Trading Is Simple (But Not Easy)
Stockscores.com Perspectives for the week ending January 11, 2009
| Get the StockSchool Pro Free |
DisnatDirect named the number one Canadian brokerage for Traders by Surviscor! Open and Fund a brokerage account with DisnatDirect and receive the StockSchool Pro home study course free, including special Pro level access through the DisnatDirect client website. Offer only available to Canadian residents. For information, click here
|
|
In this week's issue:
Trading is simple, but it is not easy. Let me begin with the simple part, here are some rules to help you make profitable trades:
1. Buy stocks that the buyers are in control of. Short stocks that the sellers control. If the bottoms on the chart are rising from left to right, the buyers are in control. If the tops are falling from left to right, the sellers are in control. Look at a one year chart to see the tops and bottoms but make the judgment of who is in control by focusing on the last two months of trading.
2. Understand the reward of the trade. The distance from your entry up to the next level of resistance is the reward potential, although there are no guarantees that prices will get to that level or stop at that level. Resistance is defined by the tops on the chart, the point in the past where the stock stopped going up and started to go down. For short sell trades, reverse everything.
3. Understand the risk of the trade. The distance from your entry down to the next level of support is the risk potential, although there is no guarantee that the stock may not gap through the support price leaving you with a bigger loss than expected. Support is defined by the bottoms on the chart, the point where the stock stopped going down and started going up. For short trades, reverse everything.
4. Only take trades where the expected value is positive. If the reward potential is twice the risk and the probability of succeeding is 70%, then you have a trade with a positive expected value. A trade that only has a 10% chance of working could still have a positive expected value if the reward potential is 10 times what the risk is.
5. Always exit losing trades when the market tells you to.
6. Only exit winning trades when the market tells you to.
7. Never add to a losing trade. If you are losing, it means you did not interpret the market's message properly.
8. Don't chase trades that are running away from their trend lines.
9. Write down a trading plan so you have a set of rules for entry, exit and managing risk.
10. Never think that you are smarter than the market, the market will take your money whether it is right or wrong.
Despite the apparent simplicity of trading well, we somehow find a way to make mistakes. It is part of being human to feel emotions that cause us to break our rules and deviate from our plan. Here are some of the reasons we complicate the simplest of trading plans.
1. Fear of losing money - it is natural to want to avoid losing money in the market since we are each programmed to avoid the pain of loss. However, since the stock market can not be predicted 100% of the time, it is inevitable that we will make losing trades. If we avoid crystallizing those losses when the market tells us that we are wrong we often see manageable losses grow in to losses that overwhelm our portfolio's overall return. Good traders know when the market has proven them wrong and takes the loss.
2. Fear of missing out on opportunities - it is easy to remember the trade that got away, that trade that we thought about entering which then went on to be quite profitable. The pain of missing out on a winner makes us worry about feeling that pain again and makes us more likely to take marginal trades, those that really don't fit our trading plan. Instead of trading what is probable, we trade what is possible.
3. Focus on information that makes us happy - there is a tendency to filter out information based on what our emotional response is. A trader who owns a stock will focus on the positive news, the positive signals in a stock chart and often miss out on the signs that tell them the trade is destined to be a loser. It is best to always consider the other side of the trade and what is motivating people to sell when you are buying and buy when you are selling.
4. Desire to prove our intelligence - most people want others to think they are smart. As traders, there is a risk of trying too hard to make an intelligent and insightful argument for why a trade is worth taking. The market often acts in illogical ways but no individual can convince the market with intellect that is wrong.
5. Desire to escape from pain - it is not fun to lose money in the market and the pain that we feel when that happens can affect our future decisions. We want to get rid of the painful feelings and may take marginal trades to try and gamble our way out of our losing positions. You must avoid taking trades motivated by the desire to erase previous losses.
6. Greed - money may not be able to buy happiness but it certainly helps. It is easy to think about the freedom that money affords and what it can buy and let those desires determine their trades. It is important to make decisions based on your trading plan and not on what you want.
7. Myopic outlook - it is natural to only look at the last trade or what is happening now in the market. Good traders look at the big picture, both in terms of what is happening in the market but also in their own performance. Do not judge your success one trade at a time.
Back To Top
This week, I ran the Sentiment Crossover Market Scan on the Canadian markets. With their emphasis on commodity based stocks, I felt that the Canadian markets were the best place to be as these sectors are leading the market with strength. The Energy market is the one exception as it has not yet set up an optimistic pattern.
The Sentiment Crossover market scan looks for stocks that had a Sentiment Stockscore below 60 before the current trading day but has crossed to 60 or higher on the recent day. There were a number of stocks that did this on Friday from the Canadian exchanges and a few also had the sort of good chart patterns that I like.Back To Top
1. T.IVN
T.IVN started moving out of its basing pattern early last week and then the stock got hit with some rather predictable profit taking. It looks like that profit taking may be letting up and the stock should start to resume its upward trend. I would consider it on the first green candle day provided support at $2.75 is not broken.
Back To Top
2. T.MAG
T.MAG broke out from a rising bottom consolidation on Thursday and then gapped up Friday but closed weak and below the open. I think the stock will pull back for a few more days but will be worth considering on the first day it can close above its open (as a green candle) provided it does not go through support at $5.30.
Back To Top
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.
Back To Top
|
