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Building a Stock Position

Sept. 13, 2010
Donald Berger examines the five points to use in analyzing stock in which you want to build a position.

by Donald R. Berger, DDS, FAAP

When building a long or short position in stocks, you use data from three time frames — daily, weekly, and monthly data. Start out with a test size and increase it to a normal or maximum size using your risk-management strategy. It is important to understand that the short term time frame (in this case, the daily) controls the market as far as distributing a price until it reaches a long-term price control.

There are five points to use in an analysis of the stock in which you want to build a position.

1. What is your view toward this stock? Are you bullish, bearish, or neutral?
2. What is your maximum event risk? What is the worst thing that can happen?
Use the Average True Range (ATR) for a 150-day period of time (equivalent to a quarter or three months). This is used in conjunction with your risk management strategy and overall risk tolerance.
3. Trade location in relationship to price, time, and bet size. What is the best fit?
4. You need a strategy or idea about how to trade that stock. Will you use initiating trades, responsive trades, or a combination of both?
5. What is your tactic or action to execute the trade to build a maximum size. Some of the tactics include reading the bars, pivots, quadrants, etc.

When you change any of the above five steps, the other four will change.

Reading the bars is a tactic or method of acquiring market knowledge and market direction day by day. Understanding the market direction for the speculator is gained by using the true highs and true lows of each individual. Reading the bars is an important skill set to learn.

Understanding pivots and turning points is important to understand in the context of multiple analyses. Pivot analysis has been a long-time domain of the floor and professional trader. You can use tactics of entry and exits at pivots and bar data. You can risk one bar, a pivot, or a valley on the chart. They can also be used for entries and reversals.

Quartile analysis time frames are also important to understand. By using this method of analysis, you can monitor the short term data in relation to the long-term data. The short-term time frame traders move the market until they are stopped by the long-term time frame traders.

Last but not least is to learn "position-building" with weekly or monthly time frame data. What is the best time frame to trade given the movement and behavior of the market? Personal time management is important to a trader and diversification of time frames is necessary for a portfolio of stocks. Some stocks are not worth trading on a daily time frame; however, those stocks may be worth trading on a weekly or monthly time frame. In addition, you can begin to develop a campaign that starts out with a small size of shares and incrementally increases the position size. As risk is reduced, an opportunity to add on to the trade may develop. The focus here is to have a portion of your trades on a larger time frame, which reduces your management time and increases your yield on capital.

Trading is more sophisticated than it seems. Becoming educated about and being strict in your wealth-management strategy allows you to know your downside risk at all times. With time and devotion to learning and understanding the markets, you, too, can become a self-directed investor.

For more information, Dr. Donald R. Berger can be reached by e-mail at [email protected] or by phone at (215) 896-7448. Visit his Web site at