Pays to Be a Loser
Stockscores.com Perspectives for the week ending May 11, 2014
In this week's issue:
Stockscores Market Minutes Video
This week, Tyler shows how patience with the strong stocks that you buy is essential for overall performance. Watch the video by clicking here.
Profitable Loser
This past week, I did a four day live trading class with a focus on my Simple Swing trading strategy. Each day, from market open to close, I demonstrated the processes that I use to find trades and then the analysis that I do to evaluate a potential trade. Through the week, I bought 12 stocks that met the criteria of my Simple Swing strategy.
The week was not a good one for trading. The overall market was directionless and there was little excitement in individual stocks. This strategy can normally find 20 to 30 trades a week but I had to struggle to find the 12 that I did. Many of the trades that I took were less than ideal.
The result is that my success rate was low - only 42% of the trades I took were profitable by the close of Friday. Yet, applying my Reward for Risk selling method still yielded a positive result - a profit of $6,939 on a $500 risk tolerance (net reward for risk of 13.88).
To achieve this result required more than just buying these stocks. It was also essential to sell them well, something that is often harder than the buy.
Successful trading requires you limit your losses and let your profits run. A few of the stocks that were exited at a loss went down a lot more after they hit their stop loss point, making their losses potentially much larger if the stop was not executed.
It was also very easy to sell some of the winners early, something that I often do as part of being risk averse. No one likes to see a winner turn in to a loser but we have to remember that the winners have to pay for the losers. The overall profitability for the week falls on the returns of the three trades that made the biggest gains. If you sell any of these early, you really hurt your financial performance.
I have a very mechanical, logic based approach for exiting trades that has no subjective element. That does not mean it is easy to follow the rules but this week's trading shows how important it is to let the winners run.
Despite a losing record (58% losers, 42% winners), the strategy was still profitable because of the big winners and small losers. That is a very important lesson for all traders. It is not about how often you are right, it is about how much you make when you are right. During a tough week, this lesson is even more noticeable.
While this example is based on swing trading, the lessons are the same for any type of trading or investing. No one is always right; you have to have a plan to limit the size of your losses when you are wrong and maximize the profit when you are right.
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Many Canadian stocks have gone in to parabolic upward trends. That is a way of describing a trend that gets steeper over time so that a line drawn across the bottoms is not a straight but a steepening curve. It is what we typically see in a hot stock before it makes a sharp correction.
I think anyone holding one of the many hot Canadian stocks that are in parabolic upward trends has to be cautious. Although most are not yet showing any sign of weakness, I would watch them closely for signs of weakness. These stocks are due for a pull back and with summer approaching, the timing of the pull back is likely sooner than later.
This does not mean that their long term upward trends are necessarily over. Many stocks can pull back to their long term upward trend lines before stabilizing and continuing the trend.
Here are a few examples of some stocks that are in parabolic trends. If you own stocks that have charts that look like these, be watchful for a break down:
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1. T.LNR
T.LNR has moved from $25 to $60 in the past year and is not yet showing any signs of slowing down. The problem is that the trend is getting very steep which shows that investors are buying more for a fear of missing out than for chasing strong fundamentals. Watch for a break of the steep upward trend line as a cue to exit.
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2. T.AIF
T.AIF has gone from about $8 to $25 and is now well above the linear upward trend line. If investors decide to cash in before the summer, this is one of the stocks that will feel some selling pressure.
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3. T.ACQ
T.ACQ has been trending up since late 2011 and has moved from $5 to $70 in that time. In the last 9 weeks the trend has become very steep making it dangerous to chase the stock higher here. Shareholders should watch it closely for weakness as a sign that it is time to take profits.
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References
Get the Stockscore on any of over 20,000 North American stocks.
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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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