Trading Lesson of the Week

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Stockscores Perspective - New Format, More to Help You in the Stock Market

In This Week’s Issue:

  • Market Outlook – Stocks are looking better but …
  • What’s Working Now – Short or long?
  • Trader Training – To Beat the Market You Have to Beat Emotion
  • Trade Ideas – Alpha Echo


Market Outlook - Stocks Are Looking Better but ...

The buyers showed some support for stocks this week as some investors sought to buy bargains in a market that was somewhat oversold. While the gains are encouraging in the short term, the long-term trend remains down. Gold is bouncing off of some price support and may make a bounce in the short term but the long-term outlook remains negative. Oil has suffered in recent months and is best avoided in the short term but the long term trend is still up. This weakness may be a buying opportunity if and when the pullback is broken. Commodities may benefit from some weakness in the US$ which has been very strong and is due for a pullback. In stocks, Biotech, Real Estate and Semiconductors are the sectors that are leading the market bounce back.

Some cause for optimism but remain cautious until the longer term down trends are broken.

For a video version of my market analysis, be sure to watch this week’s Market Minutes video, Has the Stock Market Made a Bottom?

Click here to watch

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What’s Working Now

With longer term trends down and well into their trends, short term trading of the market’s volatility is what is working best. Taking longer term trades on the buy side is like trying to paddle a canoe up a river. The trend is not the investor’s friend right now.

However, there are a few good day trades each day so the very short term trader can pull money out of the market by being patient and waiting for Alpha stocks to show good entry signals. These are the stocks that trade with very abnormal price and volume activity. There are opportunities to swing trade the market volatility with the actively traded ETFs, something that I have started doing as the market works on reversing the weakness of the past few weeks.

My swing and position trading ideas are provided with the Tradescores Alerts subscription

My day trading ideas are provided with the Active Live subscription


Trader Training – To Beat the Market You Have to Beat Emotion

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 2000, 2008 and 2019 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.

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