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Trading Made Easy - My Strategy For Buying Stocks

I would like to share my trading strategy with you, which has been working really well for me after I changed it a couple years ago.

After reading some books, attending several courses and making many mistakes, I finally understood that the best method is KISS:

I will start by teaching you the methods I employ to search for the stocks in which I want to invest, and ,once selected, how I open position and set a stop in losses.

My idea is to publish other posts with stocks that match the criteria that I will be presenting in the following paragraphs. These should help you get started with my methods and give you some companies that you could potentially invest in .

Historic peaks in the last 12 months

I limit my search to those companies that have reached record highs in the last year. I believe that these companies have a very good chance of starting upward trends in the future.

Small - Medium Caps United Kingdom

UK has a large variety of firms of all sizes.

I started investing in this market because I read several books that dealt with it and it seemed full of opportunities. After vast research I came to the conclusion that this market has high liquidity and is not as volatile as the American market (where stocks can open up with a 20% difference).

CFD's with Ig Markets

I must start by saying that I have no advertising deal or am in any way affiliated with Ig Markets. I chose them because they have good reviews and a lot of the companies that match my search criterions. They have worked very well for me up to this point.

I would encourage you read the part where they explain how CFD's work http://www.ig.com/uk/cfd-trading

The basic idea behind CFD's is that you never own the stock. This is an independent market so now I will explain how you can profit. You "buy" a stock at a certain price and you will profit whenever the stock price rises (as in the actual stock market) and lg Markets will benefit when the price of your stock decreases since you will sell for less than what you initially purchased.

One advantage of this kind of investing is that you can operate with much more money than what you actually put in so you will benefit in proportion of what you put in if the stock price increases. The more capital you operate with, the more risk that comes associated with it. It is an exponential relationship. For example, if you put in $50,000 and are operating with $500,000, you would be out of business with a 10% loss since your $50,000 are gone so that is why you have to be very careful since you can lose much more money than what you put in.

You need to calculate the maximum leverage that you are willing to work with. If you dispose of $50,000, I would recommend you operate with $100,000 or a 2:1 ratio. A grand majority of the accounts that will open today will be gone in three months and this is mainly due to people's abuse of leverage. Investing is a long-term game so you want to be cautious with your actions since the ones who win are the ones who stay longest in the game.

You need to set stops from the beginning in order to minimize losses. Your stops should be adjusted frequently since the market will vary and you will be willing to assume different risks at different points in time. For example, if a stocks price is going to decrease because a firm is going to give dividends, you should decrease your stop since there is no reason to sell.

I strongly believe that we can form a small community that can highly benefit from this type of trading.

How I operate (example)

There are a large variety of websites that inform you of the latest breakouts so I encourage you to find your favorite one.

I will inform you of some of the companies that I invest in here I believe that you can make a fair share of money too!

I am going to use one of my stocks for this example (Taylor Wimpey PLC (TW.L)) that just recently reached its historical peak in the last 12 months.

In each stock I typically invest 7,110 £ which is the equivalent of 10,000 €. The reason I chose this amount or multiples of it depending on each stock is that I like to diversify my investments since I believe that this is the safest way to do it. I prefer to have smaller amounts of money in more places than more money in fewer places.

Once I find the stocks that have reached their historic peaks in the last 12 months I go to www.yahho.co.uk to look up some values.

1) Check that the graph actually resembles this peak

The blue line resembles the value at which I bought the stock and as you can see, this investment is going fairly well.

2) Make sure that the spread is < 1%

Spread = ((184.30-184.20)/184.30) x 100 = 0.054%

This means that when I sell after buying, I am going to lose 0.104% which is very reasonable. On the other hand, if the spread was 4%, you would lose 8% just from buying and selling.

3) Can I buy all the stocks that I want to?

I am planning on investing 7,110 £ and each stock costs 1.8220 £ which means I can buy 3,902 stocks. Since I am feeling generous I will round this number up to 4,000. Check the London Stock Exchange (http://www.londonstockexchange.com) to ensure that you can buy this many.

In this case, buying or selling 4,000 should be no problem since it lets us do this with up to 15,000 stocks.

4) Observe the fundamentals

Available in Yahoo - Key Statistics

Three questions I should ask myself:

1- Does the company make money (Is EBITDA positive)?

Yes, 471.80 m £.

2 - If I where a millionaire and wanted to buy the firm, how many times EBITDA would I have to pay?

The reasonable is between 10 and 20 times. In this case Market cap is 5.96 b £ and EBITDA is 471.80 m £ so it is 12.63 which is reasonable.

3 - Is the company's debt less than 3 times EBITDA?

We would not want to invest in a firm with massive debt for obvious reasons. In this case the debs is 100.00 m £ and the cash is 212.80 m £ meaning that the firm actually disposes of 112.80 m £ since the debt is negative.

5) Open positions with your Broker

The firm has passed all the filters so it is now time to proceed to buy the stock. I am not going to place a stop immediately but I use 10% by default.

6) Edit the graph in Visual Chart

You can download it here http://www.visualchart.com/downloads/. Visual chart is an app that enables you to see the stocks graph in a very simple way. You can use it for free if you don't have live tracking of the stock and this works perfectly well for this kind of investing.

The Graphs of the London Stock Exchange are usually saved with an E in front so we would search for E-TW.

I generally use the monthly bars unless it's a recent IPO. In this case, I would use the weekly ones. There is no other way to visualize the tendency.

I zoom into the last part of the graph and try to draw an upward trending line.

I encourage you to visualize the graphs in a logarithmic scale and if you are interested why, check out this article

http://www.clasesdebolsa.com/index.php?/archives/229-La-paradoja-de-las-variaciones-porcentuales..html

The logarithmic scale is good to trace the theoretical profits that we could expect in the next year if the upward trend is followed.

The vertical line lets us calculate absolute terms or percentages in the two terms that we have selected. We only have to place ourselves on the tendency line and displace the to the values that we want to perform the calculations.

I bought the stock at 167.4 (blue line) and it is now time to determine the stop. My default value is 10 %

Stop = 167.4 x 0.9 = 150.66

I do not encourage you to place stops at nicely rounded numbers so I am going to keep the stop at 149.75 (red line).

The minimum expected profit within the next year is 128% if the tendency line is respected.

7) Let the broker know the Stop point

After calculating the stop, we need to let our broker know or else all these calculations will be futile.

Next Steps

I would not advise you to constantly check the stock market or to compulsively buy and sell stocks. As Warren Buffet says, "the majority of investors can't resist the temptation of compulsively buying and selling stocks. You can."

If the tendency goes in our favor we should raise the stop prices and they should always be under the tendency line.

I will let you know of future opportunities for you to invest in my next posts.