Tyler's Top 10 List
Stockscores.com Perspectives for the week ending March 25, 2013
In this week's issue:
SCATE 2013
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The signs that a stock is likely to outperform the market
How to manage risk and avoid big losses
Why you should avoid a conventional approach to investing
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Stockscores Market Minutes Video
A stock can be a great trading opportunity one day and not worth considering the next. This week's Market Minutes video explains why. Plus, Tyler's regular weekly market analysis. Watch it by clicking here.
This Week's Trading Lesson
I believe that making money in the market requires doing what is hard. Often, when your emotions are telling you to take one course of action, you have to go the other way. Here are 10 hard, but necessary, things to do if you want to beat the stock market.
1. Take losses when you are wrong
No one likes to take a loss but losing is part of making money. You have to recognize that the stock market can not be predicted with 100% certainty and accept that being wrong is ok. When the market proves your decision wrong, take the loss!
2. Let profits run when you are right
Never be satisfied with a trade unless it returns you at least twice what you risked on the trade. Of course, more is better; one trade that returns 10 times your risk will pay for 10 losers. Our natural tendency is to fear letting our winners turn in to losers and so we are quick to sell our winners at the first sign of weakness. But realize that is what most people are thinking which means trends will start with a lot of back and forth moves because many investors lack commitment. It is only after a sustained trend upward that the fear diminishes and the trend really starts to accelerate. That is where investors can make the most money, if they stay in the stock long enough to enjoy it.
3. Buy when there is panic selling
The emphasis here is on panic selling, where the overwhelming pessimism has people accepting prices that make no rational sense. Don't confuse a bear market with panic selling; weakness is not a reason to buy unless it is motivated by panic. Contrarian investing is only effective when emotion causes stocks to be mispriced and that comes with panic selling.
4. Sell when there is irrational buying
When the mass media is espousing the virtues of an investment, when people who know less than nothing about investing are dumping money in to the market, it is probably time to be a seller. If the upward trend goes from being linear to a curve, watch for signs of weakness as the upward trend is nearing its end. At this point, volume will often be much higher than normal and it will seem as though the stock can do nothing wrong.
5. Judge success in groups
Most of us judge our success one trade at a time. Trading is a probability game; you will not make money all of the time so why beat yourself up over a few losses? The only way to judge success is by the amount of money in your account over a large number of trades. Don't even judge success by how often you are right, it is only about how much money you make over a large number of trades.
6. Test before you trade
To make money in the market, you need a strategy that has an edge. Don't make investments on a hunch or what someone else tells you to do. Make investments based on a set of rules that you have tested and proven to be successful. Every great trader has a formula, what is yours?
7. Don't follow the crowd
Average is what most people are doing; do you want to be average? It is only a small percentage of the population that has most of the money and they are making it from the largest group. If you want the money to flow your way, you have to be ahead of the crowd, do things before it is popular.
8. Avoid the headlines
The mainstream media seems to do their big features at or near market tops. If a media outlet has a large audience then their information is going to be priced in by a large number of people. Always remember that it is only a small number of people who beat the stock market which means if you are doing what the large numbers of people are doing, you are probably on the losing side. Going against the headlines will often be the winning strategy.
9. Don't find comfort in the news
You buy a stock on a tip, based on a trading strategy or maybe after some in depth research. The stock goes down and the market tells you that you made a decision that was wrong. Rather than take the loss, you dig in to the news and find a reason to hang on. Perhaps it is that there are more results coming or that management has a proven track record. Any bit of fundamental information to justify holding the stock when the market tells you not to will help you avoid that negative feeling of taking a loss. Remember, the market never lies and the collective opinion of investors is based on all the information you are looking at. If what you are using to justify the hold is such good information, why are others selling?
10. Keep it simple
Investors have a tendency to get more sophisticated as they lose money. If there set of rules are not working, they add more rules. However, it is not usually the rules that are the problem; it is the application of the rules. People who make money keep it simple but work very hard at being disciplined and unemotional. Easy to say, hard to do.
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For this week's strategy, I set the Market Scan on Stockscores.com up to filter for stocks that had an abnormal up day with abnormal volume and at least 250 trades. This is one of my favorite ways to find stocks trading on their own story. The important step in the strategy is to check the chart to be sure that today's abnormal action is a break from optimism (a rising bottom) and is the first sign of life. Chasing stocks higher is riskier, I want to get them when they start to go up.
Here are the charts of the two stocks that I like:
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1. HZNP
HZNP was one of the few stocks today that was able to gain throughout a day when the overall market went lower through the day. The stock has been trending sideways for a few months but today was able to get through resistance on a break from a rising bottom. This stock was a feature today for my daily newsletter subscribers at $2.66 and I own the stock at an average cost of $2.698. Support at $2.49.
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2. GSV
GSV has been in a downward trend since last Fall but today broke higher from a rising bottom and broke the downward trend line. Volume was stronger than normal today and the stock closed on its high. Support at $1.01.
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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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