By

Don G. Mehling, CFA

THE MECHANICS
OF TRADING

Step 1: Find a Stock

Macro, then micro

Overall market conditions and pricing level
Find the right industry (next 6-12 months)
Then find the right stock within that industry

Use all available tools

Cyclical investing chart
Valueline Investment Survey (in your library)
Ranks industries by expected performance for

coming 12 months
Look for Timely stocks, in Timely industries
Identified Eastman Chemical Co. (EMN)

Step 2: Free Cash Flow

Yahoo Finance
EMN Cash Flow Statement (#s in thousands)

Step 3: Future Growth

Understand how the company makes

money today
Understand the companys strategy for
growing cash flow in the future
Ask yourself, Does this make sense?
How secure is the dividend, if any?
What is your expected return for the risk
you are taking by investing in this stock?
Is it worth the risk? You have to decide!

Step 4: Buy the Stock

How to read a quote

Bid amount someone is willing to pay
Ask amount willing to sell for
Spread difference between the Bid and Ask
Liquidity how fast an asset can be converted to

cash at fair market value

Narrow Spread = Liquid Market = Quick to Cash
Wide Spread = Illiquid Market = Higher Risk

Step 4: Buy the Stock (cont.)

Types of Orders
Buy/Sell
Market Fills at current market price, without restriction as to price
Limit Limit Price is set and must fill at a price equal or better than the limit price
Stop Becomes Market order when the market hits or passes the stop price
Stop Limit Becomes Limit order when market hits or passes the stop price
Trailing Stop Moves Stop price automatically as the stock moves
Trailing Stop Limit Moves Stop and Limit prices automatically as the stock moves
Bracket Stop (OCO) Take profits and limit losses at the same time
Bracket Stop Limit (OCO) Take profits and limit losses at the same time, with Limits
Pegged to Primary Follows best market bid (for sell order) minus an offset; fill room
Hidden Reserve order that displays no size to the market (good for large orders)
Reserve Hides actual order size from the market and reveals part at a time
Discretionary Limit order that allows for a slight amount of variation in the fill price
Sweep to Market Order broken up to match the available bids (or offers); for speed
Sweep to Limit Order broken up to match bids (or offers) at the Limit price or better

Step 4: Buy the Stock (cont.)

Trade Automation
Quote Trigger
Order becomes active when a specified quote hits the
Trigger price
Trigger can be for a different stock (ticker symbol)
Fill Trigger
Order becomes active when a different order is filled

in your account
One-Cancels-Other (OCO)
Useful for setting an exit strategy

Step 4: Buy the Stock (cont.)

Time in Force
Day
Any open order is automatically cancelled at the end

of the trading day

Good Til Cancelled (GTC)
Order remains open until the originator cancels the
order

Special Handling
AON All or None
NH Not Held (gives broker time/price discretion)

Summary

Know what you are buying

Industry First; Company Second
Buy Growing Free Cash Flow
Use Stops to limit losses and protect gains