Points for Earning Money in the Market
Stockscores.com Perspectives for the week ending April 7, 2007
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Stockscores Pro Exclusive Online Content
This week, Stockscores Pro members will be able to participate in a live online class where I will do a discussion on how to trade hot stocks when they quiet down, a great way to swing trade stocks that are setting up for another fast move.
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In this week's issue:
I have often compared trading the stock market to playing a video game. Consider what traders do:
don't get properly dressed
sit in front of a computer all day
can not be spoken to by spouse
suffer occasional Tourrette Syndrome like symptoms
get sore hands and eyes
Does this sound like your favorite video game player?
The difference of course is that there is money involved with trading and our emotional attachment to money causes many traders to make mistakes when playing the game. The pain of losing is far greater when trading than it is playing Grand Theft Auto. If the video game player suffered real injuries each time his car went off the road you would expect far lower scores. The prospect of pain, financial or otherwise, leads people to play differently.
When trading it is important to keep the emotion out of your decision making. One way to help with this is to look at your trading performance like a score rather than like money. However, it is not enough to say "one dollar equals one point" and try to trick yourself in to believing it. Here is what I suggest.
Stock trading is all about managing risk and reward. Therefore, frame every trade in terms of risk and reward. Good traders will have higher rewards when they are right than losses (risk) when they are wrong. Track your reward credits versus your risk debits.
For example, if I buy a stock at $10 and have a planned exit if the stock closes below $9, my risk amount is $1 per share. That means every dollar is a point. If I send up selling the stock at $13 then I have earned 3 points. If my trade does not work out then I have suffered a one point loss.
Consider another example. A trader buys 20,000 shares of a stock at $1, with a stop loss at $0.80. The risk of the trade is $0.20 times 20,000 or $4000. Within a day of the trade entry the stock goes up to $1.15 and the trader sells because they are quiet satisfied with a $3000 gain, especially in one day. But they have not even earned one reward point yet because the risk in making that $3000 was a higher $4000. Unless you have a strategy that is almost always right you can not expect to beat the market over the long run if you are not earning more reward credits per trade than the potential risk debits.
The point of this exercise is two fold. First, we want to distance our self from the emotion of the trade. By changing the reference from money to points, we can achieve some of the emotional detachment.
We are also making ourselves aware of the true payoff of the trade relative to the risk. It is easy to be happy with a $3000 gain on a trade but if it took $4000 of risk to achieve it then the result is actually not that great. We should strive for an average of two reward credits for every risk debit.
This second benefit of counting points is really the most important. I have watched many traders do really well in a bull market despite their bad risk management because the market was strong. But, when the market quieted down, they gave back all of their gains because they did not manage risk effectively. To be a winner in the long term, you have to trade without emotion and have good risk management. Whether you are a short term day trader or a long term investor, apply this thinking to your trading, I think it will improve your results.
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There are a few speculative Canadian stocks that I found this week by doing a Market Scan that simply looked for the actively traded Canadian stocks under $3. I chose this segment of the market to focus on because right now it is the best choice. US stocks are relatively quiet and I have not found great follow through in stocks that are pricier. While stocks under $3 are perceived as riskier, this risk simply requires taking smaller positions to adjust for the risk.
I found two stocks that I think have good potential for next week. Traders should treat these as short term trading opportunities that may very well not work. If the stock closes below the support price then it is necessary to just get out of them. Good traders have a discipline that limits losses when the market proves them wrong.
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1. V.GRW
V.GRW is in a good long term upward trend. Three weeks ago the stock made some quick gains and ran away from its upward trend line. It has since pulled back to the upward trend line and some volume came in to the stock in Thursday, making me think that it will bounce higher next week. Support at 0.135.
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2. V.LGO
V.LGO made a big breakout on Monday of last week but I felt it was too risky entering then because the stock was likely to make a pull back. It has since pulled back for three days but on Thursday the stock closed at its open, an indication that the sellers may be losing their motivation. I think the stock has good potential to bounce back next week. If the stock closes below support at $0.55 then I think you have to let it go and wait for another pull back signal for entry, it could still happen again at lower prices.
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References
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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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