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Tuesday, March 06, 2007

Tradesignum- How to identify good entry levels for buy candidates?

My clients have often asked me what is a good entry level for a particular stock. Here, I like to share with you a step-by-step guide on preparing a buy list with entry prices.

  1. Prepare a list of desired stocks. You can simply glance through the newspaper & highlight those stocks that interest you. Take note of their PE multiples (or, EPS), Price to Book multiples (or, NTA per share) and their Dividend Yield. Having done that, you may want to transfer these details onto a Excel spreadsheet.
  2. Go to Tradesignum (or, your preferred charting software program). I use Quickchart in the office as it is provided free by Kenanga to all its remisiers. At home, I use Tradesignum, which is a website that provides free basic charts for Malaysian stocks & indices. For this discussion, we shall see how we can make use of Tradesignum's basic charts.
  3. When you are at the 'PublicChart' page of Tradesignum, scroll down to the Chart Settings. Set the Price Overlay 1 & 2 to Simple Moving Average ('SMA') for 50 days & 100 days. If you like more price overlays, you can choose a faster SMA (say, 30-day SMA) or a slower SMA (say, 200-day SMA) or a different method of calculating the moving average (say, Exponential Moving Average or, EMA) or, even, Bollinger Bands. The more price overlays that you select (or use), the more crowded the chart would become.
  4. Then, set the 'date range' accordingly. I normally work with 6 months or 1 year of data but you can choose any period that works for you.
  5. Then proceed to key in the name of the stock in the space next to the word 'symbol'.
  6. A quick glance at the chart of any stock will give you a good feel about the direction of the price movement for that stock. Having started out with a shorter time period (say, 6 months or 1 year), then I would immediate switch to a longer time period (say, 2 or 5 years). For an example of how I studied the chart of MMC, I have attached the 6 months' daily chart (Chart 1) and the 2 years' daily chart (Chart 2). From Chart 1, you can see that MMC's medium-term uptrend line support is at RM4.50 while slightly below that is a horizontal support of RM4.25. The 100-day SMA is also around RM4.25. From Chart 2, you can see that MMC's long-term uptrend line support is at RM3.50 while a strong horizontal support is noted at the RM4.00 level. All the support levels (for uptrend line, horizontal line & SMA) should be noted down on the same excel spreadsheet.
Having identify the immediate uptrend line support at RM4.50, you could have acquired MMC yesterday (March 5) at or near the RM4.50 & benefited from today (March 6)'s technical rebounce in the stock & possibly sold off the stock at or near RM5.00 (i.e. at MMC's 50-day SMA). Of course, this is not so easy in real life, but you probably get the picture how charting can aid in your trading or investing performance.


Chart 1: MMC's daily chart for 6 months ending March 6, 2007



Chart 2: MMC's daily chart for 2 years ending March 6, 2007

Updated on March 7, 2007

In order to draw onto the chart, you need to copy the chart & paste it onto a Paint document.

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