Value and Momentum Trader

Grant Henning holds a PhD in educational psychology from UCLA, where he specialized in measurement statistics and applied linguistics. He has subsequently served as professor at UCLA, Pennsylvania State University, and several universities in Egypt, Iran, and China. For a number of years, Henning was engaged as senior research scientist at Educational Testing Service, where he conducted evaluative research on university entrance examinations. Henning has authored more than fifty articles, books, and commissioned reports, and has traveled to more than fifty countries over a thirty-year period. In June of 2000, he retired from university service to trade full-time.

• List of Tables and Figures xvForeword xviiPreface xixAcknowledgments xxiCHAPTER 1 A Philosophy of Trading 1Analogies 1Pragmatism 3Goal-Oriented Behavior 5Timing 6Stocks versus Commodities, Options, Mutual Funds, and Bonds 7Short Trading 9Use of Margin 10Trading and Gambling 11Bold Passion 12Summary 13CHAPTER 2 Tools of the Trade 15Online Access 15A Reliable Brokerage Account 16Information 17Formal Study 18Analysis Software 20Protected Workspace 21Mathematical Trading Systems 21Market Timing Indicators 22Summary 22CHAPTER 3 Constructing Mathematical Models for Stock Selection 25Technical Approaches to Stock Selection 25Fundamental Approaches to Stock Selection 26Hybrid Approaches to Stock Selection 27The Nature of the Stock Selection Challenge 27Common Mistakes in System Design for Decision Making 28Early Beginning Approaches 30Advantages and Disadvantages of Mathematization 32Summary 33CHAPTER 4 Stock Selection: A Technical-Momentum System 35Qualifying Variables 35Sample Recommendation Summary Table 39Questions and Answers 40Summary 44CHAPTER 5 Stock Selection: A Fundamental-Value System 45Qualifying Variables 45Fundamental Variables 47Questions and Answers 55Summary 57CHAPTER 6 Stock Selection: A Technical-Fundamental Hybrid Approach 59Qualifying Variables 59Point-and-Figure Analysis 64Technical Ratings 64Other Technical Indicators 65Price-to-Earnings (PE) Ratio 66Book Value 67Earnings Growth 67EPS/PE Divergence 68Cash Flow and Free Cash Flow 69Other Fundamental Indicators 70Questions and Answers 71Summary 74CHAPTER 7 Buying Stocks 75Preparing the Slate of Candidates 75Gathering Intel 76Demanding Supply 77Cost Averaging 77Limit and Market Orders 78Avoiding Purchases with Unsettled Funds 82Summary 82CHAPTER 8 Selling Stocks 85Setting Targets 86Setting Partial Targets 86Using Stop-Loss Orders 87Culling Out Losers 88Rank Indicators 88Holding Limits 89Breaking the 50-Day Moving Average 90Identifying Market Downturns 90Summary 91CHAPTER 9 Portfolio Management 93Diversifying Over Stocks 93Diversifying Over Sectors 95Record Keeping 95Proportionality over Portfolios 96Proportionality over Individual Stocks 97Turnover Ratio 97Timing the Market 98Summary 98CHAPTER 10 Market Timing 99Mythological Indicators 100Quasi-Mythological Indicators 101Reliable Indicators 102Summary 108CHAPTER 11 A Performance Record 109Performance Caveats 109Hindsight is 20/20 112Summary 113CHAPTER 12 A Typical Trading Day 115Before the Bell 115The First Half Hour 117Midday Monitoring 118After the Closing 119Weekends 120Summary 121CHAPTER 13 Threats to Success 123Actions of the Federal Reserve Board Open Markets Committee 123Analyst Downgrades 129"Pump-and-Dump" Ploys 130Message Board Panning 131Market Maker Meddling 131Negative News Events 132Large Position Dumping 133Overhead: Taxes, Commissions, Margin Interest, Spreads 134Summary 135CHAPTER 14 A Summary of Trading Principles 137Never Follow a Tip without Due Diligence 137Don't Get Grounded on Low Volume 138Never Buy at the High for the Day 138Never Sell at the Low for the Day 138Remember Why You Bought 139Don't Get Too Attached to Any Stock 139Maintain Diversification 140Don't Overtrade 140Don't Hesitate to Reacquire a Winner 141Don't Get Your Guidance from Message Boards 141Maintain Your Own Trading Identity 142Read Widely 142Back Off Periodically 143Seldom if Ever Buy with Unsettled Funds 143Look to Sell with the Same Level of Zeal That You Look to Buy 143Maintain a Trading Journal or Diary 144Gather Information on Your Holdings Daily 144Learn from Your Mistakes 145Don't Damage the Environment for Others 145Don't Let Yourself Become Discouraged 146Learn to Time General Market Trends 146Don't Begrudge the Paying of Dues 147Set Realistic, Measurable Goals for Trading Gains 147Don't Take Advice from Investment Professionals 147Avoid Buying a Stock Immediately After It Has Made a Huge Price Run Up 148Avoid Selling a Stock Immediately After It Has Had a Huge Loss 148Maintain Your Discipline 149Don't Hesitate to Sell Good Stocks When Macro Market Indicators Signal a Downturn 149Focus More on Avoiding Great Losses than on Making Great Gains 149Continually Be Watching for Success Predictors 150Summary 150CHAPTER 15 Morality in the Marketplace 151Integrity Defined 152The Gravity of the Effects of Declining Integrity 153Conditions that Can Promote the Erosion of Integrity 155Possible Solutions to the Problems that Promote the Erosion of Integrity 161Summary 168CHAPTER 16 Random Walk or Rational Wager 171Predictability and Probability 173The Limits of Predictability 174Following the Numbers or Following the Gurus 176The Accuracy and Use of Mathematical Models 180Predictable Market Phenomena 181Summary 185CHAPTER 17 On the Nature of Risk 187The Risks of Risk Management Applied to Market Phenomena 190Risk and Variance 191Risk and Compassion 191Risk and Trust 193Risk and Wealth 195Summary 195CHAPTER 18 Trading in the Information Age 197The Economy of Abundance 197A Perspective on Abundance 199Taking Advantage of Information-Access Opportunities 201Summary 202CHAPTER 19 Using a Trading System with an Excel Spreadsheet 203Step 1: Loading the Excel Spreadsheet into Your Computer 203Step 2: Recognizing Information on the Spreadsheet 205Step 3: Updating Your Spreadsheet 210Step 4: Running the Analysis 212Step 5: Interpreting the Results 214Step 6: Maintaining the Spreadsheet 214Cautionary Reminders 215Summary 215CHAPTER 20 Afterthoughts 217Timing 217Opportunities 218Market Trends 219Lessons from History 220Conclusion 224Bibliography 225About the Author 229Index 235