Learning from the Past
Stockscores.com Perspectives for the week ending November 5, 2006
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In this week's issue:
Do you review your trades on a regular basis? One of the best ways to improve your trading skill is to look at what you have done in the past and see if there are patterns that are producing losing results. By taking the time for review you can learn from your mistakes and identify opportunities to make more money. Not doing so is like paying tuition to go to school and then never attending a class.
Recently I went through all of the picks that I make for the Stockscores Perspectives Daily newsletter. I entered them all in to a spreadsheet and studied each pick for its potential to make or lose money. Before I discuss what I learned from this process, here are the basic statistics:
Stocks featured Jan 1, 2006 to August 31, 2006 - 125
Number of features that were stopped out as a loser - 37
Number of features that gained enough to have a profitable exit - 88
Percent with the potential to be profitable - 70%
Top 10 performers (based on maximum price gain after feature)
V.FO - 714%
V.KXL - 687%
V.FV - 166%
V.CPN - 152%
T.EGX - 143%
V.ISM - 120%
T.PSM - 117%
ICOC - 115%
T.AQI - 113%
V.EPL - 103%
It is important to understand a few things about the Stockscores Approach and the results of my newsletter picks. First, I am not applying a buy and hold strategy but instead look to trade the stock when it is hot and exit the trade when there is a signal to do so. Many of my feature stocks go up very quickly and then fall back when the speculative fervor has worn off. My aim is to have capital working when the stocks are moving and move out of the stock when the party is over.
No one will consistently achieve the maximum gain in the stocks as it is not possible to sell on the high. Therefore, the results of the top performing stocks are provided simply to show what these stocks did after the Stockscores Approach identified them and are not meant to represent the gains that a trader could have made.
I did not include stocks picked through the last two months because those stocks have not yet had time to realize their full potential. Some have done really well (I featured T.CUX just a week ago and it is already up 29%) but they can still do lots more over time.
The Stockscores Approach teaches to take a loss if the stock closes below the stop loss point. So, there were a few stocks that actually did quite well after I featured them but they were stopped out before they went in to a money making trend.
What I Learned
The point of this exercise was to learn something from the stocks that I picked. Here are the things that stood out after I reviewed all of the trades.
Loss Limits Are Important
Generally, the stocks that triggered a losing exit price because they hit their stop loss point were best exited. Failing to use the stop loss points often led to much larger losses. This drives home something that I teach over and over, discipline is essential to success in the market. Yes, it is painful to have to take a loss but it is better to take the small loss when the stop is triggered rather than hold on for the much bigger long term loss.
Revision of the Selling Strategy
I found that I needed to better define my rules for selling to accommodate emotion in the market. When the trend was orderly, a conservative selling strategy worked best. When there was a very steep trend and a good deal of emotion was prevalent in the market, a more aggressive exit strategy worked the best.
Hot Markets Are the Best Places to Play
You will notice from the results above that the majority of the winners were from the Canadian speculative stock market. This market had a very good run until May and produced a lot of hot stocks. Since this market has quieted down the performance of stocks found from this market have not done as well but stocks featured from the NASDAQ market have done well as that is where the action has shifted to.
You Can Play a Stock More than Once
Many of the featured stocks gave more than one signal to enter or exit the stock. An active approach of buying and selling throughout the longer term trend could have worked well for those that have the trading savvy to take advantage of the market gyrations.
Liquidity Plays a Role
There was a concentration of losers in stocks that were less active than the average. While the chart patterns were good, a lack of liquidity (how actively a stock trades) had an effect with less liquid stocks doing poorly. There was a cluster of losers in stocks priced below $0.50 that were not very active. I intend to focus on stocks that are more widely known to investors as that seems to have an effect on their ability to go in to profitable trends.
The Importance of Being Selective
In reviewing the losing features I found that many of them had chart pattern set ups that were less than great. The most common problem was a focus on the short term chart pattern rather than looking at a longer term time frame. Stocks that were just starting long term trends tended to do the best when there was an entry signal. Stocks that were giving good short term entry signals but were already in to a trend that had been underway in the longer term tended to under perform. The result is I intend to be more selective about looking for stocks that are in the very early stages of a potential trend.
The More Speculative the Stock, the Shorter the Trend
The more junior, lower market capitalized stocks, tended to have quicker trends that required more aggressive exit strategies. The larger cap, more established companies tended to go in to longer term trends that were more dependable and had more momentum. I think that traders who focus on penny stocks need to adapt more aggressive exit strategies as these stocks often go down as quickly as they go up.
I think that going through this process will improve the quality of the stocks that I feature and allow improved profitability in my own trading. We should all strive to do better than we have achieved historically and that can only be possible if we learn from the mistakes of our past. Analyzing the successes also works to build greater confidence in the trading strategy rules and the need to follow the trading plan. For me, in particular, the analysis really showed that using loss limits is the best thing to do (provided the loss limits are done at the right point).
Everyone should go through this process on a regular basis. It is time consuming and a bit tedious but the lessons you learn are extremely valuable. Losses are tuition to the College of Trading, make sure you get your education!
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This week, I ran the Sentiment Crossover Market Scan but modified it to only look at stocks that traded at least 1000 times on Friday. This scan looks for stocks that had a Sentiment Stockscore below 60 on Thursday and went to 60 or higher on Friday.
I inspect the charts and throw most of the candidates out. I want to focus on stocks that have had their Sentiment Stockscore below 60 for at least a few months and are just now turning around. This is a way to find stocks that have not been well liked by the market for some time but are just now getting some attention. I look at the charts to see if there is a good risk reward trade off and a chart pattern that is showing some optimism. I like to see a rising bottom and a pick up in volume to indicate the stock is under accumulation.
Two stocks stood out, their charts are below.
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1. MESA
MESA broke its downward trend line this week and has been trading some higher volumes that normal. The stock pulled back through the middle of last week but managed to close above its open on Friday making me think it is good to work higher next week. I think a tight stop on close at $8.54 minimizes downside risk while upside potential to $10 is reasonable.
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2. SSD
SSD is really trying to make a long term bottom, it pulled back through most of this week but I think it bounces higher next week as it has pulled back to very short term support. If the stock closes below $27.20 I would dump it. With relatively little downside and good upside to $30 in the short term, I like the risk reward trade off even though it is not as high a probability trade as some may like.
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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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