10 Things You Can Do to Be a Better Investor
Stockscores.com Perspectives for the week ending September 7, 2007
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Stockscores Market Minutes
Each week, Stockscores founder Tyler Bollhorn hosts a short online video presentation that provides an overview of the markets. Be sure to check it out at the Stockscores.com home page by clicking on the orange Market Minutes link.
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In this week's issue:
1. Use Strategies that Work
Your approach to the market won't have a hope if your analysis methods are not effective. There are many ways to analyze stocks, take one that you like and test it until you have confidence that it works.
2. Write a Trading Plan
Success has a better chance of happening when you write down a plan to get there. Make your plan include your rules for entry and exit, risk tolerances and a process for review. Adapt your plan over time as you find better ways to achieve success.
3. Manage Risk
Understand the risk in every trade you make and don't take risks that you can not tolerate. If your exposure to loss is more than you are comfortable with you will inevitably break your discipline.
4. Limit Losses
You should always know where the exit door is in case something goes wrong. When you buy a stock, decide the point where the market will have proven your decision to enter wrong. If the stock falls to that price, get out. Don't let small losses grow in to big losses.
5. Blame Yourself
There may be a good argument for why a loss you have suffered is someone else's fault. The newsletter writer could have been wrong, the media could have been wrong, the government could have gone back on a promise, the company could be corrupt. Blaming others will never get your money back. You will not change the actions of others, you can only change your own. Therefore, blame yourself for everything that happens with your money and take steps to make it better.
6. Stop Falling in Love
The more you know about a company, the more likely you are to ignore the market's message. Companies want you to own their stock; the more investors that they get to own their stock, the higher the price goes. As a result, there is a bias to the information that you are exposed to, if you listen too much you may miss activity in the market that is telling you that something is wrong.
7. Practice Patience
Up trends start slowly so you have to be patient when stocks are trying to start a long term trend. The profit is in the patience, hold on to strong stocks so long as they are showing strength. When looking at a company, avoid a short term outlook that can mislead you about the long term trend.
8. See the Other Side of the Story
Everything you know about a stock may tell you to buy it and you may do so with complete commitment. But, always ask yourself, "Why is someone willing to sell to me at this price." If you understand their motivations for selling versus your motivations for buying, you can better determine who is right. Without an understanding of the other side of the trade you can not determine whether the other side is wrong.
9. Avoid the Herd
The crowd usually loses. When buying, look around at your fellow buyers. Are they well informed, smart investors or are they generally uninformed people watching 60 Minutes? Always try to be one step ahead of the herd.
10. Analyze Your Results
The market is always evolving, making constant evolution in your approach to the markets important. On a regular basis, analyze your trades and looks for patterns of self destruction. Make changes as necessary.
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Friday brought a technical breakdown in the chart of the Dow 30 as it broke downward from a falling top flag pattern. That basically means that the sellers showed strength and look to be taking back control after a few weeks of buyer control. I think the Dow, and the market in general, is more likely to go lower than higher through September.
With that in mind, I look at the charts of each of the Dow 30. I wanted to find the stocks that are most likely to lead the market lower if the Dow does sell off as I expect. These are some names that are worth considering for short sells or Put option strategies:
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1. CAT
CAT recently broke its upward trend line and fell through the neck line of a head and shoulders top. That is a technical analyst's way of saying it looks ugly. $60 is achievable to the downside so long as it does not manage to close above $77.50.
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2. AA
AA ran upward on speculation of a buyout and now the market is bringing it back to earth as lower metal prices and higher costs take their toll. Set the stop at $37.50 with an expectation that it could fall to $27.
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3. WMT
WMT's marketing advises us to watch out for falling prices in their stores, but WMT shareholders should have the same concern with the stock. WMT closed at the lowest closing price in years today and looks like it want to go lower. Stop a loss on the short at $44.50.
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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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