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Tharp's Thoughts Weekly Newsletter (View On-Line)

April 01, 2009 — Issue #417

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Workshops

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Article

Climbing Up the Steps and Jumping Out the Window by Ken Long

Sale

Peak Performance Home Study Course

Trading Tip

Top Notch Internet Resources—Stock Screening - Fundamentals by D.R. Barton, Jr.

Mailbag

What Happens If You Own an ETF That Gets Closed?

Workshops

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April 24-26  Blueprint for Trading Success

This course is a complete structured program that will launch you to a more advanced skill level in your trading.  You’ll learn strategic, focused steps that will serve you throughout your entire trading career.

April 26  Dinner at Dr. Tharp's (Photos)
April 28-30  Peak Performance 101

You’ll leave this investment "Boot Camp" knowing, for the first time in your life, why some people consistently make profits over and over again, while other investors and traders are erratic and unsuccessful.

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  Read what past attendees have said...

 

Feature

Profitable ETF Trading Strategies
Climbing Up the Steps and Jumping Out the Window

by
Ken Long

There is nothing more frustrating than finding a good candidate for a trade, making an excellent entry, and then watching the profits disappear when the market turns around and moves against our position. This kind of experience can place an extraordinary amount of psychological pressure on someone trying to trade for a living. Learning to deal with this situation before it becomes frustrating is crucial to your development as a full-time trader.

I learned a piece of wisdom from a master trader one time, when he observed that stocks will often climb up the steps and then jump out the window. He was describing a common situation in which stocks climb a wall of worry and then make a dramatic selloff, which makes your profits disappear. This occurs in many stocks that have found a base at a lower price. Buyers are then slowly being tempted to enter new positions but without full conviction. You know this is happening when you see price move up in short small steps resembling a staircase. Last-minute buyers will then climb on board the momentum and suddenly push price up in a hurry. Professional traders call this a parabolic top. 

If you see this formation after a long slow period of price improvement, it is a clear sign that something dramatic is about to happen. This drama is normally a rapid selloff that captures all the profits of the last several days and traps the late comers to the party who are then eager to exit their positions to prevent disaster. This pattern happens so often that you can almost rely on it to make a living.

To be an effective trader you must not let your profits disappear. You need to have the discipline of harvesting your gains and protecting your open profits in every position. The easiest way to do this is to have a trailing stop of a certain percentage that is keyed on the highest high since you have been in the trade. 

If your broker does not offer this kind of automatically adjusted trailing stop, then you need to find a new broker. All the good ones have this feature. In the early stages of a trade, protecting yourself and your capital against sudden reversals is important. But after really excellent trades, you also need to incorporate this method of protecting your profits  to be successful in the long term. Good luck and good trading!

About the Author: Ken Long, a retired Lieutenant Colonel in the U.S. Army with a Master's Degree in System Development, has developed the Tortoise Method of mutual fund switching, a trading system that takes about five minutes each week with a goal of outperforming the S&P 500 Index.  Ken is founder and Chief of Research of Tortoise Capital Management, www.tortoisecapital.com.  He is a trader and writes a daily and weekly market assessment for mutual funds and exchange traded funds. He is a proud husband, dad, and ju jitsu practitioner. Read more of Ken's essays at http://kansasreflections.wordpress.com.

IITM Third Party Clause

 

Sale

Peak Performance Home Study

 

This spring, Dr. Tharp will be releasing an updated edition of his masterpiece, the Peak Performance Home Study Course. But this second edition will not be available for another month.

Trading Tip

More Top Notch Internet Resources Part II
Stock Screening -
Fundamentals

by
D.R. Barton, Jr.

We’re taking a multi-week look at stock screeners. You’re interested in ‘em.  I’m interested.  Enough said.

Last week we took a quick look at a technical screening site called “stockfetcher. For now we’ll postpone a more detailed look at the site and its screening capabilities and group it with some other technical screening sites.

For this week, I wanted to start our review of the more pervasive fundamental screeners out there.  I’m not exactly sure why there are so many good fundamental screeners and so few good technical ones.  Perhaps the fact that fundamentals have been the more “traditional” way to pick stocks means that more retail investors and traders are interested in those metrics.

For fundamental screeners, we’re typically talking about sites that allow you to filter some universe of stocks for sales, earnings, debt, ratios — all of those and many fundamental goodies.

The first screener that we’ll look at is found at the MSN Money site.  It has long been my favorite.  Unfortunately, they’ve made it harder to find than a profitable automaker.

But for your navigating pleasure, I’ve attached the direct link to the site at the end of the article.  (You know you wanted to read the rest first, anyway…)

Another couple of caveats:  first, to use their “Deluxe Stock Screener” (the one I prefer), you have to download an add-in (it’s small and seamless).  Second, since this is a Microsoft site, don’t even think about using Firefox, Google Chrome, Apple Safari or other browsers.  It’s Internet Explorer or not at all for the Deluxe Screener.

Fortunately, once you’ve run that small gauntlet to get the screener, it is extremely user friendly, fast, and powerful.

It has almost all of the fundamental screens one could ask for, and allows you to build and save custom screens for use on subsequent visits — a huge plus.  The screener also has a very simple and effective exporting capability, allowing you to easily dump the results of your screen into a spreadsheet for quick transfers to charting program watch lists, etc. 

Also, on the plus side, there is a list of useful (if somewhat limited) stock price and volume criteria under the “Trading and Volume” heading that allows you to make more useful screens. You can segregate stocks according to their exchange (U.S. only).  And once you’ve created a list of stocks that meet your screening criteria, you can sort by any of the criteria used, a very useful feature.   Last and certainly not least, it’s a no-cost offering.

On the downside, the MSN screener does not include cash flow data (very few screeners include this data, which is the most useful fundamental tool, in my opinion).  It also is limited to U.S. Stocks and will only return a maximum of 200 stocks for any screen (though this is more than enough for most screens).

The bottom line is that once you’ve gotten over the initial hurdles of getting access to the proper page, you have a very powerful and easy to use fundamental screener.

Oh yeah, here’s the direct link to download the screener add-in:  http://moneycentral.msn.com/investor/controls/finderpro.asp

I’d like to send my thanks to all of you who sent words of encouragement after the passing of my wonderful Mom.  They were all much appreciated.  And though it will take me a while, I’m doing my best to reply to all of you.

Great Trading,

D. R.

About D.R. Barton, Jr.:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  “drbarton” at “iitm.com”.  

Workshops

Workshops Coming in May

NEW Two-Day ETF Add-on

 

May 11-13  How To Develop A Winning Trading System That Fits You
May 15-17  Highly Effective ETF Techniques 101
May 18-19  Advanced ETF Techniques (ETF 101 is a prerequisite)

Learn More...

 

Mailbag

What Happens If You Own an ETF That Gets Closed?

by
Ken Long

Reader Question: I am concerned about the information you provided regarding the rate at which ETFs are being shut down. I've been trying to find the answer to the question you raised, "What happens if you own an ETF that gets closed?" Have you found an answer? I've been unable to so far.

Answer: Once it is announced that an ETF will close, there is a period of time (3-4 weeks) that it is still traded. This is currently the case with the Ameristock Treasury bond ETFs, which will cease trading today.

In this time period, investors can buy or sell shares as they normally would. On the day that the ETF closes, all trading stops. The provider then has a period of time (about 2 weeks) to sell the underlying securities within the ETF. 

The proceeds are then distributed to the owner of record. The owner will get the value of the securities from when they were sold, not when the ETF stopped trading. So, if you’re holding the ETF when it closes, you’re running the risk that the underlying securities could go down (or up) in value in that time frame.

If you want to know the value you are getting from your ETF, it might be better to sell the shares before the ETF stops trading. Otherwise, you’re left cooling your heels and won’t know what you’re going to get until the securities are sold and proceeds are distributed. It’s up to your risk tolerance.

But the closing of an ETF is an orderly process, and investors are given plenty of warning so they can plan accordingly. 

— Ken Long

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