Check back weekly for another free trading lesson:
To Beat the Market, You Need an Edge
In This Week’s Issue:
- Special Videos – What I Have Learned from 37 Years of Trading
- Market Outlook – Quiet Market … For Now
- This Week’s Market Minutes video – Is the Stock Market a Bubble About to Burst?
- Trader Training – To Beat the Market, You Need an Edge
- Strategy – Sitting
Special Videos – What I Have Learned from 37 Years of Trading
I am in the midst of a special video series on what I have learned from 37 years of trading, Make sure you check these out, they are proving to by my most popular videos ever.
After 37 Years of Trading Stocks, These Simple Things are What Work
After trading stocks for 37 years, I have condensed my approach down to a few simple concepts that can fit on a post-it note. Starting with the building blocks of chart patterns, I outline these concepts, what they say about buyer and seller intentions and how to use these to find good day, swing and position trading opportunities. Whether you are a beginner trader or have years of experience, these concepts must be understood.
After 37 Years of Trading Stocks, This is How I Manage Risk
Controlling stock trading and investing losses and maximizing profits starts with a sound plan for risk management. In this lesson, I show simple concepts to manage risk effectively and avoid the common mistakes that cause most traders and investors unnecessary stocks in the markets.
Market Outlook – Quiet Market … For Now
The last few weeks have seen the market trend sideways or gently lower, on light trading volume. As we go into September, we should be aware that it is historically the weakest month of the year for stocks. We should also be aware that the market tends to pick up in October with strength lasting into the Spring. Many investors and traders get frustrated with the markets at this time of the year and then miss the start of the strong market. Be patient, but stay focused
This Week’s Market Minutes Video – Is the Stock Market a Bubble About to Burst?
Many are concerned that the stock market is a bubble about to burst, but does it have the characteristics of a bubble? I show how bubbles typically look and what to watch for to protect your capital. Then, my analysis of the overall markets and a look at the trade of the week on BIAF.
Commentary – To Beat the Market, You Need an Edge
If you want to beat the stock market consistently, you need an edge.
That statement may sound obvious, but it is one of the most important concepts for any trader or investor to understand. Without some advantage over the other participants in the market, there is little reason to expect your returns to consistently exceed the average.
You may outperform for a while because of luck. You may catch a strong market trend or happen to own the right stocks at the right time. But over a sufficiently large number of trades, luck tends to fade and results move toward what your process deserves.
To consistently outperform, there has to be something that gives you a positive expectation.
There has to be an edge.
The Market Is Trying to Be Efficient
The Efficient Market Hypothesis argues, in its broadest sense, that available information is quickly reflected in stock prices. If markets were perfectly efficient, consistently beating the market should be extremely difficult because every obvious opportunity would quickly be exploited and priced away.
Yet some traders and investors have demonstrated an ability to outperform over long periods of time.
How?
They have an edge that allows them to capitalize on something the rest of the market is either unable or unwilling to exploit effectively.
While edges can take many forms, most tend to fall into four broad categories.
1. Better Information
The most obvious way to gain an advantage is to know something that other market participants do not.
That does not necessarily mean possessing inside information. Investors can develop an informational advantage through hard work. They may understand an industry better than the average investor, uncover an important trend before it becomes widely recognized or analyze publicly available information in a way that leads them to a different conclusion than the crowd.
The important distinction is between better analysis of available information and the use of material non-public information, which can cross the line into illegal insider trading.
Information does not have to be secret to provide an edge. It simply has to be understood better or sooner than it is by the majority of market participants.
There is also another way that ordinary traders can benefit from better-informed investors.
Instead of knowing what they know, you can sometimes follow what they do.
Those with superior information often reveal their knowledge through their buying and selling. When informed investors aggressively accumulate a stock, abnormal price and volume action may appear before the reason for that activity becomes obvious to everyone else.
The market can sometimes tell a story before the news does.
2. Human Emotion
This is one of the most durable edges available to individual traders.
Markets may become more technologically sophisticated, but the people participating in them remain human.
Humans feel fear.
Humans feel greed.
We suffer from regret, impatience, overconfidence, loss aversion and the fear of missing out.
These emotions cause people to make predictable mistakes.
Investors often hold losing stocks too long because they do not want to admit they were wrong. They chase stocks after large gains because they fear missing further upside. They sell strong stocks too early to lock in a small profit and stubbornly hold weak stocks hoping they will recover.
These tendencies can create opportunities for disciplined traders.
A good trading strategy does not simply identify where a stock might go. It identifies situations where the emotional behavior of market participants creates a favorable imbalance between risk and reward.
Fear and greed are not going away.
For that reason, strategies built around human behavior can maintain an edge even as markets evolve.
3. Faster Execution
Sometimes the edge is simply speed.
Markets react quickly to new information. When thousands of traders recognize the same opportunity, those who act first tend to receive the best prices.
This is especially important for professional firms engaged in high-frequency trading, arbitrage and other strategies where advantages can be measured in milliseconds.
For most individual traders, trying to compete with sophisticated trading firms purely on technology is difficult.
However, speed still matters on a different scale.
A trader who has a clearly defined strategy, knows exactly what conditions must exist before entering a trade and can execute without hesitation has an advantage over someone who waits for additional confirmation, debates the opportunity and finally acts after the crowd has already pushed the stock significantly higher.
You may not need to be faster by milliseconds.
Sometimes you simply need to be faster by minutes.
Preparation creates speed.
4. Supply and Demand
Ultimately, stock prices move because of imbalances between buyers and sellers.
When demand overwhelms available supply, price rises.
When supply overwhelms demand, price falls.
In smaller or less liquid stocks, unusually aggressive buying or selling can have a significant impact on price. Large institutional orders, concentrated ownership, short squeezes, forced liquidation and speculative trading can all create powerful moves.
Illegal market manipulation can also distort supply, demand and price, but attempting to manipulate a stock is obviously not a legitimate trading edge.
For the ordinary trader, the opportunity is not to create the imbalance.
It is to recognize it.
Price and volume can reveal when something unusual is happening. If demand suddenly becomes much stronger than it has been historically, the stock may begin behaving differently before most investors understand why.
That abnormal behavior is information.
The Stockscores Approach
Stockscores trading strategies tend to focus primarily on three of these areas:
Human emotion, informed trading and speed of execution.
We look for abnormal market activity that may indicate that someone knows something important.
We look for patterns created by the fear and greed of market participants.
And we use clearly defined rules so that when an opportunity appears, we can act before it becomes obvious to the broader market.
This is an important distinction.
We do not need to know why a stock is moving before we trade it.
We need to recognize that its behavior has changed.
Suppose a stock that normally trades 100,000 shares a day suddenly trades several million shares and breaks through an important price level.
Something has changed.
Perhaps an informed investor has discovered something important. Perhaps a new fundamental development is attracting capital. Perhaps short sellers are being forced to cover. Perhaps momentum traders are piling into the stock.
At the moment the trade sets up, we may not know the reason.
But we can see the effect.
That is where price and volume become valuable.
You Don't Have to Predict the Future
Many investors think successful trading is about making better predictions.
Where will the market be six months from now?
What will earnings be next quarter?
Which technology will dominate five years from now?
Predictions can be useful, but they also introduce tremendous uncertainty.
A trader does not always need to predict what will happen.
Instead, the trader can wait for the market to demonstrate that something is already happening and then participate while carefully managing risk.
That is a very different mindset.
Rather than trying to be smarter than everyone else, observe what everyone else is doing.
Rather than trying to forecast the next major news event, look for evidence that informed capital may already be positioning for it.
Rather than allowing fear and greed to influence your decisions, build rules that allow you to take advantage of those emotions in others.
Find Your Edge and Repeat It
There are countless ways to trade the stock market, but a strategy should ultimately be able to answer one very important question:
Why should this make money?
"Because the chart looks good" is not enough.
"Because I think the company has potential" is not enough.
"Because the stock has gone down a lot" is not enough.
There should be a logical reason that the opportunity provides an advantage over the other participants in the market.
At Stockscores, that advantage often comes from identifying abnormal price and volume behavior, understanding the emotional forces behind market movements and executing a defined trading plan before the opportunity becomes obvious to everyone else.
Finding an edge does not mean every trade will make money.
No edge works all the time.
It simply means that over a large number of trades, the probabilities are tilted slightly in your favor.
And in trading, a small edge applied consistently with disciplined risk management can become a very powerful thing.
You don't have to be right all the time to beat the market.
You just have to find an edge—and execute it consistently.
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