The Proficient Investor

Finding the right stocks to trade can be confusing for new investors and old alike. If you’ve been at the game long enough you have probably developed some kind of strategy for what you like to trade, but for the new investor it can seem like an insurmountable task.

The first thing I always tell people is to first trade what you know. Look around the house, or around the neighborhood and see what you can find out. Write down all the companies whose products you buy or endorse on a regular basis and start digging. Find out their revenue stream, find out where they sell their products. See how popular they are. That should give you a good place to start. Then you can use the formulas I’ve already discussed here to decide if the investment will pan out.

Not all investments have to be long term either. Many times I will buy and sell a stock because of the momentum behind it. This is fine as long as you understand the entry and exit points well and can define the catalyst behind the trade. If you can’t, meaning if you are buying it because it “seems” like a good investment…that’s not a good enough reason and you shouldn’t do it.

Another tool you can use is the Yahoo Finance most actives list. Every day the most traded stocks are listed as advancers and decliners. Generally you want to follow the trend, but when looking at advancers and decliners you need to figure out if that move is done or not.

For small and micro cap stocks a large gain over a short period of time usually signals a soon to be downtrend and you can look to short that stock. A large losss over a short period of time can signal a bottom based buy which usually means that stock is oversold.

In either case you are looking to maximize profits in a short period of time which can be anywhere from a few hours to a day or even a couple days.

The most important thing you can do is to understand and be able to explain to anyone you talk to why you made the trade. Before you buy or sell, ask yourself why you are doing it. What is the core explanation for buying or selling. If you can’t come up with an answer, don’t do it.

Look anywhere around Wall Street and investors will tell you never to invest in penny stocks. They throw around the term as if speaking about the plague. Penny stocks are guaranteed losses. Penny stocks are speculative and not worth investing in. I’ll agree somewhat with one of these statements. By and large, they aren’t worth “investing” in. They are however, worth trading.

If you’ve read this blog for any amount of time you understand my trading style and investment decisions revolve around doing pretty much the opposite any analyst thinks you should do. When all the analysts covering a stock say to buy, it’s usually at the top and when they say to sell, it’s usually at the bottom. Analysts aren’t as reliable as chart patterns and earnings reports so I only use them as a bellweather for spotting tops or bottoms. Of course, it’s very hard to predict the true bottoms and tops so I use a graduated buying approach. I buy into weakness (a value stock falling in price) and sell into strength (a value stock rising in price with a sell target based on earnings projections). There are simple formulas you can apply to most value and growth stocks to determine buying and selling points and I have detailed them in previous posts.

So why trade penny stocks? You see the ad in the upper right corner of the first post on this blog? That’s the blog of Timothy Sykes. If you don’t know who he is, I’m about to enlighten you.

Tim began trading penny stocks in college in the late 90s and through the dot-com boom and bust. He realized one day that these stocks all exhibited the same kinds of trading patterns day in and day out. He also started paying attention to conversations in message boards and boiler rooms around these stocks and within 4 years turned $12k into $2 million. He made thousands upon thousands of trades, taking profits when they were available but also losing thousands in the process all the while learning the ins and outs of trading in the “wild west” of the stock market.

He started his own hedge fund, Cilantro Fund and was the highest rated fund in his class. Dissolusioned with the industry, he closed his fund after several years of success (and several hundred thousand in losses as well), wrote An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund and started timothysykes.com to teach others how he made his fortune. Tim went back to his roots and (still being already financially independent) opened a new trading account with the same amount of $12k to show everyone that anyone can make money trading stocks. As of now, just a few short months after starting TIM (Transparent Investment Management) and detailing his trades openly on his blog, he’s already more than doubled his starting capital.

Investors that don’t understand how the OTC market works call it the Wild West. The reason is because the SEC doesn’t regulate Bulletin Board or OTC (over the counter) stocks as tightly as it does the NYSE, NASDAQ or AMEX. Due to this fact, there are people out there that will take advantage of naivete. These are the pump & dumpers you hear about. If you know how to spot them you can avoid them and for the most part its easy. You know that email you got about stock XYZ that sounded so promising…yep you guessed it, that’s a pumper. He’s hoping you go out and buy the stock he mentioned so he can profit by selling his shares to you, only to have the stock collapse in your face and leave you “holding the bag”.

So, don’t fall for those shenanigans. Learn from the best. Timothy Sykes sells a DVD called PennyStocking that teaches all the tools and techniques he uses to make money selling these stocks. His blog is also a great resource for learning trading terminology and strategies relating to penny stocks. I highly recommend you read his blog and buy his DVD if you are even thinking about trading OTC stocks. Like me, all his trades are verified by Covestor which is a service that taps into your trading account to track your trades (it’s ok, it’s totally safe). I believe in being honest about what I do, which is why you can see my Covestor widget and see exactly the trades I make and how much I profit or lose. Simple.

There are many ways to make money in the market and if you know how to spot the trades on the up and on the down, you can learn to profit everytime. Do yourself a favor and learn how the PennyStocking game works.

Other Books About Penny Stocks:

•  The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks
• FORTY YEARS A SPECULATOR
• The Penny Stock Millionaire

AMD is trading sideways this week after moving from $4 to $5.90 since the start of the month. The reason for the run up? Second quarter chip shipments rose, even in this slow economy. Both Intel and AMD have quad core processors out and both are pretty much the same in terms of performance. The real problems plaguing AMD stem from their acquisition of ATI.

Even more than the Intel/AMD debate is the disagreement between users of ATI and Nvidia products. Nvidia has long held the attention of gamers for their GeForce chipsets, a market ATI has had trouble competing with in the past. Those frustrations may soon be over however as AMD shifts their focus from competing in the gaming industry to the home entertainment business.

AMD is putting out HD cards now to tap into the growing business of home entertainment.  Large Plasma and LCD monitors have come down in price to the point where most people find them affordable. I’m willing to bet that a lot of people spent their “economic stimulus” money this year on a new HD tv. AMD plans on taking advantage of this by having HD cards power these behemoths. Imagine playing World of Warcraft on a 60 inch plasma screen in crystal clear HD.

It’s a high-end market but one that is getting more attention these days, especially with the new digital broadcast mandate coming next year which will eliminate analog broadcast signals from the airwaves. This means televisions that currently use “rabbit ear” antennas will no longer receive signals unless owners upgrade their televisions or buy set top converters. Cable subscribers of course remain unaffected by this mandate. While those upgrading their televisions to HD ready may not be gamers, the allure of being able to watch movies stored on your PC in HD is there and this is the market AMD is hoping to get a foothold on.

The acquisition of ATI also created a divide in the gaming world when the decision to no longer support SLI in favor of using ATI’s Crossfire technology which is similar. SLI allows the use of two video cards simultaneously which speeds up graphics processes making games and video much smoother. Crossfire does the same thing but it’s native to ATI cards while SLI is native to Nvidia’s architecture.

There’s no doubt that AMD has ground to make up here. As far as the stock is concerned, resistance seems to be holding at $5.90. If it can crack $6 then it’s going to $7 quickly. Although earnings projections are negative for the year, investors feel there is an opportunity to profit and that’s the action we are seeing.

I have shares in AMD but not Intel.

I decided to go whole hog on AMD today and bought 700 shares. You can verify this by checking my covestor trades. Anyway, why AMD?

Right now this is purely based on momentum. Technical analysis says this stock is trending bullish because of the MACD and there is enough volitality to push it higher.

Earnings paint a different picture though, so I’m not basing my trade on that. This is momentum at its best. I’m expecting a $6-7 exit point.

Not all trades have to be long term, but you should have a reason for every single trade you do. My recent trades in Apple and WFC all had an explanation for entry and exit and this is something you want to keep in mind with any investment.

Crystallex International (KRY) advised shareholders and stakeholders that it was invited to a meeting by representatives of MinAmb including the Vice-Minister.

The MinAmb was instructed by the Venezuelan Government to reconsider the permit to open and begin mining of the Las Cristinas gold mine. Las Cristinas is the largest gold deposit in Venezuela and the president, Hugo Chavez has until now denied the permit to open the mine but appears to be reconsidering.

Concerns over the environmental impact of mining in the area have previously stalled the permit but as long as Crystallex is willing to make some concessions they could be allowed to proceed.

The modifications suggested by the MinAmb representative fall within three main categories:

- Further improvements to optimising the social projects in the area.

- Mitigating the impact of open-vein mining in the currently affected areas of the Imataca Forest Reserve.

- Improving the remediation plans at the end of the mine life as well as repairing existing environmental damage caused by illegal mining.

The Company prepared a report which addressed these three areas and the report has been submitted to MinAmb.

Shares of Crystallex were up $0.11 cents in intraday trading.

I own shares of Crystallex (KRY).

Sometimes the market just is not doing what you expect or what you want it to be doing. In fact, rare is the case when the market does exactly what you want it to do. After all, if it were that easy, we’d all be rich now!

This week I have been able to “shnitzel” off some of my profits from my core positions. With Apple(AAPL) and Conexant(CNXT) moving up on positive earnings and growth news I decided to take some profits while the iron was hot. I freed up about half of my portfolio value in dollar terms to look for other trades.

Here’s how the last few trades went. First I bought a sizeable position in Wells Fargo (WFC) when the stock tumbled for really no good reason other than all the financials were experiencing trouble. Selling WFC into the strength it had on the bounce from $23 to $30 in just a few short days netted me a tidy profit.

I then took that money and put it into AAPL, again buying the stock on a big dip with the understanding that it really had been oversold and by looking at the earnings you can predict somewhat the movement of the stock over the next few days or even weeks.

With the exception of WFC, I have a core position in APPL that I like to use as a benchmark or radar as to how it is trading. 6 months ago, that position was $163 with a target price of $200. Since then the stock has had a roller coaster ride as initial sales of the iPhone couldn’t meet demand and investors worried about what that could mean for Apple’s profits. Then along came the App Store. It’s estimated the App Store brings in $1,000,000.00 a day, of which Apple retains 30%. That means every day Apple is earning $300,000.00

This is certainly going to boost the revenue predictions for the 3rd quarter and likely raise guidance for the 4th quarter leading to a spike in the stock price over the next few months.

Traditionally, now is a good time to be invested in Apple as well, because the end of the summer marks not only “Back to School” season but the ramp up to the holidays. Expect the 3G iPhone to continue to be a hot seller this holiday season as well as the continued success of the iTunes App Store.

Wells Fargo continues a steady price around $30.

I’ll be keeping my cash position for the time being until I see another opportunity, at which time I will of course talk about it here.

I work for Wells Fargo and have stock in both WFC and AAPL.

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