Simple Rules
Stockscores.com Perspectives for the week ending September 17, 2005
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In this week's issue:
I like to keep things simple. Perhaps it is my inability to deal with complexity, maybe I am just not smart enough to understand things that are shrouded in detail. All I know is that I am much more successful when I sit down and simplify something down to its basic elements.
With that in mind, I want to simplify the stock market for you. I want you to make money in the market without the help of those people who try to make the market complicated. I want you to make the right choices with stocks and come away feeling good. So let's simplify stocks with some basic rules for making money and avoiding losing it.
To Make Money in the Stock Market
1. Never buy stocks whose chart has falling tops. I know it is tempting to try and snatch up a bargain, but I have paid enough tuition to the College of Trading to know that trying to find the bottom is like trying to catch a falling knife. It is better to wait for a bounce. Buy stocks only if the chart shows rising bottoms.
2. Most of the time, you can not beat the stock market. The stock market is a good place to put your money because, more than any other asset class, it has consistently delivered higher returns. If you wan to play the market in general, buy an Exchange Traded Fund and earn what the market earns. However, if you want to beat the stock market, recognize that you have to have an edge.
3. Within every stock, someone has an edge. Stocks go up because the market's perception about the company changes for the better. Many things can motivate this, but usually, it is changing fundamentals. The problem for the average investor is that we learn about changing fundamentals too late, we learn about them after those changing fundamentals have been priced in to the stock. However, there are always a group of investors who know more and act on new fundamental change first. To beat the market, you have to do what these people are doing.
4. People with an edge leave a trail for you to follow. When someone knows that the fundamentals are changing for the better, they are likely willing to pay more than most other investors. That creates abnormal market behavior. Those with better information are the people who break stocks through psychological price barriers on strong volume.
5. Stocks can be moved with brute force. The market is not a level playing field. The investor with a $25,000 account is at the mercy of the institution with $25 billion. The person investing the $25 billion is not necessarily smarter, but their opinion is more important because they can make it a self fulfilling prophecy with the sheer force of their capital. A lot of money can be made riding the coat tails of the big investor.
6. Be nimble. If you could retire 10 years earlier by working a half hour a day on your stock trades, would you do it? The ability to move in and out of stocks quickly is an advantage that you have over the big institutional investors. It takes time to make those decisions, but the rewards can be measured in years.
7. Make a plan. Buildings are built from them. Football games are won from them. Cures to disease are found from them. Plans are essential to success, so make a trading plan before you start to trade.
8. Enjoy yourself. If the stock market fascinates you and trading it is fun, you will do better. If not, find something that you love and try to make money from that.
To Avoid Losing Money in the Stock Market
1. Limit how much you lose on any one trade. I believe that the effective management of risk is more important that picking the right stock. Don't expect to be right all the time and if a trade is not working according to your plan, get out of it. Small losses don't hurt your long term performance.
2. Take control of your money. We don't all have time to make the decisions about our investments, but even if you have a broker doing that for you, take an interest. No one cares more about your money than you so make sure you know and understand what is being done with your money.
3. Don't believe in the dream. I receive at least five emails a day promoting me on some speculative stock. They all imply that their stock is the destined to be the next best thing and the catalyst for easy wealth. I see nothing wrong with playing promoted stocks, just don't believe anything you hear.
4. Avoid chasing the crowd. When everyone is talking about something, it is probably time to sell. If you are looking at an investment that has been going up for a long time, leave it alone. Find opportunities that are in the early stages of their cycle.
5. Don't work harder when the market is bad. Making money in a strong market is very easy. The problem is that most people give it all back when the market reverses. If you have a hard time finding good opportunities, don't work harder. The best trading opportunities are obvious.
6. Don't rush in to the market. So many people start trading the stock market before they know what they are doing. Get an education and start slow. The stock market will be here for a long time, there is no rush to start trading. Those who start trading before they really know what they are doing are destined to have an expensive learning process.
7. Leave your emotions out of your decisions. Most of us have had to work hard for our money so it is not surprising that we have an emotional attachment to money. If this emotion transfers to your decisions, you will probably self destruct.
8. Never try to make sense of the stock market. That market does not move on what makes sense to most investors because most investors are using old information. Remember that future stock prices are based on future information and not what you know about today.
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Stock price is based on information, and how the market judges that information. Resistance is a horizontal price ceiling that represents the upper limit on what the market is willing to pay for a company. New information is often the reason why stocks break through this price ceiling.
However, our success in the market will not be great if we simply buy stocks because they are breaking through resistance. Another critical consideration is the price volatility of a stock before the breakout.
If a stock's price has not been volatile, relative to its own history, before a breakout, then the breakout is more important. Low price volatility indicates that investors have come to some consensus on what the stock is worth, making a breakout even more important.
This strategy looks for stocks that are breaking through resistance that has held up for at least four months. The longer resistance has held up, the more important a breakout is. While it is more difficult to break through long term resistance, successful breakouts tend to develop in to longer term upward trends.
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1. T.CLL
T.CLL is breaking from a pennant pattern with abnormal trading volume. After moving up nicely in early August the stock went in to a reconciliation phase that seemed to recharge buyer interest. Unless support at $2 is violated, I think this stock has good potential. Disclosure: I bought this stock on Friday.
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2. ININ
ININ made a breakout a few weeks ago and then went in to a sideways trading pattern. Friday brought a confirmation break with even better volume that I think is a good indication that this stock wants to go higher. Support at $6.
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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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