The StockScores Four Pillars
Stockscores.com Perspectives for the week ending December 16, 2007
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In this week's issue:
The Stockscores Approach to the market is probably different than what most people would consider a normal way to analyze stocks and manage a portfolio. I think that may be why it has worked well for me and so many others; the fact that it is different from what everyone is doing is why we can beat the average. After all, isn't doing what the masses do the very definition of average?
Over the next four weeks I am going to write a series in this weekly newsletter on how to understand and use the Stockscores Approach to make money in the market. I consider there to be four pillars that need to be learned, and each week I will focus on one of those pillars.
Beginning next week, I will look at how I know what stocks are worth entering. The truth is, most stocks most of the time are not worth trading. If we are to consistently earn a return that is better than the market average we must exploit opportunities that arise from a breakdown in market efficiency. In my look at the first pillar, I will examine the very simple things that make a stock worth considering for a buy or a short sell and how to use the Stockscores indicators to help you identify these stocks.
In the second week I will focus on the management of risk. Historically, risk has been managed through diversification but I think there is a lot investors can do to improve upon this. Of key importance in risk management is learning how to know when you are right on a stock and when you are wrong. That way you have a prognosis so you can move to the third pillar, knowing when to exit.
The financial industry always talks about what to buy and sometimes what to short sell. But there is little emphasis on when to exit the trade, perhaps because many investors take positions without ever considering an exit. I strongly believe that a buy and hold approach to stocks is not ideal most of the time, meaning that we have to learn how to exit a trade at the right time. Whether you are a day trader or a long term investor, there are simple rules that you can use to exit stocks when the market begins to work against the stock.
Our final pillar, and by far the most important, is to learn how to manage emotions. You may be surprised that I consider emotional control the most important aspect of trading the stock market but a seasoned investor will agree, the things that hurt our returns the most are fear and greed. I have taught thousands of investors how to trade and most people who put in some effort can learn the rules that I offer. But, the great challenge for almost everyone that I have ever taught has been the ability to follow the rules. When I look at this fourth pillar, I will offer some ways to overcome emotion to give you an edge in the greatest market battle of all, the one with yourself.
As the year comes to a close, I think you will find this four part series a great way to prime yourself for 2008. The market will be relatively quiet over the next four weeks, giving all of us a way to simplify and strengthen our approach to the market. Through the series, you will learn simple methods to analyze stocks, the markets and yourself. Hopefully, it will help all you take some more money out of the market and have more fun doing it.
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My preference is to trade stocks when they are acting abnormally because abnormal price and volume is often an indication that there is something significant happening with the company that could move the stock faster than the general market. However, it is not always possible to find the ideal set up with abnormal activity, so sometimes it is worth looking at the chart pattern on an active stock and trade with good risk management.
By this, I mean take a trade because the profit potential is significant enough to warrant the risk, given the probability of success. This week's feature stock follows this line of thinking; taking a trade based on the pattern and the expected value of the trade.
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1. GOOG
GOOG is one of the most actively traded stocks in the world which makes it easy to trade because you can move in and out of the stock or its option quite easily. This week, the chart of GOOG shows a break down from a short term upward trend that sets up a falling top pattern. That makes it probable that the stock will move lower over the next few weeks. What is important is the risk reward of the trade. If correct, the stock has good potential to fall to the $615 price point. The recent high of $724.80 establishes resistance that a person can use as the stop loss point. The idea here is to either short sell the stock or buy a Put option with the intention to cover the short at a loss if it closes above $725. With the stock's Friday close around $690, there is a $35 risk on the trade with about $75 of profit potential, making the risk reward ratio better than the requisite 1 to 2 risk reward ratio.
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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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