What is Holding You Back?
Stockscores.com Perspectives for the week ending April 22, 2005
In this week's issue:
Hear Stockscores Founder Tyler Bollhorn on the "Talk to the Experts" radio show, CHQR 770 - Calgary on Saturday, April 23 at 5:00 pm MT (7:00 pm ET). For those not in the Calgary area, listen over the web by clicking on Listen Live
What is holding you back from making money in the stock market? Having taught hundreds of people how to trade the Stockscores Approach, I have found that there are some pretty common themes that prevent people from succeeding. Many would say that not knowing how to predict where stock prices are going to go would be the obvious hurdle, but I have known many people who are good market analysts who still can not consistently make money in the market. Here are some of the common hurdles and some simple things to help overcome them.
1. Failure to Focus - trading the stock market, whether you are a long term investor or short term trader, is simple but it is not easy. To be successful, you have to put in the time and effort to analyze the market and make sure that you don't miss things. When you are trading, you should not be doing too much else as the market requires your complete attention.
2. Fear of Losing - I think this is the biggest problem facing traders who know how to pick good stocks, but just can't make money on a consistent basis. The fear of losing means the trader will fail to take a loss when the market proves their decision wrong. It also means that the trader will hesitate when a good opportunity comes along that should be taken. Beating this fear requires a comfort with the risk inherent in trading stocks. If you care too much about the money you are putting in to a stock, then you are more likely to make an emotional decision. To be a smart trader, you can't care about the money.
3. Eagerness to Win - The eagerness to make money is the opposite problem with the same negative result. Most investors and traders sell their winners too soon because it feels good to lock in a profit. An eager trader will take marginal opportunities because they dream of making money and want to realize their dream. The eager trader will take positions that have more risk than they are comfortable with because they are hoping to make the big gain. Unfortunately, this leads to emotional decisions that often end in losses. To help overcome these problems, create a trading plan and write it down. Write down every rule and make sure you check off these rules when making a trading decision. By referencing a written list, you should avoid the emotional traps that lead to losses.
4. Mainstream Methods - if you do what every one else does, you will get what everyone else gets. There are always trendy analytical methods that catch the attention of investors. However, once they are popularized, they probably won't work because of the efficiency of the market; if everyone does it, the opportunity goes away. Don't get caught up in what the crowd is doing unless you want to earn what the crowd earns. Historically, the crowd loses in the stock market.
5. Lack of Knowledge - either take the time to learn how the stock market really works or pay to have someone teach you. It is way too expensive to blindly trade the stock market on a hunch. I would guess that 90% of individual traders lose money in the market. The other 10% make their very good profits at the expense of the inexperienced. Get someone to show you a method that they have proven works, and put in a lot of effort to learn how to follow the rules and overcome your emotional tendencies. It is a lot cheaper than the do it yourself method.
In a strongly trending market, you can get away with a lot of the mistakes listed above. In a bull market, everyone is smart and trades like they know what they are doing. However, only the best traders make it through the weak market conditions and can still pull money out of the market. To make money when markets are tough requires that you don't do a lot of the things that are human nature. You have to be emotionless, disciplined, focused and knowledgeable. Take a simple trading plan and execute with cold hearted determination.Back To Top
A common theme among Head and Shoulder Bottom, Ascending Triangles, Pennants and Rectangle Consolidation patterns is a break through resistance from low price volatility, usually with volume supporting the breakout. Rising price bottom formations in to the breakout point are common, but what market dynamic do these patterns really represent?
Rising bottoms are a sign of growing optimism among investors. As time passes, they demonstrate a weakening of selling force and increase power among buyers. As a stock moves up toward a resistance price point, the market is faced with the upper limit on what investors believe the company to be worth. We often see that stocks will go in to narrow trading ranges under resistance as investors come to a consensus on the value of the company. When stocks break out from this condition, they may be signaling significant new fundamental information at work in the market since resistance has been broken from strong consensus out of a period of optimism.
The Sentiment Stockscore is useful for finding optimism in the market, and the Signal Stockscore is heavily weighted on the abnormal market activity that comes with breakouts. By looking for stocks that have a Sentiment Stockscore of 60 or higher, and a Signal Stockscore of 80 or higher, we can consider charts that may have a good chart pattern set up. The Stockscores Simple Market Scan adds in some other technical filters to shorten the list of potential candidates further.
This strategy is not solely about finding stocks with good Stockscores. The most important step is visually inspecting the charts to ensure that the chart patterns are what we are looking for. A good chart pattern will have the following characteristics:
A break through resistance
Abnormal activity, in terms of price and volume activity
The break through resistance should be from a period of low price volatility. Low price volatility is characterized by the price range of trading on each day (how tall the trading range is on the chart) and by the range of trading over a number of days (are the trading days side by side on the chart, or is there a price trend?)
A show of optimism leading in to the break through resistance from low price volatility.
It is necessary to have all of these criteria, many traders forget to check whether the stock was trading with low price volatility before the breakout, or to make sure that the stock is truly breaking through resistance and will not encounter more selling pressure soon.
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1. FISV
Over the last four months, FISV has formed a cup and handle pattern with resistance at $41. Today, the stock broke through the price ceiling with very strong volume. I am a bit concerned that the stock was a bit volatile before the breakout and failed to close near its high of the day, but aside from some possible short term weakness, I think the stock has pretty good potential to move higher provided it does not pull back through support at $39.50.
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2. PSAI
PSAI is breaking from a lengthy consolidation period where the stock traded between $12 and $13. On Friday, the stock broke out from that trading range with higher than normal volume. This tells me that there was a fundamental change in the company's business that has some investors willing to pay more. As more people learn about the new development, it is likely that this stock will move in to an up trend. If the stock reverses and closes below $12, then the market has proven the breakout false.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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