Trading Lesson of the Week

Check back weekly for another free trading lesson:

8 Important Trading Rules

In This Week’s Issue:

  • Free Webinars This Week
  • Stockscores Market Minutes Video – How to Predict a Change in a Stock’s Price Trend
  • Stockscores Trader Training – 8 Important Trading Rules
  • Stockscores Feature Strategy –

 

Three Free Webinars this Week

Click above for details and to register

 

Stockscores Market Minutes – How to Predict a Change in a Stock’s Price Trend

Lots of money can be made if you can predict when price trends will reverse. This week, I show you a simple technique to identify the change in price trends, whether you are a short-term day trader or a long-term investor. I then provide my outlook for the condition of the different markets I follow, the day trade of the week on DADA and a Market Scan to evaluate opportunities.

Click here to watch this week's Market Minutes video

To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel

 

Commentary of the Week – 8 Important Trading Rules

Don’t Chase Parabolic Trends

A parabolic trend occurs when price runs away from a trend line drawn across the lows in an upward trend. This steepening of the trend occurs because investors are emotional and chasing the stock’s price higher. It is a sign of irrational behavior.

I have never seen a parabolic trend that did not correct downward eventually. Buying when price has run up and away from the trend line is risky. It is better to wait for the pull back to the trend line. However, it is most tempting to buy when price is running quickly higher because the price action arouses our fear of missing out. Don’t do it.

 

Trust Data More Than Your Brain

It is very common for traders to make decisions based on what has happened to them recently. For example, if you are trading a strategy and go through a period when the strategy loses, it is easy to think that there is something wrong with the strategy. Since the perception is that something is wrong, you begin to change the strategy rules.

Let’s assume that the strategy was developed after testing over a large number of trades. If the testing of the strategy found that it was profitable over 1000 trades, why would you not trust the rules simply because it lost on the last 5 or 10 trades?

Put another way, we know that if we toss a coin 1000 times, we should get 500 head and 500 tails. However, that does not mean that we can’t toss a coin 10 times and get 8 heads out of 10.

The truth is told in large data sets. Our brains make interpretations based on small data sets that are most recent in our memory. Trust data, not your brain.

 

Trade Within Your Risk Tolerance

A trader’s greatest enemy is him or herself. Our emotions are what cause us to fail in the stock market.

The biggest reason our emotions play a role in our decision making is our emotional attachment to money. More succinctly, it is our desire to feel pleasure and avoid pain. That means we are emotional in our quest for profits and our avoidance of losses. We chase after marginal opportunities because of our fear of missing out and we don’t sell our losers because it brings us pain.

You can work toward overcoming these emotional problems by trading within your tolerance for risk. If it bothers you to lose $1000 on a trade then take a smaller position. Your position sizes, and their risk exposure, should be at the point that you sleep without thinking about how much you might lose if the trade does not work.

For some people, particularly new traders, that risk amount is $0. When you are learning how to trade, use my simulator at Tradescores.com so you can practice with no financial risk. This will allow you to gather experience and build confidence before you risk real money.

 

Don’t Argue with the Market

The market will often do things that don’t make sense. This happens because you don’t have all the information to explain what the market is doing. The market is made up of millions of people with trillions of dollars at work. Decisions are being made every micro second based on new information that investors receive.

The stock market isn’t fair because some people get information before others. They then act on that information, creating the market action that does not make sense to those who don’t have the information.

Not understanding why the market is doing something doesn’t mean the market is wrong. The market is always right, it is just our interpretation that can be wrong.

 

Plan to Lose

I have never met a trader who is right all of the time. You can make a lot of money in the market by being wrong more than you are right. The key is how you balance the size of your winners with the size of your losers.

This is an often used cliché in trading but so important. Stop your losses and let you profits run.

 

Add to Your Winners (Never to Your Losers)

I like to add to my winners. A stock trade that is working shows me that my analysis was correct. In this case, I will add to my position each time I see a new entry signal as the stock moves higher.

A trade that is not working shows me that my analysis was wrong. Why add to a position when, thus far, I am wrong?

Although this seems like obvious logic, far more people average down on losing positions than add to winning positions. We would rather sell our winners because if feels good. We try to buy more of a loser with the hope that they will eventually turn around and we can escape the pain.

Unfortunately, adding to losers usually means more pain. Not getting the most out of our winners leaves us trading below our profit potential.

 

Follow Abnormal Activity

Almost every stock that makes a market beating return starts its run higher with abnormal price and volume activity.

Not all stocks that trade with abnormal market activity go on to make market beating returns.

To be successful in trading, look for stocks trading abnormally but also learn how to focus in on those with the best potential. (I can teach you my methods, go to www.stockscores.com/learn for more information).

 

Pay Attention When the Market Doesn’t Make Sense

I love to find stocks or markets that are doing things that make no sense to me. These are opportunities because they are situations where some people are trading on information that is not widely known. When the entire market of investors learns of this information, the stock or market will move even higher.

Consider this example. A Biotech stock goes from $5 to $7 in one day and trades three times its normal volume. A check of the news shows that the company has a lung cancer drug under development but has not announced any news on how well that drug treats lung cancer.

There is no news to support the trading activity in the stock. However, the market activity is telling us that some investors have some new information that justifies them paying a higher price and doing so aggressively by the increased number of shares that are being bought.

2 weeks later, the company formally announces that a larger Biotech company has offered to buy the company for $20 a share. The stock immediately gaps up to $20.

The stock market is not fair. There are always some people who have better information than others. In this example, some people had at least heard the rumor that there may be a buyout. For the rest of us, the trading activity made no sense.

Go look at the charts of stocks that have made big news announcements that caused their stocks to make big moves. You will find that most of them had abnormal trading activity before the news came out.

Get the weekly email from Stockscores founder Tyler Bollhorn

Get our weekly trading lesson and stock trading ideas direct to your email in box with the Stockscores Foundation newsletter.

Learn how to be a better investor and trader plus see how to best utilize the tools of Stockscores.com.

This is a free service from Stockscores with no spam (we hate spam!). Enter your email address below to register for future email editions and see the archive of past newsletters.

Past Trading Lessons

October 18, 20208 Important Trading RulesT.HXD | QID | SDS
October 4, 2020The Most Destructive Fear in TradingT.CLR
September 27, 2020Don't Worry About the MoneyCLDX
September 20, 2020Stock Charting Basics and How to Profit from a Crashing MarketVXX | SQQQ | T.HXD
August 30, 20205 Ways to be a Better Stock TraderKIN | APTO
July 19, 20209 Essentials for Trading SuccessOCGN | AMPE | AGE
July 12, 20205 Things You Need to be a Successful TraderONCS
June 15, 2020Overcome Fear in Favor of Fact
June 7, 20203 Ways to Beat the Stock MarketHEXO | CRON
May 17, 202015 Core Principles for Stock TradersTTOO | ZYNE
April 12, 2020How to Approach the COVIDCrash Market
April 5, 2020Stockscores Webinars in AprilJWN | ALK | DIN
March 20, 2020Navigating the Stock Market CrashTVTY
March 2, 2020There is Strength in WeaknessSPY
February 23, 2020Be Afraid of Fear Based TradingSPY
February 9, 2020Don't Fall in Love (with your stocks)LYFT
February 2, 20203 ways to Improve Trading Profits
January 26, 2020There is Always Another Trading ComingLOGC | MGEN
January 19, 20208 Important Trading RulesT.CRON | T.WEED
January 13, 20203 Ways to Overcome Fear in TradingT.CFX | GSM
December 15, 2019Buy When Pessimism Turns to OptimismT.SNC | JASN | WIFI
December 8, 2019The Bottom Fishing PatternT.WEED | T.APHA
December 1, 20193 Ways to Trade BetterHL | CTRN
November 24, 2019Are Oil Stocks Ready to Move Higher?ERX | T.HEU
November 18, 2019Have Marijuana Stocks Gone Down in Smoke?T.WEED | ACB | CRON
November 3, 2019What You Need to Succeed in TradingT.BIR | T.VII | T.POU | T.MX
October 28, 2019Surprise TradesNAVB | CLUB | AQST
October 20, 2019Beat Your EnemyPDFS | CFFN
October 7, 2019The Basics of Stock Chart Reading
September 30, 2019Trading and Behavioral Science
September 22, 2019Scan the Market For Hot StocksHL | MLNT
September 8, 2019Good Stocks Do Not Go Straight UpOGEN | GTE | EYEN
August 25, 2019What Are the Stockscores?V.SVI | T.PEGI
August 19, 2019Look for Reasons to Say No to the TradeVVUS | CMCM
August 11, 2019What You Can Do to be a Better TraderT.VLE
August 5, 2019Get the Money Out of Mind
July 28, 2019How to Invest in Stocks and Sleep Well
July 21, 2019Essential for Stock Trading SuccessDRRX
July 14, 2019What It Takes to be a Winning TraderT.PTG | AQB
July 8, 2019How Much Money Can You Make Trading
June 23, 2019Avoid Fear Based Trading DecisionsT.PTG | T.ELD
June 16, 2019Keep the Money Out of ItPIRS | KIM | RDUS
June 9, 2019Trading Tactics and StrategySNAP | COTY
June 3, 2019Test Your StrategySATS | RDUS
May 27, 2019Overcoming Emotion in TradingT.NFI | AVP
May 27, 2019Overcoming Emotion in TradingT.NFI | AVP
May 19, 2019Fearlessness in FactsAVXL | BLDP | IIIV
May 12, 2019Traders Must Seek the TruthVXX | UVXY
May 5, 2019No to FOMOOVID | T.BU
April 28, 201915 Core Trading PriniciplesT.REAL | ZYME