10 Steps to Beat the Market
Stockscores.com Perspectives for the week ending October 30, 2010
In this week’s issue:
Strategy of the Week
Stocks That Meet The Featured Strategy
I believe that making money in the market requires doing what is hard. Often, when your emotions are telling you to take one course of action, you have to go the other way. Here are 10 hard, but necessary, things to do if you want to beat the stock market.
1. Take losses when you are wrong
No one likes to take a loss but losing is part of making money. You have to recognize that the stock market can not be predicted with 100% certainty and accept that being wrong is ok. When the market proves your decision wrong, take the loss!
2. Let profits run when you are right
Never be satisfied with a trade unless it returns you at least twice what you risked on the trade. Of course, more is better; one trade that returns 10 times your risk will pay for 10 losers. Our natural tendency is to fear letting our winners turn in to losers and so we are quick to sell our winners at the first sign of weakness. But realize that is what most people are thinking which means trends will start with a lot of back and forth moves because many investors lack commitment. It is only after a sustained trend upward that the fear diminishes and the trend really starts to accelerate. That is where investors can make the most money, if they stay in the stock long enough to enjoy it.
3. Buy when there is panic selling
The emphasis here is on panic selling, where the overwhelming pessimism has people accepting prices that make no rational sense. Don’t confuse a bear market with panic selling; weakness is not a reason to buy unless it is motivated by panic. Contrarian investing is only effective when emotion causes stocks to be mispriced and that comes with panic selling.
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4. Sell when there is irrational buying
When the mass media is espousing the virtues of an investment, when people who know less than nothing about investing are dumping money in to the market, it is probably time to be a seller. If the upward trend goes from being linear to a curve, watch for signs of weakness as the upward trend is nearing its end. At this point, volume will often be much higher than normal and it will seem as though the stock can do nothing wrong.
5. Judge success in groups
Most of us judge our success one trade at a time. Trading is a probability game; you will not make money all of the time so why beat yourself up over a few losses? The only way to judge success is by the amount of money in your account over a large number of trades. Don’t even judge success by how often you are right, it is only about how much money you make over a large number of trades.
6. Test before you trade
To make money in the market, you need a strategy that has an edge. Don’t make investments on a hunch or what someone else tells you to do. Make investments based on a set of rules that you have tested and proven to be successful. Every great trader has a formula, what is yours?
7. Don’t follow the crowd
Average is what most people are doing; do you want to be average? It is only a small percentage of the population that has most of the money and they are making it from the largest group. If you want the money to flow your way, you have to be ahead of the crowd, do things before it is popular.
8. Avoid the headlines
The mainstream media seems to do their big features at or near market tops. If a media outlet has a large audience then their information is going to be priced in by a large number of people. Always remember that it is only a small number of people who beat the stock market which means if you are doing what the large numbers of people are doing, you are probably on the losing side. Going against the headlines will often be the winning strategy.
9. Don’t find comfort in the news
You buy a stock on a tip, based on a trading strategy or maybe after some in depth research. The stock goes down and the market tells you that you made a decision that was wrong. Rather than take the loss, you dig in to the news and find a reason to hang on. Perhaps it is that there are more results coming or that management has a proven track record. Any bit of fundamental information to justify holding the stock when the market tells you not to will help you avoid that negative feeling of taking a loss. Remember, the market never lies and the collective opinion of investors is based on all the information you are looking at. If what you are using to justify the hold is such good information, why are others selling?
10. Keep it simple
Investors have a tendency to get more sophisticated as they lose money. If there set of rules are not working, they add more rules. However, it is not usually the rules that are the problem; it is the application of the rules. People who make money keep it simple but work very hard at being disciplined and unemotional. Easy to say, hard to do.
I ran the Stockscores Simple Market Scan on Stockscores this week to uncover some good charts. This week, I not only wanted to see a good daily chart but also a good weekly chart (which I can view on Tradescores.com). The following stocks showed good breaks from predictive chart patterns on the daily and weekly charts.
PWAV breaks out from an ascending triangle pattern and has been trading higher than normal volume over the past few days. The stock appears to be reversing the long term weakness and starting an upward trend. Support at $1.95.
DDIC has been building an ascending triangle pattern since May and broke through resistance at $10 Friday with strong volume. This stock was featured in the dailly edition of the newsletter on Friday. Support at $8.95.
WSTG has been trading with low price volatility for a number of months but came to life on Friday as it broke through resistance on strong volume. The stock is building long term upward momentum with resistance at $16. Support is at $9.80.
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Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.
Slowly, he began to learn how the market works, and more importantly, how to consistently make money from it. He realized that the stock market is not fair, and that a small group of people make most of the money while the general public suffers. Eventually, he found some of the key ingredients to success, and turned $30,000 in to half a million dollars in only 3 months. His career as a stock trader had finally flourished.
Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.
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.