DORSEY'S TRADINGTips TOM Thomas J. Dorsey and the DWA Analysts

246 Pages·2006·11.96 MB·English

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B L O O M B E R G P R O F E S S I O N A L L I B R A R Y
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MDORSEY’S
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A PLAYBOOK FOR STOCK MARKET SUCCESS 19
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Thomas J. Dorsey and the DWA Analysts
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Watson H. Wright, Tammy F. DeRosier, Susan L. Morrison, and James C. Ball
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B L O O M B E R G P R E S S
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P R I N C E T O N 37
1 © 2001 by Thomas J. Dorsey. All rights reserved. Protected under the Berne Con-
2 vention. Printed in the United States of America. No part of this book may be
reproduced, stored in a retrieval system, or transmitted, in any form or by any
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means, electronic, mechanical, photocopying, recording, or otherwise, without
4 the prior written permission of the publisher except in the case of brief quota-
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missions Department, Bloomberg Press, 100 Business Park Drive, P.O. Box 888,
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Princeton, NJ 08542-0888 U.S.A.
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8 Books are available for bulk purchases at special discounts. Special editions or
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Special Markets Department, Bloomberg Press.
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BLOOMBERG PERSONAL BOOKSHELF, and BLOOMBERG SMALL BUSI-
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This publication contains the author’s opinions and is designed to provide accu-
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author, publisher, and Bloomberg L.P. are not engaged in rendering legal,
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of specific investments or planning decisions made by the reader.
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23 First edition published 2001
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Library of Congress Cataloging-in-Publication Data
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27 Dorsey, Thomas J.
Tom Dorsey’s trading tips: a playbook for stock market success /
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Thomas J. Dorsey and the DWA analysts, Watson H. Wright ... [et al.].
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p. cm. --- (Bloomberg professional library)
30 Includes index.
31 ISBN 1-57660-077-7 (alk. paper)
1. Stocks. 2. Investments. 3. Speculation. I. Title: Trading tips. II.
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Wright, Watson H. III. Title. IV. Series.
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HG4661 .D675 2001
34 332.63’22--dc21 00-065108
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36 Edited by Rhona Ferling
37 Football icon by JoAnne Kanaval
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1
2 C O N T E N TS
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9 Acknowledgments xi
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Foreword by John Hannah xiii
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12 Introduction 1
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14 C H A P T E R 1
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Building a Foundation: Point and Figure Basics 9
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Why You Should Combine Technical with Fundamental
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Analysis 10
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Why We Use Point and Figure Charts 11
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Point and Figure Chart Basics 13
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Point and Figure Tips 15
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Point and Figure Chart Patterns 20
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Adjusting the Box Size on a Point and Figure Chart 21
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The Bullish Percent Concept 25
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C H A P T E R 2
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27 Market Psychology 31
28 Finding a Discipline 32
29 Common Investor Mistakes 33
30 Ten Ways to Sabotage Your Portfolio 35
31 Our Adaptation of Baruch’s Rules 38
32 Practice, Practice, and Then Practice Some More 39
33 Why Work with a Broker or Money Manager? 41
34 Decision Doesn’t Dictate Outcome—Use the Tools Properly:
35 That’s the Best You Can Do 42
36 Magazine Covers 43
37 A Diary of Lessons 45
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C H A P T E R 3 4
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Market and Sector Applications 49
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The 80 Percent–20 Percent Phenomenon 50
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Why the S&P 500 Is Hard to Beat 52
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Bogey Fever 53
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Do You Know Your QQQs? 54
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Using SPDRs and Other Products to Diversify 60
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Market vs. Sector Timing 61
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Which Side Are You On?: Sector Bullish Percent Charts 63
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It Feels Like the Bullish Percent Should Be at 10 Percent! 68
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Sector Relative Strength 72
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It’s an Art, Not a Science 75
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Market Leadership 78
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Dow Jones 20 Bond Average 80
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C H A P T E R 4
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Essentials of Stock Selection 87 21
Four Steps for Initiating New Positions 88 22
Stock Evaluation Checklist: Evaluating Technical Pros and 23
Cons 89 24
Bullish Support Line 91 25
Bearish Resistance Line 91 26
Relative Strength: Motorboat vs. Rowboat 96 27
Good Stocks Stand Out in Market Declines 97 28
Best in Class: Using Peer Relative Strength to Buy the Best 29
Stock in a Given Sector 99 30
Compare Your Stocks to the Market—Especially Market 31
Leaders 100 32
Buying on a Pullback 101 33
Momentum 102 34
Using Pre- and Post-Split Charts 106 35
Insider Buying vs. Insider Selling 110 36
The Quality of the Merchandise Is Important 111 37
C H A P T E R 5
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2 Risk/Reward Principles 113
3 A Free Lunch—Not: Higher Returns Come with Higher Risk 114
4 Evaluating Risk/Reward When Initiating New Positions 115
5 Catching a Falling Knife 119
6 Using Options as a Low-Risk Way to Initiate Positions 121
7 Reducing Risk in a Stock—Selling It and Buying a Call 123
8 The Mathematics of Losses 124
9 Stock Insurance—Purchasing Puts to Protect Your Stocks 127
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11 C H A P T E R 6
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Short-Term Trading Techniques 131
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Tactics for the Short-Term Trader 132
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Bulls Make Money, Bears Make Money, But Pigs Make
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Nothing 133
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Long Tail of Os Down: A Trading Technique 134
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High Short Interest 135
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The Selling Climax 136
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Spin-offs 137
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When the High-Low Reverses up from below 10 Percent 138
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Strategy for Option Expiration 139
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Guideline for Selling Short 141
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C H A P T E R 7
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26 Managing Your Investment 145
27 The Tortoise and the Hare 146
28 Two Heads Are Better Than One 147
29 Keeping Turnover to a Minimum 149
30 Let Profits Run, Not Losses 150
31 Benefits of Position Sizing for Traders: Percent Risk Method 152
32 The Hardest Decision Is When to Sell: Taking Profits, Cutting
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33 Your Losses, Stop Points, and Trimming 156 RE
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34 Buy on Rumor, Sell on News: Stick to the Reason You Bought the ER
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35 Stock 158 OO
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36 How Good Are Your Defensive Skills? 159 E:
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37 Hedging Your Portfolio with Index Options 161 OU
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No Free Lunch: Selling Calls against Your Not-For-Sale Stock 163 1
Augmented Writing 164 2
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C H A P T E R 8 4
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Understanding Options Strategies 167
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The Key to Understanding Options 168
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Definition of a Call and Put 169
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The Options Delta: An Important Term to Know 170
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Call Guidelines 171
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More Call Guidelines 173
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Put Guidelines 175
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More Put Guidelines 176
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Overleveraging an Options Position 178
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When Investing in Options, Buy Time 179
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An Option Trader’s Lesson from the Gym 181
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Puts as Insurance 182
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Uncovered Puts: Be Sure You Can Pay for Them 184
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Buy, Sell, Hold, or Hedge? 186
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Selecting the Right Covered Write 188
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Overwriting Long Positions 189
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C H A P T E R 9
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Other Investment Tips 193 24
The Job of the Fundamental Analyst 194 25
Being the Inventory Manager 196 26
When Old Meets New: An Alternative to the Dogs of the 27
Dow 198 28
Investing in Dividend Re-Investment Plans (DRIPs) 202 29
Cocktail Party Indicator 203 30
All I Needed to Know I Learned from Noah’s Ark 206 31
To Be Successful, Continually Educate Yourself 210 32
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