Learn Before You Trade
Stockscores.com Perspectives for the week ending November 26, 2010
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In this week's issue:
When the market is strong, most investors are able to do reasonably well. The problem is, they fall in to a false sense of security about their skill level and when the market turns lower, they tend to give back all of their gains. To beat the market over the long run requires a certain amount of knowledge and emotional control. What are the absolute essential things to know before investing or trading your own money? Here is my list:
1. Public Information Yields Random Results - take a $100 bill and drop it on the ground at a crowded shopping mall. Sit down on a bench and watch how long it takes for someone to pick it up. My guess is you won't even make it to the bench. The reason is simple; the world takes away opportunities for easy money almost immediately. The same can be said for the stock market. If a company is trading at $10 and then announces news of a significant change in their business that makes their stock worth $20, how long do you think it will take before the stock is trading at $20? There are no $100 bills lying around in the stock market. When information is made public, it is priced in to the market immediately. Therefore, using public information to make investment decisions will yield random results because the information is already priced in to the stock. Therefore, ignore it. Put a capital I on Ignore.
2. Beating the Market Requires Better Information - If you believe point 1, then the only way to consistently beat the stock market is to have information that is not widely disseminated. You need private information, the kind that got Martha Stewart in to trouble. Here is the Get Out of Jail Free Card; you don't have to trade with inside information. You just have to follow those that are. When they act in the market, they create abnormal activity and you can follow it using Stockscores. We know nothing about what companies do but we do know that human greed is a reliable indicator and abnormal activity tells us what the well informed are doing.
3.You Have to Limit Losses - do you have a stock that you should have sold a long time ago? Did you avoid selling it because the pain of doing so was too much to take? Are you hoping that the stock will turn around so you can get out and break even? Congratulations, you are normal. The bad news is normal people fail in the stock market. To beat the market, you have to take small losses when the market proves you wrong. Don't hope.
4. You Have to Let Profits Grow - it feels good to take a profit doesn't it? We all worry about a profit turning in to a loss or for that profit to get smaller than what it is today. That is why so many of us dump stocks when they show a little weakness. Pull backs in upward trends are normal, they recharge buyer interest and shake out weak hands. Don't be a weak hand, learn to tell the difference between short term weakness and a long term turnaround and only sell when you see the latter.
5. Never Turn Your Back on the Market - I have found that most of the time the stock market makes no sense. It goes up when it shouldn't and goes down when it shouldn't, at least by any logic. You can not try to outsmart the market nor can you try to understand it. Therefore, never take your eye off of it. It is unpredictable and if you get complacent it will kick you in the head and take your money.
6. The Crowd is Populated by Suckers - when people that don't normally buy stocks are giving you tips on what to buy, it is probably a good time to sell. The crowd comes in late in the trend and the pros sell to them. If you are reading about a strong stock or sector in the mainstream media then you are likely near the top.
7. Learn From Your Mistakes - when trading stock, it is impossible to be right all of the time. The stock market has a degree of uncertainty and that means sometimes you will have to take losses. While it is not possible to be right all of the time, it is possible to do the right thing all of the time. It is important to analyze every trade you do and determine whether you made mistakes. There will be times when you make money despite doing something wrong and there will be times when you do everything right and still lose money.
8. Don't Fall in Love - I have heard so many stories of investors who are sitting on a stock at a big loss but who won't sell it because the company is doing something that is going to turn it around. All traders need to understand that there is a lot of bias in the information that they gather and sometimes people tell lies. If the market does not agree with the information you have then there is probably something wrong with the information. Don't believe what you hear, trust the message of the market.
9. Internalize Your Trading Strategies - Stockscores teaches a number of different trading strategies and we have many students who have succeeded with those strategies. However, it is important for anyone trading any strategy to believe in that strategy, to have determined on their own that it is effective. Success with a strategy is largely based on confidence and if you don't make a strategy your own you will lack the confidence in its rules to follow it properly.
10. Trade With Who Is In Control - the market is a war between buyers and sellers. The buyers expect the stock to go higher, the sellers expect the stock to go lower and one group is always wrong. Trading with the group that is in control of the market is like paddling down a river with the current - it is just a lot easier than going upstream. One simple way to determine who is in control of a market is to look at the stock chart. If the buyers are in control, the bottoms will be rising. Falling tops means the sellers are in control.Back To Top
This past week was a slow one for the markets because of the US Thanksgiving holiday. The markets are working to reverse their recent short term weakness and I would guess that the odds of moving higher next week are about 65%. This week, I focused on finding good weekly charts, a longer term approach than what I normally do. I looked for stocks that are up for the week and traded more volume than normal, then inspected their weekly charts for good patterns. Two stocks stood out, see below. Support at $31.Back To Top
1. VAL
I featured VAL to my daily newsletter subscribers on Monday and it is now a little bit higher but still has lots of room for price appreciation. The stock has been in a sideways trading range since mid-April. This week, it broke through resistance with strong volume, indicating something is going on that has investors excited. Support at $4.
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2. WRES
WRES started its upward trend in September but had been drifting sideways since the start of October. The stock came to life late this week, indicating it has the attention of the buyers again with a good chance of continuing its recovery back to the 2008 highs. Support at $4.
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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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