Analyze the Data
Stockscores.com Perspectives for the week ending March 23, 2015
In this week's issue:
In This Week's Issue:
- Stockscores Free Webinar - The Secret to Finding Hot Stocks
- Stockscores' Market Minutes Video - Analyze the Data
- Stockscores Changes
- Stockscores Trader Training - Analyze the Data
- Stock Features of the Week - Pull Back Play
Stockscores Free Webinar - The Secret to Finding Hot Stocks
Wednesday March 25th - 6:00 pm PT, 9:00 pm ET
For over 25 years, Stockscores founder Tyler Bollhorn has been picking winning stocks using one simple concept. During this webinar, you will learn his secret for finding the hot stocks of the future and get a demonstration of the tools he has built to find them.
Click here to register
Stockscores Market Minutes Video - Analyze the Data
Strategy traders need to analyze the performance of their strategy over a large number of trades. Take the time to test entry, exit and risk management rules over this large sample to see what really works. That topic plus Tyler's regular weekly market analysis.
Click here to watch
Stockscores Changes
The list of preset Market Scans had become long and quite redundant so this weekend I cleaned it up to include those that fit with the strategies I do and teach now. If you are a Advanced or Pro subscriber, you will see this more focused list of presets. It is still possible to save your own Market Scans if you are looking to do things beyond what the presets do. If you find something you really need is missing, email me and I will try to help you with the settings.
Also, for my Active Trader students, I have made some minor changes to the Intraday Pull Back strategy lesson and recorded a new video. The lesson now includes my blue dot indicator for this strategy.
Trader Training - Analyze the Data
We have all heard the story about the King who asks a group of blind men to feel an elephant and report back on what an elephant is. Each feels a different part and as a result, each has a very different perception of what the elephant is. They fail to accurately understand the Elephant because each does not touch the entire animal.
Many traders fall in to a similar mistake when evaluating their approach to the market. It is very easy to misjudge the effectiveness of trading rules by looking at the result of the last trade. If you buy a stock because it is breaking to new highs and the trade ends up failing, it is easy to say that buying stocks breaking to new highs is not an effective strategy.
This concept is referred to by some as being fooled by randomness. By drawing conclusions from a small sample of data, the trader makes an incorrect assessment of cause and effect.
To really judge the effectiveness of strategy rules requires they be tested over a large sample size, at least 30 trades but more is better. Only then can you start to see patterns and correlations. Only then can you assess cause and effect.
Suppose you are sitting in front of your computer and you decide that you will buy shares in Herbalife (HLF) if the next car that drives past your window is blue. The next car that drives by is blue so you buy HLF and the trade ends up making you a $1000 profit.
Encouraged by your result, you take a look at Pfizer (PFE) and again determine that you will buy the stock if the next car that drives past your window is blue. The next car surprises you by being blue so you buy and again, you make a profit. Trading seems easy!
What do you think would happen if you carried out this rule for your next 30 trades? Since most will realize that there can be no cause and effect between a blue car and a winning trade, most will say that the overall result should not be positive. Intuitively, you know what there can be no correlation between the color of the car that drives past your window and the performance of your trades.
However, what if your test actually finds that 25 out of the 30 trades you do end up being winners? Is there now reason to believe that blue cars predict strong stocks?
The problem is that even when there seems to be a correlation between one factor and a result, it could simply be that there is another cause at work. The reason that there was 25 winners out of 30 could simply be due to a strong trending market that makes most stocks rise.
This example highlights two important considerations when assessing the effectiveness of strategy rules.
First, make sure you test a rule over a large sample to get data that is reliable.
Second, test your strategy rules over varying market conditions so you can remove bias.
When testing the rules of a strategy, do not stop at the entry rules. Evaluate the exit strategy and how you size positions and do risk management. Small changes in any of these areas can have dramatic effect on your profitability. I recently completed a two week test of one of my day trading strategies and found that a couple of minor changes to the exit strategy more than doubled the profitability of the strategy during the test period.
If you want to truly understand how well your trading strategy works, take the time to compile data on a large number of trades across varying market conditions. Avoid looking at just one factor or the results of your last trade.
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The Pull Back Play strategy looks for stocks in strong long term upward trends but which have pulled back in the short term. The final step is to inspect the charts of these stocks to see if they are breaking their pull back, a good sign that they will resume the long term upward trend. This week, I ran this scan on the Canadian market and found four stocks with good potential to reverse their short term pullbacks.Back To Top
1. T.RIO
T.RIO has been trending higher since early in 2014 but has fallen back over the last three weeks, taking its price down to the long term upward trend line. The stock broke the pull back on Friday and has support at $3.06.
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2. T.CRH
T.CRH has been strong for a few months but the trend went parabolic in February, setting up for the pull back that the stock has made since. The profit taking phase seems to be coming to an end, giving the stock the potential to resume the upward trend provided support at $3.20 is not broken.
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3. T.III
T.III came alive with a strong price move as February became March. The stock gave back about half of those gains but is now starting to stabilize and move higher again. Support at $11.05.
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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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