Stockfessor

#61 The Power of Frequent Trading — Stock Analysis

The Power of Frequent Trading – Stock Analysis (#61)

Investment analysts and mutual fund managers advise us to buy and hold. Why should we listen to them? Do they practice buy and hold themselves? In view of the turnovers of billions of shares at the stock exchanges everyday, who are the people who do most of the trading? Why do they buy and sell so frequently over days and weeks?

Power of Cash & Stocks
As I said many times before, the power of the big players is derived from two things: plenty of cash to buy and plenty of stocks to sell on a daily basis. This is how they are able to control the stock prices up or down.

As a small player, you are stuck if you spend all your limited money on stocks. Like a sitting duck, you are in fact doing buy and pray, instead of buy and play like the big guys. This is your most vulnerable moment, totally subject to the ups and downs of the market. Can you find a better situation to be in?

The best situation for a small player is some cash to buy and some stocks to sell everyday. It is similar to that for the big guys except that they have plenty while you have some. When the market goes up, you have some stocks to sell for a small profit and for replenishing your cash investment. When the market dips, you can afford to sit on your current stock holdings and buy some more with the surplus cash.

The second requirement is that the stocks you are holding have to be on an uptrend. Otherwise, you are just a dispirited loser as prices continue downward. So you have to make sure that the stocks you buy are on an uptrend.

Small & Frequent Profits
Small frequent profits are usually not appreciated. Let me tell you, they are powerful because they add up everyday. All you need is to look at Googles where they make only one or two cents in advertising for a mouse click. When you operate a coffee shop, you make a small profit one cup at a time. Over a period of weeks and months, you will be able to see handsome profits accumulating.

Another dimension of small frequent profits is the ability to turnover quickly. This enables you to replenish your original cash investments that can be ploughed back into your business again and again.

Figures to Illustrate
Let’s suppose the following:
Original capital: $10,000
Stock on uptrend: ABC at $5 a share.

If you do buy & hold, you spend all your investment on ABC and buy 2000 shares. You pray that the price will hit $10 next year. Suppose your prayer is answered and you make $10,000 in a year on $10,000 capital.

Now, you are a frequent trader who has followed the price movement of ABC for weeks or months. You buy in batches of 400 shares each time instead of one big batch all at once. In this way, you allow yourself the opportunity to buy more or less 5 times the same stock at different prices.

If you follow the price movement of ABC, you will find that the stock goes up and down hundreds of times over the year. It is not unusual for the stock to vary with a margin of over $0.30 in a couple of days.

If you catch one up-down cycle of $0.30 margin for one batch, your profit is:
$0.30 x 400 shares = $120 each time.
Suppose you can only catch 30 of these cycles within a year out of a few hundreds, your profit is:
$120 x 30 = $3600
With your capital, you have the opportunity to buy 5 batches at different prices, your profit is:
$3600 x 5 = $18,000

The accumulation of these small but frequent short-term profits can easily beat the buy & hold long-term profit. Besides, you will earn more as you gain more insights about the price movements of your stocks.

www.stockfessor.com
October 2009