10 Trading Essentials
Stockscores.com Perspectives for the week ending May 20, 2007
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In this week's issue:
When the market is strong, most investors are able to do reasonably well. The problem is, they fall in to a false sense of security about their skill level and when the market turns lower, they tend to give back all of their gains. To beat the market over the long run requires a certain amount of knowledge and emotional control. What are the absolute essential things to know before investing or trading your own money? Here is my list:
1.Public Information Yields Random Results - take a $100 bill and drop it on the ground at a crowded shopping mall. Sit down on a bench and watch how long it takes for someone to pick it up. My guess is you won't even make it to the bench. The reason is simple; the world takes away opportunities for easy money almost immediately. The same can be said for the stock market. If a company is trading at $10 and then announces news of a significant change in their business that makes their stock worth $20, how long do you think it will take before the stock is trading at $20? There are no $100 bills lying around in the stock market. When information is made public, it is priced in to the market immediately. Therefore, using public information to make investment decisions will yield random results because the information is already priced in to the stock. Therefore, ignore it. Put a capital I on Ignore.
2.Beating the Market Requires Better Information - If you believe point 1, then the only way to consistently beat the stock market is to have information that is not widely disseminated. You need private information, the kind that got Martha Stewart in to trouble. Here is the Get Out of Jail Free Card; you don't have to trade with inside information. You just have to follow those that are. When they act in the market, they create abnormal activity and you can follow it using Stockscores. We know nothing about what companies do but we do know that human greed is a reliable indicator and abnormal activity tells us what the well informed are doing.
3.You Have to Limit Losses - do you have a stock that you should have sold a long time ago? Did you avoid selling it because the pain of doing so was too much to take? Are you hoping that the stock will turn around so you can get out and break even? Congratulations, you are normal. The bad news is normal people fail in the stock market. To beat the market, you have to take small losses when the market proves you wrong. Don't hope.
4.You Have to Let Profits Grow - it feels good to take a profit doesn't it? We all worry about a profit turning in to a loss or for that profit to get smaller than what it is today. That is why so many of us dump stocks when they show a little weakness. Pull backs in upward trends are normal, they recharge buyer interest and shake out weak hands. Don't be a weak hand, learn to tell the difference between short term weakness and a long term turnaround and only sell when you see the latter.
5.Never Turn Your Back on the Market - I have found that most of the time the stock market makes no sense. It goes up when it shouldn't and goes down when it shouldn't, at least by any logic. You can not try to outsmart the market nor can you try to understand it. Therefore, never take your eye off of it. It is unpredictable and if you get complacent it will kick you in the head and take your money.
6.The Crowd is Populated by Suckers - when people that don't normally buy stocks are giving you tips on what to buy, it is probably a good time to sell. The crowd comes in late in the trend and the pros sell to them. If you are reading about a strong stock or sector in the mainstream media then you are likely near the top.
7.Learn From Your Mistakes - when trading stock, it is impossible to be right all of the time. The stock market has a degree of uncertainty and that means sometimes you will have to take losses. While it is not possible to be right all of the time, it is possible to do the right thing all of the time. It is important to analyze every trade you do and determine whether you made mistakes. There will be times when you make money despite doing something wrong and there will be times when you do everything right and still lose money.
8.Don't Fall in Love - I have heard so many stories of investors who are sitting on a stock at a big loss but who won't sell it because the company is doing something that is going to turn it around. All traders need to understand that there is a lot of bias in the information that they gather and sometimes people tell lies. If the market does not agree with the information you have then there is probably something wrong with the information. Don't believe what you hear, trust the message of the market.
9.Internalize Your Trading Strategies - Stockscores teaches a number of different trading strategies and we have many students who have succeeded with those strategies. However, it is important for anyone trading any strategy to believe in that strategy, to have determined on their own that it is effective. Success with a strategy is largely based on confidence and if you don't make a strategy your own you will lack the confidence in its rules to follow it properly.
10.Trade With Who Is In Control - the market is a war between buyers and sellers. The buyers expect the stock to go higher, the sellers expect the stock to go lower and one group is always wrong. Trading with the group that is in control of the market is like paddling down a river with the current - it is just a lot easier than going upstream. One simple way to determine who is in control of a market is to look at the stock chart. If the buyers are in control, the bottoms will be rising. Falling tops means the sellers are in control.
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When you look at the Dow 30 Index and the gains it has made this year, it is hard to get excited about buying stocks. I think investors are waking up every day wondering, "is this the day we get the correction?" There are certainly no signs of weakness yet and I think the strong stocks continue to be a good hold, but when you are looking for places to put money to work, what do you do?
I think the Canadian Energy Trusts are the place to be initiating positions right now. I have been bullish on this sector for a month or so but I am feeling more confident than ever. My expectation is that the good charts in the sector can gain 20% through the summer. And you get to collect their disbursements which in many cases are yielding 10 to 15% annually.
The Energy sector has been strong for two months, but I think the Energy Trusts have lagged a little bit because of the emotional overhang of the Canadian government's decision to take away the tax exemption for Trusts. However, these are still stocks, they will rise and fall with the market's expectation for future earnings. After some pretty good sell offs, I think they are poised to rise again.
Here are three to consider:
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1. T.AVN.UN
The buyers took control about two weeks ago, I think T.AVN.UN may pull back in the short term but treat that as an opportunity to accumulate. With support at $12.75 and long term resistance at $17.50, I think the risk reward trade off is pretty good.
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2. T.ERF.UN
In the past two weeks, T.ERF.UN has broken its downward trend line and broken to the upside from a pennant pattern. That is a chartist's way of saying that it looks good to go higher, I think $60 is possible before the Fall. If something goes wrong, it will fall back below $47.50 and give an exit signal.
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3. T.FRU.UN
For six months, T.FRU.UN has been trending sideways between $13 and $15. It looks like this parking lot may be ready to move up toward the $19 level so long as support at $14.75 is not violated.
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References
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Strategies that can help you find new opportunities.
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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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