More Than Just When To Buy
Stockscores.com Perspectives for the week ending September 23, 2007
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In this week's issue:
Most investors concern themselves with one thing; buying the right stock. Since this is the first choice you must make it makes sense that this be the focus but long term success can not be achieved if this is the only focus of the trader. The Stockscores Approach goes beyond this first step to encompass three more essential elements of stock market success. Together, I refer to these as the four pillars for profit. They are:
Entry
Whether buying or short selling, when entering a stock we must do all that we can to ensure that we have a high probability of making a profit. When buying a stock, we should ensure the following:
- Buy stocks that are controlled by the buyers in the market, which is to say that the market is optimistic about them. The easiest way to do this is to look for rising bottoms on the stock chart.
- Don't chase stocks higher. Buy early in an up trend when the stock is breaking from a period of sideways trading.
- Focus on stocks trading with abnormal market behavior. Abnormal activity is the clue that new information is coming in to the market that is not yet widely disseminated.
- Look for stocks breaking through ceiling prices as this also indicates that investors are trading with a new and optimistic perception of the fundamentals.
Risk Management
Imagine you are great at the first pillar and are able to pick winning stocks 70% of the time and you average a $1000 profit when you are right and lose $3000 when you are wrong. How much money do you make over ten trades? Despite being a good stock picker your account suffers an overall loss of $2000.
This demonstrates the importance of effective risk management. You have to limit losses and let profits run. You have to plan your losses so you don't allow a small loss turn in to a big one.
Don't take positions in stocks based on what you can afford, do so based on what you can afford to lose. Be comfortable with your loss exposure for taking more risk than you are comfortable with will almost certainly ensure that you make emotional mistakes. The fear of losing money is a powerful motivator to break your exit strategy rules.
Exit
There are two scenarios where you will sell a stock. The first scenario will have you selling the stock at a loss when the market proves the entry wrong. This is at the point that you plan in the risk management component to take the loss and is typically at support before the entry signal was triggered.
The second scenario is the more favorable selling at a profit. Most investors tend to do this too early and fail to maximize their gains. In general, we sell stocks at support. Support can be defined by candlestick charts, chart patterns or trend lines. The slower the stock is rising, the longer term support level we should use to trigger an exit signal. If the stock starts to move up very quickly choose shorter term support as the trigger point for a sell order.
Never sell because of what you learn from publicly available information. It is always behind what is happening in the current market because the stock market is forward looking.
Emotional Control
This is the hard part. I often joke that you are predisposed to fail in the stock market if you are a normal human being. The best traders are those that don't care about losing money, who don't have an aversion to the loss of their capital. For most of us, this is just not the case. We avoid pain and pursue pleasure which means we hold our losers and sell our winners early. Doing so ensures long term failure in the stock market so you must reprogram your long term habits to sell your losers and hold your winners. This is the most important component of trading success and yet is the greatest stumbling block for investors.
To achieve success in the market you need to master each of the four pillars for profit. The Stockscores Approach focuses on each of these in detail and can be learned through the StockSchool Pro home study course, available on the Stockscores.com web site in the Products area.Back To Top
The Nasdaq market looks to be the strongest of the North American markets right now so I focused my Market Scans on that market, looking for stocks that were up in an abnormal way on Friday and trading abnormal volume. Here is what I found:Back To Top
1. PFSW
PFSW is breaking to the upside from a flag pattern, a sign that the buyers are coming back to the market a couple weeks of quiet. The long term chart of PFSW shows a change of sentiment among investors on this company, the falling tops have given way to rising bottoms and volume has increased. I think now is a good time to consider the stock with support at $1.19 and very long term upside to $3.
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2. SVNT
SVNT has been sliding lower on what appears to be complacency by the buyers. On Friday, an abnormal amount of volume came in to the stock and it was able to break its downward trend line. This may be an indication that the buyers are working to break the seller's control of this stock, I think there is a good chance they will succeed. I think a close below $12.25 is a good way to stop losses if this trade does not work out.
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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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