15 Essential Principles of Trading and Investing
Stockscores Foundation for the week ending November 6, 2023
In this week's issue:
In This Week’s Issue:
- Market Outlook –Big Bounce, Will the Market Trend Higher?
- This Week’s Market Minutes video – IS THE STOCK MARKET CRASH OVER? BIG GAINS!
- Trader Training – 15 Essential Principles of Trading and Investing
- Strategy – Stockscores Simple
Market Outlook – Big Bounce, Will the Market Trend Higher
Stocks made a big move up after the Fed announcement on interest rates and the subsequent press conference. The market has interpreted the Fed’s comments as an indication that interest rates are not likely to rise further. That brought some long overdue strength to the bond market, bringing interest rates down and giving a boost to stocks. The strongest gains were in the small cap stocks which tend to be the most interest rate sensitive.
While the strength is encouraging, it is important to recognize that the move up is after hitting a new low rather than after making a rising bottom. This means it is likely that stocks will pullback in the short term before, hopefully, making another attempt at breaking the downward trendline on the daily chart.
In short, the markets have made a good step toward making a bottom but we do not yet have the definitive signal that the bottom is in. We still need to see a break of the downward trend line after the formation of a rising bottom. Until then, be very selective about what stocks you buy for longer term trades.
This Week’s Market Minutes video – IS THE STOCK MARKET CRASH OVER? BIG GAINS!
As predicted, the stock and bond market rallied this week. Does that mean the stock market crash is over? This week, I discuss what to watch for, provide my analysis of the stock, commodity, currency, and bond markets, and look at the trade of the week on LIFW.
Click here to watch this week’s video
Trader Education – 15 Essential Principles of Trading and Investing
What follows are 15 essentials for trading and investing successfully:
- Follow the Action - stocks that beat the market and provide the best profits trade with abnormal price and volume activity. Focus on these stocks.
- Don’t Fight the Trend - More than ever, trading in the direction of the overall market trend will have a major effect on your performance. Short when the market is moving lower, buy when the market is moving up. Focus on the sectors of the market that are leading in either direction.
- Be Patient with Winners - Avoid selling winners because it feels good to do so or because they have hit your price target. Never limit upside, just sell when the upward trend is broken.
- Have No Patience with Losers - Being wrong is part of trading. What you do with your losers will determine your trading skill. For every trade that you take, know the price level where the market will prove you wrong and get out when it hits that price.
- Do the Work - Trading is simple, but it is not easy. Take the time to learn and gather experience. Compile data to prove the worth of your trading strategies and never stop evolving your trading skills.
- Don’t Fall in Love - The more you know about a company, the greater the risk that you will fall in love with it and ignore the negative signals that the market gives you. Treat every stock as a symbol that you are just as willing to sell as you are to buy. Keep your emotions out of it.
- Respect Your Tolerance for Risk - We make emotional trading mistakes because we are afraid of losing money. If we take a risk level we are comfortable with, there is less chance we will get emotional.
- Don’t Expect to Always be Right - You don’t make money in the market by being right, you succeed by making more when you are right than you lose when you are wrong. When the market tells you are wrong, believe it.
- The Stock Market is Not Fair - Most investors are trading on information that is publicly available. Some investors are trading on better information that is not widely known. To be successful, you either have to have better information or follow those who do.
- Don’t Aim for Perfection - All traders make mistakes, miss good opportunities and take questionable ones. Don’t get frustrated by the inevitable errors. Put your focus on being as good as you can be.
- You Can Make More by Trading Less - Take the best trading opportunities, not the marginal ones. Bad traders act on their fear of missing out. Good traders sacrifice catching every winner in favor of maximizing their overall profitability. There is nothing wrong with doing nothing when conditions are not good for trading.
- The Market Will Do Things That Don’t Make Sense - A market’s move is rarely explainable until after the move happens because the market trades on information that most traders don’t have. Don’t doubt the market’s movements, you probably don’t have all the facts.
- Gamblers Lose - Good traders have a strategy that they have tested over a large sample of trades to understand the probability and profitability of success. Gamblers trade against the odds because they don’t know what they are.
- Never Buy More of a Loser - If your analysis of a stock is correct, the trade will show a profit. If it is losing then you have only been proven wrong. Don’t make being wrong worse by adding to the position.
- Add to Your Winners - When you are right, add to the position as long as you are not adding on more risk than you are comfortable with. The risk of your added positions should be mitigated by the profits from the earlier entries.
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The Stockscores Simple Market Scan seeks stocks with Sentiment Stockscores > 60 and Signal Stockscores > 80. We then inspect their charts to see if the stock is breaking from a predictive chart pattern. I ran this scan on the Canadian and US markets and found two that have good long term charts:
MYO breaks through resistance at $1.40 today with an increase in volume after building a rising bottom on the price chart in late October. The 3 year weekly chart shows a good long term turnaround pattern that should lead to continued strength in the weeks ahead. Support at $1.05.
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BRFS made a strong breakout today, moving out of a pattern of sideways trading that has been in place for four months. This completes the "bottom fishing" pattern of a break up from a rising bottom after a recent break of the downward trend line. Support at $1.95.
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