Change Your Mindset, Change Your Performance
Stockscores.com Perspectives for the week ending March 7, 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:
I think that the right mindset is the hardest thing for traders or investors to learn. Understanding how to read charts or balance sheets is not that difficult, it just takes a bit of time. The rules for diversification or risk management are not that intellectually demanding. However, learning how to think about the market is a great challenge that few investors are ever able to overcome.
Thinking about the market is hard because you have to think in ways that are very different from how we think about most everything else. When we think about buying just about anything, the reference point is always price. Consumers shop to compare prices and, in many cases, we barter to get the best price. We aim to buy things as cheaply as possible and are often motivated by low prices.
In the stock market, this is dangerous because of what stock price represents. When you buy a stock you are paying for the company's ability to make money in the future. Falling stock prices represent lowering expectations for future earnings so when you consider a stock in a downward price trend, what you are really seeing is a company that is having problems.
In this context, it starts to make sense why you would want to shun stocks in downward price trends. Do you really want to buy a company that is weak and getting weaker? Doing so is much like buying a car that has been crashed a few times and has to constantly get serviced. As consumers we know that paying a low price for a lemon is not in our best interest and most of us will avoid such purchases.
The market today has a lot of lemons and yet there are many investors who are buying these stocks because they have the wrong mindset. They might argue that owning bank stocks is smart because they are cheap, but do they really know what they are buying? By historical standards, prices may be cheap but investors need to consider value by what will happen in the future and not what has happened in the past. Bank stocks are going down because the market expects that they will make a lot less in the future.
In short, the most expensive way to buy a stock is to try and pick the bottom.
If you want to own stocks that are more likely to go higher than lower in the future you should be looking for stocks that are going up, not down. Rather than look for bargains, you need to look for stocks that the market likes. When investors like stocks, they are willing to pay more for them.
You do not, however, want to pay too much. Chasing stocks higher, buying when everyone else is buying, is dangerous. Picking stocks well requires finding stocks that the market is starting to like but well before the market loves them.
So, here is the formula for success. When looking at any stock first determine who is in control of the stock. If there are rising bottoms on the chart, the buyers are in control. If there are falling tops on the chart, the sellers are in control. Only consider stocks that the buyers control.
Next, since we do not want to chase stocks higher and pay too much, eliminate all stocks that are already well in to their upward trends. I like to find stocks that have been trading sideways for at least 6 to 8 weeks (but still have rising bottoms on their chart) and today are breaking out of that period of sideways trading. Today should be the first day of an upward move.
I also want to see passion among the buyers. Strong volume and evidence of motivated buying are important on the breakout day.
The most important thing to remember, and something that the mindset of most investors fails to recognize, is that you will be wrong some of the time. In fact, you might be wrong a lot of the time. But, you have to have the willingness to admit you are wrong as soon as the market tells you so. Be quick to take losses when you are wrong.
And have patience when you are right. The market may not reward you right away, it may not give you the confirmation that you seek. Consider a stock that I featured in this newsletter two weeks ago, T.AQI. In the three days after I featured it, the price went lower and it looked like I was wrong. However, support was never broken and eventually that buyers came back to support the stock and send it higher. It is now approaching a 10% gain over what I featured it at and there is still no reason to exit the trade.
Always remember that your winners have to pay for your losers. You will make a nice overall profit if you can keep your losers small and have some big winners in your portfolio.
Success in the market requires having the right mindset for investing. Stop trying to get deals, stop hoping that your losers will turn around. Keep it simple, trade with a winning mindset and you will improve your performance.
Back To Top
The Bottom Fishing strategy continues to be the buying strategy that I am using daily to find stocks which are going against the overall market and able to make gains. I don't think that more than 10 or 20% of an overall portfolio should be long the market right now, but if you are looking for stocks to buy which may lead the turnaround, this strategy is the one.
I used it to find stocks like SWHC on Feb 23 (was a feature in the daily newsletter). This stock is now approaching a 50% gain in only a couple of weeks.
This week's feature stock was also featured in the daily newsletter this past week but I think it is still worth considering although it is now a little higher than what the daily newsletter readers were able to get it for.
Back To Top
1. FCX
FCX has been trading sideways for three and a half months, each downward move in that sideways trading pattern has been less intense than the one before it creating the rising bottoms on the chart that tell us the buyers are in control. This week it broke through resistance with strong volume supporting the upward move. Support at $26.
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
|
