Two weeks ago, I have been reading this book because I want to learn more about investing in stock market.
I have bought penny stocks, non-dividend stocks and dividend stocks in the past and I lost money most of the time.
I think the main reasons are I sold the stocks too early and I fail to know when it is time to enter the market. As a result, I borrow this book from the library and hopefully the book would help.
The book covered four fundamental-based trading systems and three technical-based trading systems that the author, Dr. Thomas K. Carr mastered over time. Additionally, they all work for longing and shorting stocks. Longing is when someone buy stocks at a lower price and sell at a higher price for profit. Shorting, on the other hand, is when someone borrows shares and immediately sells them, in hope he or she can scoop them up later at a lower price and return them to the lender and pocket the difference.
Dr. Thomas K. Carr mentioned his favourite (also mine) and his most profitable system is the Mean Reversion System. This system relies on Bollinger Bands, which is the 20-period simple moving average (20sma) and 2.0 standard deviation. Simple moving average is formed by computing the average closing price of a stock over a specific number of periods.
Bollinger Bands was created by John Bollinger, a market technician and financial analyst who pioneered the synthesis of technical and fundamental analysis of stocks. Bollinger created trading bands that not only cover most of the price actions over time, but also are dynamic enough to show changes in both volatility and directionality of stocks.
In order to find a good moment to long a stock or enter the market and hold the stock long-term, we are looking for stocks that are traded outside of the lower Bollinger Band, but only after trading down to that level over several trading days (to rule out outliers) and that are trading significant under their “mean” (ten percent below 20sma).
So let’s look at a chart I computed on StockCharts.com (as recommended by Dr. Carr) for CIBC (TSE:CM.TO):
StockCharts.com allows me to compute Bollinger Bands and simple moving average and sets up my parameters. The purple line is the 20-period (20-day) simple moving average and the red lines are the Bollinger Bands (the 2 standard deviation).
CIBC’s stock has been on a downward trend for the last week and today the closing price ($104.54) passed the lower Bollinger Band ($104.81). This signals it may be a good time to invest in CIBC’s stock in the following weeks if the stock price keeps dropping.
In the next post, I will evaluate other stocks in my watchlist and see if they are in good positions for buying. Feel free to leave comments below! Catch you on the flip side!