How Are Your Trading Skills?
Stockscores.com Perspectives for the week ending May 29, 2011
In this week's issue:
There are a number of skills necessary to be a good investor or trader. Many people have strong ability with some of these skills, but because they are weak in other areas, they do not do consistently well. Without realizing what all of the skills are, there is a tendency to make changes in how they apply some of their strong skills in an attempt to become a better trader. This destructive behavior ends up making them trade worse.
Consider the trader who is a great stock picker but who lacks the emotional control to manage risk effectively. The result is they are unable to consistently turn a profit and look for ways to be better. Instead of working on their emotional control, they try to be better at picking stocks, the skill they are already good at. They try to fix what isn't broken while ignoring what is.
It is a good idea for every trader to evaluate their skills on a regular basis. By going over your past results in consideration of these skills, you can make a more helpful assessment of what needs to be improved.
Here are the skills that we all need to consider:
Entry Decision
How many of the trades you pick ultimately go in the direction you expect? Don't worry whether you actually make money on the trades, evaluating this skill is only about whether your entry decision was ultimately proven right. Anyone who is right more than 65% of the time is a good stock picker.
Risk Management
Look at the size of your winners versus the size of your losers, but do so in terms of reward for risk and not the actual profit size. The reward of a trade is the difference between the exit price and the entry price and the risk of the trade is the difference between the entry price and the planned stop loss price (not where you actually get out, but where you should have got out if you were proven wrong). What we want to see is whether your average losers have a reward for risk of much more than -1. If so, you are not controlling the size of your losses well. This has to be considered in terms of your risk tolerance, a trader who typically risk $500 on a trade but whose average loss is $-1500 is not managing their downside risk very well. Remember, trading is not just about how often you are right, it is about how much you make when you are right versus how much you lose when you are wrong.
Exit Decision
Study what your trades did after you exited them. Did you winners typically continue higher or were you good at getting out near the highs? If you tend to leave a lot of money on the table then your exit decision needs some work.
Emotional Control
Do you average down on losers? Do you tend to trade poorly after a loss in an attempt to make back the loss? Do you lose sleep thinking about your trades? There are a multitude of common psychological ailments that can have dramatic effects on trading and they become quite clear to anyone who studies their trades after the emotion of the trade has worn off. By going through your past trades you should be able to see if you have consistent destructive patterns that can only be attributed to emotion.
Focus
Do you miss a lot of good trading opportunities because of distractions? Have you ever had a profitable trade turn in to a loser simply because you were not paying attention to the stock? Monitoring the market and your trades can be tedious but it requires regular attention. This does not mean being glued to a computer screen, but you need to fit the kind of trades you do to your time limitations. A person who wants to spend 15 minutes a week on their portfolio should not be entering a trade that will likely play out over the next two days. A person who commits to day trading needs to be in front of the screen all day so they don't miss the opportunities when the market provides them.
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Reading charts is a skill that takes time to learn. This week, rather than pick some stocks, I decided to discuss the charts of 5 Canadian stocks that moved higher on Friday. Most stocks that move up do not represent good trading opportunities, hopefully this chart reading exercise will showcase some concepts to help you read charts better.
To find the stocks that I wanted to discuss, I used the Tradescores.com website's Chart Watch tool to view the 100 most active TSX stocks from Friday's trading. Here are my comments on some of the actively traded gainers:
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1. T.ARX
T.ARX is one of the more interesting charts from my look at the TSX. The stock is higher today than it was one year ago but has been going through a period of profit taking over the last three months. Friday's gains are important because the stock was able to break its downward trend line, a good sign that the stock wants to resume the long term upward trend. There was a lack of volume supporting the break higher on Friday and there is quite a bit of resistance for the stock to work through, so I don't consider it a great trade set up, but still one worth considering for those who like this company's fundamentals.
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2. T.BCE
Last year, I featured T.BCE as a good stock to put money in to for those seeking a safe haven. That has turned out to be a great trade as the stock has managed to continue an upward trend while the overall market has gone through some difficult times. The problem with entering the stock here is that it is coming in to long term resistance levels which limit its upside potential. The five year chart shows that the stock has topped out at $42 in the past and $40 will be a strong psychological barrier. Therefore, if I owned the stock, I would be watching closely for an exit signal. The stock is strong today, but I think it may lose its upward momentum soon.
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3. T.DML
T.DML is a well followed mining stock which made good gains on Friday. Those gains may give shareholders some encouragement, but the chart tells me the stock has an up hill battle in the short term. In February, the stock was trading as high as $4.40. Most people that have bought since then are losing on the trade. Consider how you feel when you have a loser in your portfolio, are you happy? Of course not, so the natural thing for holders to do with a loser is look to get out at break even. Since the stock has traded a lot of volume between the current price and $4.40, we can expect that there are a lot of people looking to get out of the trade. That will limit its short term upside, I think I would avoid entering the stock until the chart can show more optimism.
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4. T.GIB.A
T.GIB.A broke through resistance from a good chart pattern on Wednesday and has been moving higher since. I did not take this trade simply because the breakout lacked volume. Breakouts on light volume usually fail and there is a pull back. This stock has the benefit of being in a long term upward trend so I think it is a stock that deserves to be held for those that own it, but I would not buy it here.
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5. T.K
T.K has been a big dog in a strong sector, while most Gold stocks have been going higher, this one has worn lead boots. Over the past 10 days, T.K has been able to make some gains and finally break its downward trend line. That is a sign that it is bottoming but until the chart shows a break from a rising bottom, I would not be too optimistic about it. We may get a trade on this stock in the future since it has made the first step in a reversal, but entering on a break of the downward trend line of this variety is not usually a great trade.
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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.
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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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