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 ------------------------------------------------------- Down Cycle ------------------------------------------------------- Now, as we all know this is not a perfect world and there are many things that can and will impact the price of a stock. Still the premise of stocks moving through lows and highs is very real! Stock prices do not move up or down in a straight line. They move in cycles with a trend of up, down or flat. The up side is easier to understand simply because the brokerage firms process for handling transactions in the up cycle is rather simple. Buy and hold a stock for some period of time then sell it. Shorting a stock or selling a stock in its down cycle is a little more complex. Since you do not own the stock, how can you make a play that states you expect the stock price to go down over some period of time when you do not own the stock?  When you place a Short Sale with your broker you are requesting to sell a stock that you do not own. Sell Short orders are placed with the anticipation that the market price of the stock will decline. Remember, getting out of any trade you simply place a reverse order! Shorting a stock requires a Sale of stock you do not own, therefore getting out of the trade you are placing a Buy of that stock. Understanding how brokers process Short Sales may help understand how to place orders. Since you do not own the stock your broker either buys the stock or pulls shares from their own inventory of shares they already own at the price you specify. A short Sale appears as a negative amount in your brokerage account. A negative amount because you do not own the shares. A negative amount means you have borrowed money from you broker (margin) to buy shares in a stock on your behalf. If the stock goes up in price you owe your broker the difference between the purchase price and the sale price. Should the stock price go down your broker owes you the difference of your purchase price and the sale price. Profit Example You Sell Short 100 shares of xyz stock at $20.00 per share. The total investment is (100 * $-20.00) $-2,000. Remember, the amount is negative because you have borrowed money from your broker to buy these shares on your behalf. In five days the stock price of the xyz Corporation moves down and the price closes at $18.75. Since the price has moved down your profit is $+1.25 ($20.00 - $18.75) or $+125 ($2,000 - $1,875). Loss Example You Sell Short 100 shares of xyz stock at $20.00 per share. The total investment is (100 * $-20.00) $-2,000. Remember, the amount is negative because you have borrowed money from your broker to buy these shares on your behalf. In five days the stock price of the xyz Corporation moves up and the price closes at $21.25. Since the price has moved up your loss is $-1.25 ($20.00 - $21.25) or $-125 ($2,125 - $2,000).  Let’s agree up front all investments have risk! Measuring an investment risk is really quite simple. Answer the following question for any investment; how much money can I lose on this investment? A buy transaction has a potential risk of losing all of the money invested. That is, your purchase minus your purchase price should the company go out of business. A Short Sale has an unlimited risk because the loss depends upon how high the stock price can go. Unlike the Buy transaction your loss keeps accumulating as long as the stock price goes up! Successful investors manage their risk by placing a limit on the amount of money they are willing to lose on each transaction. Placing a Stop Loss on all transactions creates a limit on the loss for any transaction. It’s worth repeating here. Investors usually go into a transaction hoping to make obscene amounts of money without regard for the potential loss. Before placing any order you should compute the breakeven amount, amount you are willing to lose and the amount you expect to gain.  The following chart contains the selections published for the week of May 27, 2002. We will use GNSS to illustrate a conservative and aggressive placement of orders with a broker.  Genesis Microchip is involved in the origin of many video images. The company designs integrated circuits (ICs) that translate video images for viewing in flat-panel displays, consumer video products, and digital TVs. Its chips filter and refresh images, process videos, and enhance high-volume displays. Customers use Genesis ICs in their flat-panel computer monitors (more than 70% of sales), DVD equipment, and medical imaging devices. With its 2002 purchase of Sage, Genesis strengthened its video IC product line and added the Faroudja brand of home theater products to its offerings. Customers in Asia account for more than 75% of sales; top clients include IBM, Philips, Samsung Electronics, and Sony. (Description provided by Hoovers on line.)  The May 27 Weekly Picks chart shows GNSS currently at $25.00 with + 4 days left in the down cycle and approximately $4.64 left in the average downside move. There are two methods that each investor may use to place orders for GNSS. They are:
Remember technical analysis is the study of past performance. There is not any guarantee that the + 4 days or the $4.64 will repeat in the future. These are indicators that are used to select order types.   Back | Up Cycle | Down Cycle | | Weekly Research | My Playbook | | Order Now | Return Home | Home Business | Digital Economy | Sign In | Disclaimer | Training Center | FAQ | What's New | Contact Us | |
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