 months since the first stock in this strategy was selected, and -although getting off to a very poor start- since that time, the average performance has been just over 8%. This strategy is about generating slow and steady wealth, and I feel that is what is beginning to occur now.

An element that I have not mentioned in this blog so far is diversification. Even though a part of me feels that diversification is for wimps, I still think that this strategy can benefit from it. One way that my selection technique diversifies risk is by holding both long and short positions.

This helps reduce risk in that when the markets sells off violently, the type of sell off that affects all stocks, the short positions help mitigate the damage.

In addition, when I select the stocks for this blog, I do now know what product of service the company provides, but I am sure that I am probably getting into companies from many different sectors, which helps to diversify my holdings. I think it would advantageous to spread one's money amongst at least 5 to 10 stocks to help manage risk.

Anyway, here is this week's trending stock:

Is Trading With the Trend the Turtle Way?

Over the last few weeks, I have felt increasingly more confident that the method of trading stocks illustrated here is one conducive for making profits in the markets. It may need some slight tune ups here and there, like as mentioned in the previous post, but all in all, I think its a system based on a strong foundation.

This foundation is based on four principles, which again are:

• Going with the flow by trading with the trend
• Risk management, which uses the 50dma as a stop out point, and using the PPO to define risk
• Locking in gains that occur since the 50dma moves as the the stock moves
• Cutting losses short and letting winners run

I have recently started reading another trading book, and this book is called "The Way of the Turtle" by Curtis M. Faith. I would highly recommend reading this book.


In the 1980's two successful traders made a bet to determine whether or not it was possible to train individuals to become successful traders or to whether successful traders are simply born. As part of this bet, the two selected about dozen people to be apart of a experiment.

The man who bet that traders are made and not born, Richard Dennis, reportedly said that he was going to raise traders like they raise turtles in Singapore. One of these "Turtles" was Curtis Faith, and in his book, he goes through the training he received, and the mentality he acquired through the training process.

It turns out that Mr. Dennis won the bet, at least in terms of Mr. Faith's performance, as he turned his 2 million dollar account into over 30 million.

Anyway, back to the point, in this excellent book, "The Way of the Turtle" sums up the lessons learned in these three essential points:

1. Trade with an Edge: Find a trading strategy that will produce positive returns over the long run because it has a positive expectation (Going with the trend gives us the edge)
2. Manage Risk: Control risk so that you can continue to trade or you may not be around to see the benefits of a positive expectation system (Take small losses, let winners run)
3. Be Consistent: Execute your plan consistently to achieve the positive expectation of your system (Cutting losses when 50dma is broken, no exceptions)
4. Keep it Simple: The core of our approach was simple: catch every trend. Two or three trades might account for all your profits, so don't miss a trend or you might kill your whole year. This is simple and easy to understand, not easy to do. (Buying stocks that are trending is not a rocket science)

There will be no mega trending stock posted this week. Here are the results so far:

Using Percentage Based MACD to Manage Risk

This blog has been in existence for almost four months now. In this time, I have selected many stocks that would have been very profitable. I must also admit though that many others would have lost a lot of money.


I feel that in order to improve results, we should focus more closely on the stock trading techniques of market legend Jesse Livermore. Besides being made famous for his trend trading strategies, Jesse Livermore was also known for his risk management techniques. Livermore would set tight stops on all his positions, which meant that he would take many small losses. These small losses were more than made up though by the occasional gigantic gain.

With this in mind, this strategy requires more focus on risk management. The rules of this strategy dictate that the stock should only be dumped when the 50 day moving average (dma) is broken. Therefore, it is integral to determine how far the stock is from the 50dma. This is such an important piece of information because it represents the amount we are willing to lose before discarding the stock.

Fortunately, there is an easy way to determine how far a stock is from its 50dma by using an indicator called the PPO. The excellent website, StockCharts.com, has a very thorough explanation of many types of indicators including the PPO here.

The PPO essentially is a percentage based version of the MACD (moving average convergence divergence). The PPO takes the percentage difference between 2 moving averages, and then takes a moving average of that difference.

If we tell the PPO to take the difference between the 1 day moving average of price and the 50 day moving average of price, and then take a 1 day moving average of the difference, then it will tell us the information we are looking for.

Here is this week's mega-trending stock with this new indicator. The PPO will make a lot more sense when seen in context, so here it is:



I think the above chart shows how powerful StockCharts.com can be. I have spent thousands of hours tinkering with Stockcharts.com's features, and I am still finding out new things. There is no technical analysis tool that I could recommend more highly than StockCharts.com.

You can sign up for an account for under $10 a month. For those who are interested, here is a link to the site. If you enter 'Danny Merkel' in the referral box during the sign up, that would help me out a lot.

Making Money Shorting Stocks

Another week has come and gone, and in that time, most of the stocks I have selected produced incremental profits. The stock that was shorted last week, which was the stock that I said I knew nothing about, produced a profit of more than 10% in one week. Many fundamental analysts, especially the CFA type, the type that thinks they are smarter than everyone else, but could never outperform an index if their life depended on it, probably would die for 10% a year.

That being said, one stock I selected, EKO.v, has been a real stinker. That stock was too far away from its 50dma when selected, and I will keep that in mind when selecting stocks in the future.

This is the 14th week of the experiment, and here are the breakdown of the results thus far:



Here is this week's mega trending stock:



As you can see, the 50dma has formed an impenetrable wall that has acted as a bulwark against any bullish price action. Naturally, as per the rules of this strategy, we would place a stop above the 50dma.

In order to maximize profits trading and investing in stocks, I feel that we should take WD Gann's advice, and "be just as willing to sell short as you are to buy." In fact Jesse Livermore, certainly made more money shorting stocks than he ever did going long.

What I try to to do is to go with the flow. If the trend is down, then short, and if the trend is up, then buy. Here is what Mr. Livermore had to say about this principle:

"I was short one hundred and fifty thousand shares of
stock, not because I knew the news was coming, but because I was
going along the line of least resistance."

By trading with the trend, we are going along the line of least resistance. Thanks for visiting.

Let the Charts Show You the Fundamentals

Over the last week, the stocks selected for this strategy did quite well. Slow and steady profits seem to be accruing each week. The profits are not out of this world, but, then again, this strategy is not about getting rich quick. Here is a breakdown of how we are doing so far:



Here is this week's mega trending stock:




This company is called Ryland Group, Inc. I have no idea where this company is located, or how their financial statements look like, or what product or service they provide, but I do know that, by looking at its chart, that this company must be in bad shape.

Thousands of other investors have likely looked at every detail of this company, and have "voted" with their money as to the future outlook of the stock. By looking at the chart, I can see the result of this voting, which is why I need not look at any details of the company myself. The market has done this for me. This one of the basic tenants of technical analysis. Thanks for visiting this site.

Trading with The Trend Example 12

During the last week, nothing out of the ordinary happened on the markets. This means that this strategy performed as expected, which means that most stocks experienced slow but steady gains last week. This is what trending stocks tend to do.


Here is this week's mega trending stock:


This stock is currently right on the 50 day moving average (dma). This means that it must continue falling next week in order to avoid getting stopped out. This in turn means that this is a low risk, and potentially low reward play.

The Hidden Advantage of Canadian Stocks

Another week has passed, and that means another post to this blog. Out of the 6 stocks in play, 5 produced gains last week. The one stock that did not produce gains was the stock selected last week, and, as the following table shows, it did quite poorly:











Keep in mind that this blog is really just an experiment. I'll keep posting these stocks, as scientifically as possible, for at least a year, and at the end of this time, we will see what the results are. If you want to experiment with any stock trading ideas of your own, then I would recommend signing up for a free practice stock trading account with virtual money.

Although this blog really just is an experiment, I do, nevertheless, sometimes put money into these stocks. If you are curious, you can see what positions I am holding by having a look at my trading journal.

Here is this weeks trading with the trend stock:
















One thing that my table at the top of this post does not take into account is currency fluctuations. While the stock above trades in the United States, I also have many Canadian stocks in the table.

If you are American, and judging by my stats, you probably are, then many of the stocks I have posted should be of extra interest to you. This is because if you invest in the Canadian stocks I have posted, you have the potential to make money in two different ways. Firstly, of course, by the stock's appreciation, and, secondly, by the fact that the US Dollar is in a bear market.

For example, if you had invested in Canadian stock XYZ in 2001, and it increased in value by, say, 30%, then you would actually be sitting on a 65% gain, since the US Dollar has lost 35% of its value since 2001.

Also, please do not take offense by the fact that I am shorting American stocks and going long on Canadian stocks. This has nothing to do with politics or anything of that nature. I am only trying to make money!

Thanks for visiting.

Another Trend Trading Example

This week, the markets were much less volatile relative to recent weeks prior. This is beneficial to this strategy, since no stocks were blown out of the water this week. Here is an update on how we are doing so far:



In comparison, the TSX has been down about 3.5%, the Dow Jones has been down about 1.5%, and the TSX Venture exchange has been down about 17% since the commencement of this strategy.


Here is this weeks stock that is currently in an unstoppable trend:


(please click here to see a larger image)


There are a lot of things that are interesting about this stock. One of them is how is reliably it breaks out of trading ranges and then explodes higher. Another is how volume tends to accelerate before price does. However, in terms of this strategy, the main thing we care about is that this stock is in a major trend.

Before I go, I'll leave you with some excellent Jesse Livermore quotes. Enjoy the long weekend!

"After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!"

"Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end."