Keeping Score
Stockscores.com Perspectives for the week ending January 30, 2009
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In this week's issue:
I have often compared trading the stock market to playing a video game. Consider what traders do:
don't get properly dressed
sit in front of a computer all day
can not be spoken to by spouse
suffer occasional Tourrette Syndrome like symptoms
get sore hands and eyes
Does this sound like your favorite video game player?
The difference of course is that there is money involved with trading and our emotional attachment to money causes many traders to make mistakes when playing the game. The pain of losing is far greater when trading than it is playing Grand Theft Auto. If the video game player suffered real injuries each time his car went off the road you would expect far lower scores. The prospect of pain, financial or otherwise, leads people to play differently.
When trading it is important to keep the emotion out of your decision making. One way to help with this is to look at your trading performance like a score rather than like money. However, it is not enough to say "one dollar equals one point" and try to trick yourself in to believing it. Here is what I suggest.
Stock trading is all about managing risk and reward. Therefore, frame every trade in terms of risk and reward. Good traders will have higher rewards when they are right than losses (risk) when they are wrong. Track your reward credits versus your risk debits.
For example, if I buy a stock at $10 and have a planned exit if the stock closes below $9, my risk amount is $1 per share. That means every dollar is a point. If I send up selling the stock at $13 then I have earned 3 points. If my trade does not work out then I have suffered a one point loss.
Consider another example. A trader buys 20,000 shares of a stock at $1, with a stop loss at $0.80. The risk of the trade is $0.20 times 20,000 or $4000. Within a day of the trade entry the stock goes up to $1.15 and the trader sells because they are quiet satisfied with a $3000 gain, especially in one day. But they have not even earned one reward point yet because the risk in making that $3000 was a higher $4000. Unless you have a strategy that is almost always right you can not expect to beat the market over the long run if you are not earning more reward credits per trade than the potential risk debits.
The point of this exercise is two fold. First, we want to distance our self from the emotion of the trade. By changing the reference from money to points, we can achieve some of the emotional detachment.
We are also making ourselves aware of the true payoff of the trade relative to the risk. It is easy to be happy with a $3000 gain on a trade but if it took $4000 of risk to achieve it then the result is actually not that great. We should strive for an average of two reward credits for every risk debit.
This second benefit of counting points is really the most important. I have watched many traders do really well in a bull market despite their bad risk management because the market was strong. But, when the market quieted down, they gave back all of their gains because they did not manage risk effectively. To be a winner in the long term, you have to trade without emotion and have good risk management. Whether you are a short term day trader or a long term investor, apply this thinking to your trading, I think it will improve your results.Back To Top
January 2009 was the worst January in the history of the stock market. If the saying "as January goes, so goes the whole year" stands true, we are in for a rough 2009. I checked all of the US Sector ETFs and they were all down for the month with only the Utilities sector able to stay more or less even for the month.
Many have said that Canada has the best economy in the world right now, its banks are the most secure and the emphasis on commodity based industries appears to have the best potential. Indeed, when I go through the Canadian Sector ETFs, I see strength for the month of January in the following:
Information Technology (T.XIT)
Materials (T.XMA)
Gold (T.XGD or T.IGT)
Most of my Canadian newsletter picks this year have been from these sectors and while we have not yet had huge wins in any of them, they are collectively holding up better than the overall market.
With that in mind, I focused my Market Scans this week on the Canadian market, running the Stockscores Simple Strategy on the Canadian exchanges. It found the following standouts:
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1. T.CG
T.CG is breaking out from a cup and handle pattern, after breaking the downward trend line in December. I would like to see volume higher than it is but other than that this looks like a pretty good risk reward trade off with support at $3.20.
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2. T.IBG.UN
This Trust Unit has been quietly building optimism over the past few weeks as it formed a rising bottom consolidation after bouncing off of its lows in December. The stock made a little break out on Friday with higher than normal volume. This one is not super liquid, so beware. Support at $13.60. Yields 11.26%.
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3. T.PKI.UN
Historical yield on T.PKI.UN is 17.5% at these prices, and today it breaks from a pennant pattern that also breaks its downward trend line. Support at $6.80.
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References
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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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