Complete Trading and Investment Course

Introduction: What Companies to Look for in Value Investing?

1: Fundamental Analysis and Catalytic Stories

1.1 Companies with Good Fundamental Analysis

• Price/Earnings (P/E):
  P/E = Price per share / Earnings per share (EPS)
  Objective: Look for companies with a P/E 30% lower than the sector average.
  • Historical example: During the COVID crash (March 2020), Warren Buffett bought airline stocks like Delta Air Lines when their P/E fell to 4, well below the historical average of 12.
• Debt/Equity:
  Safe threshold: < 0.5 (50%). If >1, the company is highly leveraged.
  • Historical example: Apple consistently maintains a low debt/equity ratio (0.2 in 2023), providing financial flexibility.
• PEG (Price/Earnings-Growth):
  PEG = P/E / Annual earnings growth rate
  Ideal value: <1 (the stock is undervalued relative to its growth).
  • Historical example: During COVID, Pfizer had a PEG of 0.8 and a clear catalyst (vaccine), indicating undervaluation. The stock rose more than 60% in the following months.
• Revenue Growth: >25% annually for at least 3 years.
  • Historical example: Amazon (1997-2000) grew its revenue from $148M to $2.7B thanks to the e-commerce boom catalyst.
  • Historical example: Netflix (2007-2010) increased revenue from $1.2B to $2.16B due to the streaming catalyst.
• EBITDA Margin: Expanding (e.g., from 10% to 15% in two years).
  • Historical example: Apple (2005-2007) expanded margins from 12% to 18% with the iPhone catalyst.
  • Historical example: Tesla (2019-2021) improved margins from 4% to 12% due to efficiency in mass production.

1.2 Growth Companies with Catalytic Stories

• Definition: Specific events or situations that significantly boost a company's intrinsic value, leading to a fundamental change in its growth or profitability prospects. These catalysts are often inflection points that mark the beginning of a new phase of expansion, operational improvement, or market revaluation. Unlike normal market fluctuations, catalysts have a lasting and transformative impact on the company's business model or competitive position.
• Types:
  • Technological innovation: Pending patents or the launch of a revolutionary product.
    Historical example: NVIDIA in 2016-2017 with its specialized chips for AI and cryptocurrencies, or Apple in 2007 with the iPhone that revolutionized the mobile industry.
  • New contracts: Agreements with governments or large companies (e.g., Tesla and a battery contract).
  • Management change: CEO with a track record of success in company turnarounds.
  • Financial restructuring: Debt reduction or sale of unprofitable divisions.

How to research: Follow sector news and earnings conferences.

1.3 Undervalued Companies: Opportunities in Panic

• What are undervalued companies?:
  Solid companies whose market price is below their real value due to:
  • Widespread market panic
  • Temporary bad news that the market overestimates
  • Sector issues that unfairly affect solid companies
• Opportunities in panic:
  The market often overreacts to bad news, creating opportunities:
  • 20-30% drops due to minor or temporary issues
  • Massive sell-offs affecting an entire sector
  • Negative headlines that generate fear but do not affect the core business.
    Historical example: In 2015, Volkswagen suffered the "dieselgate" scandal and its shares fell 40%. However, the company had solid fundamentals and the P/E fell to 4 (vs 12 for the sector). By 2017, the stock had recovered more than 80%.
• Recoverable Stocks:
  
  • Turnaround Signals:
    • Cost reduction: Staff layoffs + closure of unnecessary plants.
    • New market: E.g., Nokia moving from phones to 5G infrastructure.
  • Key risk: Convertible debt that dilutes shareholders.
• 4.3 Stocks with Hidden Assets:
  
  • How to discover them:
    • Unexploited patents: E.g., Pharmaceutical company with a forgotten patent for a drug in demand.
    • Market value of subsidiaries: E.g., Tencent owns 40% of Epic Games (creator of Fortnite), not reflected in its balance sheet.
  • Tools: "Sum-of-the-parts" (SOTP) analysis to value each division separately.

1.4 Risks to Evaluate

• Short-term debt: If current liabilities exceed cash, risk of default.
• Dependence on a single client: If >20% of revenue comes from one client, it is a concentrated risk.
• Regulatory changes: E.g., Energy companies facing new environmental laws.

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Module 2: Advanced Risk Management

2.1 Dynamic Stop Loss

• Trailing stop loss (%):
  • If you buy at $100 and set a 10% trailing, it automatically sells if it falls to $90.
  • The stop loss automatically adjusts upwards as the price rises.
  • Example: If the stock rises to $120, the stop adjusts to $108 (10% below).
• Stop based on technical supports:
  • If the support is at $50, place a stop at $48 to avoid false exits, as "sharks" often drive the price to these levels to capture liquidity.
  • Large operators seek to trigger stops placed just below support before a rebound.
  • In volatile stocks, give a 5-7% margin below support to avoid being prematurely taken out by this manipulation.
• Time-based stop loss:
  • Exit if the stock does not reach the target in X days/weeks.
  • Useful to avoid getting stuck in sideways movements.

2.2 Position Management

• Position size:
  • Do not risk more than 1-2% of capital per trade.
  • Calculate size based on distance to stop loss. For example, if we risk $1000 and the stop loss is 10% from the entry price, the maximum position would be $10,000.
  • Always maintain a minimum risk/reward ratio of 1:2, preferably 1:3. For example, if the stop loss is 10% from the entry price, the profit target should be at least 20-30% to ensure profitability even with a lower success rate.
• Position scaling:
  • Gradual entry into position:
    • First entry (30-40%): Upon identifying the technical pattern or initial signal.
    • Second entry (30-40%): After confirmation with volume or technical indicators.
    • Third entry (20-30%): When the movement consolidates (e.g., breaks resistance with volume).
  • Staggered exit to manage risk:
    • First exit (30-40%): Upon reaching the first price target (+10-15%).
    • Second exit (30-40%): At the main target (+20-25%) or if momentum is lost.
    • Last exit (20-30%): At highs or if it breaks support/uptrend.

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Module 3: In-depth Technical Analysis

3.1 Support and Resistance

• How to draw:
  • Support:
    • Historical lows where the price bounced at least 3 times.
    • More validity the more times the level is respected.
    • Consider volume in bounces as confirmation.
  • Resistance:
    • Historical highs where the price repeatedly retraced.
    • More significant with higher volume in retracements.
    • Psychological levels (round numbers) are often resistances.
• Level validation:
  • Confirm with technical indicators (RSI, MACD).
  • Observe volume behavior.
  • Consider multiple time frames.

3.2 Price Patterns

• Support and Resistance Patterns:
  • Horizontal levels where the price bounces (support) or retraces (resistance)
  • Demand and supply zones that are respected over time
  • Upward and downward channels formed by parallel supports and resistances
• Accumulation Patterns:
  • Cup and handle pattern: U-shaped accumulation followed by a minor retracement
  • Flat base: period of lateral consolidation before breakout
  • Double/triple bottom: accumulation with bounces at the same level
• Reversal Patterns:
  • Head and Shoulders (H&S): three peaks, the middle one higher
  • Inverted H&S: three valleys, the middle one lower
  • Double top/bottom: two highs/lows at the same level
  • Triple top/bottom: three similar highs/lows
• Channel Patterns:
  • Upward channel: ascending parallel lines containing the price
  • Downward channel: descending parallel lines containing the price
  • Lateral channel: horizontal trading range
  • Channel breakout: signal of possible trend change

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Module 5: Investor Psychology and Common Mistakes

5.1 Cognitive Biases and Mental Errors

• Low point fallacy: Thinking "if it has dropped so much, it can't drop further". Error: a stock can keep dropping indefinitely until it breaks.
• High point fallacy: Thinking "if it's so high, it can't go higher". Error: there is no technical limit to how high a stock can rise.
• Low price fallacy: Thinking "it's only worth $2 per share, how much can I lose?". Error: you can lose 100% if the company goes bankrupt.
• Recovery bias: Thinking "the company will recover". Error: some companies never recover and end up going bankrupt.
• Anchoring to target price: Thinking "when it gets back to $10, I'll sell". Error: if the company doesn't meet your criteria, you should sell immediately.
• Temporal impatience: Thinking "it's been a long time and nothing". Error: the market can take years to recognize a company's value.
• Missed opportunity bias: Thinking "look how much I've lost by not buying earlier". Error: you haven't lost anything if you haven't invested, this thought only leads to impulsive decisions.

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Module 6: Options and Defensive Strategies

6.1 Strategies with Options

• Important Considerations:
  • Always trade with liquid options (high volume and open interest)
  • Use limit or mid-price orders for better execution
  • Options can be used as insurance or for leverage
• Covered Call:
  • Concept: Sell a call against your shares to generate additional income
  • Example: With 100 shares of Apple at $150, sell call strike $160, collecting a premium of $3/share
  • Maximum profit: $13 per share ($10 appreciation + $3 premium)
  • Best time: When you expect a sideways or slightly bullish movement
• Call Purchase:
  • Concept: Buy a call to benefit from rises with limited risk
  • Example: With Apple at $150, buy call strike $155 paying $5/share
  • Profit: Unlimited above $160 (strike + premium)
  • Maximum risk: Premium paid ($5/share)
  • Best time: When you expect a significant bullish movement
• Protective and Selling Put:
  • Concept: Buy puts as insurance against strong declines or sell them to generate income
  • Put Purchase:
    • Example: Put strike $90 for 100 shares bought at $100. Cost: $5/share
    • Protection: Limits loss to $15/share (drop to $90 + premium paid)
  • Put Sale:
    • Example: Sell put strike $80 when you would be willing to buy at that price
    • Profit: Collect premium and if it falls below $80, buy at desired price minus premium
    • Risk: You are forced to buy if the price falls below the strike
  • When to use it:
    • Purchase: As insurance if you foresee a risk of decline
    • Purchase: As a directional bet if you believe the stock will fall sharply
    • Sale: When you want to buy cheaper and don't mind waiting
    • Sale: To generate income in stocks you would like to have in your portfolio
• More complex structures::
• Bull Call Spread:
  • Concept: Buy a call near the money and sell a call further away
  • Example: With AAPL at $150, buy call $155 and sell call $165
  • Advantage: Reduces entry cost vs buying only a call
  • Best time: When you expect a moderate rise
• Bear Put Spread:
  • Concept: Buy a put near the money and sell a put further away
  • Example: With AAPL at $150, buy put $145 and sell put $135
  • Advantage: Reduces cost vs buying only a put
  • Best time: When you expect a moderate decline
• Iron Condor:
  • Concept: Combine bull put spread and bear call spread
  • Example: With AAPL at $150:
    • Sell put $140, buy put $135
    • Sell call $160, buy call $165
  • Best time: When you expect a sideways movement
  • Profit: Net premium received if the price stays between sold strikes
• Butterfly:
  • Concept: Buy a call/put near, sell 2 middle, buy far
  • Example: With AAPL at $150:
    • Buy call $145
    • Sell 2 calls $150
    • Buy call $155
  • Best time: When you expect the price to end exactly at the middle strike
• Calendar Spread:
  • Concept: Sell a nearby option and buy a further one at the same strike
  • Example: Sell call current month and buy next month
  • Profit: Faster time decay in the nearby option
  • Best time: When you expect short-term sideways movement

Module 8: Professional Day Trading

8.1 Fundamentals of Day Trading

• Basic Requirements:
  • Minimum capital: $12,000 to risk 2%, equivalent to a bet of $1k or $2k and a stop loss of $100-$200, and ideally a take profit of at least double.
  • Professional platform with real-time data
  • Stable and redundant internet connection
• Be careful::
  • Trade only in liquid stocks! In day trading, price action is very important. You can even allow yourself to chase the price a bit when FOMO is something
  • If you finally decide to bet on a low liquidity stock, try to buy low
• Main Strategies:
  • Fallen Angel:
  • FOMO in the successful:
    • Obviously, the report must have been very positive: yoy and quite good guidance
    • If the trend is bullish in 6 months and even better, also in 12 months, then it is a good candidate to buy
    • Sometimes they rise from minute 1, buy and wait for the price to relax, that is, the curve flattens or the MACD crosses
    • Other times they give entries, with drops from minute 1 and for less than 5 minutes, it can go from +4% approx to 0%, at that 0% it is good to enter and return to highs
  • Gap trading
  • News trading
  • Reversal trading
  • Momentum trading
  • Gap trading
  • News trading
  • Reversal trading

8.2 Advanced Day Trading Management

• Risk Control:
  • Maximum 1% risk per trade
  • Stop losses adjusted to ATR (Average True Range). Another important point of stop-loss and bullish trend changes is the current day's low
  • Review the appropriate risk/reward ratio to execute the trade, always look for at least a 1 to 2 ratio, meaning if I am wrong in the movement, the exit zone of the trade will equal a loss of half of what I could gain. So even if you only get it right 50% of the time, you would still make money.
  • When you enter a trade, there is a possibility that it will go against you. That's why you must use stop losses and exit losing trades. This is the confusing part for many people. They don't know how to accept a loss, but they still believe it's possible to make money in the market.
  • It's okay to see how several companies progress before trading one, but a maximum of 3 simultaneous trades, don't overwhelm yourself.
  • Never let a trade that turned green end in losses. Update your stop-loss to 0 loss
  • The logical thing when a trade starts to go wrong is to accept a small loss and continue evaluating the chart, being ready to trade again if another opportunity arises. Breaking risk management rules "just this once" usually turns out badly. In fact, professional traders often enter in small doses until the stock goes in the studied direction.
  • The trend (bullish) continues as long as there are higher lows and higher highs. Sometimes it's okay to identify exhaustion, but you shouldn't withdraw until this condition is met, as good moves could be missed.
  • One of the most important rules of trading is to take partial profits when a trade goes in your direction. You should take 1/2 or 1/4 of your position as profit and let the remaining position continue moving in your direction.
• Day Trader Psychology:
  • Discipline in executing the plan
  • Accepting losses without questioning the strategy: In trading, you accept a loss without questioning your strategy. You make another trade, accept another loss, and on the third trade, when it works in your favor, you make enough money to cover your previous losses, as long as you use a risk/reward ratio greater than 1:3 in executing your strategy
  • Emotional control in the face of losses
  • Structured daily routine
• Day Trading Technical Analysis:
  • Moving averages can act as support and resistance
  • For day trading, it's better to draw support and resistance lines through extreme prices or wicks at daily levels rather than areas where most bars stopped, it's counterintuitive as it's different from weekly or monthly technical analysis
  • Look for those peaks in previous days, if you don't see anything clear, don't draw anything, because others won't see it either.
  • It's not about looking for complex patterns, just higher lows (to go long) or lower lows for the opposite.

8.3 Professional Tools

• Necessary Software:
  • Professional trading platform
  • Real-time market scanner like nicestocks.ai
  • What are Stocks in Play? They are ideal stocks for day trading. They can be, in no particular order:
    • A stock with recent news
    • A stock that rises or falls more than 4% before the market opens
    • A stock that has unusual pre-market activity
    • A stock that develops important intraday levels from which you can trade
    • If it has no volume, stay away from it, it's being handled by insiders.
  • Advanced technical analysis tools
  • Backup system for orders