The Realties of Trading
Stockscores.com Perspectives for the week ending July 31, 2005
In this week's issue:
Late night television now hosts a number of infomercials that proclaim the virtues of trading the stock market. In large cities, there is a constant stream of companies hosting seminars on stock/option/currency trading. The plan for you is seemingly simple; buy the program and you too can be a professional trader, making thousands of dollars a day.
The attraction is easy to understand. Trading allows you to be your own boss and make the kind of money that provides the freedom to lead a great life. The infomercials and seminars leverage this dream to sell their products. However, it is what they don't tell you about trading that can turn the dream in to a nightmare.
Trading is simple, but not easy.
I have attended a lot of the seminars and watched the infomercials and have come to realize that the lack of knowledge that people have about the market is what allows these companies to sell millions of dollars in training programs and software. I love to see people learn how to trade and find success, but I think it is important to establish a list of things that anyone considering a trading career should think about:
1. Software is not the key to success - a wrench will not fix your car and software will not make you money. These are tools that will help you succeed but you still have to know how to use them. Don't trust someone that tells you to trust the money making ability of software.
2. Trading is not about the method - I believe I have a pretty good set of rules for making money in the stock market. They are the product of 16 years of trading and have served me well. However, my rules in the hands of an emotional decision maker make the rules useless. To be successful in the market you have to be able to ignore your natural tendencies to pursue pleasure and avoid pain.
3. Only a trader can teach others to trade - a teacher can teach rules, a trader can teach how to follow the rules.
4. You will not learn how to trade in a weekend - it can take a doctor more than ten years to learn their skills. Hockey players work their whole life to get good enough to play in the NHL. Traders can make a lot of money too but expect it to take time. Three to six months is probably the minimum learning period for most people.
5. Trading is a battle - there are hundreds of thousands of people trading the stock market. To win, you have to trade better than most of them. If you do what the masses are doing, you will only be average.
6. The game always changes - what worked last year may not work tomorrow. Don't feel secure about a system that would have made you a lot of money in the past because that does not guarantee that it will work in the future.
7. Determination will make you a winner - most people give up. The thing that sets the winners apart from the losers is the determination to succeed.
8. Trading can be very rewarding - there are some very successful people who make their living trading. There is more to success than money, trading can give you a lot more time and freedom to do what you want.
9. Profits in a strong market are often short term loans - don't think you are a good trader because you have succeeded in a strong market. Good traders make money in all markets.
10. No one cares more about your money than you - no matter what your goals are in the stock market, having a say in how your money is invested is important. Keep control because only you prioritize your best interests.
I don't want to discourage anyone from trading the stock market, but I do want everyone to have realistic expectations about the market. Work hard, find someone who knows what they are doing and learn from them and be competitive. Trade well.Back To Top
Bottom fishing is the quest for stocks that are inexpensive relative to previous levels, but show signs that the bargain is going to end soon. We want to look for stocks that are a showing a break from pessimism, an increased level of confidence that the stock is undervalued, and signs of optimism for the future. Filtering for these situations gives the investor a short list of companies to perform their necessary due diligence on before speculating on a change in trend.
Buying a stock that is in a long standing down trend can be as dangerous as stepping in front of a freight train. It takes time for stocks to reverse trends, and buying what seems to be a bargain can be a crush to your portfolio. However, bargain hunting can be profitable if the timing is right. To effectively bottom fish beat-up stocks, you have to enter when there are signs that the downslide is slowing and a move back upward is imminent.
Market psychology takes time to reverse. When bottom fishing, we want to focus on stocks that have suffered a sell off and are cheap relative to where they once were. However, we want to also look for signs that market psychology is turning favorable on these stocks and that they are ready to head higher again.
This strategy focuses on three stages:
Stage 1 - a break from the show of pessimism
Stage 2 - a show of confidence
Stage 3 - a show of optimism
Stage 1 is essentially a breaking of the downtrend. If we draw a line along the top of the declining trend, we have defined the downtrend. A break of the trend arises when the stock can break upward and through that declining trend.
In Stage 2, we want to see signs that there is confidence in the break from pessimism. The market needs to show resilience that the downtrend is indeed slowing, and that the potential for an up trend is real. A consolidation following the break is a good show of this, and is more significant if it as at a level higher than the previous low. This is a rising bottom.
Finally, we want to find signs that there is optimism about the future of the stock. A breakout from a rising bottom is Stage 3.
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1. SMSI
SMSI has switched from falling tops - pessimism, to rising bottoms - optimism. It is now making an abnormal breakout through some resistance on higher than normal volume. The Stockscores indicators have recently gone in to the green confirming what the chart pattern is showing. Support is at $4.75.
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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.
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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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