RICK BENSIGNOR: Hi, everyone. I'm Rick Bensignor. I'm CEO of the Bensignor Group, a Wall Street institutional consulting firm that works very closely with hedge funds and long-onlys and pension funds, especially with their portfolio managers and traders, to help them better trade around core positions that they have, manage risk across their portfolios, and even become a part-time psychologist for them dealing with their own demons in what goes on in the markets and how they deal with it themselves. I also have a individual investor division of the firm called In the Know Trader. And you can find it at intheknowtrader.com.
Today I want to talk about a topic that so many people need to understand in order to have more success as a trader in the market. So we're going to list five different key steps that you can take in order to up the chances that the trade you put out in the market actually succeeds.
So first step-- and we're going to walk you through this today by looking at slides along the way-- is the sense that you come to a trade having done some basic research, whether it's the fundamental backdrop to the security you're trading. If it's in equity, it would be the fundamentals of the equity. If it's a fixed-income product, you want to understand the interest rate market and what's going on at the time. And of course, in foreign exchange commodities, same type thing.
You want to have the basic backdrop. But when it comes to actually putting capital to work, you need to figure out a bunch of things in order to have a chance that that trade or investment actually makes you money over time. So let's look at step number one.
You need to ask yourself-- and this is critical. And most people don't ever think about this when they go into things. Is this going to be a trade? Or is this an investment? And you need to know the answer to that before you put your capital to work. Don't decide afterwards. If this is going my way, OK, let's make it an investment. There's problems that could easily arise when you switch the mode of what you start out doing.
So the first thing is, decide. Am I trading this? Is this for a few weeks or a few months? Or is this an investment that I'm going to be holding six months from now, 12 months from now, two years from now, and maybe even further? You've got to know that answer before you put your capital to work.
Why do you need to know that answer? Because you need to make sure that the time frames that you're analyzing match up to your intended holding period. So what do I mean? Let's take a look at a chart.
Here is a long-term chart of Walmart. And the part we're going to focus on is in between the horizontal lines that are in purple. That is approximately a 12-year period in which Walmart traded in a range. And it was about a $20 range from the low 40s to the low 60s.
Come 2012, the stock started breaking out above its highs, where we see that upper purple-colored line. This is a long-term chart. To me, the important issue is recognizing that this is on a breakout and then deciding when to get in.
And what I would say to you is, if this is coming, you're looking at a monthly chart. If you're making a decision on a breakout of a long-term pattern, does it matter if you pay 63, 64, or 65? Probably not. You know you just want to get long this stock because it's breaking out to the upside for the first time in 12 years. And of course, at the same time, the market was moving higher, too.
So in a name that had basically gone nowhere in 12 years, it breaks out to the upside. The market is breaking out to the upside. Remember, in fourth quarter of 2011, the market had a sharp sell-off. It's now recovered. This breaks out to the upside. The important takeaway here is that I'm not going to finesse my entry point. I just want to get into this name.
And I actually put this straight on for myself in my own personal account-- and really, one of the few times in life that I don't try to finesse because this to me was a long-term entry point. And I just actually bought at the market, also something I don't do often. I usually use limit bids for myself because I want to be a buyer at a particular price. In this case, it's a longer-term trade. And I just know I want to get long.
Here's the next chart. And this is Walmart up to present. You can see in the yellow circled area, that was the breakout. So I got long for my own account in the 64 handle-- somewhere between 64 and 65. I don't remember the exact price-- playing for a decent up move that should come over the next couple of years.
The stock goes from the breakout point in the low 60s to as high as 90. I myself got out in the low- to mid-80s. I don't remember the exact price. But I remembered that it had been in a $20 range for 12 years. I played for a $20 upside. I take half off in the mid-80s. It goes to 90. Then we get a big sell-off in 2015. And the stock actually breaks back underneath where it had broken out from.
But I wasn't terribly concerned. A, I had taken half off the table. B, I thought-- and I've seen this before, where it breaks back into a breakout point enough that weak-handed longs will often get out. And I actually got my wife to buy when it touched down to the 200-month moving average, that green line. So she came in and actually gotten a better entry point than I did.
You can see since then the stock got up to as high as about 110. And to this point, I still have half on. When I'm playing a long-term trade, an investment idea, I'm not going to focus on short-term charts to help me figure out when to get in.
Now let's look at the flip side. Here's a multi-day chart of Amazon. And this is a five-minute chart. So let's say I'm a short-term trader. And I notice towards the right-hand side where we get that gap lower opening. And we sell down to the two horizontal lines that represent what had been an unfilled gap.
So the stock fills an unfilled gap, comes back up. And then the same day, now it breaks out of all the highs that had just come over the last few days. I'm going to use the breakout for a short-term trade to get into Amazon. And let's say I set this up. I say, I don't know where Amazon's going. But in the next couple of weeks, this should move higher. And in fact, it did.
I'm not going to hold this for months. This was a trade idea on a short-term breakout. I hit my target. Let's say it was-- pick a number-- $40 higher. Good trade. Good short-term trade.
Do I kick myself in the butt because I missed the next $40? I don't because that was not the intention. At the time I put the trade on, it was meant to be a trade, not an investment. If I hit my area that I want to get out, I get out, and I walk away. And I look for the next trade, whether it's in this name or any other name I trade.
So don't mix time frames with the intended holding period. Match them up. Long-term idea-- use weekly and monthly charts. Short term ideas-- use daily charts, intraday charts. Play for the short-term moves.
But don't look at a short-term chart to time entry into a long-term investment. You have a 50-50 chance you miss it altogether because you were too busy finessing your entry point to miss the whole big idea that, hey, this thing is going to break out. It's going to move. That's step number one.
Step number two, determine the prevailing trend direction and key support and resistance levels. Now, this is not always as easy as simply looking at the chart to see if it's moving higher or lower. Generally, if you look at a chart and it starts on the bottom left-hand corner and your chart ends on the upper right-hand corner, fair to say you have a bull market.
And this thing's moving nicely to the upside. If it starts on the upper left-hand corner and ends on the lower right-hand corner, you're in a bear market. It's been moving down.
But it's not always so simple just to make a blanket rule like that because not all charts look that way. What I like to do is take an objective model, something that helps me define am I in a bullish trend or a bearish trend or where am I to help decide. So it's not just my eyes looking, but something else that I believe and that over time helps me decide.
Here's a chart that I'm purposely showing you with no name of the security, no dates on the bottom, no price scale on the right-hand side. I don't want you to know what this is because I don't want it to give you a bias. We look at this chart. And if I asked you the question, is this a bullish chart or a bearish chart, the answer is yes to both questions.
And the answer-- it's yes to both-- is it all depends on what time frame you're looking. If you look at the grand scale of the chart, this has been moving up nicely over time. This is a weekly chart, by the way. It's consolidated over the last several weeks. In fact, it's several months that it's been pulling back.
And if you are somewhat of a short- to medium-term player, you could easily say this stock has topped. And it's in a bearish trend. If you're a long-term player, this chart is in a long-term bullish trend that's consolidating. You've got to be able to figure out, am I in a bullish market or bearish market, because it's going to change how you look at things.
By putting up an objective model-- in this case, it's cloud charts. In Japanese, this model is called "Ichimoku Kinko Hyo." In the Western world, I am generally considered the foremost expert in how to interpret this model. And all books that have been written in English about this come from an article that was written in English back in 2000 that had incorrect information in it.
And I knew it had incorrect information at the time because the publisher of the magazine had come to me to write the article. And I actually decided I wasn't going to. I wasn't going to share everything I knew about this model. So what's available in English is not completely correct.
I like this model very much. I feel over years and years of having used it-- and it's now over 20 years that I've used this model as one of my core models. It gives me a very good clue of which direction the market's in and how to decide when the underlying security flips from bullish to bearish market or from bearish to bullish market.
By looking at this chart, I notice that the recent sell down on the very far right-hand part of the chart is coming into support that gray shaded area called the "cloud." I look back in time. And in the middle of the chart, I see other sell-offs had also bottomed into the cloud. So even though this is a long-term bullish chart with a multi-month pullback, I'm more inclined to think that in this particular time period, which is the weekly time period, this is a bullish chart. So I'm generally going to look to be a buyer.
If we look at what subsequently the stock actually is, it's this chart here. And now I'm sharing with you this is actually Microsoft. And you can see the pullback into December-- that was the pullback in December of 2018-- came right to the cloud, turned around, and moved sharply higher.
So to me, even though it had been pulling back for months, the key here was that we were still in bullish mode. And as long as we were above that gray shaded zone, this is an objective model that says to me, I'm looking to buy dips into that area given the opportunity.
Step number three, use what we've concluded already in step number one and step number two to decide which technical indicators are the most sensible ones to use for the present market mode. What's the present market mode? Well, there's generally two modes-- a trending market mode or a stabilized range market mode-- because you're going to use very different indicators. And when I talk about indicators, I'm talking about technical indicators. You're going to use different indicators in order to decide how to best analyze a chart depending upon its mode.
So let's take a look at-- this is the S&P going back into 2016. And the far right-hand side was going into the US elections. So you can see a week or two before the elections, the S&P broke down beneath the uptrend line in orange. And it had been trading sideways for a couple of years and had just recently a few months before broken out to the upside. But going into elections, the market sells off.
The next chart, we want to look at the middle of the chart. That spike down into November is the night-- these are S&P futures now I purposely put up because they showed-- if you recall at the time, if I remember, the Dow sold off 700, 800 points or so. On election night, the S&P was down probably 70, 80, 90 points that night. And yet within two weeks, the market was ripping to the upside.
So is there any doubt? If you look at this objectively, was the market in a trending mode or a sideways mode? Well, the market was trending. It had pulled back into election. It goes and explodes to new all-time highs.
If I'm in a trending mode, I want to use trending indicators. And I'm going to pay much less attention-- and I've got them here, and take a look at them-- where they use the RSI, which is on the bottom of the chart along with slow stochastics. You can see they almost mimic each other. They're very similar models. If one corroborates the other, I'll tell you you have no added value because they're virtually the same indicator.
Using overbought signals when a market is ripping to the upside is a terrible way of saying, oh, the market is overbought. Let's get out. It's generally a very bad idea. Most of the time that a market is strongly moving higher, the RSI will be overbought. And it is not a good idea to be a seller.
In fact, the most useful way to use an oscillator in a trending market is when it gives you a signal to play in the direction of the primary trends, which you can see back in 2016 at election time. You got it oversold. You got a positive crossover on the stochastics. The RSI had gotten oversold.
So in other words, oversold in a long-term bullish market is often the best time to be a buyer. Being overbought in a bullish market is generally not a good time to be a seller. The market can go. And you can see here through at least half this chart are signs stochastics told you you are overbought. And yet this market kept making new all-time highs.
Take a look at the sell-off in fourth quarter 2018. You get a buy signal. You get oversold in what has been a bullish market-- perfect time to come in. Use your oscillators only to play in the direction of the primary trend. And use them as a way to play a market that's going sideways so that a sideways market that gets overbought-- you generally can fade that move. And you'll get a chance to buy it oversold.
So when you're oscillating back and forth in a sideways pattern, use oscillators. Don't use trend-following models, like moving average crossovers or anything that tries to play the bigger trend. Because if you're really going sideways, you're going to have lots of false breakouts to the upside and false breakdowns to the downside, which your trend-following systems are going to tell you are up here.
And yet the market's really in a sideways mode. And it's not going anywhere. So it's really important to know. Step three is about understanding which mode the market's in and using the right indicators for that mode.
Step four of the five, determine achievable price targets. And then actually reduce or completely exit your trade or investment when you reach those targets.
Now, I've got to start off by saying one of the most difficult things for people to do is actually come up with good targets. Besides the fundamental analysts on the street, especially on the equity side, that come up with an upside target for a stock-- and then you can look at the collective thinking of the Street to get a consensus view of a target-- most people don't have the skill or the knowledge base or the tools in order to help figure out how to determine targets.
This is something on how we're able to sell stocks that are ripping to the upside and actually get darn close to the right place to get out before they fall because there are ways of measuring and determining how far a stock should often run-- or a foreign exchange product or a commodity or anything you're trading. There are ways to figure out achievable price targets.
Now, why do I say get out at least half, if not the full trade? Because of the damage it does to your psyche if you don't get out. So there's nothing more damaging to your psyche than doing the following.
You set up a trade. You decide you're going to get in at $40 a share. And your target is $50 a share. And you get in at 40. The stock moves up. And you're happy. And it's doing what you thought. And now it gets to 50.
But when it gets to 50, everybody on TV is saying, oh, this stock's going to 60. It looks great. So you go, I'm not getting out. This thing is going higher. And it goes to 51 and 52. I'm so glad I didn't get out. Two weeks later, the stock's trading at 45.
And now you're kicking yourself in your rear end. You didn't do what you said you would do. You got greedy. And you didn't take the profit that you had originally intended to make. So