Differences Between Winners and Losers
Stockscores.com Perspectives for the week ending October 29, 2004
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In this week's issue:
Profitable trading in the stock market requires more than good knowledge and strategies. So much of trading is mental, and it is often necessary to reprogram our brains so we can make money in the stock market. Here are some of things that separate those who make money trading stocks from those who don't:
Winners Stop Losses, Losers Hope For Turnarounds
Risk management is essential to trading success. To make money over the long run, you have to plan your losses and take them when the market proves your trade wrong. Small losses can be overcome, but the big loss that comes from a lack of discipline can outweigh 10 good trades. Remember to never find a reason to keep a loser, hope belongs in the bedroom.
Winners Listen to the Market, Losers Listen to Cheerleaders
It can be hard to trust what lines on a stock chart are telling you, but remember what is behind those lines. Each day, millions of investors cast their opinion on stocks by buying or selling. Would you rather trust market activity, or a biased source that will benefit if you buy the stock? Realize that everyone who gives you a stock tip has a bias and may be overly optimistic. However, the market never lies.
Winners Let Profits Run, Losers Sell Too Soon
It feels good to lock in a profit. Therefore, it is not surprising that most traders sell out of winning positions before there is a sell signal. At the first sign of weakness, many traders jump out to make small profit, and congratulate themselves. However, it is important to remember that your profits have to outweigh the inevitable losses that come with trading, and selling strong stocks too early can hurt your performance.
Winners Keep It Simple, Losers Get Sophisticated
Every trade I make is based on six simple concepts of technical analysis. Many traders that fail to consistently profit look for new and more sophisticated methods than those proven to be successful. They add more indicators, do more back testing and read more books. Usually, the problem is not in the method, but the application of the method, making greater sophistication a waste of time. Stick to the basics and learn to apply them well.
Winners Look at What Will Happen, Losers Look at What Has Happened
You don't drive your car by watching the rear view mirror, so don't make investment decisions based on what has happened in the past. Reading news releases and annual reports has little use since all of the information contained in them is public knowledge of what has happened, and is therefore priced in to the stock. To make money in the stock market, we have to figure out what the fundamentals will be in the future.
Winners Act, Losers Hesitate
When a stock shows a high probability trading opportunity, it is time to act. Many traders see these opportunities but wait for the market to prove them right. Because of a lack of confidence, they have difficulty taking action when a major market move is starting, and instead wait to take a position when the move is well under way. While it may be more comforting to the hesitating trader, it is also more risky and less likely to be successful.
Winners Judge After 10, Losers Whine After 1
Trading stocks is a probability game, and you will lose on some of your trades. Good traders don't judge their performance one trade at a time, but instead, look at their profitability after 10 trades or more. If you focus on individual losses, you will begin to lose your confidence and start to make bad decisions. Judge and respond to your performance after at least 10 trades.
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Historically, the stock market performs best from November till May. The market also tends to do better when there is not a lot of uncertainty. Since the US Presidential election will happen this week, and because we are going in to "money making season", it seems likely that stocks will have an upside bias in the weeks to come. An end to uncertainty and a seasonally bias should create buying opportunities in stocks.
With that in mind, I ran the Optimistic Consolidation Market Scan this week, which is a Stockscores Advanced Strategy, available to Advanced members of the web site. The concept is as follows.
Market volatility is the best determinant of uncertainty. Stocks that trade with a good deal of volatility do so because the market is unsure about the value of available information about the company. So, market participants argue back and forth by buying and selling the stock, and eventually come to some consensus on the value of the company. As they do so, volatility is reduced, and the stock enters into a consolidation. Breaks from these consolidations often preclude strong directional moves.
Stocks that consolidate are a demonstration of increased market confidence on the value of the company. Where there is strong consensus, there is certainty. For a stock to break out of one of these consolidation patterns often requires significant new information about that company's future earnings potential. By taking a position in a stock that is consolidating, we can get in before the start of a significant move and minimize risk because we are taking a position in a stock that the market has confidence in regarding its price.
The direction of the breakout from the consolidation pattern is often indicative of the near term trend. Generally, we can anticipate the move of the breakout based on the type of consolidation pattern we are seeing by looking at the chart to see if rising bottoms are falling tops are present. Rising bottoms are a sign of optimism, and tend to lead in to breakouts. However, at the point of breakout, we can also see very quickly if our expectations were correct and minimize losses if we are proven incorrect.
I restricted my search to stocks that had at least 500 trades on Friday, and it generated 87 candidates. Here are a few that I like for longer term Position Trades:Back To Top
1. SEBL
The recent gap up on SEBL broke the downtrend, and started a shift in psychology from pessimism to optimism. The stock is finding some resistance at $9.60, but I think a breakout through that ceiling is likely if the overall market can firm up after the election. This stock has good potential to continue its turnaround, and has support at about $8.75.
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2. NSM
The Semiconductor sector is starting a turnaround, and this NSM chart is a good example of a stock that is trying to reverse its downtrend. Falling tops have switched to rising bottoms, and the stock has good potential to head up toward $22, where the last consolidation will provide resistance.
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3. AGIL
The downward trend line on AGIL was broken in September, and recent rising bottoms indicate investors are becoming more optimistic. The stock is working on getting through some overhead resistance at $9, but I think that can happen in the weeks to come. This is a good example of a head and shoulder bottom pattern.
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4. BCSI
The one year chart of BCSI looks a lot like a mountain, and we now find ourselves in the valley after a sharp six month sell off. The stock looks to be in an accumulation phase now, and optimism is finally picking up after a lengthy period of weakness.
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5. SPIL
Watch SPIL for a breakout through $3.75, as that is the current ceiling price that seems to be keeping the stock from ascending to the $4.50 - $5 price level
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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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