Are You Committed?
Stockscores.com Perspectives for the week ending July 15, 2005
In this week's issue:
Commitment is important. Thinking about passing another car on the highway? You had better be committed or the eventual oncoming traffic will cause you a problem. Want a happy marriage? Be committed and you will be on your way. Trading stocks? The failure to be committed will lead to poor performance, so be sure of what you are doing.
The commitment to the trade may not seem as obvious as other examples of the importance of commitment. Yet, consider what happens when you lack the drive to see the trade through.
You buy a stock but are not sure about whether you are doing the right thing. At the first sign of weakness you exit the trade at a small loss, only to watch the stock continue significantly higher after you exit.
A stock you own is doing well but then starts to pull back. While you know that pull backs are part of the trend, the uncertainty of the trade makes you sell the winner and lock in the profit. Shortly after, the stock has continued its uptrend and you are not on the money train.
The lack of commitment causes many traders to take small losses because they fear the losses will grow bigger. It also causes traders to sell their winners too early. Both have a profound effect on the trader's profitability by lowering their probability of success and the profitability of the trade. So what is behind the lack of commitment?
Simply, it is a lack of hard work. I have often said that it is dangerous to work too hard in the market because it causes us to take marginal trades that we have to work hard to find. However, it is important to put in the hard work when you get a good looking trade so that you can believe in your choice.
Commitment is about confidence. The more time you spend testing your trading strategy, the more confident you will be. The more criteria a trade meets, the more confident you will be in the trade. The greater your skill in analyzing a stock, the more confident you will that you are making the right choice. Commitment comes from confidence, and confidence comes from working hard.
When you consider a potential trade, put in the effort to convince yourself that it has a high probability for success. If your decision to enter a trade is the result of hard work rather than emotional whim then you will have the commitment to see the trade through the inevitable pull backs. You will be able to commit a greater amount of risk to the trade and ride it for its profit potential. With commitment, you will be a better trader.
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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.
I ran this market scan on the TSX market and found the following stock with a good chart pattern set up:
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1. T.AEN
The rising bottoms on T.AEN indicate that optimism is building on the stock, and today it broke out to a 9 month high after a period of low volatility trading. Volume is increasing indicating that investors are taking an interest in the stock. This stock looks to have good potential as long as it can hold above support at $1.44.
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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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