A Simple Way to Improve Profitability
Stockscores.com Perspectives for the week ending March 7, 2014
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In this week's issue:
b>Stockscores Market Minutes Video
In this week's Market Minutes video, I show a simple Market Scan that I do each morning about half an hour after the open to find stocks in the early stages of a move. Watch that segment plus my regular market analysis by clicking here.
Upcoming Events
Stockscores Live Presentations
The 8 Rules for Successful Investing
Calgary April 3 and 5
Vancouver April 12 and 15
Disnat has purchased 500 copies of my book to give away to the first 500 people registered (and who attend the event). For details and to register now, Click Here.
Lower Risk, Increase Reward
In this week's Market Minutes. video, I show how the reward potential for a trade goes up and the risk goes down if you are able to catch a hot stock early. Let's review the concepts of Reward and Risk and their importance for the success of a trade.
Risk is the difference between the entry price and the stop loss price. Buy a stock at $10 with a stop loss at $9 and you have $1 a share in risk.
Reward is the difference between the profitable exit price and the entry price. Buy a stock at $10 and sell it at $15 and you have a reward of $5.
The Reward for Risk ratio is a measure of how much you make for the risk you take. Making $5 by risking $1 is an excellent trade. The person who does not limit their downside and potentially risks $10 to make $5 has only earned a reward for risk of 0.5.
Trading is a balancing act between controlling risk and maximizing reward. The tighter your stop is to your entry price, the lower risk is and the higher the potential reward for risk is. However, a tighter stop has a higher chance of getting triggered so the probability of a profit goes down with a tighter stop. You don't want a stop so tight that it takes you out of what turns out to be a profitable trade.
You can widen your stop to increase the chance of making a profit but that lowers the reward for risk of the trade. Another way to improve the reward for risk of the trade is to try and find a breakout stock early so you can get in at a lower price, lowering the risk and increasing the potential reward for risk ratio.
In our example, consider the effect of finding the stock at a lower price. Instead of paying $10 a share, what happens if you can get the stock at $9.50 with the same $9 stop loss point? Now your risk is $0.50 a share. Assuming we exit the trade at the same price, $15, you now have a Reward for Risk ratio of 10 instead of 5. Same stock, a very similar probability of success but a much higher profitability simply because you found the stock earlier. I show this visually in this week's Market Minutes. video.
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I think the Canadian market has more potential and less risk than the US market right now. This week, I ran the Abnormal Breaks Canadian scan and found three standout charts:Back To Top
1. V.GPH
Big volume and a break through resistance on the 6 month chart of V.GPH, likely because of the hype surrounding Tesla's lithium ion battery factory (these batteries use a lot of graphite). Support at $0.16 (disclosure, I own warrants in this stock)
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2. T.ECI
Strong gain on strong volume for T.ECI, I like the longer term weekly chart for this stock which shows the important breakout through resistance going back to 2012 at $10. Support now at $10.
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3. T.WJX
A nice breakout from an ascending triangle pattern on T.WJX with an increase in trading volume. A good long term turnaround Bottom Fishing pattern. Support at $38.
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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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