The Profit Puzzle
Stockscores.com Perspectives for the week ending October 21, 2005
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StockSchool Pro Calgary
Thanks to all who attended our Stockscores seminars in Alberta and to those who will be joining us on October 29th for the StockSchool Pro course. It is another sell out!
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In this week's issue:
I think we all want to make money in the market. It was the idea of "easy" money that got me interested in stocks a long time ago, although time certainly proved that there is nothing easy about consistent stock market success. To take bags of loot out of the stock market requires successfully implementing a number of components. This week, I look at the pieces to the profit puzzle and some things to think about with each.
Strategies for Entering a Position
Knowing what to buy is most people's focus, but it receives more attention than it is worth. Yes, we do need to know what to trade and when to enter the trade, but a successful trading strategy requires a lot more. Regardless, every good trader has proven strategies for entering the trade. Find something that you can prove works and write down the rules for entering the position.
Risk Management
Often ignored, effectively managing risk is extremely important to trading success. How large of a position you take and your plans to exit the position if you are wrong are essential to long term trading success. Write down your risk management model and implement it on every trade.
Strategies for Exiting a Position
When should you sell the trades you are in? I believe this is more difficult than knowing when to enter the trade because our emotions can play a powerful role in this decision. That makes it necessary to test a number of exit strategies and find one that works for your personality and trading style. Once you find that formula, right down the rules.
Discipline
Notice that I keep telling you to write down your rules? The most difficult part of trading is following the rules that you establish. Writing them down is one way to improve your discipline. Create a trading plan and have those rules in front of you when making your trading decisions. Encourage a spouse or friend to review your trades to see if you have been following the rules and set consequences and rewards for yourself for following them.
Review
You can't learn from your mistakes if you don't know what they are. Make a trading journal and review it on a regular basis. Treat mistakes like tuition and make sure you learn from what you paid for.
Technology
Individuals trading from home can now be on a level playing field with financial industry professionals, but you need a computer and access to the Internet. Since you are reading this newsletter, I assume that you have those things. However, if it took you a long time to access the Internet to do so, you may be working on a computer better suited for anchoring a small boat. You don't need the best computer out there but something relatively modern with a good monitor will make your trading easier.
Brokerage
When selecting a brokerage, consider a number of factors. The commission cost is important because it affects your profitability, but don't nickel and dime it; there are other factors that you should be willing to pay something for. Support from them is important (in my experience, all brokerages have technical problems at some time or another; you need to know how they deal with them). When actively trading, speed of order fulfillment is important but not essential when you are a longer term position trader.
Software
Tools for identifying and taking advantage of opportunities are important. If a tool that costs you $500 a month makes you an extra $5000, then it is a good investment. I have seen free tools that I think cost the trader money because they are so poorly designed. Consider your tools an investment that pays a return, the cheapest is not always the best choice.
Support
So much of stock trading relates to confidence. Believing in what you are doing will give you the conviction to get through the inevitable losing periods. Find someone that knows what they are doing and use them as a mentor while you are learning.
Health
For day traders in particular, it is important to get a life. Sitting in front of a computer screen all day is not good for you. Exercise and an active pastime will reduce stress and improve your ability to think under pressure. That will help you make more money.
Take each of these components and treat them seriously. Missing one piece can be the difference that leaves you on the losing team.
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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.
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1. T.ZL
T.ZL has enjoyed a recent increase in trading volume and today broke out to the upside with abnormal volume supporting the breakout. The Sentiment Stockscore has finally come through the important 60 threshold indicating that some buyer interest is returning to the stock. Technical support at about $1.70.
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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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