Emotional Control
Stockscores.com Perspectives for the week ending May 4, 2012
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In this week's issue:
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Fear and greed drive investor decisions in destructive ways. People want to buy stocks that have been going up for some time because their market performance gives legitimacy to the story. A stock that is falling sharply brings out sellers eager to get out because of their fear that the stock will go lower.
You have to know the difference between a strong stock that is going higher and one that is near its top. Stocks that are falling can be sold before the fall farther, but at a certain point they get so low that they are worth considering. We have to learn to overcome our emotions so that we can buy stocks that are starting to go up and sell stocks when they start to go down.
Here are 10 things you can do to overcome your emotions and become a better investor:
1. Use Strategies that Work
Your approach to the market won't have a hope if your analysis methods are not effective. There are many ways to analyze stocks, take one that you like and test it until you have confidence that it works.
2. Write a Trading Plan
Success has a better chance of happening when you write down a plan to get there. Make your plan include your rules for entry and exit, risk tolerances and a process for review. Adapt your plan over time as you find better ways to achieve success.
3. Manage Risk
Understand the risk in every trade you make and don't take risks that you can not tolerate. If your exposure to loss is more than you are comfortable with you will inevitably break your discipline.
4. Limit Losses
You should always know where the exit door is in case something goes wrong. When you buy a stock, decide the point where the market will have proven your decision to enter wrong. If the stock falls to that price, get out. Don't let small losses grow in to big losses.
5. Blame Yourself
There may be a good argument for why a loss you have suffered is someone else's fault. The newsletter writer could have been wrong, the media could have been wrong, the government could have gone back on a promise, the company could be corrupt. Blaming others will never get your money back. You will not change the actions of others, you can only change your own. Therefore, blame yourself for everything that happens with your money and take steps to make it better.
6. Stop Falling in Love
The more you know about a company, the more likely you are to ignore the market's message. Companies want you to own their stock; the more investors that they get to own their stock, the higher the price goes. As a result, there is a bias to the information that you are exposed to, if you listen too much you may miss activity in the market that is telling you that something is wrong.
7. Practice Patience
Up trends start slowly so you have to be patient when stocks are trying to start a long term trend. The profit is in the patience, hold on to strong stocks so long as they are showing strength. When looking at a company, avoid a short term outlook that can mislead you about the long term trend.
8. See the Other Side of the Story
Everything you know about a stock may tell you to buy it and you may do so with complete commitment. But, always ask yourself, "Why is someone willing to sell to me at this price." If you understand their motivations for selling versus your motivations for buying, you can better determine who is right. Without an understanding of the other side of the trade you can not determine whether the other side is wrong.
9. Avoid the Herd
The crowd usually loses. When buying, look around at your fellow buyers. Are they well informed, smart investors or are they generally uninformed people watching 60 Minutes? Always try to be one step ahead of the herd.
10. Analyze Your Results
The market is always evolving, making constant evolution in your approach to the markets important. On a regular basis, analyze your trades and looks for patterns of self destruction. Make changes as necessary.
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The markets are breaking down, giving rise to concern that we must once again ignore stocks from May to October. However, with the easy access that Exchange Traded Funds allow, it is possible to make money in a downward sloping market. Here are a few of the many ETFs that make it easy to benefit from a downward trending or panicked market.Back To Top
1. T.HVU
Based on the CBOE Volatility Index (VIX), this is a good way to profit from panic, expect this ETF to go up if investors find a reason to speculate on market weakness.
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2. T.HXD
If the TSX goes down, this one goes up. It should go up twice as fast as the TSX goes down but it is not quite that close of a correlation. Still, a good way to profit from a falling market or to carry some insurance against a portfolio of Canadian stocks.
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3. SDS
This is a double correlated ETF based on the S&P 500 Index, if the market does down 1% this ETF should go up 2%. Be careful with all leveraged ETFs as they endure a decay in value over time because of the need to constantly balance the fund to maintain the 2 to 1 leverage. These are good as long as the trade is working for you but be sure to have good risk management if the trade fails to work.
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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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