Tyler Bolhorn: Trading a Correction

Posted by Tyler Bollhorn - StockScores Newsletter

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In This Week’s Issue:

  • Three Stocks that meet the Strategy of the Week
  • Upcoming Free Webinar – Stockscores Strategy Overview
  • Stockscores’ Market Minutes Video -Trading Should Not Be Scary
  • Stockscores Trader Training – Trading a Correction
  • Stock Features of the Week – These Go Up When the Market Goes Down

Upcoming Free Webinar
Stockscores Strategy Overview
Saturday Nov 5 – 9:00 AM PT, 12:00 PM ET
Click here to register for this free webinar
Stockscores founder Tyler Bollhorn will provide an overview of the Investor and Active Trader strategies. Who they are right for, how much time they take to apply and the basic process behind each.

Stockscores Market Minutes Video – Trading Should Not Be Scary
This week’s Market Minutes video looks at how to avoid fear when trading. That plus the market analysis and my trade of the week. Click Here to Watch
To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel

Trader Training – Trading a Correction
There are some signs that the market may enter in to another correction here, not a certainty but certainly a good probability. Here is a list of things to keep in mind when the market is correcting:

1. Stocks Can Go Down To Zero – I often hear investors tell me that they bought a stock because it had fallen so far already, it just had to bounce back. After all, stocks can not go down forever. Yes, that is true, stocks can only go down to zero and then they stop, but a stock that does go to zero is eternally gone. Do not buy something because it appears to be on sale, you should only buy something if it is more likely to go up than down.

2. Never Average Down – averaging down is the practice of buying more of a stock you are losing on as the price falls. Investment advisors sometimes refer to this as dollar cost averaging, but basically, it is all about buying more of a stock that has proven your original decision wrong. If you were betting on a horse that was in last place half way down the back straight of the Kentucky Derby, would you go back to the wager window and add more to your bet if you were able to? Of course not! Buying more when you are wrong is no different, so just wait until the market proves you right and average up.

3. Trade With Who Is In Control – next time you are in an airport, hop on one of those moving sidewalks that speeds you to the gate. When you get off, turn around and hop back on but this time, going against the traffic to understand what it is like trying to trade against the momentum of the market. Yes, it is possible but it sure is a lot harder than going with the flow. The market is no different; you will always have an easier time if you select strategies that are appropriate for the market condition. To understand whether the buyers are in control or the sellers, look at a chart of the stock or market index. If the tops are falling, the sellers are in control. If the bottoms are rising, the buyers are in control. So long as you can draw a line on the chart with a ruler, you can do this analysis and save yourself from a lot of difficulty.

4. Don’t Apply Logic – many investors make the mistake of using logic to make their trading decisions. The market will do a lot of things that do not make any sense because the market has information that you don’t have. A stock that “should” be going higher may not because a large shareholder has learned that there are problems that the general public does not know about. Or perhaps a large shareholder has a liquidity problem and has to sell stock whether they like it or not. You can not argue with what the market does and you will never convince the market that it is wrong. You just have to do what the market tells you to do.

5. Don’t Take More Risk Than You Are Comfortable With – the great enemy of every investor is emotion. It makes us break our rules and lose our discipline. We are emotional because we have an attachment to money that we must learn to minimize if we are going to have a chance of beating the market. The first step toward that goal is to find comfort in the risks that you take. If your exposure to financial loss is too great, you will break the rules and forget your discipline because you don’t want to feel the pain of the loss. If all you are facing is a manageable amount of discomfort, you are more likely to trade well.

6. Markets Predict, Not React – the market is a leading indicator for the economy; it tends to move at least six months early. This means you can not look at the world around you and use what you see to make trading decisions. Since the market looks ahead, so too must you and think about what will happen in the future instead of what has already happened.

7. Diversification Does Not Mitigate Risk – this market is a perfect example of how you can not diversify away risk. An investor with money in bonds, commodities, industrials, technology and banking is feeling losses in all areas. The best way to manage risk is to limit losses. If the market proves you wrong on a decision, get out and take the small loss. Never let small losses grow in to big ones.

8. The Market Never Lies – all markets express the opinions of those who trade it and the wisdom of the crowd is far smarter than you or I can ever be. If you learn how to read the true message of the market, you can make money by doing what it tells you to do. If, instead, you try to outsmart the market, you will likely get your ego delivered to you in the form of debits to your trading account. Do you think you are smarter than thousands of people?

9. Everyone is Smart in a Bull Market – riding a trend is the best way to make money, but many investors confuse their trend timing with investment intelligence. The truly good traders are those that can beat the market in all market conditions. Don’t fall in to a false sense of security if you make money while everything is going up because you are likely to give it all back. For most, profits in the market are just short term loans.

10. Leverage is a Double Edged Sword – all of the problems that we are seeing in the market and the economy right now are because of leverage. Yes, you can improve your return if you borrow money to make money, but always remember that you can also increase the loss potential if the market goes against you. If you use leverage, it is even more important to manage risk and have discipline. If you don’t understand the true risk that the leverage of margin, options and other derivatives provide, don’t trade them.

Here are three vehicles to consider if you think the market is going to go down:

perspectives stocksthatmeet

1. T.HVU
A Canadian listed ETF that is based on the Volatility Index. It is leveraged so it will suffer time value decay if the trade is not working so it should only be used as a short term trading vehicle.

Screen Shot 2016-11-01 at 10.12.27 AM

2. SDS
Another leveraged ETF, this one goes up twice as fast the S&P500 goes down.

Screen Shot 2016-11-01 at 10.12.52 AM

3. QID
Focused on the tech heavy Nasdaq, this is also leveraged and goes up twice as fast the Nasdaq goes down.

Screen Shot 2016-11-01 at 10.13.11 AM

Alert: Don’t miss Michael’s great interview with Tyler Oct. 29th/2016 : Tyler Bolhorn on the Markets Today



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    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.