Improve with Introspection
Stockscores.com Perspectives for the week ending January 2, 2011
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In this week's issue:
At the end of each year, I spend some time analyzing my trading strategies and trades, looking for ways to improve my overall profitability. Every trade is an education but we really only learn the lesson if we take time to study what we have done. If you are not analyzing your trades, you are paying tuition without gaining as much knowledge as you could.
I like to go through as many trades as I can and consider a few simple statistical measures. First, what is the reward for risk earned on the trade? This is the ratio of the profit to the amount of money risked. If I buy 1000 shares at $10 with a stop loss at $9, I have $1000 in risk. If that trade is exited at $15, I have earned a reward for risk ratio of 5.
When doing this analysis, I consider the reward for risk ratio that I earned versus what I could have earned if I had held to the top. I don't ever expect to get out at the high, but if I consistently see that I am earning reward to risk ratios that are a small fraction of what they could be, I quickly see that I am selling my winners too early and need to change my exit rules.
The losers also need to be considered. It is not hard to plan to take a loss at $9 but it can be a challenge to actually exit the trade at a loss. What if the losing trade continues to be held as it goes lower? What should be a reward for risk ratio of minus one can easily turn in to a loser of minus three, four or more. So, checking the losers for numbers that go beyond minus one will tell me if I am hanging on to my losers with the hope that they turn around.
It is also good to look at the losers and see if they ultimately became winners. This helps me to understand whether my method for defining the stop loss point needs to be improved. A few losers that turn in to winners after the stop is triggered is to be expected. However, if it happens often then I need to widen the initial stop loss point to give the stock a little more room to move.
Most people consider the win/loss percentage an important metric but it is not as important as you may think. Traders with very high win/loss percentages tend to have small profits on their winners and often have large, albeit occasional, losses. Being right often does not mean you will be profitable.
I do like to look at the win/loss percentage but in the context of the reward for risk number. This allows me to calculate the expected value for my trades. If I am right 7 times out of 10 with the average winner double the size of the average loser, the expected value is 11, a good positive number. This is calculated by taking the average reward for risk on the winners of 2 and multiply it by how often they occur out of 10, 7 times, to equal 14. You then subtract the 3 losers of 1 each to get 11.
Doing this sort of statistical analysis is only useful if you also try to figure out what causes your weaknesses and what needs to be done to change the behavior. Trading is 90% psychological, so it is important to really try to figure out what the mental hurdles are that need to be overcome.
For example, in my own analysis, I find that my reward for risk number is lower than it should be. I am exiting my winners too early.
I need to answer the question of why if I am going to improve. With some self analysis, I know that I had quite a few distractions this past year, so greater focus is something that I plan to work on. I also know that I am not a very patient person, I like the feeling of locking in gains and don't like to wait for them. Do I make money? Yes. Could I make more with some patience? Yes!
It is not enough to have a general idea of what needs to be improved, it is important to write down a detailed plan for improvement. An hour devoted to writing down exactly how you are going to become a better trader could be worth thousands of dollars.
Take that time in the next week to do some self analysis of your trading, the effort you put in will show in your future trading success.Back To Top
Using the Stockscores Market Scan, I found stocks that made gains this past week and broke from predictive chart patterns. These stocks have good potential to continue higher in the weeks and months ahead.Back To Top
1. V.WLC
V.WLC broke higher on strong volume Friday. The move was one shared by all Lithium stocks but I found this stock had one of the better patterns. Support at $1.22.
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2. IMMR
IMMR was strong for the final two trading sessions of the week, trading strong volume in an otherwise quiet market. The 5 year chart shows a stock that is working on a long term turn around as it has is now optimistic after three bad years. Support at $5.50.
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References
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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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