Stockscores.com Perspectives for the week ending August 13, 2010
Trading By The Numbers
In this week’s issue:
Strategy of the Week
Stocks That Meet The Featured Strategy
Here are some numbers that relate to trading, and some important lessons that come with them:
In statistical analysis, a T-statistic is a measure of how many standard deviations from the average a tested event is. A t-stat of 1.95 means that the result is two standard deviations from the average, which means the result is statistically significant 95% of the time.
This is important to me as a trader because I am always looking to trade abnormality. Where there is abnormal trading activity there is opportunity and the chance of success improves. The Stockscores Approach to trading is built around the number 1.95 and what it means in statistics.
90% is my guess for how many aspiring traders fail. Trading is simple but it is not easy. Do not expect to learn how to trade with consistent profitability overnight. It takes time, determination and discipline to learn how to trade well. Trading is a great profession and can certainly be lucrative, but don’t have illusions that success in the market comes easily.
If you are right 70% of the time in the market, you are doing amazingly well. However, don’t think that being right is what makes traders profitable. How much you make when you are right versus how much you lose when you are wrong is what is important. You can be a profitable trader by being right 10% of the time if you have big winners and small losers. Every trader needs to focus on the expected value of their trades; how much they expect to make if they do the same trade 100 times.
If you can be right 70% of the time then that means you will be wrong and lose money 30% of the time. Most rookie traders fail to realize that losing is part of making money. When the market proves you wrong, you must take the loss and move on. It is dangerous to hold on to losers, they tend to grow much bigger over time causing small losers to turn in to big losers. Big losers overpower the winners so overall profitability suffers.
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I have been trading for 20 years and I still find that I learn something new every day. The market is a fascinating thing that can never be mastered . You can only know enough to make money, but the learning never stops.
There is only one person who can be blamed for your success or failure in the market, and that is you. As soon as you start to blame or rely on others you are destined to fail. Leverage the experience of others to help you succeed but remember where the buck stops – with you!
An average reward for risk of 2 is excellent. This means that your average winning trade delivers a profit that is double your average loss. As your success rate goes down, this number must increase if you are to be profitable.
There are four pillars to what I teach aspiring traders. To be successful, you have to learn and understand when to buy, how to manage risk, when to sell and how to manage your emotions. The last one is the hardest thing to do.
The year that proved that diversification is not an ideal way to manage risk. Most investments are correlated to one another, especially during extreme times. Manage risk by limiting losses when you are wrong.
The market is not looking great right now, so this week I did some scanning to find stocks to hide out in. I wanted to find stocks that were optimistic despite the general fear that is in the market right now.
I began by focusing on Canadian stocks since the Canadian market has a heavy weighting of mining stocks, one area of strength right now. Canada is not suffering the same macro economic concerns as the US.
I did a pretty simple scan, looking for Canadian stocks that have a Sentiment Stockscore of 60 or higher and trading at least 500 times a day. This returns optimistic stocks that have decent liquidity.
Here are a few names to consider as they appear likely to hold up well in a bearish summer market.
After trading sideways for a few months, T.CG is moving to new highs. The Gold sector is strong while the rest of the market is not. Support at $12.70.
Optimistic and paying a yield of 6.90%, support at $19.50.
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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.