Stockscores.com Perspectives for the week ending May 21, 2010
In this week’s issue:
Strategy of the Week
Important Notice – the company that hosts the Stockscores websites will be moving to a new location this weekend. This will mean that the Stockscores.com and Trading Desk websites will be down from just after the close on Friday until before the open on Monday. We apologize for any inconvenience.
The market is made up of people. People run the companies that we trade, people trade the market and people program the computers that do the analysis. The most important thing about the stock market is people. Therefore, the first thing you need to analyze when trading stocks are the people.
I often say that it is more important to study human psychology that finance if you want to succeed in the stock market. People behave in fairly predictable ways and you can make money if you understand the relationship between human emotion and stock pricing.
Think about the emotional cycles that people go through as they move through their day to day life. What happens when someone is given bad news? They might fight back at first and then deny the presence of the bad news. They might hope it is not so bad before they finally give in to it and work toward accepting it. If you work through a stock chart you can see these phases in a sell off like the one we saw over the past few weeks. Continued below…..
Most people sell at the bottoms of steep downward trends because it takes them that long to accept the news. Of course, this is usually just before the market bottoms out and starts to recover.
It would be much better to move right to acceptance when the bad news hits with a plan to get back in when everyone else is working on acceptance (and after prices have dropped significantly).
Now, what about upward trends? Optimism and greed have a cycle too. We tend to doubt good things at first despite evidence to the contrary. People want to see proof before they open themselves up to good feelings. This is because we mostly want to avoid the pain of disappointment. It is not fun to get your hopes up and then have them crushed.
The result is that most people do not buy in to upward trends until they are well under way. We are full of doubt until the market offers us proof. However, by the time the proof shows up, it is usually too late. These investors end up paying a premium because they got in to the trend too late.
The lesson is to not approach the market with a fear of pain. Do not be reckless, but if things are starting to look good, take advantage with the knowledge that the pain you will feel early in a trend that fails is much less than the pain you feel if a well established trend fails. The higher stocks rise, the harder they fall.
Do you want to beat the market? Stop worrying about what companies are doing and start focusing on what people think about what they are doing. Take some basic knowledge of human psychology and try to figure out the emotional cycle from the stock chart. This process is much more effective than studying balance sheets and income statements. After all, stock prices will only go because people are willing to pay more.
As the Stockscores site will be down over the weekend, we are unable to display charts so there are no feature stocks for this weekend’s newsletter. I believe the market has bottomed but I expect we are destined for some range bound trading in the months to come with some short up and down moves along the way. Trade with extra discipline right now. Having the patience to wait for quality trading opportunities will be rewarded.
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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.