Forum Archive Index - February 2004

["Gavin Treadgold" <gav@rediguana.co.nz>]

Hi All.

Have been mostly lurking and reading the list - its gone from quite quiet to
extremely active over the past couple of months.

I have some questions about taking a hybrid approach to investing - that is
combining FA and TA techniques.

I have primarily been a FA investor that has made the usual mistakes,
particularly not having a plan to sell (relatively easy to decide to buy,
much harder to decide to sell). It has cost me a significant amount in the
past - particularly the US tech boom - didn't lock in some excellent profits
there, and ended up making a minor loss. However, in my continual quest to
improve I would like some discussion and advice around a few trading
techniques, so I can change to a hybrid TA/FA approach. My focus is still on
longer term investing, not daily/weekly trading however.

1. STOP LOSSES - What is a suitable approach to take for long-term
investments (say 3-6 months+) with regards to stop-losses.
1a. What is an appropriate % loss to set them at? Given that generally the
longer you hold a share the more volatility you are going to see, I guess I
need a larger %, say 10%-25% vs short-term trading that may be set at on a
few % - say 1-5%.
1b. How frequently should they be reviewed? Weekly? Monthly?
1c. What sort of criteria do you use for raising them over time to lock in
gains? What sort of % increase in current price/purchase price triggers an
increase in the stop loss.

2. TRENDS - I haven't done much detailed reading on Exponential Moving
Averages (EMA) but they seem like a good technique that produces a much more
accurate trendline than the ever-lagging moving averages. I get the
impression that a 300 day EMA would be useful for the longer term investor
like myself.
2a. Does a 300 day EMA seem a good choice for a basic trendmapping function
for a longterm investor?
2b. If 300 days of data are not available for a stock, can you get away with
doing a 1 day EMA after your first day of data, 2 day after the second, and
so on until you reach 300 days, or does the nature of the calculation not
allow this? I guess this is the only way to deal with new listings and the
like. Of course the longterm user would have to be careful about not reading
too much into the early gyrations of the EMA until a reasonable corpus of
data is built up.

3. PROFIT TAKING - When do you decide to actually take some or all of the
profit? The trick being to take some, but also not sell to early. What sort
of mechanisms do people use, such as selling half or a third when it reaches
a certain %? By having stop-losses in place, I would be much more inclined
to sit out the ride than have a predefined mechanism that may force me out
too early. But I would like some way of forcing me to lock in some gains,
for example at 15 or 20%.

I'll be interested to hear peoples feedback and comment on how they are
using such techniques - both from the TA on use of their techniques, and how
FA investors have got on using these techniques.

Thanks in advance for you help!

Cheers Gavin



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