Trading Track Record
Stockscores.com Perspectives for the week ending June 26, 2009
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In this week's issue:
Tracking your trades in a journal and analyzing your performance on a regular basis is an important part of being a Stockscores trader. You learn a lot about what makes you money when you do this analysis and you can use the results to make you an even better trader.
This past week I did some analysis on the stocks that I have featured in the daily newsletter this year. It gave me some good insight in to the factors that improve performance. I thought I would share this analysis with you and provide some thoughts on how you can improve your own performance in the market.
First I will provide and explain some statistics and then highlight the factors that I find are important for performance, as proven by this exercise.
All results are as of June 23 and based on stocks that I featured in the daily newsletter and using the exit and risk management methods taught in the StockSchool Pro course.
It is important to understand what the risk reward ratio is and how we determine position size. Each time I feature a stock, I identify the stop loss price. The difference between the entry price and the stop loss price is the risk per share. A trader determines their risk tolerance, the amount they are willing to lose on a trade, and divides that number by the risk per share to get the number of shares that should be held in the position.
For example, suppose I feature a stock to buy at $10. Support, or the stop loss price, is $9. That means the risk per share is $1. If the trader is willing to lose $500 on one trade then they would buy 500 shares since 500 shares times $1 a share in risk equals the $500 risk tolerance. This position would cost $5000, 500 shares times $10 a share. $5000 is the capital requirement, assuming no margin is used.
Suppose that a month later the stock is sold at $13.50. The profit per share is $3.50 which is 3.5 times the risk. The risk reward number is therefore 3.5. The total profit for the 500 shares is $1750, before commissions. While most people consider the percentage gain of 35% to be the important number, experienced traders realize that it is the risk reward number that is important. Making 3.5 times your risk is a good trade because this winner essentially pays for 3.5 losers (if the stock had instead stopped out at $9 then the risk reward number would be -1).
So, when we analyze a group of trades, we want to know the average risk reward number (anything above 0 means you made money), the capital required to make that money and how the winners did in terms of reward relative to the losers.
Number of stocks featured - 44
Positions exited as of June 23 - 29
Positions still open as of June 23 - 15
Closed Trades
Average Risk Reward - 1.381
Average Hold Period - 52 days
Total Profit (assuming a $500 risk tolerance) - $21,134
% Winners - 62%
Average Winner - $1541
Average Loser - -$422
Winner$/Loser$ ratio - 3.65 to 1
Maximum Capital Required (assuming a $500 risk tolerance and no margin used) - $60,988
Overall Trades (including positions still open)
Average Risk Reward - 1.005
Average Hold Period - 58 days
Total Profit - $23,222.51
% Winners - 50%
Average Winner - $1450
Average Loser - -$315
Winner to Loser ratio - 4.61 to 1
A few things stand out. First, it was not an exceptional period in terms of success rate. Over the years I have tended to average about 70% correct on my trades. However, on the closed trades year to date my success rate is only 62% and including the trades that are still open, the success rate is only 50%.
Despite the lower than normal success average, the overall trading is still nicely profitable. This drives home one of the things that I always stress with my students; it is not about how often you are right, trading success is about how much you make when you are right versus how much you lose when you are wrong. You can see that on the closed trades above, the average profit is $1541 while the average loser is $422.
Over the years I have found that this is where most aspiring traders really fail. They have big losses and small gains and so, even with a good success rate on their trades, they still lose money in the market. You absolutely have to be patient with your winners and get rid of your losers when they hit your loss limit. I succeed because I have a number of my features that gained 4, 5, 6 or more times the risk taken. And my losers are always right around a loss of 1 risk element (they can be slightly more with slippage on where the trade is actually exited).
What also stands out when I look at the individual trades is how the winners tend to come in groups. The stocks I featured in January and February generally did not do great. Those featured in March and April did very well. May and June features generally did not do great although they may still need more time to develop as most have not yet been exited.
This highlights the need to analyze the overall market first. Trade aggressively when the market is strong and trending. Scale back your trades when the market is in a consolidation phase and be on the short side when the market is weak and trending. A large part of what causes a stock to move is the overall market trend so you have to be sure not to be fighting against it.
These results assume that all trades have the same amount of risk and represent a strict application of the rules that I teach in the StockSchool Pro. Experienced traders can improve on this performance using their judgment to put more risk in trades that appear to have better potential and use advanced trading techniques like Scaling to add to winning positions. The results here show a gain of about 33% on maximum capital required but in my own trading of these stocks I actually enjoyed an 87% gain. The difference in performance was mostly due to being more selective of the trades that I took and adding more shares to winning trades as they went higher.
What I want to emphasize is that trading successfully is about more than just picking the right stocks. You have to exit trades well, letting profitable trades perform well and getting rid of your losers as soon as they break through support. You have to read the overall market well and let it determine what strategies you apply to pick trading opportunities. Above all else, you need good strategies and the discipline to follow their rules.
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I am not too sure what the market is going to do in the next short while so I am not comfortable featuring stocks right now. It looks like we may go in to a sideways trading range through the summer but there was a short term technical breakdown on Monday which has me concerned that we could see a sell off. I think right now is a good time to play defence.
So, I thought I would show the charts of some of the stocks that I featured in the daily newsletter in recent months to highlight the entry and exit signals using the Stockscores Approach.
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1. BGP
BGP was featured on April 1 but it was far from a foolish trade. Our exit signal came on May 5th when it formed a "Bursting Bubble" candle. This trade demonstrates that it is hard to exit at the top as the stock went on to even more gains after the exit signal.
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2. CAR
CAR is another example of a stock that has gone on to even greater gains after the exit signal, but that does not mean the exit signal was bad to take. This stock was featured April 16th and exited June 18th on a break of the upward trend line. Along the way there were a number of pull backs that might have shaken a trader out of their position, but none were actual exit signals. Be patient when you have a winner, upward momentum will carry them through.
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3. BLC
BLC is an example of a trade that did not work. It was not actually an ideal pick, I normally like to see a stock trade sideways for at least two months before they break through resistance and BLC only went sideways for a month. It also did not quite get through resistance from early January when I featured it June 8th. I was a bit too flexible on my trading rules and it cost me, this one was stopped out June 23rd.
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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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