Caution Time
Stockscores.com Perspectives for the week ending September 29, 2015
In this week's issue:
In This Week's Issue:
- Stockscores' Market Minutes Video - Trade the Right Market
- Stockscores Trader Training - Caution Time
- Stock Features of the Week - Trading Fear
Stockscores Market Minutes Video - Trade the Right Market
Traders often struggle with consistent success and work to change their trading strategies as a result. Often, it is not the strategy that is at fault but the market that is traded. This week, I look at the importance of trading the right market before providing my regular market analysis.Click Here to Watch To get instant updates when I upload a new video, subscribe to the Stockscores Youtube Channel.
Trader Training - Caution Time
This is the time of year when it is really necessary to be selective with the trades you take. We are at the seasonal end of the weak season for trading; the market tends to improve sometime in October or November.
Before that happens, the market also tends to be its most volatile and difficult. We often get sharp corrections at this time of year so it is essential to be very fussy about the trades you take. We are likely within a few weeks of an improvement in the market, so be patient.
It's better to miss a good trade than to take a bad one. Missing a good trade doesn't deplete your capital-it only fails to add to it. A bad trade will not only reduce the size of your trading account, it will eat up emotional capital and your confidence.
A losing trade is not a bad trade. Bad trades are simply taking the trade that doesn't meet your requirements. Bad trades come from working hard to see something that's not there, guided by your need to trade rather than the market offering a good opportunity.
I have read very few books about the stock market, but one that I've read more than once and that I think is a must-read for every investor is Reminiscences of a Stock Operator by Edwin Lefevre. Here is a wonderful quote from that book that captures the essence of what this chapter is about:
What beat me was not having brains enough to stick to my own game-that is, to play the market only when I was satisfied that precedents favored my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily-or sufficient knowledge to make his play an intelligent play.
-Reminiscences of a Stock Operator
I advise all my students that they will make more money by trading less, at least so long as trading less is the result of having a high standard for what they trade. If you tell yourself you're limited to only making 20 trades a year, you're probably going to be very fussy about what trades you take. With less than two trades to be made each month, only the very best opportunities will pass your analysis. All of the "maybes" or "pretty goods" will get thrown out.
We take the pretty good trades because we're afraid of missing out. It's painful to watch a stock you considered buying but passed on go up. You remember this pain and the next time you see something that looks pretty good, you take it with little regard for the expected value of trading pretty good opportunities.
Pretty good means the trade will make money some of the time and lose some of the time, and the average over a large number of trades may be close to breaking even. The fact that one pretty good trade did well is reasonable and expected. In the context of expected value, taking those pretty good trades many times will lead to less than stellar results when the losers offset the winners.
You shouldn't judge your trading success one trade at a time. You must look at your results over a large number of trades. To maximize overall profitability requires you to have a high standard for what trades you make. Maintaining that standard will be easier if you take the trades that stand out as an ideal fit to your strategy, not by taking those that are marginal and require a lot of hard work to uncover.
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I have been Bearish on stocks for some time, I am almost entirely in cash for the longer term but day and swing trading each day to take advantage of the volatility and fear. How do I do that? Here are three vehicles that tend to do well when the market is falling apart:Back To Top
1. VXX
The VXX is the most liquid way to take advantage of market weakness. This is actually based on the implied volatility of the S&P 500 Futures so the market does not have to just go down for this one to go up. However, that is what tends to happen when the market is gripped by fear, making it a good vehicle for taking advantage of sharp corrections.
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2. SDS
If the S&P 500 goes down 1% in a day, this one should go up about 2%. Since it is a leveraged ETF, it rebalances each night to keep the 2 t 1 leverage so over time, it will not move double what the market index moves. For short term traders, it is a good way to take advantage of a falling market.
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3. T.HVU
If you want to play the VIX but in Canadian Dollars, consider this ETF which essentially moves with the VXX. Not as liquid so larger trades may be better on the VXX but nice if you don't want to think about the currency effect.
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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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