Insight Trading utilising our special ‘tools of the trade’

There is no holy grail but the reality is we actually have all the tools we need to trade and invest successfully readily at hand.

My primary tool of the trade is the analysis of price action devoid of stock knowledge, opinion or bias preferring to focus purely on the demand supply dimensions of a stock using repetitive psychological human behaviour as a reason to buy or sell a stock. We see repetitive behaviour play out on the stock market every day. Some mistakes, same reactions, and the same responses

To initiate the analysis of a stock on a price basis I look at the price cycle of demand and supply and how the investor is interacting with the stock. It gives me an idea of what state of mind the investor is in and in turn what part of the cycle. The cycles move in waves of demand (uptrend) and supply (downtrend) punctuated by periods of indecision. An equal balance of buying and selling represents these stages in the price cycle. At the highs we call this distribution and the lows accumulation.

This provides a framework which all stocks move through and reflects how we ‘feel’ about a stock following certain behaviours. e.g. a down trend is always followed by a period of indecision and relative balance as the last sellers sell and the new buyers begin to buy seeing a low value opportunity. This behaviour repeats itself with varying degrees of greed and fear behaviour generating readable and assessable price action. Thus the price analyst is born. We don’t predict what will happen next we just assess the probabilities of what follows certain stages of the stock cycle.

‘Buy the fear and sell the greed’ being one of Warren Buffett’s favourite adages. We all agree. Bottling it into a framework is the tricky part.

We then move into more specific realms of price analysis, which are more importantly bound by the primary controls of method, discipline and money or risk management. The ‘raw data’ of price and volume generates the most reliable and trustworthy information for the price analyst with subsequent trending and momentum tools of secondary benefit only. These are often tools used by the shorter-term trader.

My membership following, which is primarily superannuation based, focuses on the longer-term accumulation of wealth and the absolute necessity of capital preservation thus the discipline of a strict adherence to a methodology that is bound by money management.

Thus my expertise is not on subjective stock picking per se but the development of investing models built on the basis of probability based stock behaviour further controlled by money management. This means all decisions are prepared and known well before the price action actually occurs. Or to flip the coin our behavioural response is always known prior to any behaviour actually occurring. This removes the emotion, subjectivity and ‘trading on the run’ so detrimental to successful stock investing

I run two types of models based on these features, Conservative and Energiser. Both use the same capital controls thus having similar risk profiles but the second offers heightened equity exposure in relation to the capital invested.

For more information see my Stockradar Trading Strategy page

By using our stock analysis methodology and the discipline imposed by the portfolio process it provides us with all the control we need to benefit from the probabilities of generating a profit while at the same time offering a level of comfort and safety that your capital will remain intact and be preserved.