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Stockcores Trading Club - Edmonton
The Stockscores Club Meetings are a great way to get an introduction to the Stockscores Approach to trading the markets, and meet others with an interest in stock trading. Each month, our groups meet to discuss trading methods and promising opportunities. The Edmonton group charges $5 per meeting to cover their expenses.
At this month's meeting, I will discuss:
The New Stockscores Website
Support and Resistance
Trend Breaking Strategy
plus, We will scan the market for opportunities and discuss the overall market direction
Edmonton Stock Trading Club Meeting
Monday, September 13, 2004 6:45 - 9:00
French Cultural Center
8627 - 91 Street
Register Here
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Stockscores.com Perspectives
For the week ending September 12, 2004
In this week's issue:
The New Stockscores Website
After months of effort, the new Stockscores website will launch. Look for it sometime this week, with new tools, a new look and a more efficient design that will make it easier to use.
There have been significant technical hurdles to overcome in transferring everyone from the old site to the new. Therefore, if you do not receive the newsletters next week, or you can not access the new site the way that you used to, please send me an email (tyler@stockscores.com) and I will get the problem fixed for you. With a new site of this complexity, there will be some bugs but we hope to have them all straightened out soon after we launch the new site.
We hope you enjoy it! - the Stockscores Development Team
This week, I want to talk about the Risk/Reward trade off, and why understanding it is so important to successful investing and trading. Most traders are concerned with when to enter a stock, and neglect understanding the appropriate position size and profit potential of the trade.
When considering a trade, it is important to establish a loss limit. You can not be right on every trade, but limiting losses when you are wrong will improve your long term performance. When buying a stock, plan to sell if it moves below support. When shorting a stock, plan to cover the short when it moves through resistance.
The difference between the entry price and your stop loss price represents the basic risk of the trade. If you are buying a stock at $10, and will take a loss if it moves to $9, then you have a risk per share of $1. If you don't want to lose more than $500 on the trade, then your position size should be 500 shares (this is a simple example, we should also factor in commissions and slippage).
When looking at the stock chart, we should also consider what the potential gain on the position is. If we are buying a stock at $10, but the stock will encounter technical resistance at $11, then we only have $1 of upside. If the stop loss point is at $9, then we have the same upside potential as downside potential. That makes the risk reward trade of 1:1.
When trading, I have found that it is better to have a 1:2 or better risk reward ratio. That would mean that we would not take the trade at $10 unless we saw good potential for it to move to $12.
You can take trades that have less than a 1:2 risk reward trade off if the probability of success is very high (70% or better). You can also take low probability trades if the risk reward ratio is very high.
When you find a good stock chart, you should then consider the position size based on the entry price and stop loss point. Then, consider the likely upside potential of the trade, and calculate the risk reward ratio. If the trade has a good probability of success, and the profit potential is two times or better the loss potential, then the trade is worth considering. A good chart that does not have enough upside potential to compensate for the downside risk is not worth doing unless there is a very high probability of success.
Good traders are more than good stock pickers, they also practice good risk management, limiting losses when they are wrong and letting profits run when they are right.
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Bottom fishing is the quest for stocks that are inexpensive relative to previous levels, but show signs that the bargain is going to end soon. We want to look for stocks that are a showing a break from pessimism, an increased level of confidence that the stock is undervalued, and signs of optimism for the future. Filtering for these situations gives the investor a short list of companies to perform their necessary due diligence on before speculating on a change in trend.
Buying a stock that is in a long standing down trend can be as dangerous as stepping in front of a freight train. It takes time for stocks to reverse trends, and buying what seems to be a bargain can be a crush to your portfolio. However, bargain hunting can be profitable if the timing is right. To effectively bottom fish beat-up stocks, you have to enter when there are signs that the downslide is slowing and a move back upward is imminent.
Market psychology takes time to reverse. When bottom fishing, we want to focus on stocks that have suffered a sell off and are cheap relative to where they once were. However, we want to also look for signs that market psychology is turning favorable on these stocks and that they are ready to head higher again.
This strategy focuses on three stages:
Stage 1 - a break from the show of pessimism
Stage 2 - a show of confidence
Stage 3 - a show of optimism
Stage 1 is essentially a breaking of the downtrend. If we draw a line along the top of the declining trend, we have defined the downtrend. A break of the trend arises when the stock can break upward and through that declining trend.
In Stage 2, we want to see signs that there is confidence in the break from pessimism. The market needs to show resilience that the downtrend is indeed slowing, and that the potential for an up trend is real. A consolidation following the break is a good show of this, and is more significant if it as at a level higher than the previous low. This is a rising bottom.
Finally, we want to find signs that there is optimism about the future of the stock. A breakout from a rising bottom is Stage 3.
I ran the Market Scan this weekend and found three stocks that I think have good potential for a turnaround in the weeks to come:
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1. AMTD
AMTD is breaking through the neck line of a head and shoulders bottoming pattern, with good volume supporting the breakout. The stock may stall at $13, but looks to have good potential to go to $16. Support is at about $11.
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2. UTEK
The Semiconductor sector remains pretty weak, but investors took an interest in them on Friday. UTEK made a break through resistance on a cup and handle pattern, after breaking its downtrend about a month ago. That indicates investors are beginning to show optimism in this stock, and it has good potential to go higher. Support is at about $15.
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3. T
T has broken is downtrend, and is now forming a rising bottom consolidation, indicating pessimism is weakening and optimism is picking up. The stock recently made a Sentiment Stockscore cross above 60. Support is at about $13.50, but upside in the months to come could be $20, so the risk reward trade off is pretty good.
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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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