In This Week’s Issue: Overcome Your Enemy
In This Week’s Issue:
– Stockscores’ Market Minutes Video – Chart Message and Timing
– Stockscores Trader Training – Overcome Your Enemy
– Stock Features of the Week – Trading Volatility
Stockscores Market Minutes Video – Chart Message and Timing
Some charts provide the message, others the timing for putting the message in to action. That and the weekly market analysis in this week’s Market Minutes Click Here to Watch
Trader Training – Overcome Your Enemy
Emotion is the enemy of every trader.
Our emotional attachment to money is what causes us to lose our discipline, to take big losses, to not let our strong and profitable trades run higher. It causes us to own too many stocks in one sector or fall in love with a stock that will only hurt us. Letting emotion in to our trading decisions is a fast way to insomnia.
The perception is that the stock market is too risky, many investors don’t like the potential for a sharp sell off that can destroy their portfolio in a very short time period. The collapse of the stock market in 2008 has given many a form of post-traumatic stress disorder, leaving them on the sidelines when it has not made sense to do so.
The stock market may be volatile at times but that is not what determines risk. Risk is how you respond to the volatility, how you manage the potential size of your losses. The stock market is not risky, the people that play it are. It is how you deal with price volatility that determines risk.
If you want to sleep well while invested in stocks, you need to have a plan for managing risk. The notion that you can buy some “good” companies and forget about them is outdated and reckless.
Here are my essentials to being invested in the stocks and sleeping well:
Plan to lose. When you buy a stock, know the price level where the stock market will have proven you wrong. Learn how to determine where a stock’s support price is and if the stock closes below that level, realize that the market is telling you that something is probably wrong at the company. Get out.
Know your tolerance for risk. How much are you willing to lose on any one stock trade? If you risk more than this amount, you will get emotional. Take the difference between the entry price and the stop loss price and divide that in to your risk tolerance to determine how many shares to buy. If you are buying a stock at $10 with a stop loss point at $9 and you are willing to lose $500 on any one trade then you should buy 500 shares.
Don’t obsess. You don’t need to watch your stocks constantly, if you are position trading then only look at the once a day or even once a week. You only need to check to see if your stock has given an exit signal, obsessing over every gyration will make you emotional and lead you to make mistakes.
Have a written plan. You must write down your trading rules. When will you buy, when will you sell, how will you manage risk and how will you review your positions. Keep the plan simple but concise enough that there is no room for interpretation.
Stick to your plan. Your plan should be based on strategies that you have tested and believe in. Deviating from the plan means you are going in to areas that have not been tested and that puts you closer to being a gambler. Gambling traders may win in the short term but in the long term they lose.
Remember that trading stocks is as risky as you make it. Not having a plan with rules for limiting the size of your losses leaves you exposed to big losses if the market corrects sharply. With loss limits and discipline, you should never be the victim of a major market correction.
The market is showing signs that further weakness is coming. There are few stocks showing strength and concern about what is happening with Greece has sellers taking a stance. While corrections cause anxiety for many traders, they do present great trading opportunities. Here are two Exchange Traded Funds that move up when the market is correcting:
The VXX is based on the CBOE Volatility Index (VIX) for the S&P500 Futures. When volatility is expected to rise, this index goes up which is why the price of the VXX tends to rise when the market is correcting. I like to day and swing trade the VXX when the market is pulling back but I don’t tend to hold it for very long as there is some value decay over time.
UVXY is also based on the VIX but this ETF is leveraged two to one. That means a 1% rise in the VIX leads to a 2% rise in the UVXY. I find it tends to do a little less than 2 to 1 but it is still a good way for traders with less capital to trade volatility. It also suffers value decay over time so it is important to only use this is a short term trading vehicle.
- 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.
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 diligencT