Make a Trading Plan
Stockscores.com Perspectives for the week ending June 5, 2010
|
| Upcoming Events |
Vancouver Resource Investor Show
Tyler Bollhorn invites you to the World Resource Investment Conference in Vancouver June 6th and 7th. Tyler speaks on Sunday at 3:30, click here for more information. For his presentation, Tyler plans to go through a number of trades that he has made, explaining what motivated him to make the trades and teach you what to look for when considering a trade opportunity.
|
|
In this week's issue:
Trading decisions are often made in the blink of an eye, the result of a sometimes emotional thought process. Maybe you want to find a stock that will go up to pay for the loss you just suffered on a previous trade or you enter a trade because you are tired of watching it go up without you. These impulse decisions often lead to losses and show why it is important to have a well thought out plan when making a trade.
Planning your trades means you will likely trade less, leaving many marginal opportunities for those that have the best profit potential. When you make a plan you establish a series of criteria for entering and holding a position. You write down those criteria and check to see how your stock is trading relative to your plan. If it is behaving the way you expect then you have understood the stock correctly. If not, it may be better to get out of the position.
The best trades are those that you have the most confidence in. Confidence comes from being proven right, from having the market live up to your expectations. You are probably not too sure of whether you are right or not if you find yourself monitoring your positions every possible moment.
A key to having a good trading plan is to have a good method. You need a good method for entering a stock and managing risk. You need a good method for exiting a stock. You need a good method for managing your emotions through the process. Once you have a method that works and is one you can believe in, you can write the plan. Plan the trade and then trade the plan.
A plan should at least answer the following:
What is my strategy for entry?
What is my risk tolerance?
What do I expect to happen after I enter the trade?
What has to happen for me to consider my decision to enter the trade wrong?
What are my criteria for exiting the trade at a profit?
What are the emotional obstacles that I will face and how will I overcome them?
How will I judge my success?
How will I learn from my mistakes?
Is all this worth the effort? The little bit of time that it takes to make and follow a trading plan should improve your performance in the market. Is it worth it to make a plan when building a house? Is it worth it to make a plan when starting a business? Most of us answer yes to these questions but fail to plan our trades. Why?
The answer lies in emotion. Too many traders treat the stock market like a casino. They make trades with the hope that they will make money just like a gambler puts down money on the hope their number will come up. Hope should not be part of your plan. If you are a trader who believes your success in the market is a matter of luck then you should probably close your brokerage account and head to Las Vegas. At least there they give you free drinks when you gamble.
Think when you trade. Impulsive decisions are not likely to succeed. Well thought out trades may not always succeed either but at least you will have a means to judge when you are wrong. When a trade ceases to go according to plan, it is time to get out.
Back To Top
The Sentiment Stockscore indicator was designed to help position traders determine whether a stock or market is worth considering. As an indicator, it is based on the characteristics of the chart. Points are awarded for technically positive things and taken away for negative. If a stock is breaking out through resistance, points are earned. If it has an abnormal day to the downside, points are lost.
There are two reasons for using the Sentiment Stockscore to help you with your investment picks. First, it is a quick and easy way to determine whether a stock is worth considering. I don't consider the longer term position trades on stocks with a Sentiment Stockscore of less than 60 (for swing and day trading, I don't consider the Sentiment Stockscore as it is not designed for short term trades). So, if I look at the chart of Research in Motion and see that it has a Sentiment Stockscore of 31, I know it is not worth buying.
The second reason for the Sentiment Stockscore is that it allows the computer to do a lot of the work for us. With the Stockscores Market Scan, we can filter the market using the Sentiment Stockscore combined with other technical indicators to find stocks that are worth our consideration. It is a way to build a short list of stocks to check in to futher.
You can also apply the Sentiment Stockscore to market indexes to determine whether the market is suitable for buying, short selling or sitting on the fence. I do this by looking at a few Exchange Traded Funds which give me an overview of North American markets.
Back To Top
1. SPY
The US market is best represented by the S&P 500 ETF, symbol SPY. As of Friday, the Stockscores could not get much worse with a Sentiment Stockscore in the red at 36 and a Signal Stockscore of 2. After trying to bounce, it looks like the SPY (and the US market in general) is likely to go lower. The downside to support is about 2% so we may not see a major continuation of the downtrend, but for now I would not be a buyer of US stocks in general.
Back To Top
2. T.XIU
The TSX ETF is T.XIU. It has a Sentiment Stockscore of 47 which is neutral. Its chart is stuck in a trading range with a slight upward bias over the last year. It does not look very bad, but there is nothing great there either. Based on that, I would only be a buyer of Canadian stocks that are trading abnormally because they will likely be trading on their own story and able to overcome the general market complacency among Canadian investors. However, unlike the US, the Canadian market should provide a few position trading opportunities from the buy side.
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
|
