Risk
Stockscores.com Perspectives for the week ending February 25, 2006
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Edmonton - Feb 28
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In this week's issue:
Risk. Are you comfortable with it? This is an important question that you must ask yourself when trading stocks. While we all understand that risk is part of the stock market, many of us don't realize that how we react to risk is an important determinant of our success.
How do you feel when you buy a stock? I remember that my first stock purchase decision took me weeks to make, and when I finally pulled the trigger, I was filled with anxiety. I checked the stock constantly, and did all I could to find out as much as possible about the company. From what I have seen over the years, this is a pretty typical response to that first trade, but it is not a good way to make decisions.
I lost money on my first stock purchase, in part because I did not know what I was doing, but also because I was way too emotional to make an intelligent decision. I did not understand the risk of the stock I was buying; much less have a comfort level with it.
Over the years, I have learned to manage risk more effectively, to the point where I now plan my losses by picking a stop loss point. By doing so, I know what my downside risk is on the position, so long as I have the discipline to stick to the stop loss point.
More importantly, I have learned that to make smart, unemotional decisions, I have to be comfortable with the risk I am taking. Simply, I need to take no more risk in a stock than I care to lose. By being comfortable with the risk I am taking in a position, I am more likely to follow my rules for risk management and trade execution.
Consider the trader who has a $20,000 portfolio. How will that trader feel if he purchases a stock and sets his stop loss point where the loss will amount to $3000? Since this represents 15% of his portfolio potentially lost on one trade, chances are he will be pretty nervous. There are two effects to doing this. First, if the stock starts to make him money, he will be looking for a fast exit to lock in a profit and end his anxiety. Selling good stocks too early is a common problem among stock traders.
The second effect is in dealing with the stop loss point. If the stock starts to fall toward that predetermined stop loss point, and the trader begins to face the loss of 15% of his portfolio, he may begin to find reasons to hang on to the trade by canceling his stop loss point. We tend to associate losing money with the exit of a trade, so by not selling, we have not really lost (which is an error in logic). By ignoring the $3000 loss limit point, the trader is now flirting with an even bigger loss that could bring a serious set back to his portfolio performance.
Both of these problems begin when the trader takes more risk than he is willing to accept. Facing a potential loss that exceeds the comfort level of the trader causes him to make emotional decisions. The trader either sells too early, failing to let a strong stock run higher, or he fails to sell at his predetermined stop loss point to avoid the pain of taking the severe loss. Both are deadly mistakes for any one playing the stock market.
Don't take more risk than you are comfortable with. Build your trading confidence by taking monetary risk that you can handle, and you are more likely to make unemotional trading decisions.
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Information affects stock price. The more important the information, the greater the effect on price. Recognizing that there are market participants who act on information that has not yet been made public, we can often predict the arrival of significant news by monitoring market activity. Statistically significant abnormal activity is often an indication that positive new information is becoming a factor in the market. The Abnormal Activity Market Scan and Strategy seeks out the abnormal behavior that can telegraph the future.Back To Top
1. V.QTA
V.QTA made an abnormal break to the upside with strong volume on Friday. The stock is breaking from a Flag pattern after starting its up trend about a month ago. The volume indicates that the market is excited about owning this stock and should motivate a longer term up trend. Support at $0.54.
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2. WIBC
Those seeking a less volatile stock can consider WIBC, which is breaking from a consolidation pattern with strong volume support on Friday. Long term optimism is intact, this stock may stall on some short term profit taking but it looks good to continue the upward trend. Support at $16.90.
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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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