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Stock

Investing

Table of Contents
Getting Started 

Step 1Prepare to be an Investor 

12

Step 2Start Analyzing from the Top Down 

22

Step 3Conduct a Thorough Fundamental Analysis 

84

Step 4Search for Additional Strong Stocks 

140

Step 5Conduct a Thorough Technical Analysis 

174

Step 6Protect Your Investment Capital 

187

Step 7Manage Your Portfolio 

204

Stock Investing Review 

251

Updating Your Education Plan 

254

2015 TD Ameritrade IP Company, Inc.

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2015 TD Ameritrade IP Company, Inc.

Disclosures
Securities Used As Examples: The security used in this example is used for illustrative purposes only. Investools is not
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Return on Investment ROI Examples: The security used in this example is for illustrative purposes only. The calculation used
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2015 TD Ameritrade IP Company, Inc.

Disclosures
Futures: The risk of trading futures can be substantial. The valuation of futures may fluctuate, and as a result, investors may lose
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Testimonials: The results described in testimonials are not indicative of the results individual investors may generally expect to
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2015 TD Ameritrade IP Company, Inc.

Disclosures
Options are not suitable for everyone as the special risks inherent to options trading may expose investors to potentially rapid
and substantial losses. Investors must consider carefully all relevant factors including their own personal financial situation
before investing in options. Prior to engaging in trades involving options, you should carefully read Characteristics and Risks of
Standardized Options, which was previously provided or the hard copy provided today. This important document is also available
at www.tdameritrade.com or by contacting TD Ameritrade at 800-669-3900.
The risk of loss in trading securities, options, futures, and forex can be substantial. Trading foreign exchange on margin carries a high
level of risk, as well as its own unique risk factors. Please read the following risk disclosure before considering trading this product:
Forex Risk Disclosure. Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC).
Option trading privileges in your account are subject to TD Ameritrade review and approval. Not all account holders will qualify.
Industry regulations require certain conditions be met before TD Ameritrade can extend options trading privileges. For additional
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Brokerage services provided by TD Ameritrade, Inc., member FINRA | SIPC | NFA.
Investools Inc. and TD Ameritrade, Inc. (member FINRA | SIPC | NFA) are separate but affiliated companies that are not
responsible for each others services or policies.

2015 TD Ameritrade IP Company, Inc.

Getting Started
There is no such thing as a rich victim. Take back your
power and realize that you create everything that is in your
life and everything that is not in it. Realize that you create
your wealth, your non-wealth and every level in between.
T. Harv Eker

Getting Started

Welcome
Congratulations on deciding to learn about the stock market and strategies to help improve
investing returns. This course is designed to teach you how to take your financial future into your
own hands by providing the foundational information and skills necessary to make better, more
informed investing decisions.

2015 TD Ameritrade IP Company, Inc.

Getting Started

7-Step Investing Formula


Successful investors have an investing methodology. These can be as varied as the investors who
use them. Some investors use short-term practices, while others prefer long-term techniques.
In this course you will learn about the 7-Step Investing Formula. In addition you will begin to
create investing plans for the strategy taught in this course and can add other strategies as you
continue your Investools education.

2015 TD Ameritrade IP Company, Inc.

Getting Started

The 7 Steps
The 7-Step Investing Formula incorporates the following steps:
1.
2.
3.
4.
5.
6.
7.

Prepare to be an Investor
Start Analyzing from the Top Down
Conduct a Thorough Fundamental Analysis
Search for Additional Strong Stocks
Conduct a Thorough Technical Analysis
Protect Your Investment Capital
Manage Your Portfolio

Learning to follow these seven steps will help put you well on your way to successfully managing
your own investments. The Investor Toolbox is the primary instrument for applying the 7-Step
Investing Formula. It will help you simplify, categorize, and act on the information necessary to
complete the seven steps.

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Getting Started

Stock Investing Learning Outcomes


In this course, you will learn to:

Create an investing plan


Use the top-down analysis process
Build a watch list using fundamental analysis
Recognize entry and exit signals for a stock trade using technical analysis
Calculate proper risk and position size for a stock trade
Set up daily and weekly routines
Define criteria for and create a trading journal

To complete this course, read all material, update your investing plan, and complete all activities
and assessments.

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Getting Started

Making the Most of Your Learning Experience


One final word before beginning: background matters very little. Successful investors can be
found in all personality types and professional backgrounds. Surprisingly, despite how much a
student can learn, investing success has more to do with what you will learn. For this reason, a
positive, committed, and patient attitude can go a long way to improving the success of your
education and your performance as an investor.
To get the most from this course, commit to making your education a priority. Many times, the
difference between failure and success is caused by doing something nearly right and doing it
exactly right, and all that is required to bridge the gap may be a little more time and patience.
Now that you have a basic idea of what this course is about, complete the following activity
that teaches you how to navigate the Investools website.

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Step 1Prepare to be
an Investor
No profession requires more hard work,
intelligence, patience and mental discipline
than successful speculation.
Robert Rhea

Step 1Prepare to be an Investor

Introduction
In this lesson, you will learn how building an
investing plan can help you develop discipline
and take ownership of your trades. Having a laserlike focus can help you learn how to filter out the
noise that can lend itself to emotional, often
senseless, trading and develop logical, disciplined
trading. Having a plan is essential in nearly all
major projects, organizations, and governments
investing is no different.
Lets get started by watching a short video that
introduces key concepts of this lesson, followed
by a video that details the basic components of an
investing plan.

2015 TD Ameritrade IP Company, Inc.

Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position size
for a stock trade
Set up daily and weekly routines
Define criteria for and create a trading
journal

14

Investing Plan

Step 1Prepare to be an Investor

What is an investing plan?


In the video, you just learned that an investing plan is a document constructed of various rules
that define what to buy, when to enter, how much to buy, and when to exit.
An investing plan has six main components:
1.
2.
3.
4.
5.
6.

Objective
Watch List Criteria
Entry Rules
Exit Rules
Money Management
Routines

Now that you have a basic understanding of an investing plan, we will review the investing plan
tool in the following activity. Then we will introduce you to the concept of a trading journal.

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Trading Journal

Step 1Prepare to be an Investor

Good Trades
Unfortunately, many investors believe that the only way to measure success in investing is by
looking at the bottom line of their portfolio. While this is important, it is not always the most
important. Knowing this might surprise you and may require a vocabulary change. Look at the
following definitions based on your new understanding of an investing plan.

Good Trade: From here on out, wed like you to start defining a good trade as one where you
follow your rules. A good trade means you followed your rules, whether you
made money or not.

Great Trade: A great trade is one where you follow your rules and made money.

Dangerous Trade: A dangerous trade is one where you didnt follow your rules and you made
money because you have been rewarded for a bad decision and this may cause you to choose
to ignore your rules in the future.

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Step 1Prepare to be an Investor

Trading Journal
Now that you know the difference between a good, great, and dangerous trade, its important to
have a way to track all your trades. A trading journal is how investors document and monitor their
trades. There is an example of a trading journal below.
There is no one way to do this. However, investors often record the basics, such as the date, stock
price, how many shares are purchased, and type of trade made.
Now that you know what a trading journal is, complete the following assignment.

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Trading Assignment:
Create a Trading Journal

Step 1Prepare to be an Investor

Trading Assignment: Create a Trading Journal


Your assignment is to create your personal trading journal.
This could be in a notebook, spreadsheet, or whatever you
are most comfortable with. There are a number of trading
journals that have been developed by other students and
coaches that are available in Community. These are great
references and will serve you well in setting up your
trading journal.
1. Type trading journal in the Keyword Search box
and wait. A list dispalying search results will appear.
2. Click the search results to access trading journals.
Download a few different trading journals to find the
journal that works best for you.

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Step 1Prepare to be an Investor

Lesson Review
In this lesson, you were introduced to the concept of being a disciplined trader by creating and
using an investing plan and trading journal.
In the next lesson, you will learn to analyze the markets from the top down. This includes starting
from the broad market indices and moving down to sectors, industry groups, and finally stocks.
This process will generate criteria for your watch list in your investing plan.

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Step 2Start Analyzing


from the Top Down
Spend at least as much time researching a
stock as you would choosing a refrigerator.
Peter Lynch

Step 2Start Analyzing from the Top Down

Introduction
We just reviewed how important it is to prepare to
be an investor. How you approach investing is just
as important.
In this lesson, you will learn to start analyzing a stock
from the top down and identify how it fits within your
investing plans watch list criteria.

Lets get started by introducing the basics of a


top-down analysis by watching the following video.

Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position size
for a stock trade
Set up daily and weekly routines
Define criteria for and create a trading
journal

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Top-Down Analysis

Step 2Start Analyzing from the Top Down

Finding Stocks
The importance of Step 2 is to learn a structured
way to look for stocks. First, you start by searching
for stocks on a large scale, and then continue to
progressively narrow your search to single out
stocks in which to invest. This method is called
top-down analysis.

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Step 2Start Analyzing from the Top Down

Top-Down Analysis
The chart on the right illustrates top-down analysis.
This process has four phases:
1.
2.
3.
4.

Analyze Market Posture


Analyze Sectors
Analyze Industries
Select a Stock

With each step in the top-down analysis process, you are


funneling down to select a strong stock to invest in.

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Step 2Start Analyzing from the Top Down

Top-Down Analogy
It may be helpful to think of top-down analysis in terms of narrowing in on real estate as a multinational real estate tycoon would do.
In this case, the market represents the country in which a tycoon wants to purchase real estate.
The country (or market) is broad in scope, and it contains various states or provinces (or sectors),
cities and towns (or industries), and finally real estate (or stock)
that the tycoon can invest in.

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Step 2Start Analyzing from the Top Down

Top-Down Analogy
If investors can first find the top-performing market,
then top-performing sectors and industries, and then
the best stocks, at the best times, their capability
to outperform the market and their personal
benchmark increases.
Just like land developers want to find the best land to
build houses or buildings, investors will want to find
the best industries in order to find the best stocks.
But just like any purchase, you need to consider the
environment you are buying in, which is why its best to
use top-down analysis.

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Step 2Start Analyzing from the Top Down

Top-Down Analysis Review


In this section you learned that a market is defined by a geographical location and a common
trading instrument like a stock or a bond. You also learned that markets can be broken down
into related groups called sectors. These sectors can be divided even further by separating
them into industry groups. You learned that using a top-down approach can help you use these
divisions to find the best-performing stocks in the best markets, the best sectors, and the best
industry groups.
Next, youll start to learn how to perform a top-down analysis step by step by looking closer at
these divisions using the tools available in the Investor Toolbox. Now, lets dive deeper into each
step to understand how each is conducted.

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Market Posture Analysis:


Trend Identification

Step 2Start Analyzing from the Top Down

Market Posture Analysis: Trend Identification


Swimming with the Current
Imagine two swimmers in a river, one downstream
from the other. They are having a contest to see
which one can swim to a point in the middle of the
two swimmers. One goes with the current, while
the other swims against it. Obviously, the swimmer
going with the current has a huge advantage over
the swimmer going against it. In fact, a novice
swimmer going with a strong enough current could
beat an Olympic gold medalist.
The same concept applies to the stock market. It is
easier to invest with the trend, or current, of the market than against it. Top-down analysis helps
investors identify a trend and focus on investing in stocks that are moving with it.

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Step 2Start Analyzing from the Top Down

Trade with the Trend


Trade with the trend. This is one of the golden rules of investing and should be in every students
investing plan. So what is a trend and how do investors trade with it? In the case of our swimmers,
think of a trend as the direction of ocean currents. To get somewhere fast and with relative ease,
ships follow the direction of the current and flow with it. When looking at a chart, the flow or the
trend is a series of increasingly higher waves.
In order to better understand the concept of trend, become familiar with recognizing peaks and
troughs on a stock chart. First, you need to know the stock market moves in one of the following
three directions called market trends:
1. Up
2. Down
3. Sideways

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Step 2Start Analyzing from the Top Down

Posture
Knowing the trends direction is important because it helps determine your bias or posture. Your
posture is how you position your investments and trades. Look at the following chart to see how
the trend typically measures up to posture:
Market Trend

Posture (Bias)

Up

Bullish

Down

Bearish

Sideways

Neutral

Next, lets dig deeper into what a market trend looks like. The next series of graphs will demonstrate
up, down, and sideways trends.

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Step 2Start Analyzing from the Top Down

Uptrend
An uptrend is defined as higher highs and higher lows and is bullish.

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Step 2Start Analyzing from the Top Down

Downtrend
A downtrend is defined as lower highs and lower lows and is bearish.

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Step 2Start Analyzing from the Top Down

Sideways
A sideways trend is defined as relatively equal highs and equal lows and is neutral.

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Step 2Start Analyzing from the Top Down

Trend Duration
Trends are like the oceanthe tide rises, waves hit the
shore, and ripples stream across the beach. Within the
long-term trend are intermediate-term trends. Within
the intermediate-term trend are short-term trends.
The most successful trading occurs when all waves
are crashing at high tide because everything splashes
higher on the beach.
As you develop a posture around trend, it is important
you remember the time frame you are considering.
Next, lets review the variable time frames that typically
affect the trend: long term, intermediate term, and
short term.

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Step 2Start Analyzing from the Top Down

Long Term
Long term is generally considered to be nine months or longer. When looking at a long-term
ProphetCharts of five years, each bar represents one week. This long-term trend is similar to the
ocean tide that continues to rise even when waves ebb.

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Step 2Start Analyzing from the Top Down

Intermediate Term
Intermediate term is generally considered to be three to nine months in length. An investor
hoping to determine this trend length typically uses charts that show six months to a year.
The image below shows an intermediate chart with a green arrow acting as the trendline. The
intermediate trend is created by higher highs and higher lows. In a six- or 12-month chart, each bar
represents one day. This trend is akin to the waves of the ocean that ebb and flow with a rising or
falling tide.

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Step 2Start Analyzing from the Top Down

Short Term
Short term is generally considered to be three months or less; therefore, a short-term investor
would use a three-month chart to determine trend. This chart shows short-term uptrends (blue
arrows) and downtrends (red arrows) within the intermediate chart. Notice that short-term
trends create the higher highs and higher lows of the intermediate trend. Short-term trends are
similar to ripples on the waves that create small ebbs and flows as the larger waves ebb and flow.

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Step 2Start Analyzing from the Top Down

Trend Identification Review


You have just learned that markets tend to move in trends. A trend can move in three directions at
varying time intervals.
1. Up
2. Down
3. Sideways
Lets take a moment to practice identifying the trend. Complete the following activity, after which
we will dive deeper into market posture.

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Market Posture Analysis:


Trend Confirmation

Step 2Start Analyzing from the Top Down

Markets and Indices


A market is a group that has a similar financial instrument (i.e., bonds, stocks, commodities,
currencies) and a common demographic or geographic area. Frankly, a market is huge in scope.
A common unit of market measurement is an index. The table below lists a few popular
market indices.
Index

Symbol

Dow Jones Industrial AverageSM


Standard & Poors (S&P) 500
NASDAQ Composite

$INDU
$SPX
$COMPQ

Knowing what the market is doing directs your trading, which is why it is the best place to start.
So lets talk specifics...like how do you actually analyze market indices? The Market Posture
page in the Investor Toolbox is a tool you can use in your top-down analysis to help determine
market posture.

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Step 2Start Analyzing from the Top Down

Market Posture Analysis


Market Posture Page
The Market Posture page will help in your top-down analysis because it lists many prominent
stock indices. It also allows you to look at various stock sectors and some exchange-traded funds
(ETFs) all in one page.

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Step 2Start Analyzing from the Top Down

Market Posture Analysis


After locating the Market Posture page, identify and analyze market trends by doing the following:

1- Broad Index Analysis

Scan the thumbnail charts of the major indices listed that make up the overall market trend.
As you review them, youll notice that some trends are up, some are down, and some are
sideways in the intermediate term.

2- Form an Opinion of the Markets Direction

Identify the overall market trend from the thumbnail charts and determine your posture
for the intermediate term as up (bullish), down (bearish), or sideways (neutral).

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Step 2Start Analyzing from the Top Down

Market Posture Analysis


Additional Tools
If youre interested, the Market Forecast graph, found in the Investor Toolbox, can provide
early warnings of potential trend changes and is an effective way to help assess the level of risk
within the current market environment.
The one line to pay special attention to is the green intermediate-term line because it confirms
the current trend.

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Step 2Start Analyzing from the Top Down

Trend Confirmation Review


When establishing your market posture:

Determine the market trend by scanning the thumbnails charts on the Market Posture page
to identify the current trend of major indices.

Confirm your posture by using the Market Forecast indicator. The green line of the Market
Forecast should confirm the current direction youve determined by showing a similar trend.

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Trading Assignment:
Conducting a Market Posture Analysis

Step 2Start Analyzing from the Top Down

Trading Assignment: Conducting a Market Posture Analysis


Determine the market trend for three major market indices in multiple time periods and then
determine your own market posture.

Directions
1. From the Market Posture page, click the index
symbols that are located above the thumbnails to
launch the Index Snapshot for the following indices:
$SPX, $INDU, and $COMPQ
2. From here, you can change the graph view for each
index to three months, one year, and five years by
clicking the icons just below the graph
3. Determine the overall market posture (bullish,
bearish, or neutral)
4. If you own Coaching services, call your coach or join an Online Coaching session to discuss
what youve identified as the market posture and why
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Sector Analysis

Step 2Start Analyzing from the Top Down

Sector Analysis
Now that youve learned how to determine your
market posture, the next step is to determine
which sectors are leading the markets. Youve
determined the country in which you want to
look for real estate, now lets look for states or
provinces you might like.
You may be asking, If Im bearish on the stock
market, doesnt that mean all stocks will be going
down? Thats a very good question. While its true
that most stocks will be downtrending during a
bear market, there are stocks that will rise during
this time. Finding sectors and then strong industry
groups can be a great way to identify these stocks.

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Step 2Start Analyzing from the Top Down

Sector Analysis
A sector is a broad-based group of stocks that deal
in similar business functions or services. This
broad-based group is made up of a number of
industry groups that are more narrowly defined by
competing products.

10 Sectors
There are 10 sectors represented on the Investor
Toolbox. This table shows all sectors and their
corresponding index ticker symbols.

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Sector

Symbol

Materials

$BASICM

Consumer Discretionary

$CYCLIC

Energy

$ENERGY

Financials

$FINANC

Health Care

$HEALTH

Industrials

$INDUST

Consumer Staples

$NONCYC

Technology

$TECHNO

Telecommunication

$TELCOM

Utilities

$UTILIT

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Step 2Start Analyzing from the Top Down

Sector Analysis
There are two tools used for sector analysis:

Big Chart
Comparison Chart

Well discuss each in more detail, but well start with the Big Chart, available in the Investor
Toolbox under the Market 360 link. The Big Chart tells you which sectors are attracting or
losing institutional investors (i.e., organizations such as banks, insurance companies, retirement/
pension funds that pool large sums of money to invest, etc.). The Comparison Chart allows you to
find sectors that are outperforming the market. Knowing which of the 10 sectors are strong right
now allows investors to invest with more control and helps increase their probability for success
in strong industry groups and ultimately, quality stocks.

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Step 2Start Analyzing from the Top Down

Sector Analysis
Big Chart
The Big Chart at the sector level enables you to visualize which sectors may be rotating into favor
(attracting more institutional money) and which may be rotating out of favor (losing institutional
money). The more money flowing in, the lower the score. A ranking on the Big Chart tells how the
sector has performed versus all other sectors.
The following is the scoring
and coloring system for the
sector level Big Chart.

1-2 = Green
3-4 = Yellow
5-10 = Red

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Step 2Start Analyzing from the Top Down

Sector Analysis
Big Chart (continued)
Sectors in the Big Chart are commonly viewed as either strong, neutral, or weak if they do
the following:
Sector

General Rules

Strong

Green Ranking (1 to 2)
Consistent Decreases in Numerical Rankings

Neutral

Yellow Ranking (3 to 4)
Consistent Yellow Numerical Rankings

Weak

Red Ranking (5 to 10)


Consistent Increases in Numerical Rankings

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Step 2Start Analyzing from the Top Down

Sector Analysis
Under and Outperforming the Market
Analyzing sectors can be done in ProphetCharts with the comparison charts you learned about in
the previous activity. The comparison chart allows you to see how well the sector has performed
compared to the S&P 500.
Comparison features are valuable resources because they tell you if a sector is under or
outperforming the market. Underperforming means the sector is returning less than the market
and outperforming means its returning more than the market. Of course, you want to be finding
sectors, industry groups, and stocks that outperform the market.
Lets review some comparison examples of sectors with the S&P 500. Well use the S&P 500 to
represent the market.

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Sector Analysis
This example compares the
Materials sector (black line)
to the S&P 500 (blue line).
Here you can see that both
the S&P 500 and Materials
are downtrending. Also
the Materials sector is
underperforming the S&P 500,
which means it probably isnt
the best sector to search for
quality industry groups.
Now compare this example to a
more bullish sector.

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Sector Analysis
The Consumer Staples sector
(black line) in this example
moved sideways when the
S&P 500 (blue line) was
downtrending. This sector is
considered bullish here because
it is outperforming the S&P by
showing higher returns for the
same time period. This sectors
industry groups have a higher
likelihood of uptrending because
of the sectors relative strength.
There is one main take away
from these two examples:
find sectors that outperform the market.

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Sector Analysis Review


Sector analysis can be easy if you follow these steps.
1. Find the strongest sectors using Market 360
2. Find sectors that are outperforming the S&P 500 using Comparison Charts
Strong, uptrending sectors that are outperforming the S&P 500 are usually good states to find
terrific communities to buy in. But before you go on, lets practice determining your posture and
spotting top sectors with an activity, following which you will complete a trading assignment on
sector analysis.

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Trading Assignment:
Conducting a Sector Analysis

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Trading Assignment: Conducting a Sector Analysis


Identify three strong sectors that have outperformed the S&P 500.

Directions

Sector

Symbol

Materials

$BASICM

Consumer Discretionary

$CYCLIC

Energy

$ENERGY

3. Bring up the S&P 500 using the ticker


symbol $SPX

Financials

$FINANC

Health Care

$HEALTH

4. Using the sector symbols listed to the right,


compare the top three from step 1 to the S&P
500 and find the sector(s) that outperformed
the S&P 500

Industrials

$INDUST

Consumer Staples

$NONCYC

Technology

$TECHNO

Telecommunication

$TELCOM

5. If you own Coaching services, call a coach or


join an Online Coaching session to discuss the
outperforming sectors you identified and why

Utilities

$UTILIT

1. Find the top three ranked sectors on the


sector level Big Chart
2. Pull up the ProphetCharts tool

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Industry Group Analysis

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Industry Group Analysis


At this point youve zoomed in from a birds eye
view of the world to try and find good real estate
and narrowed your search to a state and city.
Now, its time to start researching neighborhoods.
Translate this to stock: You have your list of
sectors that are outperforming the market, now we
can dig a bit deeper and look at industry groups.
Dividing sectors into industry groups can help you
find stocks that will give you those far-reaching
ripples in your portfolio.

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Industry Group Analysis


Investools has two analysis tools in the Investor Toolbox that help students drill down their topdown search even further:

Big Chart
Best & Worst Industries list

Well discuss each in more detail, but well start with the Big Chart, available in the Investor
Toolbox under the Market 360 link or Industry Group section. You learned about the sector
level big chart in the Sector Analysis section. The Big Chart at the industry level tells you which
industries are attracting or losing institutional investors (i.e., organizations such as banks,
insurance companies, retirement/pension funds that pool large sums of money to invest, etc.).
The Best & Worst Industries list allows you to find the best-performing industries during various
time periods and observe the performance of stocks in those industries. Knowing which of
the 154 industries are strong right now allows investors to invest with more control and helps
increase their probability for success in finding quality stocks.

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Industry Group Analysis


Big Chart
The Big Chart enables you to visualize which industries may be rotating into favor (attracting
more institutional money) and which may be rotating out of favor (losing institutional money).
The more money flowing in, the lower the score. A ranking on the Big Chart tells how the industry
group has performed versus all other groups.
The following is the scoring
and coloring system for the
Big Chart.

1-32 = Green
33-65 = Yellow
66-154 = Red

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Industry Group Analysis


Big Chart (continued)
Industry groups in the Big Chart are commonly viewed in either good, neutral, or poor neighborhoods
if they do the following:
Industry Group

General Rules

Good

Green Ranking (1 to 32)


Consistent Decreases in Numerical Rankings

Neutral

Yellow Ranking (between 33 and 65)


Consistent Yellow Numerical Rankings

Poor

Red Ranking (66 to 154)


Consistent Increases in Numerical Rankings

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Industry Group Analysis


Best & Worst Industries List
The Best & Worst Industries list ranks industries according to their percentage gains during
specified time periods in the past. You can use this tool to employ an alternative top-down approach
to finding stocks by first finding industries that performed the best in the recent past, and then
locating stocks that had previously performed best in the recent past within those industries.

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Industry Group Analysis


Best & Worst Industries List (continued)
Identifying good industry groups using the Best & Worst Industries list is easy because they
are ranked by performance depending on the time frame. Groups with positive returns are
highlighted in green, while those with negative returns are in red.

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Industry Group Analysis


Big Chart vs. Best & Worst
One benefit of the Big Chart compared to the Best & Worst Industries list is that the Big Chart
can help identify groups that are increasing in performance compared to other industry groups,
whereas the Best & Worst Industries list simply focuses on the rate of return for a selected
time period.
We recommend that you start out by using the Big Chart and then use the Best & Worst Industries
list to enhance your research.

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Industry Group Analysis


Accounting for Diversification
You have likley heard how important it is to diversify your investments. Diversification makes
a lot of sense, but investing in stocks within the same sector may reduce the benefits of
diversification. Why? Stocks in the same sector often move in the same direction because they
are subject to the same industry and market risks.
For exampleA telecommunication services firm could have issued a disappointing earnings
release. A similar company could also be affected by the news at the same time.
An effective way for investors to approach diversification across sectors is to evenly divide
asset allocation across a range of sectors. A hypothetical portfolio of 20 stocks should represent
at least eight different sectors. Remember that industry groups in the same sector isnt
diversification. Consider the following guidelines when making your own buying decisions.

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Industry Group Analysis


Diversification Guidelines
1. Look out for Similar Groups: There is actually very little difference between the price
movement of the Oil Well Services & Equipment ($OILSRV) and Oil & Gas Exploration &
Production ($OILPRD) industry groups. Putting two energy groups into a single portfolio
may expose it to more risk than appropriate.
2. Watch Industry Group Rotation: When an industry group begins to drift out of favor and
into the red on the Big Chart, it may be time to shift to a group that is showing promise by
emerging from the Big Charts yellow ranks. Industry group rotation is a professional tool
that can be used to identify potential new opportunities.
3. More Components, More Choices: Industry groups with more components provide more
choices, while those with fewer components can make it difficult to find good opportunities.
With 154 industry groups to choose from, look for the group with more members when
deciding between similar groups.

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Industry Group Analysis Review


In this part of the lesson you learned that sectors are made up of industry groups. Industry
groups are groups of stocks that have similar product lines and goals. You learned how the Big
Chart and the Best & Worst Industries list can help you identify top-performing industry groups,
which groups are coming into favor, and which groups are falling out of favor.
Next, lets complete two activities to practice identifying these industry groups. Following
which, you will complete a trading assignment about industry group analysis.
After the assignment, we will discuss using ETFs in the top-down approach before wrapping up
this lesson.

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Trading Assignment:
Conducting an Industry Group Analysis

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Trading Assignment: Conducting an Industry Group Analysis


Earlier in the lesson you were asked to find three top-performing sectors using ProphetCharts.
Now, your assignment is to find the three best industry groups within each sector using the
Big Chart.

Directions
1. From the Investor Toolbox, select Big Chart
2. Recall the top three sectors from the previous assignment
3. Find the three best industry groups within each of the top three sectors
4. If you own Coaching services, call your coach or join an Online Coaching session to discuss
what youve identified as the best industry group and why

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Using ETFs in the Top-Down Approach

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Using ETFs in the Top-Down Approach


Lets take a moment and learn more about ETFs and the
top-down approach:

Definition: An ETF is an investment fund (similar


to a mutual fund) that trades like a stock

The goal of the top-down approach is to find uptrending


markets, sectors, and industry groups. However, you
should know that each segment is commonly tracked in
ETFs as well.
This means that, before progressing to the next level of
the top-down approach, you may choose to trade an ETF that mimics the market, sector, or some
selected industry group. By trading these ETFs you can take advantage of the uptrends in each
level of the top-down analysis.

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ETF Symbols
So how do you trade ETFs? You can analyze ETFs much the same way you do with individual
stocks by typing the ETF symbol in the search box. Market 360 shows ETF symbols associated
with sectors and market indicies. Clicking the ETF symbol in the ETF column opens the Corporate
Snapshot for the ETF.
The image below shows
the ETF symbols for the
10 sectors displayed in
Market 360.

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ETF Example
Lets take a moment to run
through an example. If I was
reviewing sectors and found
that the Energy (XLE) sector
was outperforming the market,
I could invest in an ETF that
mimics the Energy sector.
By entering the symbol, XLE, in
the search feature, I have the
option to paper trade the ETF
in paperMoney.

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ETF Review
Finding stocks is similar to finding a needle in a haystack at times. But when you are able
to start trading ETFs by choosing from a small pool of markets, then progressing to a midsized pool of sectors, then a larger pool of industry groups, and finally on to that enormous
ocean of stocks, you ease yourself into trading and the top-down analysis process.
It is also important to give yourself time at each level (markets, sectors, industry groups, stocks)
to practice before progressing.
Now that we have completed the ETF part of this lesson, lets update our investing plan.

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Investing Plan Update

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Investing Plan Update: Watch List Criteria


Course Investing Plan
This course has three main sections under the watch list criteria, one of which is for the topdown analysis. Below are key points you will find on your course investing plan pertaining to
top-down analysis.
Top-Down Analysis
1. Major Markets: Identify the long-term, intermediate-term, and short-term trend of major
markets ($INDU, $SPX, $COMPQ)
2. Sector and Industry Group: Use the Big Chart to identify stocks that are within a stable or
strengthening sector and industry group
3. Stocks and ETFs: Stocks and/or ETFs that are trending up or sideways

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Investing Plan Update: Watch List Criteria


Personalized Investing Plan
You should be considering ways to update your investing plan based on this lesson. One way is to
add rules similar to the example rules below:

Search for stocks with a Big Chart ranking of 32 or lower


Search for stocks with a Big Chart ranking of 62 or lower
Search for stocks that have decreasing rankings over at least five weeks

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Lesson Review
In this lesson you learned that the top-down analysis approach helps you:

Determine your market posture using a chart of the S&P 500

Identify uptrending stock sectors using ProphetCharts and the Big Chart

Select industry groups that are receiving institutional attention by using the Big Chart and
Best & Worst Industries list

You also learned that some investors may choose to focus on index or sector ETFs as a way to
invest in stocks with a better degree of diversification. Finally, you updated your investing plan
with the top-down rules that best suit your investing style and preferences.
The top-down approach leads you to finding a single stock. The next lesson will teach you how to
analyze a stocks fundamental scores once you have found it.

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Step 3Conduct a Thorough


Fundamental Analysis
Buy a stock the way you would buy a house.
Understand and like it such that youd be content to
own it in the absence of any market.
Warren Buffett

Step 3Conduct a Thorough Fundamental Analysis

Introduction
In the previous lesson, you focused on how to
identify potential watch list stocks by using a topdown approach, all the way up until actually selecting
a stock. The top stocks in an industry group are
determined by their fundamental strength.

Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process

Step 3 of the 7-Step Investing Formula is


Conduct a Thorough Fundamental Analysis.

Build a watch list using fundamental


analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position
size for a stock trade Set up daily and
weekly routines
Define criteria for and create a trading
journal

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Step 3Conduct a Thorough Fundamental Analysis

Introduction to Fundamental Analysis


Fundamental analysis is a systematic process of determining whether a particular company is a
good growth candidate for your investing plan watch list.

Phase 1 and Phase 2


The Investor Toolbox makes fundamental analysis a lot easier by simplifying the process into
two phases: Phase 1 and Phase 2. These phases are important because they help you identify
stocks with key growth and stability characteristics.
Phase 1 is an accumulation of fundamental and technical ratios. These ratios are designed to
help investors determine a companys financial strength. As the name suggests, Phase 1 is the
first step in your fundamental analysis. Phase 2 is the second step in your financial analysis and
focuses on analysts future estimates and the companys ability to promote sales and earnings.

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Introduction to Fundamental Analysis


Phase 1 and Phase 2 (continued)
Its important to realize that Phase 1 and Phase 2 tend to direct an investor toward smaller,
growth companies. This could mean that some larger common companies youre familiar with
wont qualify with the higher scores youd hoped for. This doesnt mean those companies are
necessarily bad; however, they are usually past the growth stage that Phase 1 and Phase 2 focus on.
By conducting a fundamental analysis on a company, investors can reduce or limit the emotion
that comes with their investment decisiona stock either passes a fundamental screening or it
doesnt. Fundamentals tell you the good and bad, helping reduce risk. Good fundamentals provide
a solid foundation on which companies can build.
After watching this short video, we will jump into Phase 1 of the fundamental analysis process.

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Phase 1

Step 3Conduct a Thorough Fundamental Analysis

.Phase 1
The Phase 1 score is the first step in a fundamental analysis.
To calculate it, the Investor Toolbox examines 13 criteria and
returns a score presented as a ratio7/2, for examplewith
the number of positive readings listed before the number of
negative readings.
When looking at a stocks Phase 1 score, pay close attention
to the first number because its the number of good Phase
1 scores. With the criteria used, a stock may be generally
considered a candidate for further examination if it shows a
positive score of five or higher. Each stocks Phase 1 score is
updated every 24 hours.
Passing Phase 1 Score: Five or higher

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Calculations
Look at how various items in Phase
1 are scored by the computer to
determine green and red arrows.
The automated scoring on the
Investor Toolbox makes scoring
Phase 1 easy. Obviously the more
green arrows the better. Phase 1
scores with at least five positives
(or green arrows) tend to have better
growth prospects. If a Phase 1 score
has five positives or better, it will
show a green arrow right by the title,
meaning that the stock has passed
Phase 1.

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Positive

Negative

Volume Ratio 5/30 Day

Higher than 150%

Lower than 50%

P/E Ratio

620

> 40 or < 6

P/E Relative Ratio

30 or lower

70 or higher

Projected EPS 1 Mo. Chg.

Positive

Negative

EPS Growth 5 Year

20% or more

10% or less

Company Growth Ratio

Above 1.2

Below 0.8

Acc/Dist Current

60 or higher

40 or lower

Cash Flow Growth 5 Yr.

Positive

Negative

Debt/Equity Ratio

20 or lower

Above 100

Insider Trading

Positive

Negative

EPS Rank

70% or higher

30% or lower

Price Rank

70% or higher

30% or lower

Group Rank

70% or higher

30% or lower

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Step 3Conduct a Thorough Fundamental Analysis

Phase 1 Review
Investools has made it easy for you to quickly determine
if a stock has passed Phase 1. Remember that the Phase
1 indicators help you determine a companys financial
growth and stability potential. You also learned that a good
Phase 1 will have at least 5 positive scores. Now that you
understand Phase 1 basics, lets move on to Phase 2.

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Phase 2

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Phase 2
Phase 2 is a systematic, repeatable process that looks more closely at a companys
fundamentals. It has been completely automated by the Investor Toolbox.
With the Phase 2 scoring system, a stock either scores well or it doesnt. Before watching a stock
for a potential buy signal, the stock must score well in Phase 2.

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Phase 2
When scoring Phase 2, evaluate the following criteria:

F/E: An average of the Financial and Estimates score.


Estimates: What analysts (professionals in the
investing world) are projecting for the companys
future earnings
Financials: Analyzes a companys past performance

Price Pattern: Indicates whether the stock has been


moving up, down, or sideways.

Volatility: Shows how fast the stock has moved up and down on a daily, weekly, and monthly
basis. Scoring volatility helps investors determine how comfortable owning the stock will be.

News (not pictured): Measures whats happening with a company at the present time. Recent
company news can affect the overall Phase 2 score positively or negatively.

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Phase 2
Scoring Phase 2 involves giving individual numbers to each component: Estimates and Financials
(F/E), Price Pattern, Volatility, and News. The automated Phase 2 scoring uses a four-point scale,
similar to how most schools report grades. A 4.0 is a strong A and 0.0 is a failing grade, or F.
The following determines a passing Phase 2 score:
Phase 2 Criteria

Score

F/E

3.25 or higher

Price Pattern

2.5 or higher

Volatility

3.0+ (conservative)
1.0- (aggressive)

News

Pass

Now lets spend time learning more about each Phase 2 criteria and scores.

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F/E
The F/E score is the average of the Financials and Estimates scores. Lets learn about each separately.

Financials
To determine the Financials score, there are four things that are considered.

Return on Equity (ROE): Reflects the managements


effectiveness in using investor equity to grow profits

Growth Rates: How quickly a companys sales have grown

Revenue: How much the company brings in before expenses

Earnings per Share (EPS): Tells how much the company is


making in profits per share of stock

Passing F/E Score:


3.25 or higher

Each of these four considerations are included on the Financials page in the Investor Toolbox for
you to review.

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F/E
Financials
In the Corporate Snapshot, if you click Financials under
the Phase 2 header located in the left navigation bar, it will
take you to a stocks financials overview.
For more specifics on how each score is determined, see the
Additional Information section at the end of this lesson.

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F/E
Estimates
The Estimates score, also known as Earnings Estimates, is the process that looks at what analysts
are saying about the companys future earnings growth potential. If you click Earnings Estimates
under the Phase 2 header on the left navigation bar in the Corporate Snapshot, it will take you to
a stocks financials overview.
For more specifics on how these scores are determined, see the Additional Information section
at the end of this lesson. Now lets move on to the next Phase 2 criteriathe Price Pattern score.

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Price Pattern
As previously mentioned, the Price Pattern score determines
which way the stock is moving (up, down, or sideways) on a
stock chart.
The Investor Toolbox compares one-year and five-year charts
to determine an overall Price Pattern score, with the most
recent price movements carrying more weight.

Passing Price Pattern


Score: 2.5 or higher

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Price Pattern
To score 4.0 (A), the stock must
have been moving upward
on both one-year and fiveyear charts. If the stock was
primarily moving sideways, it
scores 2.0 (C). If the stock was
moving downward, it scores
0.0 (F).
A passing Price Pattern score
is 2.5 or higher. Now, lets look
at the Volatility score.

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Volatility
The next step in this systematic process is to assess the
Volatility score, which indicates risk and measures the
magnitude of a stocks price movements up and down in a
given time period. The Volatility score provides an idea of
how wide the stocks price swings may be in the future.
Looking at a charts price movements can be helpful in
preparing for the experience of owning a particular stock.
On average, monthly price movement of 10% to 20% is
considered normal for some stocks, but for others, the
price may fluctuate even more.

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Passing Volatility
Score: 3.0 or more
(conservative)
1.0 or less (aggressive)

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Step 3Conduct a Thorough Fundamental Analysis

Volatility
The Investor Toolbox scores Volatility based on how a stock compares to the baseline average.
To arrive at this average, the system looks at the price movement of all optionable stocks during
the past year and measures how fast they move up and down on a monthly basis.
The system then does the same analysis on the stock that the student is analyzing and compares
its volatility to the baseline average. The Investor Toolbox then calculates the Volatility score for
that stock according to the following criteria:

If the stock has the SAME or has LESS volatility as the large basket of stocks, it scores 4.0

The lower the volatility score, the MORE volatile the stock is

If the stock scores BELOW 2.0, it could be a warning sign

With some understanding about the Volatility score, lets learn more about how the News score
is determined.

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News
The last step in determining Phase 2 is the News score.
Positive or negative, news may impact the Phase 2 score.
News Score: Pass
While earnings may refer to results that are months past,
news offers information about what is happening with
a company right now. When examining the news, students should determine whether the
information is good or bad in terms of how it might impact the stock.

Good News: News is considered good when a company announces it beat earnings estimates,
received a significant contract, opened new facilities, and so on. Such events might indicate that
the company is moving in a direction of increased revenue and earnings, which is always good.

Bad News: News is considered bad when a company doesnt meet earnings estimates,
someone files a class action lawsuit against the company, or it loses a major contract. These
kinds of events might negatively impact the stock.

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The Headlines
To read the news within the Investor
Toolbox, go to the Corporate Snapshot
page for any company (found by clicking
the stock symbol). The Company News
section is located at the bottom of the
page, after the stock chart and industry
group information.
Begin by reading headlines for the
companys name or stock symbol. These
may be generally positive, like earnings
reports, new product announcements, and
so on, or generally negative, like a drop in
earnings. If you want to read an entire
news story, click its headline to load
the full article.

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Scoring the News


As you read the headlines and appropriate articles, you score the News as either pass or fail.
Before a news item can fail, there must be sufficient negative evidence. In fact, the following two
things must happen:
1. Negative news must occur (bad earnings, losing a major contract, etc.)
2. The stock must go down as a result of bad news
Both conditions must apply before giving the News a failing grade. It may seem intuitive that if
negative news occurs, a stock will go down. But what an investor might consider to be negative
news, the market might not care about because it has already absorbed or factored that news in.
Remember, news drives stock prices to the extent that it is new news or different from what
was expected.
Now that we understand Phase 2, lets learn more about the features in the Investor Toolbox that
automate the Phase 2 process.

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What is the AutoAnalyzer ?


Similarly to the automated Phase 2 scores calculated by the Investor Toolbox , we also
have the Auto Analyzer feature, which automates most of the Phase 2 process as well. This
feature automatically scores four of the five areas of Phase 2. It does not, however, score
News (which students should analyze).
This feature is very powerful and saves a tremendous amount of time. After reviewing Phase 2
components, you should be comfortable understanding what the numbers mean and why they are
good or bad.

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What is the AutoAnalyzer?


Based on these numbers, you should ask yourself the following
question, Do these scores meet the minimum requirements for
a passing Phase 2 score?
Youll notice that there are only two green arrows in the
AutoAnalyzer, despite the list of five criteria. This is to
synthesize the information so that when looking at the Phase 2
score youll quickly identify if Phase 2 passes by seeing if it has
two green arrows.
Passing Phase 2: Two green arrows

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Phase 2 Review
While having a good Phase 2 score doesnt guarantee the stock will go up, it does suggest a strong
financial company. When conducting a Phase 2 analysis, remember to look for the following:
Phase 2 Criteria

Score

F/E

3.25 or higher

Price Pattern

2.5 or higher

Volatility

3.0+ (conservative)
1.0- (aggressive)

News

Pass

Now that you understand how to calculate Phase 1 and Phase 2 scores, complete the following
three tool masteries and a trading assignment aimed at helping you deepen your understanding
of Phase 1 and Phase 2. Following which, for those students interested, is additional information
on the F/E score. All other students can progress to the investing plan update section.

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Trading Assignment:
Analyzing Phase 1 and Phase 2

Step 3Conduct a Thorough Fundamental Analysis

Trading Assignment: Analyzing Phase 1 and Phase 2


Previously you identified your market posture and selected three top sectors and industry
groups within those sectors. Now, your assignment is to build your watch list. Identify five stocks
with good Phase 1 and Phase 2 scores in each industry group you identified and add them to your
watch list.

Directions
1. Hover over the Investor Toolbox and select Searches
2. Select and run the Great Earnings, Sales and Cash Flow Growth search
3. Review stocks that resulted in the search
4. Add stocks to your watch list that have passed Phase 1 and Phase 2 criteria and have a solid
uptrend
5. If you own Coaching services, call your coach or join an Online Coaching session to discuss
your choices and share your rationale

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Supplemental Information (F/E Score)

Step 3Conduct a Thorough Fundamental Analysis

F/E Score: Earnings Estimates


The Earnings Estimates score, looks at what analysts are
saying about the companys future earnings growth potential.
Here is an example of how the Earnings Estimates score
is derived:

Go to a companys Corporate Snapshot (found by clicking


the stock symbol)

Click the Earnings Estimates link under the Phase 2


heading in the left navigation menu

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F/E Score: Earnings Estimates


Wall Street Estimates
The Wall Street Estimates score is based on analyst predictions for a companys future Earnings
per Share (EPS) and overall growth rate.

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F/E Score: Earnings Estimates


Scoring Wall Street Estimates
In each of the following, meeting the criteria means keeping the score as 4.0 (A). Failing to meet
the criteria means dropping the score one point.

In the Mean row, look for the year-over-year earnings estimates to increase. This means the
number in the Next Fiscal Year End column should be larger than the number in the Current
Fiscal Year End column.

In the Mean row, look for quarter-over-quarter earnings estimates to increase. The Next
Quarter End number should be larger than the Current Quarter End number.

In the Mean row of the Next 5 Year Growth column, look for a number above 20%.

In the Mean Change row, positive numbers (upgrades) are good, and negative numbers
(downgrades) are cause for concern. Score the first four numbers from left to right as a unit,
not individually.

Wall Street Estimates, the first section of the Estimates, scores 3.0 (B).

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F/E Score: Earnings Estimates


Company vs. Industry EPS Growth Rates
Company vs. Industry EPS Growth Rates compares how fast the companys EPS have grown and
are expected to grow, to the average EPS growth rates in the industry and other indices.

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F/E Score: Earnings Estimates


Scoring Company vs. Industry EPS Growth Rates
In each of the following, meeting the criteria means keeping the score as 4.0 (A). Failing to meet
the criteria means dropping the score one point.

In the Last 5 Years Actual column, look to see if the number in the Company row is larger than
the number in the Industry row.

In the Current/Last column, look to see if the number in the Company row is larger than the
number in the Industry row.

In the Next/Current column, look to see if the number in the Company row is larger than the
number in the Industry row.

In the Next 5 Years column, look to see if the number in the Company row is larger than the
number in the Industry row. If it is, keep the score the same. If it is not, drop the score one point.

Company vs. Industry EPS Growth Rates, the second section of the Estimates, scores 4.0 (A).

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F/E Score: Earnings Estimates


Historical Surprises
Public companies announce earnings once every quarter. Prior to these announcements, Wall Street
analysts predict what they believe these earnings will be. The analysts are usually pretty close in
their predictions, but every now and then a company surprises Wall Street with its earnings.
These surprises can be positive or negative. Positive surprises are generally good for a stocks
price, while negative surprises are usually bad. Consider looking for a company that consistently
meets or beats analyst estimates each quarter. Lets learn how to score these surprises using
AAPL as an example.

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Step 3Conduct a Thorough Fundamental Analysis

F/E Score: Earnings Estimates


Scoring Historical Surprises
In each of the following, meeting the criteria means keeping the score as 4.0 (A). Failing to meet
the criteria means dropping the score one point.

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F/E Score: Earnings Estimates


Scoring Historical Surprises (continued)

In the first row, look to see if the number in the Actual column is larger than the number in the
Estimate column.

In the second row, look to see if the number in the Actual column is larger than the number in
the Estimate column.

In the third row, look to see if the number in the Actual column is larger than the number in
the Estimate column.

In the fourth row, look to see if the number in the Actual column is larger than the number in
the Estimate column.

In the fifth row, look to see if the number in the Actual column is larger than the number in the
Estimate column.

Overall, AAPL scores 4.0 (A) in Historical Surprises, the third section of the Estimates score.

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F/E Score: Earnings Estimates


Analyst Recommendations and Revisions
Looking at analyst recommendations can help determine what you think of a companys
future prospects. For the stock to score well in this section, consider finding analysts who are
recommending to buy the stock.
To score Analyst Recommendations and Revisions, find the Mean Rating number in the Current
column and score it according to the following scale:



1.01.5 = A
1.62.5 = B
2.63.5 = C
3.6+ = F

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F/E Score: Earnings Estimates


Scoring Analyst Recommendations and Revisions
In this example, AAPL has a rating of 1.55, which gives it a 4.0 (A) for Analyst Recommendations
and Revisions.

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F/E Score: Earnings Estimates


Calculating the Estimates Score
After scoring each of the four Estimates categories individually, combine the scores and
calculate an average. First, take all four scores and add them together. Using the following scores
from AAPL in this example, you can discover the final Estimates score:
Wall Street Estimates
Company vs. Industry EPS Growth Rates
Historical Surprises
Analyst Recommendations and Revisions
TOTAL

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3.0 (B)
4.0 (A)
4.0 (A)
4.0 (A)
15.0

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F/E Score: Earnings Estimates


Calculating the Estimates Score (continued)
The total is then divided by four to find the average Estimates score of 3.75 (A).
Average Score = 15.0 4 = 3.75 (A)
And as you can see, the Investor Toolbox
calculated the same Estimates score for AAPL
that was arrived at by calculating the score by hand.

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Step 3Conduct a Thorough Fundamental Analysis

F/E Score: Financials


The next step in the systematic process is the Financials
score, which looks at a companys past performance. If a
company has been strong in the past, it has a better chance
of continuing to be strong in the future. Thats great news
for investors.
Calculate the Financials score by going to the Company
Snapshot of the company you are interested in analyzing
and then click Financials under the Phase 2 heading in the
left navigation menu.
The companys most recent stock data is at the top of the page, followed by the Company
Information section. This section includes a brief Business Summary for the company, along with
important contact information should you decide to check out the Investor Relations section of
the companys website.

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F/E Score: Financials


Within the Financials page, there are four sections to examine when scoring:

Return on Equity
Growth Rates
Revenue
Earnings per Share (EPS)

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F/E Score: Financials


Return on Equity (ROE)
The Key Ratios and Statistics section of the page provides broad performance data, illustrating
how well the company performed in the past. All this information is useful, but there is one key
piece of information in this section needed to score the Financials: Return on Equity (ROE).
ROE reflects the management teams effectiveness in using investor equity to grow profits. The
higher the ROE, the more likely some investors think the companys profitability will continue to be.

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F/E Score: Financials


Scoring Return on Equity (ROE)
To score ROE, look under Management Effectiveness and consider using the following scale:
18+ 4.0 (A)

1517.99
3.0 (B)

1214.99
2.0 (C)
911.99 1.0 (D)

Below
9 0.0 (F)
For this method, ROE should be 18% or better. If ROE is greater than 18%, give it a 4.0 (A). If the
ROE is less than 18%, then reduce the ROE score by one grade for every three points below the
18% standard.

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Step 3Conduct a Thorough Fundamental Analysis

F/E Score: Financials


Growth Rates
Growth Rates depict how quickly a companys sales have grown, as well as how quickly EPS has
grown compared to sales.
When looking at Growth Rates, focus on the one-year column, where youll want to see the
following three things:

Sales Growth Rates of 25% or more


EPS Growth Rates of 25% or more
EPS growing faster than sales

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F/E Score: Financials


Scoring Growth Rates
In each of the following, meeting the
criteria means keeping the score as 4.0
(A). Failing to meet the criteria means
dropping the score one point.
1. In the Sales % row, the number
should be greater than 25. In the example the number for AAPL is 14.02, which drops the
score to 3.0 (B).
2. In the EPS % row, the number should be greater than 25. In this example the number for
AAPL is 36.91, which keeps the score at 3.0 (B).
3. The number in the EPS % row should be greater than the number in the Sales % row.
The EPS % number for AAPL is 36.91 while the Sales % number is 14.02, which keeps the
score at 3.0 (B).

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F/E Score: Financials


Revenue
Revenue is how much money the company brings in before expenses. Ideally, revenue increases
year-over-year, proving company growth, and thus increasing the chances that its stock value will
also grow.

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F/E Score: Financials


Scoring Revenue
To score Revenue, consider the following steps:
1. Is the number in the second yearly column larger than the number in the first yearly column?
2. Is the number in the third yearly column larger than the number in the second yearly column?
3. Is the number in the fourth yearly column larger than the number in the third yearly column?
4. Is the number in the fifth yearly column larger than the number in the fourth yearly column?
If the numbers are not getting consecutively larger, drop the score one point each time.

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F/E Score: Financials


Scoring Revenue (continued)
The numbers for AAPL (29,182, and 42,905) would normally drop the score to 3.0 (B). However,
because the numbers are incomplete, compare quarterly numbers for the final year with
quarterly numbers for the second-to-last year.
Calculating for an incomplete fiscal year, AAPL receives a 4.0 (A) for Revenue.

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F/E Score: Financials


Earnings per Share (EPS)
EPS tells how much the company is making in profits per share of stock. Naturally, investors want
the EPS of a stock they own to be as high as possible and also want to see the EPS grow from
year to year.

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F/E Score: Financials


Scoring Earnings per Share
To score EPS, students should consider the following steps:
1. Is the number in the second yearly column larger than the number in the first yearly column?
2. Is the number in the third yearly column larger than the number in the second yearly column?
3. Is the number in the fourth yearly column larger than the number in the third yearly column?
4. Is the number in the fifth yearly column larger than the number in the fourth yearly column?
If the numbers are not getting consecutively larger, drop the score one point. In this example,
APPLs numbers are 7.00 and 9.08, which would normally drop the score to 3.0 (B). However,
because the numbers are incomplete, compare quarterly numbers for the final year with
quarterly numbers for the second-to-last year. Correcting our calculations for an incomplete
fiscal year, AAPL receives a 4.0 (A) for EPS in this example.

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Earnings per Share


Calculating the Financials Score
After scoring all four Financials categories individually, combine them and calculate an average.
First, add all four of them together and then divide the total by four. In this example well use the
following scores from AAPL again:
Return on Equity (ROE)
Growth Rates
Revenue
Earnings per Share (EPS)
TOTAL

4.0 (A)
3.0 (B)
4.0 (A)
4.0 (A)
15.0

Average Score = 15.0 4 = 3.75 (A)


And as you can see, the Investor Toolbox calculated the same Financials score for AAPL that was
arrived at by calculating the score by hand.

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Investing Plan Update

Step 3Conduct a Thorough Fundamental Analysis

Investing Plan Update: Watch List Criteria


Course Investing Plan
You have already started to build your investing plan watch list in the previous lesson with
the top-down analysis requirements. Now you can fill in more of your watch list criteria by
determining what Fundamental rules using Phase 1 and Phase 2 indicators can be added to your
investing plan.
Fundamentals

Phase 1 = 5 or higher
F/E = 3.25 or better
Price Pattern = 2.5 or better

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Investing Plan Update: Watch List Criteria


Personal Investing Plan
If you are building a personal investing plan, youll want to consider the material learned in this
lesson in order to update your investing plan with new or modified rules about your watch list. You
might add rules such as these:

Phase 1 should have at least five good scores


Phase 1 shouldnt have more than three bad scores
Stocks should have an F/E score of 3.25 or higher
Stocks should have a Volatility score of 2.0 or higher
Stocks should have a Price Pattern score of 2.5 or higher

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Lesson Review
Fundamental analysis helps investors know what to trade. We encourage you to build watch lists
consisting of stocks that meet the criteria as outlined in your investing plan. The idea is to create
a list of stocks in good industry groups with strong fundamental scores for potential candidates.
These stocks should remain in a watch list until entry signals appear.
In addition to using the top-down approach to select stocks, learning how to use various searches
for more fundamentally sound companies can help. The next lesson introduces other ways to
search for stocks to build watch lists.

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Step 4Search for


Additional Strong Stocks
Dont confuse brains with a bull market.
Humphrey Neill

Step 4Search for Additional Strong Stocks

Introduction
In the previous lesson, you learned how to evaluate
a stock using fundamental analysis. You discovered
that the Investor Toolbox will actually do most of
the hard work, making this analysis easy.
While there are various searches for building a watch
list, in this lesson we focus on two main searches
found in the Investor Toolbox:

Prebuilt Searches
Global Search

After watching this short video, lets start with


prebuilt searches.

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Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal

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Prebuilt Searches
The Investor Toolbox offers many prebuilt searches to help investors find potential investment
candidates. Each prebuilt search looks at all stocks in the database using specific screening
criteria and displays the top 25 stocks that most closely match the criteria of the chosen search.
At the click of a mouse and based on the search criteria, 25 of the best-performing stocks from
the entire database appear in seconds. Consider using these results to choose stocks to perform
a fundamental analysis on. Those that pass the analysis may be watch list candidates.

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Conducting a Prebuilt Search


To conduct a prebuilt search, from the main Investor Toolbox , click the Searches link. The
main Search page appears with more than 40 different prebuilt searches.

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Conducting a Prebuilt Search


Students often ask, Which of these searches should I run? The first set of searches is the Most
Popular Searches. Consider beginning with these.

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Understanding Your Search


To learn more about a particular search and
the parameters it uses to screen stocks,
right click its name. Then select Show
Description from the list.
This brings up a page outlining which
criteria the search is looking for.

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Performing the Search


From the Searches page you can perform a search by clicking one of the prebuilt searches. For
the purpose of this example, use the Strongest Stocks in Multiple Time Periods. As the name
suggests, this search looks for strong stocks in numerous time periods.

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The Search Results


The Investor Toolbox searches its
database of more than 12,000 stocks to
find the top 25 that best meet the selected
search criteria. The top 25 stocks are
displayed on the results page.
A stock symbol with four or more letters
means it is traded on the NASDAQ. If the
stock symbol has less than four letters, it is
traded on the New York or American Stock
Exchange. If you click any symbol link on
the results page, the Corporate Snapshot
for that stock is launched.

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Understanding the List of Stocks


As shown in our example, the results page shows a wide range of information, including the following:

Name: Name of company the stock represents

Industry: The market industry of which the company is a part; each symbol is a clickable link
that launches the industry group Corporate Snapshot for that industry

Symbol: The ticker used to represent a company; each symbol is a clickable link that launches
the Corporate Snapshot for that security

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Understanding the List of Stocks

Options: Signifies whether a particular stock offers options; this is a clickable link that
displays options available for that company, if applicable

Phase 1: A measure of the stocks likely attractiveness to investors

F/E: Automatically combines the Financials and Estimates scores

Price Pattern: Automatically measures the current direction of a stocks price pattern

Volatility: Automatically measures the volatility of a stock

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Navigating the List of Stocks


Scroll down the page to review the entire list of the top 25 stocks that meet the search criteria.
Statistically speaking, the 25th stock is as good as the first because it is still one of the best
stocks out of 12,000 screened by the search. Also, just because a stock appears in the search
results does not mean an investor should buy it. A more rigorous analysis (described later) often
eliminates many of these stocks. The goal of the search is to find stocks that best match the
search criteria.
When conducting an analysis of the search results, pay special attention to the following three
columns on the results page:

Symbol
Industry
Options

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Step 4Search for Additional Strong Stocks

Symbol
After a stock has been selectedApple Inc. (AAPL) will be used for the purpose of this example
click the stock symbol link to load its Corporate Snapshot.

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Corporate Snapshot
The default view of the Corporate Snapshot is a one-year chart, with the most recent month
appearing on the right side of the graph.

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Charting Time Frames


Below each chart are time span buttons, which can be used to change the graphs time frame. For
example, you can bring up a one-month chart, a five-year chart, or any other time frame indicated
simply by clicking the corresponding button.
On the one-year chart, each bar of data represents one full day of trading (the open, high, low, and
closing price of each day). The bar in the graphs of the varying time frames represent different
things and the following table helps explain this.

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Button

Time Frame

1-10 day

minutes, hours

1-6 months, 1 year

days

2-5 years

weeks

10 years

months

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The Short-Term Chart


Here is an example of a one-month
chart. Charts from one month to
one year will focus on different
time frames but will have the same
signals from the indicators. Charts
from one day to 10 days will give
intraday signals while charts five
years or more will give weekly to
monthly signals.

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The Long-Term Chart


On the five-year chart, each bar
of data represents a full week
of trading. On the 10-year chart,
each bar represents a month. The
stock chart to the right shows
five years of performance for
AAPL, with each bar representing
a week of trading.
These varying time frames help
traders looking for different
perspectives.

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Industry
Go back to the results page and look at
the Industry column.
Each industry is distinguished by a sixletter ticker symbol that begins with a
$. Clicking the symbol for the industry
($CMPTRS in this example) brings up
a chart that illustrates how well that
industry has been performing in the
recent past. You can also see a chart
of the industry by typing the symbol
(complete with $) into the Symbol or
Search field in the upper-right corner
of the Investools website.

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Industry
The industry chart depicts which direction the group was recently moving and if institutional
money may have been moving into stocks in that group. Industry movement often affects stock
movement, so some investors prefer to look at the direction the industry has recently been
moving when considering investing in a stock.
There are times when you might find what looks like an excellent investment opportunity, where
everything about the stock looks great except the trend of its industry. Such circumstances
imply that, in the current time frame, any increase in the price of the stock must occur
independent of the industry group. The company may have to swim against the current, so to
speak, to attract investors.

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Industry Example
Continuing with the example of
AAPL, from the results page, click
the ticker symbol for AAPLs industry,
$CMPTRS, to launch its graph.
The industry group was trending
upward but has recently started to
trend sideways.

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Organizing by Column Heading


Search results can be organized according to a particular characteristic by clicking the
characteristics column heading to sort the results automatically. For example, to place stocks
with the highest Phase 1 scores at the top of the list, click the Phase 1 column heading.

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Viewing the Charts


All search results are viewable
by selecting an option from
the Arrange Charts list.
Consider using this feature to
avoid clicking back and forth
among Corporate Snapshots
for every stock on a list.

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Adding Stocks to a Portfolio or Watch List


From the search results you can select stocks to add to watch lists by clicking the check box next
to each stock(s).

After making selections, click the Portfolio or Watch List button, depending on where those
stocks should be saved for future reference. After clicking the button, a pop-up box will appear.
To finish, click the Portfolio or Watch List button in the pop-up box.

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Different Search Types Available


In addition to prebuilt searches, the Investor Toolbox has a variety of other searches to assist
you in finding stocks and options that meet specific criteria.
Here are some of the available searches:

Prebuilt TurboSearch: A group of prebuilt searches using the Global Search engine.

Strategy Searches: Four categories of searches built by investing coaches on the Power
ProSearch engine for different investing strategies.

Green Red Arrows Search: A search to find recent stocks that have either three green
arrows or three red arrows.

ETF Searches: Searches to find exchange-traded funds (ETFs) exhibiting specific behavior.

Options ProSearch: Searches built to find stocks with options and options with specific
pricing and criteria.

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Prebuilt Searches Review


This concludes the prebuilt searches part of this lesson. Next, you will complete an activity that
will give you more practice learning to access the host of prebuilt searches in the Investools
database. Following which, we will learn about Global Search.

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Global Search

Step 4Search for Additional Strong Stocks

Discovering Global Search


One remarkable feature of the
Investor Toolbox is Global
Search. Global Search searches
the entire database of 12,000+
stocks and prepares a list of
stocks with positive Phase 1
and Phase 2 scores.
To access this feature, click
Global Search under the
Investor Toolbox.

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Entering Your Criteria


Select 5 in the Min list for Number of Good
Phase 1 Indicators, 3.25 for F/E, 2.50 for Price
Pattern, and 2.00 for Volatility.
The next step is to click the Run Search
button at the bottom of the page. Global
Search will scan all 12,000+ stocks in the
database and bring back the ones with
the best Phase 2 scores. By default, the
computer ranks the top 25.

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Other Variables
Through the remainder of this course, you will learn more about the importance of industry
groups and investing in stocks that are considered to be in strong groups. You can restrict the
results in Global Search to show only stocks containing acceptable F/E, Price Pattern, and
Volatility scores, as well as those in strong industry groups. Industry group criteria can be added
to Global Search as follows:

In the Industry Group Criteria section of Global Search, choose a Big Chart indicator
In the Big Chart Indicator list, select Big Chart Current Rank
From the Minimum list, select 1
From the Maximum list, select 32

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Global Search Review


Global Search can be an incredibly useful investing tool. One of its best features is that you only
need to run it every week or so. Focusing on stocks that are considered strong and researching
investment decisions on when to enter and exit them can help improve investing results.
Note: A group ranking of 1 to 32 means that the stock is in an industry group with a price
history that had recently outperformed 80% of all other groups followed. Typically, adding
the industry restrictor significantly reduces the number of stocks to analyze.
Next complete an activity on how to run a Global Search in more detail. Following which, we will
update your investing plan.

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Investing Plan Update

Step 4Search for Additional Strong Stocks

Investing Plan Update: Search for Stocks


Course Investing Plan
In this lesson you learned that using the searches available in the Investor Toolbox can speed
up the watch list building process because it helps you search for stocks that meet a particular
criterion. Many investors choose to search on the weekends when the markets are closed and
there is emotional distance. Additionally, searching at regularly scheduled weekly intervals helps
minimize time spent searching within the week.
Searches

Prebuilt searches: One-click searches that help locate the top 25 stocks that most closely
match the criteria of the specific search

Global Search: Customizable search that prepares a list of stocks based on positive Phase 1
and Phase 2 scores

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Investing Plan Update: Search for Stocks


Personalized
You should now be able to search directly for stocks that are described in the Watch List Criteria
section of your investing plan. At this point consider the following:

Decide how often you want to conduct searches and make note of this in your investing plan

Build your watch list and then focus on entry signals for the stocks in your watch lists

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Step 4Search for Additional Strong Stocks

Lesson Review
In this lesson, you explored various searches and searching tools in the Investor Toolbox that
will allow you to build watch lists according to your investing plan. These searches included
Most Popular Searches, Strongest Stocks in Multiple Time Periods, and Global Search.
You may find that part of your investing plan routine will be to determine which day of the week
you want to conduct searches and build watch lists. Searching for stocks every day would be a
less effective use of time, which could be spent monitoring watch lists for entry signals. The next
lesson will focus on how to recognize these signals as they occur.

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Step 5Conduct a
Thorough Technical Analysis
Charts not only tell what was, they tell what
is; and a trend from was to is (projected
linearly into the will be) contains better
percentages than clumsy guessing.
R. A. Levy

Step 5Conduct a Thorough Technical Analysis

Introduction
In previous lessons, you learned that, after outlining
certain fundamental factors for your investing plan,
you can use various searches to help find stocks to
build watch lists. Then, monitor this list on a daily
basis for entry opportunities. But how do you know
when to enter?
This lesson will help you recognize entry and exit
signals for a stock using technical analysis. Technical
analysis is the study of price and volume movement
on a stock chart to identify trend direction, support
and resistance levels, and momentum changes as
a means to making informed investing decisions.
Understanding how to read different stock chart
types is critical to technical analysis.

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Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals
for a stock trade using technical
analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal

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Step 5Conduct a Thorough Technical Analysis

Introduction
Youve already been introduced to technical analysis way back in Step 2Start Analyzing from
the Top Down by learning to define trend in a broad market index and a stock sector. Now you will
add to your knowledge by increasing your ability to spot trend. Youll also learn how to identify
entry and exit signals.
Due to the nature of this content, the bulk of this lesson will be taught in video format to give you
a better understanding of how to use technical analysis tools. The three main videos you will view are:

Video One: Trend, Support, and Resistance


Video Two: Oscillators
Video Three: Entries and Exit

We will begin this lesson with the Trend, Support, and Resistance video. This will be followed by
three activities and a trading assignment.

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Trading Assignment:
Identify Support and Resistance

Step 5Conduct a Thorough Technical Analysis

Trading Assignment: Identify Support and Resistance


So far, youve identified your market posture, top sectors, top industry groups in those sectors,
and created a watch list of the best fundamental stocks in those industry groups. Your next
assignment is to identify the trend and support and resistance levels on those stocks in your
watch list using ProphetCharts.

Directions
1. Select the Watch Lists link from the Investor Toolbox
2. Open at least 10 charts for stocks in your watch list in ProphetCharts
3. Identify the trend
4. Draw support and resistance lines
5. If you own Coaching services, call your coach or join an Online Coaching session to discuss
where youve identified support and resistance on your individual stocks

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Trading Assignment:
Identify Entry and Exit Signals

Step 5Conduct a Thorough Technical Analysis

Trading Assignment: Identify Entry and Exit Signals


You can identify entry signals on stocks with three green arrows and exit signals with red arrows.
Your next assignment is to identify and paper trade any stocks from your watch list that have
entry and exit signals.

Directions
1. Select the Watch Lists link from the Investor Toolbox menu
2. Identify stocks with entry signals and place an order in paperMoney
3. Identify stocks with exit signals and readjust the stop order in paperMoney
4. If you own Coaching services, call your coach or join an Online Coaching session to discuss
your entries and exits and share your rationale

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Investing Plan Update

Step 5Conduct a Thorough Technical Analysis

Investing Plan Update: Entries


Course Investing Plan
There are three main categories for entries in the course investing plan.
Support and Resistance

Identify support and resistance by analyzing stocks or ETFs in multiple time periods (time
periods ranging from six months to five years)

Three Green Arrow Entry

On a daily chart, enter the trade when the third green arrow appears

Breakout Entry

On a daily chart, if a stock or ETF is trending sideways, wait and enter the trade on
1. A breakout of a sideways trend
2. A volume surge of 150%
3. Three green arrows

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Step 5Conduct a Thorough Technical Analysis

Investing Plan Update: Entries


Personalized Investing Plan
You have probably been thinking about what to include in your investing plan. You may have been
updating your plan as you read. For instance, entry and exit rules couldve been added. To ensure
that you are updating your investing plan as needed, here are some examples of rules that could
be included:

Invest in uptrending stocks


Three green arrows is an entry signal
Stocks breaking resistance with higher volume

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Step 5Conduct a Thorough Technical Analysis

Investing Plan Update: Exits


Course Investing Plan
Here is an exit rule for your investing plan.
Three and Three Rule

On a daily chart, when the third red arrow appears, move the stop loss up 3% below the
lowest price at which the stock traded

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Step 5Conduct a Thorough Technical Analysis

Investing Plan Update: Exits


Personalized Investing Plan
To ensure that you are updating your investing plan as needed, here are some examples of exit
rules that could be included in your personalized investing plan:

Set a stop loss 3% below support


Set a stop loss 3% below the moving average
Adjust a stop loss 3% below new support
Adjust stop losses each day to 3% below the moving average
Stop-loss orders should only be raised and never lowered

These are just some examples of rules to consider adding to your investing plan. No matter what
rules you include, they should be clear and concise, making investing easier, and remove some
emotional attachment that often accompanies stock purchasing.

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Step 5Conduct a Thorough Technical Analysis

Lesson Review
In this lesson, you discovered how to identify uptrending stocks, entry signals and exit signals.
You should now be able to identify when to enter and exit a stock position.
Practice identifying support and resistance levels, pinpointing trends, and determining where to
set stop-loss and profit targets. Portfolio management conceptsunderstanding how much to
buy and how it can fit within your portfolio frameworkwere also introduced. The next lesson
will build upon these concepts.

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Step 6Protect Your


Investment Capital
A loss never bothers me after I take it. I forget it overnight.
But being wrongnot taking the lossthat is what does
damage to the pocketbook and to the soul.
Jesse Livermore
famous investor from the early 1900s

Step 6Protect Your Investment Capital

Introduction
In the previous lessons youve learned to identify
what to buy, when to enter, and when to exit.
However, knowing how much to buy is as important
as each of these other steps because no matter
how much research you do and how strong a stock
is, there are times when the stock will lose money.
Therefore, protecting your investment capital
is as important as knowing when to enter and
exit a position.
Lets start this lesson off by watching a short
video. Then we will discuss money management.

Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position size
for a stock trade
Set up daily and weekly routines
Define criteria for and create a trading
journal

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Money Management

Step 6Protect Your Investment Capital

Money Management
Money management is the practice of allocating capital
among various investments to avoid risking too much of it
in any one trade. The most important money management
task is to properly determine the size of the investment.
Investors who can enter a trade with the right amount of
risk have a much better chance of a profitable exit. This
notion is even more important in bear market conditions
like those of 2008 and 2009.

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Step 6Protect Your Investment Capital

Determining Risk per Trade


Many successful investors risk no more than % to 1% in any single trade. For example, assume an
investor has an account with $50,000 and has determined he is willing to risk only 1% of his account
in any one trade. This means the investor does not want to risk more than $500 in a position.

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Step 6Protect Your Investment Capital

Determining Risk per Trade


If an investor determines to purchase a stock valued at $10.00 while using a $2.50 stop loss, he
can buy 200 shares of stock without risking more than the $500.00. The investor would also
be investing $2,000.00 of the account. The total amount invested in any one trade is known as
portfolio heat and will be discussed in more detail in the Portfolio Management lesson of this
course. The table below summarizes the example above.
Account Balance

$50,000

Acceptable Risk Percentage

1%

Max Risk per Trade

$500 ($50,000 x 1% = $500)

Stock Value

$10.00

Stop-Loss Amount

$2.50 ($10.00 - $2.50 = $7.50 so the stop-loss order is at $7.50)

Max # of Shares to buy

200 ($500 max risk/$2.50 stop loss)

Total Invested

$2,000 (200 max shares x $10.00 stock value)

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Step 6Protect Your Investment Capital

Position Sizing
The big question is, how many shares should an investor buy? If the approximate buying price is
known, and the stop-loss order has been set, then determining the appropriate number of shares
to buy becomes simple. An investor should buy only enough shares so that if the stock loses value
and hits the stop order, the value loss is not uncomfortable.
A good rule is to never lose more than % to 1% of the total account value on any single trade.
This does not mean putting only % to 1% of an account into each trade; it means you should buy
only enough shares so that the maximum loss of value is % to 1% of the total account value if
the stock hits the stop-loss order and triggers a market order.

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Step 6Protect Your Investment Capital

Position Sizing
For example, an investor with a $100,000 account should never lose more than $500 to $1,000
(% to 1%) on any one trade. Beginning investors should use a smaller percentage until they are
consistently making money, after which the percentage can be increased.
An investor with an account that has less than $10,000 in it may feel the need to be more liberal
with this rule and accept more loss. Investors who do so are taking on significant risk. Investors
whose accounts grow to $20,000 or $30,000 could then consider holding more conservatively to
the 1% rule. The larger an investors account grows, the more likely that investor will feel the need
to reduce that percentage even further.

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Step 6Protect Your Investment Capital

Four Steps to Proper Position Sizing


The following four-step procedure can determine the correct position size and keep risk at no
more than 1%.

1. Start with Three Numbers

Account Value: The account value at the time a trade is placed


Stock Price: The price at which the stock is to be bought (buy price)
Stop-Order Price: The lowest price at which the stock should be sold (stop-order price)

2. Calculate Acceptable Loss

Total Account Value x Risk Percentage = Acceptable Loss

3. Calculate Risk

Buy Price Stop-Order Price = Risk

4. Calculate Number of Shares to Buy

Acceptable Loss Risk = Position Size

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Step 6Protect Your Investment Capital

Four Steps to Proper Position Sizing


This four-step procedure can determine the proper number of shares to be bought while keeping
risk at no more than 1% of the total account value. This protects capital from a dangerous level
of drawdown. This term is used to describe the decline between peak and trough and is often
referred to as the drawdown effect.
Position sizing is important because every investor experiences losing runs, but how they
manage those runs during a series of losses determines their ability to recover. The larger the
drawdown, the greater the percentage needed to recover. One guideline is to make sure that a
significant number of losing trades in a row does not result in a drawdown that exceeds 20% (i.e.,
80% of the account value is retained).

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Step 6Protect Your Investment Capital

Drawdown Effect
Investors may make a profit on half of their investments;
however, over the course of 1,000 trades, they might experience
a string of 10 losers at least once. Suppose an investor did have
a losing streak like this. How much money would she lose? If she
risked as high as 2% on each trade, she would be down 20%.
More than 20% drawdown requires that an investor make large
percentage gains to recover. Remember that a good rule is to
never lose more than % to 1% of the total account value on
any single trade because the larger the drawdown, the larger
the percentage gain will be required to recover from the loss, as
illustrated in the table to the right.
Lets practice determining a proper position size by completing
the following tool and concept masteries. Here youll learn how
to make these calculations using a Position Size Calculator.
Following which, you will complete a position sizing trading
assignment.
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% Loss to
Account

% Gain
Required to
Recover Loss

10%

11%

20%

25%

30%

43%

40%

67%

50%

100%

60%

150%

70%

233%

80%

400%

90%

900%

100%

Broke

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Trading Assignment:
Calculate Your Position Size

Step 6Protect Your Investment Capital

Trading Assignment: Calculate Your Position Size


Youve just practiced calculating position size. In the previous lesson you were challenged to place
paper trades on stocks that have entry signals and open stop orders using the three and three
rule from your paperMoney watch list. Your next assignment is to calculate what the proper
position size should be for your paper trades and adjust your position accordingly.

Directions
1. Go to the Portfolios section of the Investor Toolbox menu or your paperMoney account
2. Go through the four steps of position sizing to determine if you need to adjust the positions
on your trades
3. Use the Position Size Calculator in the investing plan
4. If you own Coaching services, call your coach or join an Online Coaching session to review
your position sizing calculations and share your rationale

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Investing Plan Update

Step 6Protect Your Investment Capital

Investing Plan: Money Management


Course Investing Plan
Youve already built in a number of rules for your investing plan. In the previous lesson you
determined entry and exit signals. You can now use those rules to help determine how many
shares to buy. Here are some example rules you should include.
Money Management

Position Size: Position size % to 1% of portfolio risk per trade


Allocation: Never allocate more than 10% of your portfolio to one stock position

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Step 6Protect Your Investment Capital

Investing Plan: Money Management


Personalized Investing Plan
Your personalized investing plan might contain rules that look similar to the following:

Never risk more than 1% of your portfolio on any one particular trade (this rule may be as low
as % or as high as 1%, but it should be definitive)

Always use stop-loss orders

Stocks should be purchased from at least five different sectors before choosing a second
stock purchase in a particular sector

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Step 6Protect Your Investment Capital

Lesson Review
To help protect your investment capital, consider the following:

Sufficiently plan your trades so you know how much risk you are prepared to take
Select the right position size to fit your desired risk
Use stops that correspond to your risk and position size
Create and maintain an investing plan that lists rules and guidelines to be followed

You have learned that money management is a key factor to successful investing. It is critical to
recognize the advantage of a properly managed, well-diversified portfolio, because protecting
capital ensures that it will be around to grow in the future. In the next lesson, we will review the
principles of managing a portfolio.

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Step 7Manage
Your Portfolio
I measure whats going on and I adapt to it. I
try to get my ego out of the way. The market
is smarter than I am, so I bend.
Martin Zweig

Step 7Manage Your Portfolio

Introduction
In the previous lesson, you learned how to protect
your capital. In this lesson, you will learn more about
calculating portfolio heat. You will also learn about
portfolio management tools and how to identify daily
and weekly routines necessary to manage a portfolio
and identify criteria used in a trading journal.
Lets start by watching a short video and then move
on to discussing portfolio heat.

Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal

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Portfolio Heat

Step 7Manage Your Portfolio

Portfolio Risk and Allocation


In the previous lesson the concept of protecting investor capital by using stop losses was
introduced. This introduced the idea of portfolio heat, which deserves a more in-depth explanation.
As you have learned, investing carries risk, so controlling that risk is paramount. You may have
updated your investing plan with reference to risking no more than 1% of your portfolio on any
particular trade (as was taught in Step 6). For the purposes of this course, a risk between %
and 1% per trade will be considered the maximum acceptable risk.

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Step 7Manage Your Portfolio

Portfolio Risk and Allocation


There are different ratios that go into risk management: trade risk, portfolio risk, maximum
investment, and portfolio heat. Here are key terms and concepts to focus on:

Portfolio Risk: Acceptable portfolio exposure

Stop Loss or Risk Per Share: Difference between purchase price and stop-loss price

Position Size: Portfolio risk divided by stop loss

Trade Risk: Position size multiplied by Risk Per Share (should be equal to or smaller than
portfolio risk)

Total Stock Investment: Position size multiplied by stock value

Maximum Invested per Trade: Portfolio amount multiplied by the maximum investable
percentage (10%)

Total Portfolio Investment: All open positions stock value

Portfolio Heat: Maximum loss or drawdown if all positions were to hit your stop losses

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Step 7Manage Your Portfolio

Portfolio Risk and Allocation Example


Using an example portfolio with five identical positions, we have listed the various risks here.
Portfolio Amount

$50,000

Portfolio Risk Percentage

1%

Portfolio Risk

$500 ($50,000 x 1%)

Stock Value

$10.00

Stop-Loss Value

$7.50

Position Size

200 shares ($500 max. risk/$2.50 stop risk)

Trade Risk

$500 (200 x $2.50 stop risk)

Total Stock Investment

$2,000 (200 max shares x $10.00 stock value)

Maximum Invested per Trade

$5,000 (10% x portfolio equity)

Total Portfolio Investment

$10,000 (5 x $2,000)

Portfolio Heat

$2,500 (5 x $500)

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Portfolio Risk and Allocation Example Specifics


Portfolio AmountThe example portfolio is $50,000.
Portfolio Risk PercentageIn this example students will only risk 1% for greater risk control.
Portfolio RiskThis is the risk percentage multiplied by the portfolio amount to determine how
much money can be risked in any one trade. Using the portfolio amount of $50,000 multiplied by
the risk percentage of 1%, we have a portfolio risk of $500, which means we shouldnt risk more
than $500 on any trade.
Stock ValueFor simplicity, assume that each stock in this example is priced at $10
Stop-Loss ValueFor this example, the stop loss is set at $7.50, which is $2.50 from the stocks
current price of $10.00
Position SizeThis is the number of shares that can be purchased of each stock. This was
determined by dividing the portfolio risk amount of $500 by the $2.50 stop risk.

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Step 7Manage Your Portfolio

Portfolio Risk and Allocation Example Specifics


Trade RiskEach trade will risk $500 or the number of shares purchased multiplied by the stop loss.
Total InvestedTrades will consist of 200 shares at the $10 stock price for a total of $2,000 invested.
Maximum Invested per TradeUsing a rule that no more than 10% of the portfolio is invested in
any trade, no more than $5,000 can be used for each trade (10% x $50,000 = $5,000). In this case,
each trade only amounts to $2,000 for each stock. The trades are well below the specified amount.
Total InvestedFive trades with $2,000 being employed for each one, equals $10,000 being invested.
Portfolio HeatThis is the amount of the entire portfolio that is at risk. Because $500 can be
lost on each trade, if each trade was to fail, the portfolio could experience a $2,500 loss.

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Step 7Manage Your Portfolio

Gains and Losses


In this example, if all five trades hit their stop losses at the same time, the account would lose
$2,500, which is 5% of the $50,000 portfolio value. As explained previously, large drawdowns
are difficult to recover from. Here is the drawdown percentage for this example, including what
return would be required to recoup the losses. If the example portfolio was to lose $12,500 or
25% of its value, the portfolio would have to gain more than 30% to recover!
Investors can avoid large losses like these by diversifying their investments. You may have
learned that most securities are correlated. This means when some investments fall, other
investments rise. Avoiding large drawdowns is a benefit of diversification and when coupled with
controls, like stop losses, investors have more control over risk.

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Step 7Manage Your Portfolio

Market Diversification
Proper money management is an extension of diversification. The difference is that while money
management prevents losing too much money in any one trade, diversification prevents losing
too much money in a particular industry group or sector.
Highly correlated stocks, or stocks that tend to move at the same time in similar directions, can hurt
a portfolio if the sector turns sour. To individual investors, diversification means that they have to
spread their risk across a broad group of stocks or investment vehicles. As your investing talents
grow, you may eventually manage a diversified portfolio including options, foreign exchange, fixedincome markets,and stocks.
Remember the principles of diversification still apply to stocks found using the 7-Step
Investing Formula.

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Step 7Manage Your Portfolio

Portfolio Heat Review


You learned that portfolio heat is the summary of potential losses if all your investments turned
against you and triggered their stop-loss orders. Understanding the amount of portfolio heat can
help you determine if you have too many positions open. Because portfolio heat is the summary
of each open position, you can reduce the heat by reducing the number of positions.
Now that you have a better understanding of why portfolio heat is important, complete the
following activity. Following which, complete the portfolio heat trading assignment. After, you will
learn more about portfolio management tools.

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Trading Assignment:
Calculate Your Portfolio Heat

Step 7Manage Your Portfolio

Trading Assignment: Calculate Your Portfolio Heat


Youve just practiced calculating portfolio heat. In previous lessons we had you build a watch list
that you used to enter and exit stocks based on proper entry and exit signals and appropriate
position size and stop-loss placement.
Now, your assignment is to calculate your portfolio heat in your paperMoney account.

Directions
1. Calculate the position heat for each stock in your portfolio
2. Tally each position heat to determine your current portfolio heat
3. If you own Coaching services, call your coach or join an Online Coaching session to review
your portfolio heat calculations and share your rationale

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Portfolio Management Tools

Step 7Manage Your Portfolio

Portfolio Management Tools


Powerful portfolio tools can help you closely track stocks you own, as well as those you would like
to own. The Investor Toolbox features portfolio tracking tools that help you efficiently manage
investments. These unique features put the investor in control.
To keep up with continuous advancements in the Internet and technology, Investools is constantly
adding new capabilities to the Investor Toolbox, making it easier for investors to manage their
portfolios. In addition to tracking stocks in a watch list (stocks you are thinking of buying), you can
also track stocks you already own.
After creating a new portfolio of stocks, the Investor Toolbox adds information on those stocks
for you. Your portfolio then operates off the server, which means that no matter where you are or
which computer youre using, as long as you have Internet access, you can access your portfolio.
Within the portfolio, you can view information such as number of shares owned, transaction
price, price paid, current stock price, current value, and so on. You can also click a stock symbol to
access its one-year graph.

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Step 7Manage Your Portfolio

Creating a Portfolio
To access portfolios already set up or to create a new portfolio, click the Portfolios tab in the
Investor Toolbox.
This automatically brings up the existing default portfolio, if there is one. If accessing this area
for the first time, a new, empty portfolio is brought up.
To create a new stock portfolio, click the Create New Portfolio button or the Create Portfolio link
in the left navigation menu under the Portfolio heading.

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Step 7Manage Your Portfolio

Creating a Portfolio
After opening a new portfolio page, clicking the Create New Portfolio button lets you change the
portfolios name. A portfolio should be named in a way that suggests what stocks are in it (e.g., a
portfolio of bullish stocks might be named Bullish Stocks).

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Step 7Manage Your Portfolio

Adding Symbols
Next, determine whether this particular portfolio is the default (the portfolio that automatically
comes up when the Portfolio tab is clicked). Clicking Set it to Default will do this.
After making these selections, you can enter stocks into the portfolio. Clicking the Add Symbol
button will start this process.

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Step 7Manage Your Portfolio

Adding Symbols
Now, you can add stock symbols by clicking in the Add Symbol(s) field and typing them in.
Multiple symbols can be added at one time by separating each with a comma (there is no need to
put a space either before or after the comma).
After entering ticker symbols, click the Add button. This expands the window with the new symbols.

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Step 7Manage Your Portfolio

Understanding the Portfolio


You can now enter information you would like to monitor for each stock. Information can be added
to each of the following columns (moving from left to right):

Initial SharesThis is the number of shares purchased when tracking an actual position.
This should not be used if creating a watch list.

Transaction PriceThis is the price paid for a stock in an actual position. Again, this should
not be used if creating a watch list.

CommissionThis is the commission paid on a stock purchase (if any). This also should not
be used if creating a watch list.

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Step 7Manage Your Portfolio

Understanding the Portfolio

Transaction TypeThis is the type of transaction made on an actual position. Long indicates
the stock was bought. Short indicates the stock was shorted, or sold. This also should not be
used if creating a watch list.

Transaction DateThis is the date on which the transaction of an actual position was
completed. This also should not be used if creating a watch list.

NotesThis is for making notes regarding the stocke.g., why it looks like a promising
stock to watch.

CheckboxThis tool allows you to create an alert for a stock or delete it from your portfolio.
This should be followed by clicking either the Create Alert(s) or Delete Symbol(s) buttons at
the top of the tool.

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Step 7Manage Your Portfolio

Saving the Portfolio


After entering all pertinent information, the list will save automatically.
You can access any of your portfolios by selecting the one you want to view from the Portfolio list.

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Step 7Manage Your Portfolio

Managing a Portfolio: Current Valuations


A number of powerful, yet user-friendly, features on the Investor Toolbox make it easier to
manage your portfolios.
When accessing a portfolio, the Investor Toolbox automatically brings up the Current
Valuations, or Details, page. This page can also be accessed by clicking the Details tab at the top
of the portfolio or the Current Valuations link in the left navigation menu of the Portfolio section.

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Step 7Manage Your Portfolio

Managing a Portfolio: Current Valuations


The Current Valuations, or Details, table is used to keep track of investment performance.
It displays the following:

How many shares are owned


Transaction price for the trade
Initial trade value when it was entered
Current price of the stock
What the trade is worth now
Amount of dollars the stock moved today
Percentage price change today
Profit or loss in dollars
Profit or loss in percentages
Transaction type
Any alerts set for the stock
Any notes created

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Step 7Manage Your Portfolio

Managing a Portfolio: AutoAnalyzer


AutoAnalyzer can be accessed by clicking the AutoAnalyzer tab at the top of the portfolio. This
tool takes all stocks in a portfolio and analyzes them by automatically scoring Phase 1 and Phase
2. This helps you make sure stocks are fundamentally sound.

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Step 7Manage Your Portfolio

Other Useful Features of the AutoAnalyzer


The AutoAnalyzer lists the following information for each stock:

SymbolClick the ticker symbol to show the stocks Corporate Snapshot


F/ECombined Financials and Estimates score
EstimatesScore of analyst predictions for the stock
FinancialsScore of a companys past performance
Price PatternScore of the stocks current trend
VolatilityScore of the stocks volatility level
Phase 1Score of the stocks current valuation
NewsLink to news stories about the stock
Industry GroupClick the ticker symbol for the stocks industry group to show its chart
NotesLink to any notes created for the stock

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Step 7Manage Your Portfolio

Managing a Portfolio: Thumbnails


The Thumbnails feature is a timesaver that allows you to view a
thumbnail chart of each stock in
a portfolio, all on one page. This
feature can be accessed by clicking
the Thumbnails tab at the top of
the portfolio, or on the Thumbnail
Charts link in the left navigation
menu. The page displays small, sixmonth graphs. From here, you can
make a quick check of each chart to
determine its characteristics.

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Managing a Portfolio: Thumbnails


A Corporate Snapshot for any stock shown in Thumbnails is available by clicking the stocks
thumbnail chart. When scanning through and checking these charts, some students focus on the
stochastic indicators position because it tends to be the slowest-moving indicator, giving the
fewest signals throughout the year. If the stochastic indicator is below the 25% line, the next
signal will be an entry signal. If the stochastic indicator is above the 75% line, the next signal will
be an exit signal.
You can click a stocks thumbnail to bring up a larger, one-year graph.

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Managing a Portfolio: Alerts


Alerts for any stock in a portfolio can be created by clicking the Create Alert(s) button located in
the Details tab. This brings up the Alerts setup page, where investors can specify which alert to add.

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Alert Choices
An alert requires entering an email address in the upper-right cornerthis is the address to
which the alerts will be sent. One or all of the following eight alerts can be set for the stock:

Price Low BreakoutSends email when the stocks price breaks below a specified level

Price High BreakoutSends email when the stocks price breaks above a specified level

Technical Breakout (MACD)Sends email when the MACD indicator shows a green or red arrow

Technical Breakout (moving average)Sends email when the moving average shows a green
or red arrow

Technical Breakout (stochastic)Sends email when the stochastic indicator shows a green
or red arrow

Earnings Release (week ahead alert)Sends email one week before the company is
scheduled to release its earnings numbers

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Alert Choices

Earnings Release (actual earnings release)Sends email the day the company is scheduled
to release its earnings numbers

News AlertSends email when company-specific news is released (Note: some companies
are frequently in the news, and so this setting may trigger quite a few emails throughout the
course of a day)

After the alerts are set, they can be saved by clicking the Save button.

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Step 7Manage Your Portfolio

Altering an Alert
These alerts can be accessed at any time by clicking the Alerts tab at the top of the portfolio, or
the Alerts link in the left navigation menu.

Alerts can be edited or deleted by placing a checkmark in the box to the right of the alert, then
clicking either the Delete Alert(s) or Edit Alert(s) button.

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Managing a Portfolio: Technicals


The Technicals page can be accessed by clicking the Technicals tab at the top of the portfolio.
This page provides a tabular view of charts for all stocks in the portfolio. Instead of seeing red
and green arrows and other information graphically, this view shows numbers signifying those
arrows as well as other information on the stock charts.

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Step 7Manage Your Portfolio

Viewing the Technicals Page


The Technicals page lists the following information for each stock in the portfolio:

SymbolClicking the ticker symbol for the stock shows the stocks Corporate Snapshot

Current PriceCurrent trading price of the stock

Transaction PricePrice at which the stock was bought

Profit/Loss %Percentage made or lost in the trade

MACD 8-17-9 Day BreakoutNumber of days since the last green or red arrow appeared
on the MACD indicator (positive numbers indicate green arrows, while negative numbers
indicate red arrows)

Stochastic 14-5 Day BreakoutNumber of days since the last green or red arrow appeared
on the stochastic indicator (positive numbers indicate green arrows, while negative numbers
indicate red arrows)

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Viewing the Technicals Page

30-Day Moving Average BreakoutNumber of days since the last green or red arrow
appeared on the 30-day moving average (positive numbers indicate green arrows, while
negative numbers indicate red arrows)

One-Day to 10-Day VolumePercentage of one-day volume, when compared to 10-day volume

Five-Day to 30-Day VolumePercentage of five-day volume, when compared to 30-day volume

NotesLink to any notes created for the stock

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Step 7Manage Your Portfolio

Portfolio Tool: paperMoney


The paperMoney platform is a state-of-the-art practice tool that offers an extremely robust
suite of paper-trading tools. It is very useful to simulate trading experiences and encourages
learning by doing. Take time to become acquainted with the information and tools available in the
paperMoney system.

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Step 7Manage Your Portfolio

Routines
After learning how to analyze stocks from a fundamental and technical basis, developing routines
for trading provides investors with consistency in the types of stocks they find as well as the
returns from stocks over time. Creating a routine and following it, keeps a watch list full and up-todate with potential trading opportunities. It also creates a repeatable pattern for daily, weekly, and
monthly activities. As you study these routines, consider adding them to your investing plans. When
the routines are pushed aside, trading results and risk management can suffer. An important part of
your routine should be to progress in your investor education by doing the following:

Determine your education path by speaking with an Education Counselor

Determine study times

Attend the weekly Market Wrap

The following pages provide examples of additional daily and weekly routines.

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Daily Routines

Check current positions and look to tighten stop losses

Add to current positions

Look at watch list for set-ups and triggers (set-ups = stock setting up to give an entry signal
in the next few days, while trigger = the actual entry signal)

Look at the major markets

Continue investor education

Tune in to Virtual Coaching and Trading Rooms

Listen to the daily commentary on Investools.com

Call coaches for clarification before paper trading

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Weekly Routines

Run a top-down analysis

Determine long-, intermediate-, and short-term trends of global markets

Determine which sectors are leading the market

Determine which areas of the globe are outperforming others

Analyze overall risk (portfolio heat)

Review which sectors and industry groups you would use to find stocks to paper trade

Review trading journal

After creating easy-to-follow routines, it is time to integrate them into an investing plan and
document trades in a trading journal.

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Step 7Manage Your Portfolio

Portfolio Management Tools Review


In this lesson you learned what tools are available on the Investor Toolbox to help you manage your
portfolio. You also recognized the need for developing daily, weekly, and monthly routines that allow
you to examine your investments and potential investments while minimizing time spent.
You have now completed the portfolio management tools section. The next step is to complete an
activity, then complete an investing plan update.

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Investing Plan Update

Step 7Manage Your Portfolio

Investing Plan Update: Routines


Course Investing Plan
Now that youve completed this lesson, review the following sample routines that could be added
to your investing plan.
Sample Routines

Check stop losses on current investments each week night


Looking for entry signals in watch lists each week night
Run Global Search on Saturday mornings
Update watch lists on Saturday mornings
Calculate portfolio heat on Saturday mornings
Update trading journal with each trade

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Investing Plan Update: Routines


Course Investing Plan (continued)
Here are the rules you will find in your course investing plan under daily routine.
Daily Routine

Three and Three Rule: Monitor open positions for three red arrows (follow the three and
three rule)

Market Posture: Determine the market posture by analyzing major indices and confirm with
the Market Forecast graph

Watch List: Survey your watch list or portfolio for three green arrows or breakout entry signals

Commentary: Listen to the daily commentary available on Investools.com

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Investing Plan Update: Routines


Course Investing Plan (continued)
Here are the rules you will find in your course investing plan under weekly routine.
Weekly Routine

Search for Stocks: Every couple of weeks, rerun your search to update your watch list
Coaching: Call the Coaching Team often with any questions
Education: Continue education (courses, Trading Rooms, and Online Coaching)

The course investing plan has now been taught in its entirety. You downloaded the course investing
plan at the beginning of the course and should now be able to use it freely. If you have concerns or
questions, you are welcome to reference the course or contact our Coaching Team at Investools.

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Investing Plan Update: Routines


Personalized Investing Plan
An investing plan can serve as part of your personally designed roadmap to reaching financial
goals. At this point you should be very familiar with the area on the Investools website for
creating investing plans. The investing plan area of the site has a sample plan that allows you to
develop and save numerous plans to the website. Saving your investing plan to the website makes
it accessible anywhere there is an Internet connection and allows an Investools coach to view the
plan with you while on a coaching call.
There are six categories of information that should be included on each investing plan:

Definition of Success
Watch List Criteria
Entry Rules
Exit Rules
Money Management
Routines

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Step 7Manage Your Portfolio

Lesson Review
In this lesson you focused on the principles of portfolio management by exploring concepts of
money management, position sizing, portfolio heat, and diversification. You should also have
finished up your investing plans for stocks based on concepts taught in this course. And you
should have started a trading journal to measure the success of each plan. Testing investing plans
through paper trading will help lead to success as you move into the markets.
At this point youre ready to take the lesson seven assessment and progress on to the Stock
Investing Review where you will take the final assessment. In completing this course, you are
well on your way to becoming a successful investor.

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Stock Investing Review


Furious activity is no substitute for understanding.
H.H. Williams

Stock Investing Review

Stock Investing Review


Congratulations, youve completed the Stock
Investing course and you should now feel
comfortable with course learning outcomes. If not,
call your coach or visit the Community.
As youve learned, every successful investor has
an investing methodology. You can now begin
applying the 7-Step Investing Formula in your own
account. As you progress through the Investools
education, you may choose to refine your personal
methodology as you incorporate options and forex
investing. But for now, focus on laying a strong
investing foundation.

Stock Investing
Learning Outcomes
Create an investing plan
Use the top-down analysis process
Build a watch list using fundamental
analysis
Recognize entry and exit signals for a
stock trade using technical analysis
Calculate proper risk and position
size for a stock trade
Set up daily and weekly routines
Define criteria for and create a
trading journal

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Stock Investing Review

Investools 7-Step Investing Formula Review


Heres a quick reminder of the steps taught in this course:
1.
2.
3.
4.
5.
6.
7.

Prepare to be an Investor
Start Analyzing from the Top Down
Conduct a Thorough Fundamental Analysis
Search for Additional Strong Stocks
Conduct a Thorough Technical Analysis
Protect Your Investment Capital
Manage Your Portfolio

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Stock Investing Review

Investools 7-Step Investing Formula Review


Each step is a task with its own activities. You may not perform each step in sequence every
day, but you should repeat each one on a regular basis. Some daily, some weekly, and others
less frequently. As you master these seven steps, you will find that you are well on your way to
successfully managing risk and achieving success. But even then, the journey is not complete.
After taking the final exam, precede to the final section to update your education plan based on
the investing path you want to travel next.

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Updating Your
Education Plan
Good luck is what happens when preparation
meets opportunity, bad luck is what happens when
lack of preparation meets a challenge.
Paul Krugman

Updating Your Education Plan

The Next Step


As your investing abilities and activities grow, there are other investing vehicles you might
want to explore. If you want to continue learning about stock investing, consider pursuing the
Fundamental Analysis and Technical Analysis courses. These two courses explore various
avenues of investing from an expansion of growth, value, income stocks, or a blend of each. You
will learn how to focus on trend lengths from intraday trading to long-term investing. Each of
these courses offer more insight to evaluating the markets from the top down.

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Updating Your Education Plan

Further Education
If you want some of the same benefits of stocks without expensive stock prices, consider options
as your investing vehicle. Start your options education with the Options Strategies course and
then move on to the Advanced Options Strategies course. These two courses contain a copious
quiver of strategies that can help an investor profit in any market. Speculators and income
collectors can find a number of strategies to help them define risk while increasing returns. These
courses are designed to help you get the most out of the paperMoney platform by using the
powerful analysis tools available.
Students who plan to take control of their financial future have already discovered the power of
education and want to obtain more to maximize their ability to succeed in investing. Whether your
focus is on stocks, options, or any other investment vehicle, you should meet with your Education
Counselor to outline your education plan today.

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Bibliography

Bibliography
Quotations
Buffett, Warren. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.
Eker, Harv T. Secrets of the Millionaire Mind. New York: HarperCollins, 2005.
Krugman, Paul. Stock Traders Almanac 2010. Hoboken: John Wiley and Sons, 2010.
Levy, R.A. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.
Livermore, Jesse. Reminiscences of a Stock Operator. New York: George H. Doran Co., 1922.
Lynch, Peter. One Up on Wall Street. Philadelphia: Running Press, 2001.
Neil, Humphrey. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.

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Bibliography

Bibliography
Rhea, Robert. Stock Traders Almanac 2005. Hoboken: John Wiley and Sons, 2005.
Williams, H.H. The Quotations Page. 23 September 2010
<http://www.quotationspage.com/quote/929.html>
Zweig, Martin. All About the Market Timing: The Easy Way to get Started. New York: McGraw-Hill
Professional, 2003.

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