Hey, Write These Down!
Stockscores.com Perspectives for the week ending October 25, 2009
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In this week's issue:
Here is a list of 10 rules that all traders should keep in mind, whether they are just starting out or have been trading for a long time.
1. Trade with an edge
Successful trading starts, but does not end, with a set of rules that has shown to consistently lead to profits. These trading rules should be tested across a variety of market conditions to ensure that they produce profits without portfolio destroying drawdowns. Once you have the rules right, you can work on following them.
2. Don't take more risk than you can tolerate
Masterful trading is about mastering your emotions and the key to that is not letting your fear of losing cloud your judgment. If you risk more than you are comfortable with, it is likely that you will break your trading rules. If you risk little you are less likely to care about losing and more likely to be a disciplined trader.
3. Never let small losses grow in to big losses
Before you execute any trade you should define where your exit door is. Establish the price point where the market will prove your entry decision was wrong and, if the stock gets to that price point, exit the trade and take the small loss. Don't let the hope for a turnaround make you stick with the trade and let a small loss grow in to a bigger one.
4. Never stop small profits from growing in to big profits
You will be right some of the time, make sure that when you are right you let the profit run until the market demonstrates signs of a reversal. Remember that your profitable trades have to pay for the losers and earn you a return for your risk. The profit is in the patience.
5. Don't fight the mood of the market
The market can stay wrong longer than you can stay liquid so trade with the market's sentiment. If the buyers are in control, buy. If the sellers are in control, short. Learn to understand how to read the trend and don't trade against it.
6. Keep it simple
Winning traders rarely have a complex set of rules. You can over analyze the market and over optimize your trading rules, so be sure to keep your list of requirements relatively short and straight forward. Simple rules are easier to follow and easier to profit from.
7. Don't work too hard
Good trades are obvious, if you have to work really hard to uncover an opportunity then the chances are good that the trade is a marginal one. When the going gets tough, good traders get lazy.
8. Don't trade to fix past mistakes
What has happened in the past must be irrelevant to the trading decisions you make in the future. We all want to escape the pain of a recent loss, but taking a marginal trade in an attempt to turn the pain in to happiness is usually a quick way to add more pain. Every trade must stand on its own merits and not be guided by your emotional responses to past experiences.
9. Do track your trades
When a trade leads to a loss, you have bought yourself an education. Be sure to learn from that lesson by keeping your past trades in a journal to be studied and analyzed. As you collect a large number of trades you will likely see a pattern of mistakes that can be overcome with a change in your approach.
10. Find your passion
Trading is simple, but not easy. It will take great determination to master the markets so make sure you enjoy it. The love of trading will be the force to guide you to success.
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I think that the best trade approach for next week will be to short strong stocks that have run away from their upward trend lines and are showing signs of short term break down. The expectation is that these stocks will pull back for a few days, giving the short swing trader some profits on the back up in prices.
I ran a scan that looked for stocks over $5, with a Sentiment Stockscore of 75 or higher and at least 2500 trades a day. The list of candidates were long, but with the Gallery Chart viewer it did not take me too long to go through them to find the kind of chart set up that I had in mind.
For this set up, I want to see that current prices are well above the upward trend line, that the trend has gone parabolic. My expectation is that these stocks will pull back to the trend line if the market continues its pull back, as I expect it will.
My suggestion is to monitor the stocks I list below for a confirming breakdown on the intraday, 15 minute chart. This is a strategy for swing trades; those who are not able to watch the market too closely may want to sit on their hands this week.
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1. PVX
PVX has done well over the last two weeks but closed below its open on Friday after a strong start to the day. I would watch it for a break down from a falling top or from a pessimistic chart pattern on the intraday chart as the cue to take this trade. Put the stop at the recent high of $6.87.
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2. FINL
A move down through $11.15 or a break down from a falling top should be a good cue to short FINL, which has had a good run over the past six weeks and looks like it is ready to make its move back to the upward trend line. Stop at $11.72.
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3. BCSI
BCSI has been in a strong and steady upward trend since Dec 2008 but in the last month that trend got pretty strong and prices have now run away from the long term upward trend line. I think we could see it pull back 10 - 15% but I would like to see a confirming break down on the intraday chart first. Resistance at $26.64.
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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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