Trading With EquiVolume. R. Arms

I just sold a stock for $23 that I bought last week for $18. What a high! That is the
pleasure of being a trader, being right. Taking a profit is great, but the money is not as important as the success. I think the best trader is the one who only uses the money to keep score. He treats trading as a challenge. In the pages that follow we are going to be looking at some unique methods of analysis that can help to make trading more successful and therefore more fun. When I say traders I am thinking primarily of those who buy individual stocks and hold them for a period of days, or at most a few weeks. All the examples we look at will be concerned with that time frame. That is not to say the methodology is not applicable to other time frames, it is. But our emphasis will be on short term trading. If we can think of the market movements as consisting of tides, waves and ripples, we are going to be looking at the waves.

Day traders may want to apply the ideas to the ripples. Long-term investors can look at the larger picture and use the methods to take advantage of the large tidal movements. In addition, we will not be looking at options trading, just the underlying stocks. But anyone wanting to trade options must be able to understand where the underlying stock appears to be headed. Every principle in the pages that follow is a tool for the options trader as well. When I first became a retail stockbroker, forty years ago, one of the first admonitions from the firm was that we were never to equate investing in stock with gambling.

Even when a client was trading on a short-term basis, it was a no-no to suggest that it was a form of wagering. We were well above acting as though we were operating a Las Vegas casino. Moreover, it was pointed out, when you put your money on a roulette table or a horse, it either won and made money or it lost and you lost all your money. With stocks, there was residual value. You might sell at a lower price than where you bought, but you would get back some of your money. Therefore, it was investing, not gambling. Of course, if you were in a margin account, it might take a lot of it in a hurry.

And if you did not act quickly enough and the market acted unusually, you could get wiped out just about as quickly as at a blackjack table. On the other hand, the right stock in the right market was not very different than the right horse in the Kentucky Derby. But still, it was not to be thought of as gambling. In the pages that follow we are going to put that admonition aside, and realize that our
only aim in the market is to buy at a lower price than we sell. The desire is to make money. The vehicle we will use in trying to make money is stock. Any stock that goes up when we are long, or down when we are short, is a good stock. I often say, when I am making a speech, that it would be a lot better if stocks did not have names, just numbers.

Then we would not become emotionally attached to them. If it was just stock 175 instead of Compaq Computer, we would be less likely to make bad decisions because we “liked” the company. It is that sort of detached objectivity that we will be striving for in the pages that follow. True, it is not gambling, in that you are buying something of value; ownership in a corporation. But if one is adopting a short-term and aggressive attitude, that objective is far overshadowed by the fact that it is only a vehicle used to try to make money. Moreover, we are going to want to be as willing to sell short as we are to buy. Selling short is certainly not designed to participate in “Corporate America”.

Understand, we are not talking about the building of a long-term portfolio of stocks. That is an entirely different approach, and has been the basis of several of my earlier books. We are, in the pages that follow, going to be talking about the aggressive buying and selling of stocks. We are going to look at the short side as well as the long side of the market. We are not going to be talking about “owning a piece of Corporate America”, we are going to be talking about buying and selling stocks because we think the price is going to change in our favor.

But there is another factor that makes it far different than a trip to Vegas. When we pull the lever on a slot machine or place a bet on red at the roulette wheel the result is entirely a function of chance. We have absolutely no control over the outcome. Intelligence plays no part beyond that point. Perhaps we can know the odds well enough to place our bets where we have the best chance of winning, but we cannot play any part in where the ball drops in the slot or how the wheels turn in the machine. In the stock market we can be rewarded for being smart.

We can make good decisions and swing the odds in our favor. In addition, at the casino the house always wins. The odds are such that in the long run the gamblers are always the losers. It is not even a zero-sum situation. It is an automatic losing position, on average. In the market, if stocks are in a long-term advance, the buyers can all be winners, on average. In bear markets all the short sellers can be winners. Of course, there is still a cost of buying and selling, which puts a part of every investment in the pocket of a broker. But it is not the handicap it once was. Commissions are now so low as to be of little concern. In a sideways market it is not quite a zero-sum game, but it is close to it.

As we go along we will be looking at a methodology that is designed to swing the odds in our favor. We will be combining price and volume into usable information. It is a methodology that helps to shield us from irrational emotional decisions. We will be concerned with the emotionalism of others, and attempting to recognize times when a swing in emotions is presenting an opportunity to make money. The interplay of price and volume will help to tell us what others are doing, and allow us to take advantage of that knowledge.
Interestingly, all of the methodology we will consider in the pages that follow have their place in conservative long-term investing also. In fact, my prior books have concentrated on that aspect of the market.

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