How I Made Money in a Challenging Summer Market
Stockscores.com Perspectives for the week ending September 2, 2011
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In this week's issue:
The summer of 2011 was a difficult time for stock market traders. From June 1 to Aug 31, the S&P 500 fell 7.3% and the TSX 60 dropped 7.9%. Within that three month period, the market went in to a free fall from July 26 to August 8, falling 15.8%. That kind of price drop hurts investor confidence and makes many pull their money out of the market, usually at the worst time.
Now that the markets are beginning to stabilize again, many investors have withdrawn their money from stocks and will not enjoy a recovery that traditionally begins in the Fall and lasts until May.
Despite the difficult conditions, it was still possible to pull money out of the market. Over this three month summer period, I made 46 trades and exactly half of them were profitable. Historically, I expect to be profitable on about 70% of my trades. This success rate statistic was the most disappointing factor, a result of the difficult market condition.
My trades earned a total gain of 10.07% over the three month summer period.
My average winning trade was 2.1 times larger than my average losing trade. I was right less often but was still able to beat the benchmark stock market index by about 17%.
If I ask you what you consider to be the important factor for making money in the stock market, I expect that your answer is that it is a must to pick the right stock. For most investors, the entry decision is the focus. However, when you consider that I was only right half of the time this summer and still made a market beating return, there must be more to success than picking the right stock.
There are five skills that you must master if you are going to do well in a difficult market. Many investors look smart in a Bull market but then suffer losses through the kind of market like we witnessed in the summer of 2011.
Skill 1 - The Entry Decision
Having a good strategy for entering a trade is important; the strategy must be well tested through a variety of market conditions and proven to have a positive expected value. That means the strategy is not a gamble, it has rules that make money over a large number of trades. I spend a lot of time reverse engineering the stock market to come up with strategies to find winning trades. However, I don't expect to be right every time, losing on some trades is part of the game.
Skill 2 - Risk Management
Since I expect to be wrong some of the time, it is important to do the right thing when I am wrong. That means limiting the size of my losses. There is a tendency for investors to hang on to their losers as they try to avoid the bad feeling that comes with taking a loss. The result is that small, manageable losses turn in to bigger losses that use up both financial and emotional capital. Good traders plan to take losses when the stock they own falls to their stop loss price.
Skill 3 - Scaling
When you catch a strong trade, it is essential to add to your position to get the most out of the trending price move. I always ease in to a stock trade with a relatively small position and then add to that position as the trade proves itself. This minimizes the emotional attachment to the money at risk, since the loss exposure initially is small. If the trade works, adding to the position is easier because we are using gains that have been given to us by the trade.
Skill 4 - The Exit Decision
Most traders sell their winners too early. Since we are going to be wrong some of the time, we have to maximize our gains when we are right. This allows us to cover the inevitable losses and give us the profit we need. The profit is in the patience; let your winners run for you until the market tells you it is time to exit.
Skill 5 - Emotional Control
You can right down as many rules as you want, if you don't have the emotional control to follow the rules, you will not succeed as a trader. This skill is the most difficult to master and typically is the final hurdle for the aspiring trader. The best traders are those who don't care about the money, they are focused on following their trading plan.
One of my more profitable trades this past summer was a short sell of Gold. This trade only lasted a few days but, with good risk management and scaling, provided a nice profit. However, without a tested strategy and emotional control, this profitable trade would never have happened.
I applied these skills on a recent short trade of Gold, making a good profit in only three days. The good initial pick was enhanced by adding to the position and the traded worked in my favor.
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Friday was a strong down day that revealed few good opportunities. On Thursday, I ran the Stockscores Simple Market Scan Strategy and found the feature stock for this week.
This market scan looks for stocks breaking from predictive chart patterns. Ideally, we want to see a break through resistance from optimism and out of a period of converging price volatility. I opted not to buy it or feature it in my daily newsletter on Thursday because I felt there was a very good chance the market would pull back on Friday. However, I think this stock is worth watching for next week.Back To Top
1. V.DAN
V.DAN breaks to new highs through long standing resistance, with abnormal volume supporting the breakout. On the day after the break, there was not much profit taking, another positive sign that this stock wants to go higher from here. Support at $1.30.
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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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