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In this week's issue:

• Weekly Commentary
• Strategy of the Week
• Stocks That Meet The Featured Strategy

In This Week’s Issue:

• Market Outlook – Tech Trouble?
• This Week’s Market Minutes video – These Two Factors are Driving the Stock Market
• Trader Training – The Foundations of Trading Success
• Strategy – Stocks in Play

 

Market Outlook – Tech Trouble?

NVDA suffered a big drop on Monday as new AI technology from China can do the job of sophisticated AI applications but requiring less computer power and energy. This price drop broke the upward trend on the NVDA chart, giving a sell signal for the stock.

While this weakness in NVDA also pulled the market indexes lower, there is not yet a break of the upward trend for the Nasdaq or S&P 500. Therefore, the overall market remains in a Bullish trend and is a hold, but be careful with the tech stocks that are breaking their upward trend lines.

There is still good trading action in the low priced, low float stocks that have strong volume and making price gains. These stocks require focus and attention to take advantage of their big price jumps as they often fall back as quickly as they go up.

 

This Week’s Market Minutes Video – These Two Factors Are Driving the Stock Market

There are two primary factors that drive the performance of stocks and understanding them is essential if you are going to profit in stocks. This week, I show what is driving the stock market, provide my analysis of the overall markets and look at the trade of the week on DWTX.

Click Here to Watch This Week's Video

https://youtu.be/2-yhTZ-3JOY

 

Commentary – The Foundations of Trading Success: Strategy, Risk Management, and Emotional Control

Trading stocks can be both thrilling and daunting. While it's tempting to believe that the path to trading success lies in discovering a secret formula or strategy, the truth is much more fundamental. Success in trading begins with having a strategy that is not only proven to work across a variety of market conditions but also one that is consistently profitable over the long term.

However, even the best trading strategy can fail in the hands of a trader who doesn't manage risk effectively. In fact, poor risk management is one of the most common reasons traders fail despite having a solid strategy.

The Role of Risk in Trading

Risk in trading refers to the difference between your entry price and your stop loss price—the point at which you decide to exit the trade to prevent further losses. For example, if you buy a stock at $10 with a stop loss at $9, you have a risk of $1 per share.

But trading isn't just about minimizing losses; it's also about maximizing rewards. This is where the concept of the "reward-to-risk ratio" comes into play. The reward-to-risk ratio is a key factor in determining whether a trade is worthwhile.

Let's say you buy a stock at $10, set a stop loss at $9 (risk of $1 per share), and sell it at $14. In this case, your reward for risk is $4 (the difference between the selling price and the entry price) divided by the risk of $1, resulting in a reward-to-risk ratio of 4:1.

The Importance of Emotional Control

Even with a proven strategy and solid risk management in place, trading can still be a rollercoaster of emotions. A trader who is not able to control their emotions, particularly fear and greed, is more likely to make impulsive decisions that derail their trading performance.

A key part of achieving trading success is developing emotional control. This is something that can be honed over time, particularly by gradually increasing risk as you gain more experience and success.

The Gradual Approach to Risk Management

A trader can start by paper trading—simulating trades with no financial risk—allowing them to gain experience without the fear of losing real money. The goal during this phase should be to earn a cumulative reward-to-risk ratio of at least 10. Achieving this milestone demonstrates that the trader can apply the strategy effectively without the pressure of real money on the line.

Once a trader feels comfortable with their strategy and has accumulated a reward-to-risk ratio of 10, they can begin to trade with real money. However, the amount of financial risk taken per trade should remain small initially, perhaps around $50 per trade. The aim here is still to achieve a reward-to-risk ratio of 10, leading to a profit of around $500 if successful.

As the trader becomes more confident, they can gradually increase the amount of risk per trade. For example, they might increase their risk per trade to $100, still aiming for a reward-to-risk ratio of 10. By continuing to increase the risk incrementally and using profits to fund this increase, the trader is building their confidence while mitigating the risk of large losses.

Why Gradual Risk Scaling Works

The process of gradually increasing the amount of risk per trade helps a trader desensitize themselves to risk. Trading is a psychological game as much as it is a financial one. The more exposure you have to managing risk without experiencing significant losses, the more comfortable you will become with making decisions under pressure.

By laddering up the risk in this controlled, systematic way, traders can avoid the emotional pitfalls that often lead to failure. When traders risk too much too soon, they can quickly become overwhelmed by fear or greed, leading to poor decisions like abandoning their strategy or overtrading. By building risk tolerance incrementally, traders mitigate these emotional mistakes, and their chances of long-term success improve dramatically.

Conclusion

The foundation of trading success lies in having a sound strategy, managing risk effectively, and developing emotional control. A great strategy without risk management is like a fast car without brakes—it may look impressive but is destined to crash. By starting with small risks, gradually scaling up, and keeping emotions in check, traders can create a sustainable approach to achieving success in the markets.

While there’s no shortcut to becoming a consistently profitable trader, the gradual approach to increasing risk, combined with a proven strategy, is a reliable path toward long-term success. By focusing on risk management and emotional control, traders can weather the ups and downs of the market and build a foundation that leads to lasting profitability.

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Stocks trading with abnormally high volume and a high number of trades continue to be the place to focus for trading. This week, I ran a Market Scan to look for stocks trading abnormal volume and at least 20,000 trades a day, here are two stocks to watch for short term swing and day trading.



1. DWTX
DWTX was very hot last week, made a bit of a pullback on Friday but the buyers came back to the stock on Monday, breaking the pullback and starting the build of a rising bottom. Good potential if it can move up through $20 and not break down through support at $10.

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2. SLS
SLS came alive with abnormal volume and a strong price gain on over 40,000 trades Monday. This trading activity shows that investors have taken an interest in the stock and put it into play. Needs to hold support at $1.

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