The Differences Between Winners and Losers
Stockscores.com Perspectives for the week ending December 17, 2005
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In this week's issue:
Profitable trading in the stock market requires more than good knowledge and strategies. So much of trading is mental, and it is often necessary to reprogram our brains so we can make money in the stock market. Here are some of things that separate those who make money trading stocks from those who don't:
Winners Stop Losses, Losers Hope For Turnarounds
Risk management is essential to trading success. To make money over the long run, you have to plan your losses and take them when the market proves your trade wrong. Small losses can be overcome, but the big loss that comes from a lack of discipline can outweigh 10 good trades. Remember to never find a reason to keep a loser, hope belongs in the bedroom.
Winners Listen to the Market, Losers Listen to Cheerleaders
It can be hard to trust what lines on a stock chart are telling you, but remember what is behind those lines. Each day, millions of investors cast their opinion on stocks by buying or selling. Would you rather trust market activity, or a biased source that will benefit if you buy the stock? Realize that everyone who gives you a stock tip has a bias and may be overly optimistic. However, the market never lies.
Winners Let Profits Run, Losers Sell Too Soon
It feels good to lock in a profit. Therefore, it is not surprising that most traders sell out of winning positions before there is a sell signal. At the first sign of weakness, many traders jump out to make small profit, and congratulate themselves. However, it is important to remember that your profits have to outweigh the inevitable losses that come with trading, and selling strong stocks too early can hurt your performance.
Winners Keep It Simple, Losers Get Sophisticated
Every trade I make is based on six simple concepts of technical analysis. Many traders that fail to consistently profit look for new and more sophisticated methods than those proven to be successful. They add more indicators, do more back testing and read more books. Usually, the problem is not in the method, but the application of the method, making greater sophistication a waste of time. Stick to the basics and learn to apply them well.
Winners Look at What Will Happen, Losers Look at What Has Happened
You don't drive your car by watching the rear view mirror, so don't make investment decisions based on what has happened in the past. Reading news releases and annual reports has little use since all of the information contained in them is public knowledge of what has happened, and is therefore priced in to the stock. To make money in the stock market, we have to figure out what the fundamentals will be in the future.
Winners Act, Losers Hesitate
When a stock shows a high probability trading opportunity, it is time to act. Many traders see these opportunities but wait for the market to prove them right. Because of a lack of confidence, they have difficulty taking action when a major market move is starting, and instead wait to take a position when the move is well under way. While it may be more comforting to the hesitating trader, it is also more risky and less likely to be successful.
Winners Judge After 10, Losers Whine After 1
Trading stocks is a probability game, and you will lose on some of your trades. Good traders don't judge their performance one trade at a time, but instead, look at their profitability after 10 trades or more. If you focus on individual losses, you will begin to lose your confidence and start to make bad decisions. Judge and respond to your performance after at least 10 trades.
Winners Accept Responsibility, Losers Blame
You can not control the market, you can not control what others say in the market. The only thing you can do is control yourself. If the media says something that sends your stock lower, you can only be disciplined and sell if it hits your stop. If you lose your Internet connection in the midst of a trade, only you can have a back up connection. Trading has many uncertainties and issues and blaming others for your losses will not get you any farther ahead, but it will make you emotional and frustrated which ultimately hurts your performance.Back To Top
Companies that announce major news after the close of trading will often gap up in price the following day. An upward price gap occurs when the low of the current trading day is higher than the previous day's high. This abnormal price activity is useful because it indicates that the stock is trading more on its own story and less on the general movements of the market.
The Gap Ups strategy seeks stocks that are gapping upward on abnormal volume from low price volatility. Adding in these extra criteria improves the probability of picking a stock that is likely to go in to an up trend in the future. By focusing on stocks with low price volatility before the gap, we focus on stocks that were truly surprised by whatever motivated the price gap. Since the market's psychology is shaped by the past performance of the stock, price gaps tend to influence the market's mood favorably, and create optimism. This optimism can lead to a further price appreciation.
However, stocks that gap up often have to take a rest before they try to go in to an up trend. The sudden move to the upside is met with selling pressure as some investors happily sell at a profit, without regard for where the stock may be going in the future. When faced with fast money, many investors take their profit and run.
Therefore, it is often better to wait for entry in to a stock that gaps up in price. After the gap up, patience for a subsequent close above the gap day high can improve the probability of success again. Of course, having this patience can also mean paying a higher price, or being left without a position in a strong stock.Back To Top
1. V.MAW
V.MAW has been under accumulation for the last six weeks and has been building a nice pennant pattern over that time. Friday brought a strong break on abnormal volume out of that pattern, indiicating the market has a reason to be excited about what the company is doing. Support resisdes at about $0.65, I would be concerned if the stock closes below that price level.
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2. MSTR
I like the increase in volume on MSTR as it works on moving through resistance at $80. I would not call this a strong breakout but it does appear that investors are getting
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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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