Practice Makes Perfect
Stockscores.com Perspectives for the week ending November 6, 2010
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Trade the Challenge!
Play the Money Talks Tradescores Trading Challenge, over $20,000 in prizes! Go to Tradescores.com to enter.
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We invite you to try our new website, Tradescores.com. Make simulated trades to improve your skills and gauge your talent. Tradescores.com is the place where traders meet and compete. Go to Tradescores
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In this week's issue:
I invite everyone to play the current Money Talks Tradescores Challenge, presented by Disnat. Not only can you win some nice prizes (first prize is 5 ounces of Gold!), but you will also learn a lot about trading effectively. This week, I want to explain how the game works and what you have to do to win.
Typical trading games give you $100,000 of capital to trade with, the person who grows that money the most by the end of the game is the winner. I have never found these kind of games to be too realistic because players take risks that few would ever take in the real market and the winner is often the person who had the time to make hundreds of trades per day. The winner ends up being the person who is good at playing the game, but not necessarily good at trading the stock market.
I designed the Tradescores Challenge to better test the skills necessary to be an effective trader. To make money in the market over the long term requires an ability to find stocks that will move faster than the overall market and the ability to manage risk effectively.
Every trade you make in the Tradescores Challenge earns a Tradescore. The person with the highest average Tradescore wins the game.
The Tradescores has two components. Percentage gain adjusted for hold period is worth 50 points. Reward earned for risk taken is worth another 50 points. The maximum Tradescore that you can earn on any one trade is 100 points.
Let's consider the percentage gain component first. What would you rather do, make 10% in a day or 10% in a year? The answer is obvious; the same percentage gain in a shorter time period is best. So, we award points based on percentage gain in the shortest amount of time possible using a formula that is outlined in the How to Play document at Tradescores.com. Click on this link and go to the Measuring Performance section for the details.
Reward for risk is based on the price you enter the stock, the stop loss price you set and your ultimate exit price. Here is an example to best explain it.
Supposed you buy at a stock at $5. When entering a trade in the trading challenge, you must define a stop loss price. If the stock hits the stop loss price, you will be automatically exited from the trade so it is important that you do not set the stop loss price too close to your entry price.
However, if you set it too far from your entry price, your Reward for Risk ratio will suffer and you will earn fewer points for the trade. The Reward for Risk ratio is calculated as follows:
(Exit Price - Entry Price) / (Entry Price - Stop Loss Price)
If you enter at $5 with a stop loss at $4.50, you have $0.50 in risk. If you exit that trade at $7.50, you have earned $2.50 of reward. This gives you a Reward for Risk ratio of 5.
What if you had set your stop loss at $2.50? This would mean you have a lower chance of getting stopped out for a loss but the risk of trade goes up to $2.50, lowering the Reward for Risk ratio down to 1.
You earn more points in the trading challenge with a higher reward for risk ratio, you can see how those points are awarded in the Measuring Performance area of the How to Play document at Tradescores.com.
Remember that your ranking in the game is based on the average Tradescores for all your trades?
We don't want to make it too easy to get a high average so we calculate the average over at least 15 trades. If you have only done five trades, your average will be a lot lower than the actual average since we use a minimum of 15 to calculate the average.
What makes this trading challenge attractive to more people is that you only have to make 15 trades before the game is done to be competitive. You can win by casually playing the game rather than having to play every minute of the day like you would in a more traditional stock trading game.
This current game runs from now until Feb 11, 2011. There is a $19 entry fee but we are pleased to donate 100% of the proceeds from your entry fee to the Special Olympics.
So, learn to be a better trader, have fun competing for prizes and help out a great cause. Enter now by clicking here.
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If you are an Advanced member of Stockscores ($29 per month) you can use the Advanced Strategies in the Market Scan tool. The strategy that I use more than any other to find trading opportunities is the Stockscores Simple. Here is the process I go through:
Log in to Stockscores.com and go to the Market Scan tool
Select the Stockscores Simple Market Scan from the "Select a Scan" pull down menu
If scanning the US market, I select All American from the exchange area and set the number of trades to >500
If scanning the Canadian market, I select All Canadian from the exchange area and set the number of trades to >150
Click on Market Scan Report at the bottom of the page
This brings up the Market Scan Results table. I check on "Select All", view in Gallery and then click on Go.
This will take me through the charts of the stocks that the Market Scan found. When inspecting the charts I want to see charts where the stock is breaking from low price volatility with abnormal volume supporting the breakout.
If a chart looks promising, I click on it to increase its size so I can see more detail. I look at six month charts for the pattern and a two year chart to see where long term resistance is.
I went through this process on Saturday to find a good Canadian stock and a good American stock. Here they are, with my comments:
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1. V.RVC
V.RVC has been in an upward trend for some time but has been trading sideways for the past six weeks. I prefer that stocks trade sideways for at least two months before a break, but this was the best chart I could find in Canada because so many of these stocks are already well in to their upward trends. This is more of a short term swing trade for the trader who has more time to monitor their stocks. Support at $2.70.
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2. SBLK
SBLK has been building a cup and handle pattern since early this year. It broke through resistance with strong volume on Friday and appears likely to move higher in the weeks ahead. I already own this stock and subscribers to the daily edition of the newsletter were alerted to it on Friday afternoon before the close of trading. Support at $2.89.
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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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