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Thursday, October 30 6:30 pm
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This month, our agenda will include:

Market Overview
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Trade Decision Logic

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Stockscores.com Perspectives
For the week ending October 24, 2003

In this week's issue:

Weekly Commentary
Strategy of the Week
Stocks That Meet The Featured Strategy

Are you afraid of losing money in the stock market? While we would all agree that taking losses is not a good thing, the fear of losing is much worse. The trader who is afraid of losing will tend to sell winners too early, and avoid taking losses when the market indicates it is time to do so. To be a good trader, you must overcome an aversion to losing money.

If you have ever golfed, you have probably felt the fear of putting the ball in the water. As you stand over your ball, all you can think about is not hitting the ball in to the lake, and as you swing, it is the one dominant thought in your head. What happens? First you hear the sound of your club striking the ball, and then the kerplunk as your ball finds his H2O. Sometimes the golf club follows.

Like a fearful golfer, a trader who is afraid of losing tends to visualize the worst outcome when he or she is holding a winner. As the stock goes higher, negative thoughts enter the brain. "I remember a time I had a big winner and then all of a sudden it dropped like a rock." It does not matter how often the bad experience occurred, the fear that it created causes us to focus in on the negative experience. Fear is a powerful emotion, and it will cause the trader to make bad decisions.

The result is that many traders tend to sell strong stocks before the stock begins to break down. "I'll lock in my profit now, just in case something bad happens. After all, you don't go broke making a profit," the trader says. After the profitable exit, the stock continues to march higher. After all, there never really was a sell signal.

We also tend to avoid losses by not taking them. We purchase a stock, it heads lower to the point where we should take the loss and walk away from the trade, but instead, we hang in there. In our head, we decide that the trade is not really a loss until we sell, so by holding, we postpone the bad feeling that comes with selling at a loss. Again, we suffer a fear of the loss, and it causes a bad trading decision. Since the stock broke down and gave a sell signal, it is now likely to head lower. The failure to sell and take the small loss causes the trader to suffer an even large loss, potentially crippling his or her longer term performance.

I had a friend who created a trading strategy and back tested it exhaustively. The results of the testing were impressive; the strategy consistently made money. So, he decided it was time to try it for real. But, with real money on the line, he did not trade the market the way the computer did. Instead, fear came in to his decision making, and he would avoid taking losses when the system told him it was time to. As a result, he was more eager to take profits when they came, to help make up for the losses. The net result was that the system which looked so good on paper failed him in the market.

The truth is, the system did not fail, he did.

I have said many times that stock trading is a probability game. To be successful, you have to judge your performance over ten trades, not one at a time. By doing so, you can help to overcome your fear of losing. Keeping in mind the ten trade factor, it will be easier to take the small losses on the trading decisions that do not go your way, and let the profits run on the trades that are doing well.

The stock market is all about fear and greed. If you can overcome emotion, you will be ahead of the majority of investors and traders. If you trade with a fear of losing, you may as well throw your money in a lake.

This week, I thought I would discuss a top down approach to identifying opportunities, with a focus on one individual market sector.

With the weakening US$, Middle East tensions and a host of other reasons, there is a lot of talk among market experts about the attractiveness of Gold. To be honest, for as long as I have been trading the stock market, there has always been someone who had a very well thought out and attractive argument for buying gold. However, for most of the last 10 years, Gold has not been a great investment.

That is not to say that it is not a good place to be right now. When I hear a good fundamental argument for buying something, I check the charts. After all, people can be disillusioned by their own bias, but the market always knows what is right. The charts don't lie.

To do this kind of analysis, I go in to the Sector Watch area of Stockscores.com. For this analysis, I chose to look at the Canadian Gold stocks, by first examining the TSX Gold Index (IT.TTGD). which is the first chart that I show below. This chart shows a long term cup and handle pattern, with the Gold stocks just below long term resistance. They have done quite well over the past six months, but seem to have come to a ceiling that is difficult to break through. Based on what I see in the industry chart, it looks like Gold stocks have potential if they can make a break through resistance, but in the mean time, are probably destined to trade sideways after a good performance through most of the year.

Next, I look at some charts of the Gold stocks themselves. First up, T.ABX. This stock had a decent week, but has a lot of overhead resistance to work through. All of the people that were buying the stock in August and September at higher prices are probably frustrated and looking to get out now that the stock is showing life again. T.ABX does not look like a high probability play right now.

I go through a number more charts, and many of them look like T.G, which has been steadily moving higher. The stock, like many this year, has done well, and appears to be a good hold. However, entering it here carries a significant risk of coming late to the party and missing out on the action. These kind of charts are best left alone too.

I then turn to a real strong performer for this year, T.BGO. Stockscores look good, but again, the chart pattern is not good for entry right now. This stock has gone up significantly and fast, what will happen when investors decide it is time to take profits?

My conclusion after seeking technical confirmation of the fundamental argument is that there does not seem to be a general opportunity in gold stocks right now. Yes, there is some potential there if the Gold index can make a long term break through resistance. However, many gold stocks have done well already this year, making their purchase at current levels pretty risky. While the fundamental argument sounds attractive, the market reality does not really support it right now.

1. IT.TTGD
Based on what I see in the industry chart, it looks like Gold stocks have potential if they can make a break through resistance, but in the mean time, are probably destined to trade sideways after a good performance through most of the year.

2. T.ABX
T.ABX does not look like a high probability play right now.

3. T.G
The stock, like many this year, has done well, and appears to be a good hold. However, entering it here carries a significant risk of coming late to the party and missing out on the action.

4. T.BGO
This stock has gone up significantly and fast, what will happen when investors decide it is time to take profits?

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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