Professional Documents
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Investing
Table of Contents
Getting Started
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22
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140
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254
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Getting Started
There is no such thing as a rich victim. Take back your
power and realize that you create everything that is in your
life and everything that is not in it. Realize that you create
your wealth, your non-wealth and every level in between.
T. Harv Eker
Getting Started
Welcome
Congratulations on deciding to learn about the stock market and strategies to help improve
investing returns. This course is designed to teach you how to take your financial future into your
own hands by providing the foundational information and skills necessary to make better, more
informed investing decisions.
Getting Started
Getting Started
The 7 Steps
The 7-Step Investing Formula incorporates the following steps:
1.
2.
3.
4.
5.
6.
7.
Prepare to be an Investor
Start Analyzing from the Top Down
Conduct a Thorough Fundamental Analysis
Search for Additional Strong Stocks
Conduct a Thorough Technical Analysis
Protect Your Investment Capital
Manage Your Portfolio
Learning to follow these seven steps will help put you well on your way to successfully managing
your own investments. The Investor Toolbox is the primary instrument for applying the 7-Step
Investing Formula. It will help you simplify, categorize, and act on the information necessary to
complete the seven steps.
10
Getting Started
To complete this course, read all material, update your investing plan, and complete all activities
and assessments.
11
Getting Started
12
Step 1Prepare to be
an Investor
No profession requires more hard work,
intelligence, patience and mental discipline
than successful speculation.
Robert Rhea
Introduction
In this lesson, you will learn how building an
investing plan can help you develop discipline
and take ownership of your trades. Having a laserlike focus can help you learn how to filter out the
noise that can lend itself to emotional, often
senseless, trading and develop logical, disciplined
trading. Having a plan is essential in nearly all
major projects, organizations, and governments
investing is no different.
Lets get started by watching a short video that
introduces key concepts of this lesson, followed
by a video that details the basic components of an
investing plan.
Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position size
for a stock trade
Set up daily and weekly routines
Define criteria for and create a trading
journal
14
Investing Plan
Objective
Watch List Criteria
Entry Rules
Exit Rules
Money Management
Routines
Now that you have a basic understanding of an investing plan, we will review the investing plan
tool in the following activity. Then we will introduce you to the concept of a trading journal.
16
Trading Journal
Good Trades
Unfortunately, many investors believe that the only way to measure success in investing is by
looking at the bottom line of their portfolio. While this is important, it is not always the most
important. Knowing this might surprise you and may require a vocabulary change. Look at the
following definitions based on your new understanding of an investing plan.
Good Trade: From here on out, wed like you to start defining a good trade as one where you
follow your rules. A good trade means you followed your rules, whether you
made money or not.
Great Trade: A great trade is one where you follow your rules and made money.
Dangerous Trade: A dangerous trade is one where you didnt follow your rules and you made
money because you have been rewarded for a bad decision and this may cause you to choose
to ignore your rules in the future.
18
Trading Journal
Now that you know the difference between a good, great, and dangerous trade, its important to
have a way to track all your trades. A trading journal is how investors document and monitor their
trades. There is an example of a trading journal below.
There is no one way to do this. However, investors often record the basics, such as the date, stock
price, how many shares are purchased, and type of trade made.
Now that you know what a trading journal is, complete the following assignment.
19
Trading Assignment:
Create a Trading Journal
21
Lesson Review
In this lesson, you were introduced to the concept of being a disciplined trader by creating and
using an investing plan and trading journal.
In the next lesson, you will learn to analyze the markets from the top down. This includes starting
from the broad market indices and moving down to sectors, industry groups, and finally stocks.
This process will generate criteria for your watch list in your investing plan.
22
Introduction
We just reviewed how important it is to prepare to
be an investor. How you approach investing is just
as important.
In this lesson, you will learn to start analyzing a stock
from the top down and identify how it fits within your
investing plans watch list criteria.
Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position size
for a stock trade
Set up daily and weekly routines
Define criteria for and create a trading
journal
24
Top-Down Analysis
Finding Stocks
The importance of Step 2 is to learn a structured
way to look for stocks. First, you start by searching
for stocks on a large scale, and then continue to
progressively narrow your search to single out
stocks in which to invest. This method is called
top-down analysis.
26
Top-Down Analysis
The chart on the right illustrates top-down analysis.
This process has four phases:
1.
2.
3.
4.
27
Top-Down Analogy
It may be helpful to think of top-down analysis in terms of narrowing in on real estate as a multinational real estate tycoon would do.
In this case, the market represents the country in which a tycoon wants to purchase real estate.
The country (or market) is broad in scope, and it contains various states or provinces (or sectors),
cities and towns (or industries), and finally real estate (or stock)
that the tycoon can invest in.
28
Top-Down Analogy
If investors can first find the top-performing market,
then top-performing sectors and industries, and then
the best stocks, at the best times, their capability
to outperform the market and their personal
benchmark increases.
Just like land developers want to find the best land to
build houses or buildings, investors will want to find
the best industries in order to find the best stocks.
But just like any purchase, you need to consider the
environment you are buying in, which is why its best to
use top-down analysis.
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30
32
33
Posture
Knowing the trends direction is important because it helps determine your bias or posture. Your
posture is how you position your investments and trades. Look at the following chart to see how
the trend typically measures up to posture:
Market Trend
Posture (Bias)
Up
Bullish
Down
Bearish
Sideways
Neutral
Next, lets dig deeper into what a market trend looks like. The next series of graphs will demonstrate
up, down, and sideways trends.
34
Uptrend
An uptrend is defined as higher highs and higher lows and is bullish.
35
Downtrend
A downtrend is defined as lower highs and lower lows and is bearish.
36
Sideways
A sideways trend is defined as relatively equal highs and equal lows and is neutral.
37
Trend Duration
Trends are like the oceanthe tide rises, waves hit the
shore, and ripples stream across the beach. Within the
long-term trend are intermediate-term trends. Within
the intermediate-term trend are short-term trends.
The most successful trading occurs when all waves
are crashing at high tide because everything splashes
higher on the beach.
As you develop a posture around trend, it is important
you remember the time frame you are considering.
Next, lets review the variable time frames that typically
affect the trend: long term, intermediate term, and
short term.
38
Long Term
Long term is generally considered to be nine months or longer. When looking at a long-term
ProphetCharts of five years, each bar represents one week. This long-term trend is similar to the
ocean tide that continues to rise even when waves ebb.
39
Intermediate Term
Intermediate term is generally considered to be three to nine months in length. An investor
hoping to determine this trend length typically uses charts that show six months to a year.
The image below shows an intermediate chart with a green arrow acting as the trendline. The
intermediate trend is created by higher highs and higher lows. In a six- or 12-month chart, each bar
represents one day. This trend is akin to the waves of the ocean that ebb and flow with a rising or
falling tide.
40
Short Term
Short term is generally considered to be three months or less; therefore, a short-term investor
would use a three-month chart to determine trend. This chart shows short-term uptrends (blue
arrows) and downtrends (red arrows) within the intermediate chart. Notice that short-term
trends create the higher highs and higher lows of the intermediate trend. Short-term trends are
similar to ripples on the waves that create small ebbs and flows as the larger waves ebb and flow.
41
42
Symbol
$INDU
$SPX
$COMPQ
Knowing what the market is doing directs your trading, which is why it is the best place to start.
So lets talk specifics...like how do you actually analyze market indices? The Market Posture
page in the Investor Toolbox is a tool you can use in your top-down analysis to help determine
market posture.
44
45
Scan the thumbnail charts of the major indices listed that make up the overall market trend.
As you review them, youll notice that some trends are up, some are down, and some are
sideways in the intermediate term.
Identify the overall market trend from the thumbnail charts and determine your posture
for the intermediate term as up (bullish), down (bearish), or sideways (neutral).
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47
Determine the market trend by scanning the thumbnails charts on the Market Posture page
to identify the current trend of major indices.
Confirm your posture by using the Market Forecast indicator. The green line of the Market
Forecast should confirm the current direction youve determined by showing a similar trend.
48
Trading Assignment:
Conducting a Market Posture Analysis
Directions
1. From the Market Posture page, click the index
symbols that are located above the thumbnails to
launch the Index Snapshot for the following indices:
$SPX, $INDU, and $COMPQ
2. From here, you can change the graph view for each
index to three months, one year, and five years by
clicking the icons just below the graph
3. Determine the overall market posture (bullish,
bearish, or neutral)
4. If you own Coaching services, call your coach or join an Online Coaching session to discuss
what youve identified as the market posture and why
2015 TD Ameritrade IP Company, Inc.
50
Sector Analysis
Sector Analysis
Now that youve learned how to determine your
market posture, the next step is to determine
which sectors are leading the markets. Youve
determined the country in which you want to
look for real estate, now lets look for states or
provinces you might like.
You may be asking, If Im bearish on the stock
market, doesnt that mean all stocks will be going
down? Thats a very good question. While its true
that most stocks will be downtrending during a
bear market, there are stocks that will rise during
this time. Finding sectors and then strong industry
groups can be a great way to identify these stocks.
52
Sector Analysis
A sector is a broad-based group of stocks that deal
in similar business functions or services. This
broad-based group is made up of a number of
industry groups that are more narrowly defined by
competing products.
10 Sectors
There are 10 sectors represented on the Investor
Toolbox. This table shows all sectors and their
corresponding index ticker symbols.
Sector
Symbol
Materials
$BASICM
Consumer Discretionary
$CYCLIC
Energy
$ENERGY
Financials
$FINANC
Health Care
$HEALTH
Industrials
$INDUST
Consumer Staples
$NONCYC
Technology
$TECHNO
Telecommunication
$TELCOM
Utilities
$UTILIT
53
Sector Analysis
There are two tools used for sector analysis:
Big Chart
Comparison Chart
Well discuss each in more detail, but well start with the Big Chart, available in the Investor
Toolbox under the Market 360 link. The Big Chart tells you which sectors are attracting or
losing institutional investors (i.e., organizations such as banks, insurance companies, retirement/
pension funds that pool large sums of money to invest, etc.). The Comparison Chart allows you to
find sectors that are outperforming the market. Knowing which of the 10 sectors are strong right
now allows investors to invest with more control and helps increase their probability for success
in strong industry groups and ultimately, quality stocks.
54
Sector Analysis
Big Chart
The Big Chart at the sector level enables you to visualize which sectors may be rotating into favor
(attracting more institutional money) and which may be rotating out of favor (losing institutional
money). The more money flowing in, the lower the score. A ranking on the Big Chart tells how the
sector has performed versus all other sectors.
The following is the scoring
and coloring system for the
sector level Big Chart.
1-2 = Green
3-4 = Yellow
5-10 = Red
55
Sector Analysis
Big Chart (continued)
Sectors in the Big Chart are commonly viewed as either strong, neutral, or weak if they do
the following:
Sector
General Rules
Strong
Green Ranking (1 to 2)
Consistent Decreases in Numerical Rankings
Neutral
Yellow Ranking (3 to 4)
Consistent Yellow Numerical Rankings
Weak
56
Sector Analysis
Under and Outperforming the Market
Analyzing sectors can be done in ProphetCharts with the comparison charts you learned about in
the previous activity. The comparison chart allows you to see how well the sector has performed
compared to the S&P 500.
Comparison features are valuable resources because they tell you if a sector is under or
outperforming the market. Underperforming means the sector is returning less than the market
and outperforming means its returning more than the market. Of course, you want to be finding
sectors, industry groups, and stocks that outperform the market.
Lets review some comparison examples of sectors with the S&P 500. Well use the S&P 500 to
represent the market.
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Sector Analysis
This example compares the
Materials sector (black line)
to the S&P 500 (blue line).
Here you can see that both
the S&P 500 and Materials
are downtrending. Also
the Materials sector is
underperforming the S&P 500,
which means it probably isnt
the best sector to search for
quality industry groups.
Now compare this example to a
more bullish sector.
58
Sector Analysis
The Consumer Staples sector
(black line) in this example
moved sideways when the
S&P 500 (blue line) was
downtrending. This sector is
considered bullish here because
it is outperforming the S&P by
showing higher returns for the
same time period. This sectors
industry groups have a higher
likelihood of uptrending because
of the sectors relative strength.
There is one main take away
from these two examples:
find sectors that outperform the market.
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60
Trading Assignment:
Conducting a Sector Analysis
Directions
Sector
Symbol
Materials
$BASICM
Consumer Discretionary
$CYCLIC
Energy
$ENERGY
Financials
$FINANC
Health Care
$HEALTH
Industrials
$INDUST
Consumer Staples
$NONCYC
Technology
$TECHNO
Telecommunication
$TELCOM
Utilities
$UTILIT
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Big Chart
Best & Worst Industries list
Well discuss each in more detail, but well start with the Big Chart, available in the Investor
Toolbox under the Market 360 link or Industry Group section. You learned about the sector
level big chart in the Sector Analysis section. The Big Chart at the industry level tells you which
industries are attracting or losing institutional investors (i.e., organizations such as banks,
insurance companies, retirement/pension funds that pool large sums of money to invest, etc.).
The Best & Worst Industries list allows you to find the best-performing industries during various
time periods and observe the performance of stocks in those industries. Knowing which of
the 154 industries are strong right now allows investors to invest with more control and helps
increase their probability for success in finding quality stocks.
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1-32 = Green
33-65 = Yellow
66-154 = Red
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General Rules
Good
Neutral
Poor
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70
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Trading Assignment:
Conducting an Industry Group Analysis
Directions
1. From the Investor Toolbox, select Big Chart
2. Recall the top three sectors from the previous assignment
3. Find the three best industry groups within each of the top three sectors
4. If you own Coaching services, call your coach or join an Online Coaching session to discuss
what youve identified as the best industry group and why
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ETF Symbols
So how do you trade ETFs? You can analyze ETFs much the same way you do with individual
stocks by typing the ETF symbol in the search box. Market 360 shows ETF symbols associated
with sectors and market indicies. Clicking the ETF symbol in the ETF column opens the Corporate
Snapshot for the ETF.
The image below shows
the ETF symbols for the
10 sectors displayed in
Market 360.
78
ETF Example
Lets take a moment to run
through an example. If I was
reviewing sectors and found
that the Energy (XLE) sector
was outperforming the market,
I could invest in an ETF that
mimics the Energy sector.
By entering the symbol, XLE, in
the search feature, I have the
option to paper trade the ETF
in paperMoney.
79
ETF Review
Finding stocks is similar to finding a needle in a haystack at times. But when you are able
to start trading ETFs by choosing from a small pool of markets, then progressing to a midsized pool of sectors, then a larger pool of industry groups, and finally on to that enormous
ocean of stocks, you ease yourself into trading and the top-down analysis process.
It is also important to give yourself time at each level (markets, sectors, industry groups, stocks)
to practice before progressing.
Now that we have completed the ETF part of this lesson, lets update our investing plan.
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83
Lesson Review
In this lesson you learned that the top-down analysis approach helps you:
Identify uptrending stock sectors using ProphetCharts and the Big Chart
Select industry groups that are receiving institutional attention by using the Big Chart and
Best & Worst Industries list
You also learned that some investors may choose to focus on index or sector ETFs as a way to
invest in stocks with a better degree of diversification. Finally, you updated your investing plan
with the top-down rules that best suit your investing style and preferences.
The top-down approach leads you to finding a single stock. The next lesson will teach you how to
analyze a stocks fundamental scores once you have found it.
84
Introduction
In the previous lesson, you focused on how to
identify potential watch list stocks by using a topdown approach, all the way up until actually selecting
a stock. The top stocks in an industry group are
determined by their fundamental strength.
Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
86
87
88
Phase 1
.Phase 1
The Phase 1 score is the first step in a fundamental analysis.
To calculate it, the Investor Toolbox examines 13 criteria and
returns a score presented as a ratio7/2, for examplewith
the number of positive readings listed before the number of
negative readings.
When looking at a stocks Phase 1 score, pay close attention
to the first number because its the number of good Phase
1 scores. With the criteria used, a stock may be generally
considered a candidate for further examination if it shows a
positive score of five or higher. Each stocks Phase 1 score is
updated every 24 hours.
Passing Phase 1 Score: Five or higher
90
Calculations
Look at how various items in Phase
1 are scored by the computer to
determine green and red arrows.
The automated scoring on the
Investor Toolbox makes scoring
Phase 1 easy. Obviously the more
green arrows the better. Phase 1
scores with at least five positives
(or green arrows) tend to have better
growth prospects. If a Phase 1 score
has five positives or better, it will
show a green arrow right by the title,
meaning that the stock has passed
Phase 1.
Phase 1 Criteria
Positive
Negative
P/E Ratio
620
> 40 or < 6
30 or lower
70 or higher
Positive
Negative
20% or more
10% or less
Above 1.2
Below 0.8
Acc/Dist Current
60 or higher
40 or lower
Positive
Negative
Debt/Equity Ratio
20 or lower
Above 100
Insider Trading
Positive
Negative
EPS Rank
70% or higher
30% or lower
Price Rank
70% or higher
30% or lower
Group Rank
70% or higher
30% or lower
91
Phase 1 Review
Investools has made it easy for you to quickly determine
if a stock has passed Phase 1. Remember that the Phase
1 indicators help you determine a companys financial
growth and stability potential. You also learned that a good
Phase 1 will have at least 5 positive scores. Now that you
understand Phase 1 basics, lets move on to Phase 2.
92
Phase 2
Phase 2
Phase 2 is a systematic, repeatable process that looks more closely at a companys
fundamentals. It has been completely automated by the Investor Toolbox.
With the Phase 2 scoring system, a stock either scores well or it doesnt. Before watching a stock
for a potential buy signal, the stock must score well in Phase 2.
94
Phase 2
When scoring Phase 2, evaluate the following criteria:
Volatility: Shows how fast the stock has moved up and down on a daily, weekly, and monthly
basis. Scoring volatility helps investors determine how comfortable owning the stock will be.
News (not pictured): Measures whats happening with a company at the present time. Recent
company news can affect the overall Phase 2 score positively or negatively.
95
Phase 2
Scoring Phase 2 involves giving individual numbers to each component: Estimates and Financials
(F/E), Price Pattern, Volatility, and News. The automated Phase 2 scoring uses a four-point scale,
similar to how most schools report grades. A 4.0 is a strong A and 0.0 is a failing grade, or F.
The following determines a passing Phase 2 score:
Phase 2 Criteria
Score
F/E
3.25 or higher
Price Pattern
2.5 or higher
Volatility
3.0+ (conservative)
1.0- (aggressive)
News
Pass
Now lets spend time learning more about each Phase 2 criteria and scores.
96
F/E
The F/E score is the average of the Financials and Estimates scores. Lets learn about each separately.
Financials
To determine the Financials score, there are four things that are considered.
Each of these four considerations are included on the Financials page in the Investor Toolbox for
you to review.
97
F/E
Financials
In the Corporate Snapshot, if you click Financials under
the Phase 2 header located in the left navigation bar, it will
take you to a stocks financials overview.
For more specifics on how each score is determined, see the
Additional Information section at the end of this lesson.
98
F/E
Estimates
The Estimates score, also known as Earnings Estimates, is the process that looks at what analysts
are saying about the companys future earnings growth potential. If you click Earnings Estimates
under the Phase 2 header on the left navigation bar in the Corporate Snapshot, it will take you to
a stocks financials overview.
For more specifics on how these scores are determined, see the Additional Information section
at the end of this lesson. Now lets move on to the next Phase 2 criteriathe Price Pattern score.
99
Price Pattern
As previously mentioned, the Price Pattern score determines
which way the stock is moving (up, down, or sideways) on a
stock chart.
The Investor Toolbox compares one-year and five-year charts
to determine an overall Price Pattern score, with the most
recent price movements carrying more weight.
100
Price Pattern
To score 4.0 (A), the stock must
have been moving upward
on both one-year and fiveyear charts. If the stock was
primarily moving sideways, it
scores 2.0 (C). If the stock was
moving downward, it scores
0.0 (F).
A passing Price Pattern score
is 2.5 or higher. Now, lets look
at the Volatility score.
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Volatility
The next step in this systematic process is to assess the
Volatility score, which indicates risk and measures the
magnitude of a stocks price movements up and down in a
given time period. The Volatility score provides an idea of
how wide the stocks price swings may be in the future.
Looking at a charts price movements can be helpful in
preparing for the experience of owning a particular stock.
On average, monthly price movement of 10% to 20% is
considered normal for some stocks, but for others, the
price may fluctuate even more.
Passing Volatility
Score: 3.0 or more
(conservative)
1.0 or less (aggressive)
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Volatility
The Investor Toolbox scores Volatility based on how a stock compares to the baseline average.
To arrive at this average, the system looks at the price movement of all optionable stocks during
the past year and measures how fast they move up and down on a monthly basis.
The system then does the same analysis on the stock that the student is analyzing and compares
its volatility to the baseline average. The Investor Toolbox then calculates the Volatility score for
that stock according to the following criteria:
If the stock has the SAME or has LESS volatility as the large basket of stocks, it scores 4.0
The lower the volatility score, the MORE volatile the stock is
With some understanding about the Volatility score, lets learn more about how the News score
is determined.
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News
The last step in determining Phase 2 is the News score.
Positive or negative, news may impact the Phase 2 score.
News Score: Pass
While earnings may refer to results that are months past,
news offers information about what is happening with
a company right now. When examining the news, students should determine whether the
information is good or bad in terms of how it might impact the stock.
Good News: News is considered good when a company announces it beat earnings estimates,
received a significant contract, opened new facilities, and so on. Such events might indicate that
the company is moving in a direction of increased revenue and earnings, which is always good.
Bad News: News is considered bad when a company doesnt meet earnings estimates,
someone files a class action lawsuit against the company, or it loses a major contract. These
kinds of events might negatively impact the stock.
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The Headlines
To read the news within the Investor
Toolbox, go to the Corporate Snapshot
page for any company (found by clicking
the stock symbol). The Company News
section is located at the bottom of the
page, after the stock chart and industry
group information.
Begin by reading headlines for the
companys name or stock symbol. These
may be generally positive, like earnings
reports, new product announcements, and
so on, or generally negative, like a drop in
earnings. If you want to read an entire
news story, click its headline to load
the full article.
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Phase 2 Review
While having a good Phase 2 score doesnt guarantee the stock will go up, it does suggest a strong
financial company. When conducting a Phase 2 analysis, remember to look for the following:
Phase 2 Criteria
Score
F/E
3.25 or higher
Price Pattern
2.5 or higher
Volatility
3.0+ (conservative)
1.0- (aggressive)
News
Pass
Now that you understand how to calculate Phase 1 and Phase 2 scores, complete the following
three tool masteries and a trading assignment aimed at helping you deepen your understanding
of Phase 1 and Phase 2. Following which, for those students interested, is additional information
on the F/E score. All other students can progress to the investing plan update section.
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Trading Assignment:
Analyzing Phase 1 and Phase 2
Directions
1. Hover over the Investor Toolbox and select Searches
2. Select and run the Great Earnings, Sales and Cash Flow Growth search
3. Review stocks that resulted in the search
4. Add stocks to your watch list that have passed Phase 1 and Phase 2 criteria and have a solid
uptrend
5. If you own Coaching services, call your coach or join an Online Coaching session to discuss
your choices and share your rationale
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In the Mean row, look for the year-over-year earnings estimates to increase. This means the
number in the Next Fiscal Year End column should be larger than the number in the Current
Fiscal Year End column.
In the Mean row, look for quarter-over-quarter earnings estimates to increase. The Next
Quarter End number should be larger than the Current Quarter End number.
In the Mean row of the Next 5 Year Growth column, look for a number above 20%.
In the Mean Change row, positive numbers (upgrades) are good, and negative numbers
(downgrades) are cause for concern. Score the first four numbers from left to right as a unit,
not individually.
Wall Street Estimates, the first section of the Estimates, scores 3.0 (B).
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In the Last 5 Years Actual column, look to see if the number in the Company row is larger than
the number in the Industry row.
In the Current/Last column, look to see if the number in the Company row is larger than the
number in the Industry row.
In the Next/Current column, look to see if the number in the Company row is larger than the
number in the Industry row.
In the Next 5 Years column, look to see if the number in the Company row is larger than the
number in the Industry row. If it is, keep the score the same. If it is not, drop the score one point.
Company vs. Industry EPS Growth Rates, the second section of the Estimates, scores 4.0 (A).
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In the first row, look to see if the number in the Actual column is larger than the number in the
Estimate column.
In the second row, look to see if the number in the Actual column is larger than the number in
the Estimate column.
In the third row, look to see if the number in the Actual column is larger than the number in
the Estimate column.
In the fourth row, look to see if the number in the Actual column is larger than the number in
the Estimate column.
In the fifth row, look to see if the number in the Actual column is larger than the number in the
Estimate column.
Overall, AAPL scores 4.0 (A) in Historical Surprises, the third section of the Estimates score.
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1.01.5 = A
1.62.5 = B
2.63.5 = C
3.6+ = F
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122
3.0 (B)
4.0 (A)
4.0 (A)
4.0 (A)
15.0
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Return on Equity
Growth Rates
Revenue
Earnings per Share (EPS)
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4.0 (A)
3.0 (B)
4.0 (A)
4.0 (A)
15.0
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Phase 1 = 5 or higher
F/E = 3.25 or better
Price Pattern = 2.5 or better
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Lesson Review
Fundamental analysis helps investors know what to trade. We encourage you to build watch lists
consisting of stocks that meet the criteria as outlined in your investing plan. The idea is to create
a list of stocks in good industry groups with strong fundamental scores for potential candidates.
These stocks should remain in a watch list until entry signals appear.
In addition to using the top-down approach to select stocks, learning how to use various searches
for more fundamentally sound companies can help. The next lesson introduces other ways to
search for stocks to build watch lists.
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Introduction
In the previous lesson, you learned how to evaluate
a stock using fundamental analysis. You discovered
that the Investor Toolbox will actually do most of
the hard work, making this analysis easy.
While there are various searches for building a watch
list, in this lesson we focus on two main searches
found in the Investor Toolbox:
Prebuilt Searches
Global Search
Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal
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Prebuilt Searches
Prebuilt Searches
The Investor Toolbox offers many prebuilt searches to help investors find potential investment
candidates. Each prebuilt search looks at all stocks in the database using specific screening
criteria and displays the top 25 stocks that most closely match the criteria of the chosen search.
At the click of a mouse and based on the search criteria, 25 of the best-performing stocks from
the entire database appear in seconds. Consider using these results to choose stocks to perform
a fundamental analysis on. Those that pass the analysis may be watch list candidates.
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Industry: The market industry of which the company is a part; each symbol is a clickable link
that launches the industry group Corporate Snapshot for that industry
Symbol: The ticker used to represent a company; each symbol is a clickable link that launches
the Corporate Snapshot for that security
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Options: Signifies whether a particular stock offers options; this is a clickable link that
displays options available for that company, if applicable
Price Pattern: Automatically measures the current direction of a stocks price pattern
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Symbol
Industry
Options
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Symbol
After a stock has been selectedApple Inc. (AAPL) will be used for the purpose of this example
click the stock symbol link to load its Corporate Snapshot.
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Corporate Snapshot
The default view of the Corporate Snapshot is a one-year chart, with the most recent month
appearing on the right side of the graph.
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Button
Time Frame
1-10 day
minutes, hours
days
2-5 years
weeks
10 years
months
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Industry
Go back to the results page and look at
the Industry column.
Each industry is distinguished by a sixletter ticker symbol that begins with a
$. Clicking the symbol for the industry
($CMPTRS in this example) brings up
a chart that illustrates how well that
industry has been performing in the
recent past. You can also see a chart
of the industry by typing the symbol
(complete with $) into the Symbol or
Search field in the upper-right corner
of the Investools website.
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Industry
The industry chart depicts which direction the group was recently moving and if institutional
money may have been moving into stocks in that group. Industry movement often affects stock
movement, so some investors prefer to look at the direction the industry has recently been
moving when considering investing in a stock.
There are times when you might find what looks like an excellent investment opportunity, where
everything about the stock looks great except the trend of its industry. Such circumstances
imply that, in the current time frame, any increase in the price of the stock must occur
independent of the industry group. The company may have to swim against the current, so to
speak, to attract investors.
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Industry Example
Continuing with the example of
AAPL, from the results page, click
the ticker symbol for AAPLs industry,
$CMPTRS, to launch its graph.
The industry group was trending
upward but has recently started to
trend sideways.
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After making selections, click the Portfolio or Watch List button, depending on where those
stocks should be saved for future reference. After clicking the button, a pop-up box will appear.
To finish, click the Portfolio or Watch List button in the pop-up box.
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Prebuilt TurboSearch: A group of prebuilt searches using the Global Search engine.
Strategy Searches: Four categories of searches built by investing coaches on the Power
ProSearch engine for different investing strategies.
Green Red Arrows Search: A search to find recent stocks that have either three green
arrows or three red arrows.
ETF Searches: Searches to find exchange-traded funds (ETFs) exhibiting specific behavior.
Options ProSearch: Searches built to find stocks with options and options with specific
pricing and criteria.
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Global Search
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Other Variables
Through the remainder of this course, you will learn more about the importance of industry
groups and investing in stocks that are considered to be in strong groups. You can restrict the
results in Global Search to show only stocks containing acceptable F/E, Price Pattern, and
Volatility scores, as well as those in strong industry groups. Industry group criteria can be added
to Global Search as follows:
In the Industry Group Criteria section of Global Search, choose a Big Chart indicator
In the Big Chart Indicator list, select Big Chart Current Rank
From the Minimum list, select 1
From the Maximum list, select 32
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Prebuilt searches: One-click searches that help locate the top 25 stocks that most closely
match the criteria of the specific search
Global Search: Customizable search that prepares a list of stocks based on positive Phase 1
and Phase 2 scores
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Decide how often you want to conduct searches and make note of this in your investing plan
Build your watch list and then focus on entry signals for the stocks in your watch lists
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Lesson Review
In this lesson, you explored various searches and searching tools in the Investor Toolbox that
will allow you to build watch lists according to your investing plan. These searches included
Most Popular Searches, Strongest Stocks in Multiple Time Periods, and Global Search.
You may find that part of your investing plan routine will be to determine which day of the week
you want to conduct searches and build watch lists. Searching for stocks every day would be a
less effective use of time, which could be spent monitoring watch lists for entry signals. The next
lesson will focus on how to recognize these signals as they occur.
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Step 5Conduct a
Thorough Technical Analysis
Charts not only tell what was, they tell what
is; and a trend from was to is (projected
linearly into the will be) contains better
percentages than clumsy guessing.
R. A. Levy
Introduction
In previous lessons, you learned that, after outlining
certain fundamental factors for your investing plan,
you can use various searches to help find stocks to
build watch lists. Then, monitor this list on a daily
basis for entry opportunities. But how do you know
when to enter?
This lesson will help you recognize entry and exit
signals for a stock using technical analysis. Technical
analysis is the study of price and volume movement
on a stock chart to identify trend direction, support
and resistance levels, and momentum changes as
a means to making informed investing decisions.
Understanding how to read different stock chart
types is critical to technical analysis.
Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals
for a stock trade using technical
analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal
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Introduction
Youve already been introduced to technical analysis way back in Step 2Start Analyzing from
the Top Down by learning to define trend in a broad market index and a stock sector. Now you will
add to your knowledge by increasing your ability to spot trend. Youll also learn how to identify
entry and exit signals.
Due to the nature of this content, the bulk of this lesson will be taught in video format to give you
a better understanding of how to use technical analysis tools. The three main videos you will view are:
We will begin this lesson with the Trend, Support, and Resistance video. This will be followed by
three activities and a trading assignment.
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Trading Assignment:
Identify Support and Resistance
Directions
1. Select the Watch Lists link from the Investor Toolbox
2. Open at least 10 charts for stocks in your watch list in ProphetCharts
3. Identify the trend
4. Draw support and resistance lines
5. If you own Coaching services, call your coach or join an Online Coaching session to discuss
where youve identified support and resistance on your individual stocks
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Trading Assignment:
Identify Entry and Exit Signals
Directions
1. Select the Watch Lists link from the Investor Toolbox menu
2. Identify stocks with entry signals and place an order in paperMoney
3. Identify stocks with exit signals and readjust the stop order in paperMoney
4. If you own Coaching services, call your coach or join an Online Coaching session to discuss
your entries and exits and share your rationale
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Identify support and resistance by analyzing stocks or ETFs in multiple time periods (time
periods ranging from six months to five years)
On a daily chart, enter the trade when the third green arrow appears
Breakout Entry
On a daily chart, if a stock or ETF is trending sideways, wait and enter the trade on
1. A breakout of a sideways trend
2. A volume surge of 150%
3. Three green arrows
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On a daily chart, when the third red arrow appears, move the stop loss up 3% below the
lowest price at which the stock traded
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These are just some examples of rules to consider adding to your investing plan. No matter what
rules you include, they should be clear and concise, making investing easier, and remove some
emotional attachment that often accompanies stock purchasing.
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Lesson Review
In this lesson, you discovered how to identify uptrending stocks, entry signals and exit signals.
You should now be able to identify when to enter and exit a stock position.
Practice identifying support and resistance levels, pinpointing trends, and determining where to
set stop-loss and profit targets. Portfolio management conceptsunderstanding how much to
buy and how it can fit within your portfolio frameworkwere also introduced. The next lesson
will build upon these concepts.
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Introduction
In the previous lessons youve learned to identify
what to buy, when to enter, and when to exit.
However, knowing how much to buy is as important
as each of these other steps because no matter
how much research you do and how strong a stock
is, there are times when the stock will lose money.
Therefore, protecting your investment capital
is as important as knowing when to enter and
exit a position.
Lets start this lesson off by watching a short
video. Then we will discuss money management.
Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position size
for a stock trade
Set up daily and weekly routines
Define criteria for and create a trading
journal
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Money Management
Money Management
Money management is the practice of allocating capital
among various investments to avoid risking too much of it
in any one trade. The most important money management
task is to properly determine the size of the investment.
Investors who can enter a trade with the right amount of
risk have a much better chance of a profitable exit. This
notion is even more important in bear market conditions
like those of 2008 and 2009.
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$50,000
1%
Stock Value
$10.00
Stop-Loss Amount
Total Invested
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Position Sizing
The big question is, how many shares should an investor buy? If the approximate buying price is
known, and the stop-loss order has been set, then determining the appropriate number of shares
to buy becomes simple. An investor should buy only enough shares so that if the stock loses value
and hits the stop order, the value loss is not uncomfortable.
A good rule is to never lose more than % to 1% of the total account value on any single trade.
This does not mean putting only % to 1% of an account into each trade; it means you should buy
only enough shares so that the maximum loss of value is % to 1% of the total account value if
the stock hits the stop-loss order and triggers a market order.
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Position Sizing
For example, an investor with a $100,000 account should never lose more than $500 to $1,000
(% to 1%) on any one trade. Beginning investors should use a smaller percentage until they are
consistently making money, after which the percentage can be increased.
An investor with an account that has less than $10,000 in it may feel the need to be more liberal
with this rule and accept more loss. Investors who do so are taking on significant risk. Investors
whose accounts grow to $20,000 or $30,000 could then consider holding more conservatively to
the 1% rule. The larger an investors account grows, the more likely that investor will feel the need
to reduce that percentage even further.
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3. Calculate Risk
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Drawdown Effect
Investors may make a profit on half of their investments;
however, over the course of 1,000 trades, they might experience
a string of 10 losers at least once. Suppose an investor did have
a losing streak like this. How much money would she lose? If she
risked as high as 2% on each trade, she would be down 20%.
More than 20% drawdown requires that an investor make large
percentage gains to recover. Remember that a good rule is to
never lose more than % to 1% of the total account value on
any single trade because the larger the drawdown, the larger
the percentage gain will be required to recover from the loss, as
illustrated in the table to the right.
Lets practice determining a proper position size by completing
the following tool and concept masteries. Here youll learn how
to make these calculations using a Position Size Calculator.
Following which, you will complete a position sizing trading
assignment.
2015 TD Ameritrade IP Company, Inc.
% Loss to
Account
% Gain
Required to
Recover Loss
10%
11%
20%
25%
30%
43%
40%
67%
50%
100%
60%
150%
70%
233%
80%
400%
90%
900%
100%
Broke
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Trading Assignment:
Calculate Your Position Size
Directions
1. Go to the Portfolios section of the Investor Toolbox menu or your paperMoney account
2. Go through the four steps of position sizing to determine if you need to adjust the positions
on your trades
3. Use the Position Size Calculator in the investing plan
4. If you own Coaching services, call your coach or join an Online Coaching session to review
your position sizing calculations and share your rationale
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Never risk more than 1% of your portfolio on any one particular trade (this rule may be as low
as % or as high as 1%, but it should be definitive)
Stocks should be purchased from at least five different sectors before choosing a second
stock purchase in a particular sector
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Lesson Review
To help protect your investment capital, consider the following:
Sufficiently plan your trades so you know how much risk you are prepared to take
Select the right position size to fit your desired risk
Use stops that correspond to your risk and position size
Create and maintain an investing plan that lists rules and guidelines to be followed
You have learned that money management is a key factor to successful investing. It is critical to
recognize the advantage of a properly managed, well-diversified portfolio, because protecting
capital ensures that it will be around to grow in the future. In the next lesson, we will review the
principles of managing a portfolio.
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Step 7Manage
Your Portfolio
I measure whats going on and I adapt to it. I
try to get my ego out of the way. The market
is smarter than I am, so I bend.
Martin Zweig
Introduction
In the previous lesson, you learned how to protect
your capital. In this lesson, you will learn more about
calculating portfolio heat. You will also learn about
portfolio management tools and how to identify daily
and weekly routines necessary to manage a portfolio
and identify criteria used in a trading journal.
Lets start by watching a short video and then move
on to discussing portfolio heat.
Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal
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Portfolio Heat
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Stop Loss or Risk Per Share: Difference between purchase price and stop-loss price
Trade Risk: Position size multiplied by Risk Per Share (should be equal to or smaller than
portfolio risk)
Maximum Invested per Trade: Portfolio amount multiplied by the maximum investable
percentage (10%)
Portfolio Heat: Maximum loss or drawdown if all positions were to hit your stop losses
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$50,000
1%
Portfolio Risk
Stock Value
$10.00
Stop-Loss Value
$7.50
Position Size
Trade Risk
$10,000 (5 x $2,000)
Portfolio Heat
$2,500 (5 x $500)
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Market Diversification
Proper money management is an extension of diversification. The difference is that while money
management prevents losing too much money in any one trade, diversification prevents losing
too much money in a particular industry group or sector.
Highly correlated stocks, or stocks that tend to move at the same time in similar directions, can hurt
a portfolio if the sector turns sour. To individual investors, diversification means that they have to
spread their risk across a broad group of stocks or investment vehicles. As your investing talents
grow, you may eventually manage a diversified portfolio including options, foreign exchange, fixedincome markets,and stocks.
Remember the principles of diversification still apply to stocks found using the 7-Step
Investing Formula.
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Trading Assignment:
Calculate Your Portfolio Heat
Directions
1. Calculate the position heat for each stock in your portfolio
2. Tally each position heat to determine your current portfolio heat
3. If you own Coaching services, call your coach or join an Online Coaching session to review
your portfolio heat calculations and share your rationale
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Creating a Portfolio
To access portfolios already set up or to create a new portfolio, click the Portfolios tab in the
Investor Toolbox.
This automatically brings up the existing default portfolio, if there is one. If accessing this area
for the first time, a new, empty portfolio is brought up.
To create a new stock portfolio, click the Create New Portfolio button or the Create Portfolio link
in the left navigation menu under the Portfolio heading.
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Creating a Portfolio
After opening a new portfolio page, clicking the Create New Portfolio button lets you change the
portfolios name. A portfolio should be named in a way that suggests what stocks are in it (e.g., a
portfolio of bullish stocks might be named Bullish Stocks).
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Adding Symbols
Next, determine whether this particular portfolio is the default (the portfolio that automatically
comes up when the Portfolio tab is clicked). Clicking Set it to Default will do this.
After making these selections, you can enter stocks into the portfolio. Clicking the Add Symbol
button will start this process.
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Adding Symbols
Now, you can add stock symbols by clicking in the Add Symbol(s) field and typing them in.
Multiple symbols can be added at one time by separating each with a comma (there is no need to
put a space either before or after the comma).
After entering ticker symbols, click the Add button. This expands the window with the new symbols.
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Initial SharesThis is the number of shares purchased when tracking an actual position.
This should not be used if creating a watch list.
Transaction PriceThis is the price paid for a stock in an actual position. Again, this should
not be used if creating a watch list.
CommissionThis is the commission paid on a stock purchase (if any). This also should not
be used if creating a watch list.
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Transaction TypeThis is the type of transaction made on an actual position. Long indicates
the stock was bought. Short indicates the stock was shorted, or sold. This also should not be
used if creating a watch list.
Transaction DateThis is the date on which the transaction of an actual position was
completed. This also should not be used if creating a watch list.
NotesThis is for making notes regarding the stocke.g., why it looks like a promising
stock to watch.
CheckboxThis tool allows you to create an alert for a stock or delete it from your portfolio.
This should be followed by clicking either the Create Alert(s) or Delete Symbol(s) buttons at
the top of the tool.
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Alert Choices
An alert requires entering an email address in the upper-right cornerthis is the address to
which the alerts will be sent. One or all of the following eight alerts can be set for the stock:
Price Low BreakoutSends email when the stocks price breaks below a specified level
Price High BreakoutSends email when the stocks price breaks above a specified level
Technical Breakout (MACD)Sends email when the MACD indicator shows a green or red arrow
Technical Breakout (moving average)Sends email when the moving average shows a green
or red arrow
Technical Breakout (stochastic)Sends email when the stochastic indicator shows a green
or red arrow
Earnings Release (week ahead alert)Sends email one week before the company is
scheduled to release its earnings numbers
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Alert Choices
Earnings Release (actual earnings release)Sends email the day the company is scheduled
to release its earnings numbers
News AlertSends email when company-specific news is released (Note: some companies
are frequently in the news, and so this setting may trigger quite a few emails throughout the
course of a day)
After the alerts are set, they can be saved by clicking the Save button.
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Altering an Alert
These alerts can be accessed at any time by clicking the Alerts tab at the top of the portfolio, or
the Alerts link in the left navigation menu.
Alerts can be edited or deleted by placing a checkmark in the box to the right of the alert, then
clicking either the Delete Alert(s) or Edit Alert(s) button.
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SymbolClicking the ticker symbol for the stock shows the stocks Corporate Snapshot
MACD 8-17-9 Day BreakoutNumber of days since the last green or red arrow appeared
on the MACD indicator (positive numbers indicate green arrows, while negative numbers
indicate red arrows)
Stochastic 14-5 Day BreakoutNumber of days since the last green or red arrow appeared
on the stochastic indicator (positive numbers indicate green arrows, while negative numbers
indicate red arrows)
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30-Day Moving Average BreakoutNumber of days since the last green or red arrow
appeared on the 30-day moving average (positive numbers indicate green arrows, while
negative numbers indicate red arrows)
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Routines
After learning how to analyze stocks from a fundamental and technical basis, developing routines
for trading provides investors with consistency in the types of stocks they find as well as the
returns from stocks over time. Creating a routine and following it, keeps a watch list full and up-todate with potential trading opportunities. It also creates a repeatable pattern for daily, weekly, and
monthly activities. As you study these routines, consider adding them to your investing plans. When
the routines are pushed aside, trading results and risk management can suffer. An important part of
your routine should be to progress in your investor education by doing the following:
The following pages provide examples of additional daily and weekly routines.
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Daily Routines
Look at watch list for set-ups and triggers (set-ups = stock setting up to give an entry signal
in the next few days, while trigger = the actual entry signal)
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Weekly Routines
Review which sectors and industry groups you would use to find stocks to paper trade
After creating easy-to-follow routines, it is time to integrate them into an investing plan and
document trades in a trading journal.
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Three and Three Rule: Monitor open positions for three red arrows (follow the three and
three rule)
Market Posture: Determine the market posture by analyzing major indices and confirm with
the Market Forecast graph
Watch List: Survey your watch list or portfolio for three green arrows or breakout entry signals
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Search for Stocks: Every couple of weeks, rerun your search to update your watch list
Coaching: Call the Coaching Team often with any questions
Education: Continue education (courses, Trading Rooms, and Online Coaching)
The course investing plan has now been taught in its entirety. You downloaded the course investing
plan at the beginning of the course and should now be able to use it freely. If you have concerns or
questions, you are welcome to reference the course or contact our Coaching Team at Investools.
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Definition of Success
Watch List Criteria
Entry Rules
Exit Rules
Money Management
Routines
250
Lesson Review
In this lesson you focused on the principles of portfolio management by exploring concepts of
money management, position sizing, portfolio heat, and diversification. You should also have
finished up your investing plans for stocks based on concepts taught in this course. And you
should have started a trading journal to measure the success of each plan. Testing investing plans
through paper trading will help lead to success as you move into the markets.
At this point youre ready to take the lesson seven assessment and progress on to the Stock
Investing Review where you will take the final assessment. In completing this course, you are
well on your way to becoming a successful investor.
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Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal
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Prepare to be an Investor
Start Analyzing from the Top Down
Conduct a Thorough Fundamental Analysis
Search for Additional Strong Stocks
Conduct a Thorough Technical Analysis
Protect Your Investment Capital
Manage Your Portfolio
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255
Updating Your
Education Plan
Good luck is what happens when preparation
meets opportunity, bad luck is what happens when
lack of preparation meets a challenge.
Paul Krugman
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Further Education
If you want some of the same benefits of stocks without expensive stock prices, consider options
as your investing vehicle. Start your options education with the Options Strategies course and
then move on to the Advanced Options Strategies course. These two courses contain a copious
quiver of strategies that can help an investor profit in any market. Speculators and income
collectors can find a number of strategies to help them define risk while increasing returns. These
courses are designed to help you get the most out of the paperMoney platform by using the
powerful analysis tools available.
Students who plan to take control of their financial future have already discovered the power of
education and want to obtain more to maximize their ability to succeed in investing. Whether your
focus is on stocks, options, or any other investment vehicle, you should meet with your Education
Counselor to outline your education plan today.
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Bibliography
Bibliography
Quotations
Buffett, Warren. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.
Eker, Harv T. Secrets of the Millionaire Mind. New York: HarperCollins, 2005.
Krugman, Paul. Stock Traders Almanac 2010. Hoboken: John Wiley and Sons, 2010.
Levy, R.A. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.
Livermore, Jesse. Reminiscences of a Stock Operator. New York: George H. Doran Co., 1922.
Lynch, Peter. One Up on Wall Street. Philadelphia: Running Press, 2001.
Neil, Humphrey. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.
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Bibliography
Bibliography
Rhea, Robert. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.
Williams, H.H. The Quotations Page. 23 September 2010
<http://www.quotationspage.com/quote/929.html>
Zweig, Martin. All About the Market Timing: The Easy Way to get Started. New York: McGraw-Hill
Professional, 2003.
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