Preface

I've written numerous articles about trading on the stock market now. Some were based on
very general principles that all investors should follow, others were strict guidelines for
following a specific stock trading system.

Over time I found some has worked better than others. I've taken the time to sift through all
my trading styles and techniques, and with back-testing* I've come up with a rock solid
formula for extremely profitable stock market trading. I am going to keep this as simple as
possible since it does not need to be complex. One of the most beautiful parts of this system is
that you can currently trade the very stocks you are now with more profit.

In this system I will very briefly cover your attitude toward the stock market, the concept of the
system that works, and then lastly how to pick and trade your stocks. I am not making this e-
book into a novel for your bedtime reading enjoyment. This is your training to quickly get into
the stock market and trade.

*Back-testing was done on stock charts by looking at a years worth of stock data on a visual
charts WITHOUT STOCK PRICES! I had no idea what the price of the stock was doing while
reading the chart. I looked for the visual technical indicators that work – and wrote down the
day that the stock hit my buy-in prerequisites. I had no idea at any time what the price was.

What's in the e-book?

1. Stock Market Attitudes

2. The 10% System

3. The technicals (Big chapter that includes 1 year worth of data to practice on)

Appendix : Picking a stock with the right 'stuff'

 1. Stock Market Attitudes
The biggest problem with the stock market is greed. People want something for nothing and
they want it casino style. Now you might think that I am the same way – hyping a stock system
to make multiple times your money. I am not. The stock market is not a game – its an
investment of time and resources. If you want to gamble – goto Las Vegas.

You stand to make more money on a solid stock market system than finding amazing stocks
due to the power of mathematics. In general – people either don't understand the principles of
math or don't find it as sexy as they do when they find a stock that will rocket upwards in a
year. Would you rather tell your friends you earn a sensible 10% profit on your stock portfolio
every month trading average stocks – or that you picked an amazing stock that tripled in one
year? They are essentially the same thing as I will show you later, but making your profits one
way is reasonable and trustworthy while the other is elusive and you almost need to be psychic
to foretell.

But enough digressing – here are some basic attitudes you should follow for successful trading.

1. Do not be swayed by friends, family, message boards, or any one else for that matter. If you
do you will lose every time. I've seen people triple their stock value in 2 months. When the
stock reaches its selling target – the investor believes all the hype and thinks the stock will
double yet again. Soon he is left with his initial investment minus some sedatives for the wild
ride up and down.

2. Patience is the key. You can't make millions every day. Sometimes you will have to wait for
the stock to move in the desired direction. Often it may head South for a brief time while you
sweat it out. To this end you should never sit in front of your computer watching the stock
market in real time. Investing takes forethought and time - then just plain old patience.
Watching the stock market intra-day only makes you anxious and leaves yourself open to make
a rash, emotional trade. PLAN, INVEST, then LEAVE IT!

Enough about this. I am sure all of you are responsible adults - lets read about how the system
actually works.
 2. The 10% system
Remember when I said that 10% on your portfolio per month was the same as finding a stock
that would triple in one year? And you shook your head in disbelief thinking who was the fool
that did the math on that one?

My entire system is based on smaller profits that compound like interest. I got the idea back in
the 1980's from a Childcraft book. One of the riddles was about a man that offered a little girl
a large sum of money or he would pay her one penny and every day double it for a year. Day
one = 1 penny, day two = 2 pennies, day three = 4 pennies, and so on. The girl took the 'double
your money' plan. The wealthy man laughed but soon went bankrupt as it compounded such a
large sum.

This is what 10% profits per month will do for you as they compound.
Initial investment capital $2000
Month 1 $2200
Month 2 $2420
Month 3 $2662
Month 4 $2928.20
Month 5 $3221.02
Month 6 $3543.12
Month 7 $3897.43
Month 8 $4287.18
Month 9 $4715.9
Month 10 $5187.48
Month 11 $5706.23
Month 12 $6276.86

You triple your money in one year by getting 10% profits per month. Now my goal is not to
make one 10% trade per month. You could conceivably make one per week(which would
almost give you 150 times your investment in 1 year) or you could play a single stock and
double your money as the buy-in triggers might only occur every 6 weeks or so.

But the math principle is there and the stock market will support it. I have noticed that most
stocks that aren't blue chip have frequent 10 -12 percent oscillations in a month. The overall
trend may be up and down - but it may 'quiver' many times in a month. Your goal is to take
advantage of these hiccups. I will show you how in the next section, but suffice to say right
now that you must stick to the 10% rule. This system takes out some of the highs and lows
from the stock market and gives you a more consistent, high return.

A quick example: TASR. From Jan 1st 2004(adjusted for stock splits and dividends to current
price) the 'effective price' was around 7.00. Aug/05 sees the price around 9.00. Granted there
was a price spike where you could've made 4 times your money - but without a system you'd
probably still be holding it. So your initial investment went from $1000 to almost $5000 and
now back down to $1278.24 using the 'investment' style 'buy and hold until I retire' mentality.
Using my 10% system I would have traded it 6 times in 2004 and then never touch it again.
I would have turned my initial investment of $1000 into $1771.56 having traded the stock 6
times in one year. I didn't ride the stock up and down - but I made a nice return.

But you only need average stocks, not these flash in the pan money makers. Other average
stocks give me double my investment while the buy and hold method makes 10% over the year.

Trading one stock may get you 70% - 100% returns in a year. That's why you should have
about 5-10 stocks that you monitor. Split your portfolio up into quarters(or some other amount
that you are comfortable with). Invest no more than 25% at one time. When a stock gives you
the buy signal - put 25% into that stock. When the next one goes green - do the same for it. As
your stocks sell themselves - reinvest. Playing multiple stocks can realize 3 to 5 times your
invest while you are still splitting up your portfolio and not putting your eggs all in one basket.

Lets go through the actual steps for placing an order on a stock.

Steps for trading:

1. Set your sell limit for 10% profit. If you bought for $10, then set your sell price at $11.
Placing and on-line order is the best way as you leave your stock alone to do its business.

2. Set your stop-loss at 20%. If a $10 stock fell to $8 you should have a stop-loss to sell.

Most traders and investors will think I am nuts - but this is market observation and math
combined. Most stock will not fall that far unless the company is in serious trouble. By doing
this your are taking out 95% of stock market manipulation as most investors cannot control a
stock price to these levels. Setting your stop-loss too tight only allows traders to 'play' with a
stock to get your shares. Less than 3% of the time with this system will you ever hit your stop
loss.

3. Now you need to wait. Often the stock will give you back your 10% profit in a few days.
Infrequently I have had to wait up to 6 - 7 weeks to get my profit out. Be patient!

A few extra reminders: You should buy limit orders only, not the market. If few shares are
available you will pay a lot if you use market orders. When you place a buy or sell order –
select GTC or ‘good till complete’ or its equivalent. This way your orders won’t expire at the
end of the day.
 3. The Technicals(plus exercises)
The 10% rule is simple and takes no practice. This part on the other hand will take a bit of time
and finesse. What stocks do you pick? When do you buy in?

The stocks you pick are up to you. You only need average stocks. Pick something that is
overall going up. That's some insurance for you should you ever pick a bad time to buy in. I
go with insider trading, surprise earnings, just a favorite stock that I like, what-ever. You
probably have a handful of stocks right now. The important thing is not the stocks but timing
the buys.

There are 2 technical indicators that work together.

They are the only 2 that I truly trust and they rarely let me down.

MACD HISTOGRAM + RSI = PROFITS

Using these 2 indicators I actually ignore the stock price and buy solely by these. Again -
many traders think I am nuts - but over 450% return / year can't be wrong.

Let me explain and then show you how. Essentially you want positive divergence on both
indicators for a buy signal. You may or may not know what 'positive divergence' means or what
it looks like. I will show you an obvious example.

Look at Friday Jan 14th on this stock. Don't look at the price but look at the second
window that says 'MACD'. The beginning of Jan 14th Shows a big dip downwards,
then it goes up. It goes down again but not quite as low. Now look at the line on the
'RSI' row. At the end of Jan 13th it makes a powerful dip downwards and near the end
of Jan 14th it dips down again but not quite as low.
That is called positive divergence. Two dips down with the second not going as far
down. You need to see BOTH RSI and MACD do this positive divergence thing AT
THE SAME TIME! It must do it or you should NOT buy. The MACD histogram bars
should always be down below the 0 reference line and the RSI should be dipping at
least below the 50(the more the merrier) line.

Now pick a stock and this is how you can set up your screening process. Goto
www.stockcharts.com and type in the stock you want to look at. I am going to use
AAC over 1 year to teach you. It should look like this.

1. Choose a Style: SharpChart:

2. Enter a Symbol: aac

3. That's it! Just click

"Go" --->

You will get taken to a new page.

There is some highlighted words at the top with a line that says:

Please try the preview version of our NEW SharpCharts2 Charting tool - now in 'Beta'
release.

Click the link to SharpCharts2.

Follow these steps on the next page carefully.
Symbol: Whatever stock you want
Periods: Daily

Now scroll down and this part is under CHART PARAMETERS

Range: Select start/end
Start(yyyy-mm-dd): Do a one month time span between start and end
End(yyyy-mm-dd) :

*Example: Start(2004-01-01) End(2004-02-01)

This way you can look at one month of data at a time.

Style: Invisible
Size : Landscape
Color Scheme: Default
Volume: Off
Make sure none of the boxes are checked. Uncheck them if they are.

Overlays: None
Indicators: RSI 14 Above
MACD Hist 12,26,9 Above

Goto the next page to see what your setup should look like
 Make sure you do this right. If it is it should look like this.

Now all you do is look for slant divergence for both MACD and RSI. Lets look together
for 12 months of this stock AAC and see what happens. Remember I am closing my
eyes as to the price - you won't see them here. We are operating on these two
technicals only.

So the chart above is for Jan 01/04 to Feb 01/04. Macd and RSI both have positive
divergence on about Jan 13th or the 14th. So that will be our first buying day. Lets run
through all 12 months one at a time.
All I do is change the month field for the start and end date on stockcharts.
Start(2004-02-01) End(2004-03-01) and so on. Then I hit update.

Feb 2004

Notice that there are 2 bounces BUT the second bounce is lower than the first. That
means I definitely do not buy.
March 2004

Now something interesting happened at the beginning of Feb and beginning of March
so I make a new chart to see it all. The dates I pick include 2 months for the next
chart.

Feb and March 2004

Now that's what I wanted to see. There is a slight double bounce at March 2nd. I buy
again.
April 2004

April 27th also sees slant divergence from both MACD and RSI.
May 2004

At the end of May its looking okay but I'm just not seeing that definite double bounce.
Looks like one bounce only so I wait.
June 2004

Yes. If you put May and June together it looks like the second bounce went lower
meaning do not buy. Macd goes above the reference line and there is no buy signal
July 2004

A nice low bounce and the second bounce is not quite as low for both RSI and MACD
on July 23rd. Another buy in point.
August 2004

August looks okay at the 25th except the second bounce goes a hair lower. I am
tempted to grab at it but I will let this one pass. Must follow my own rules.
September 2004

MACD is upwards and the bars do not go downwards. I hold again.

October 2004

October 26th sees two double bounces with the second bounce not going quite as far
down. I buy at October 26th.
November 2004

November proves to be a good month too.

November 23rd or the 24th is my buy in day too.
December 2004

December has a promising RSI bounce but the MACD doesn't follow suit.

Here are the days that I would've bought in at

Jan 13th / Mar.2nd / Apr.27th / July 23rd / October 26th / November 23rd

I have 6 buy in points. Now to test myself I goto Yahoo Finance. I select AAC and
goto 'historical prices' and select the entire year of 2004. I will buy at the closing
prices of those days to make it fair - not the extreme lows. I will set a 10% profit limit
and 20% stop loss. Want to see how I fared? Look at the next page to see.
Stock Date Price bought Date sold(for 10% profit)
AAC Jan 13th 0.67 Jan 14th(1 day later)
AAC Mar 2nd 0.77 March 5th(3 days later)
AAC Apr.27th 0.83 Apr.29th(2 days later)
AAC July 23rd 0.48 July 27th(4 days later)
AAC Oct 26th 0.41 October 27th(Next day)
AAC Nov 23rd 0.39 November 26th(3 days later)

I made 6 easy trades and my money was only tied up for a few days at a time.
If I had $1000 invested and reinvested the full amount after every trade - I would have
$1771. Thats 77% from some easy easy trades. If you played the buy and hold game
you would've made only 18% profit by the end of the year and if you were still holding
now you would have little over half your portfolio left.

Imagine if I had 5 stocks that I was watching. And none of my trades ever came close
to my stop-loss either.

You should practice with stockcharts as well. Do exactly what I did with a stock of
your choice. Hone your skills at reading the stocks then check yourself with historical
prices on yahoo to see how well your trades went. When you are confident you can
practice on the real market.

That's it. Use my 10% rule and use these 2 indicators in tandem with a handful of
stocks that are going upward and you'll be making hand over fist money. Really. If
you don't - just e-mail me your 5 stocks that were trending up(or how many you had)
and let me look them over. If it wasn't possible to double your money using my
system I will give you $100. Its that easy.

Happy trading,

Kurtis Hemmerling
 Appendix : Picking a stock with the right 'stuff'

When picking a stock - I don't try to use psychic powers to foretell which stocks will be long-term
goldmines. What I do try though is to find a suitable stock that has enough oscillations per year for
me to take advantage of. I also want minimal risk. Here are a few rules I've set for myself in that
regard.

1. The stock must be trending up.

Essentially this means the stock is going on an upward slant overall. I look back at minimum 1
year and usually 2 years to get the 'big' picture. The stock may be going up over the last 3
months - but if the trend is down over 2 years - you may lose. Just click a one year and two
year chart to see where its heading.

2. Don't go too large on the market cap.

Too big and stable like a bank can mean too few hiccups to take advantage of in a month.
More important than the price of a stock is its market cap. The price of the shares x the
amount of stock = its market cap. Its a far better indicator than the price of a stock. Company
A has 1,000,000 shares at $1.00/share. Company B has 100,000 shares at $10.00/share.
You see the two stocks - one at $1.00 and the other at $10.00 but they are the same. Below
are the official numbers for the 'market value' of a stock or its market cap. Remember each
broker changes the exact definition of market cap but these are fairly generic ones.

Large cap - $10 billion and $200

Mid cap - $2 billion to $10 billion
Small cap - $300 million to $2 billion
Micro cap - $50 million to $300 million

I usually invest in the micro to small cap and never more than a mid cap. How small you go is
up to the amount of risk vs. reward you are willing to take.

3. 10x the volume

I pick stocks that have enough daily volume so my order will not spike the price. I usually make
sure the stock has at least 10 times the daily volume than the order I am placing.

A good place to start to look for good trends is www.clearstation.com

You'll have to poke around a bit but its under -
TAG AND BAG - A-LIST TECHNICAL EVENTS - CONTINUING TRENDS : BULLISH - THIS
YEAR'S BEST TRENDS.

Click the 'graphs in bulk' to get a real fast down and dirty look at macd histograms.

Another great spot is at Yahoo Finance. This one is a gold mine. Goto Yahoo Finance. One the
side bar in blue under the heading INVESTING - STOCK RESEARCH - SCREENER - MORE
PRESET SCREENS - SMALL CAP GROWTH. This is the url if you want to get to the MORE
PRESET SCREENS directly.

http://screen.finance.yahoo.com/presetscreens.html

Again, only one of many beginning points.

That's it for the appendix. I am really going this time. Pick a stock with good volume, not too high
market cap, and an overall up trend.