|Knowledge Check List|
Stockscores.com Perspectives for the week ending June 24, 2006
In this week's issue:
I like making lists. I am such a scatter brain that I have to makes lists for myself for just about everything. Shopping lists, what to take with me when I go to my office list, what tasks I have to complete list; all these and more are enumerated in point form notes to myself. I sometimes think I should make a list to organize my lists.
In that spirit, here is my list of things that every aspiring trader should learn and do before putting a penny in to the stock market. Can you check all of these items off the list?
1. Understand risk management - you should always know what the upside and downside is for each trade. You should be able to calculate what the expected value of the trade is based on the risk and reward. Are you willing to lose the amount you have at risk? Is the potential gain worth taking that risk?
2. Learn how to read chart patterns - it is about six simple things. Support, Resistance, Optimism, Pessimism, Price Volatility and Abnormal Activity. Every predictive chart pattern is made up of some of these components in some way. Learn them and understand how the work together to predict where stocks are going to go.
3. Know the signs that a trade is not working - when do you cut your losses and dump a dog? It is a matter of getting out when the market has proven you wrong and you are more likely to lose more money than you are to make a gain.
4. Know the signs that a good trade is ending - at some point you have to take money off the table and cash in a profitable trade. Do that too early and you don't maximize the gain. Do it too late and you let a winner turn in to a loser.
5. Realize that everyone wants your money - the stock market is not fair, it is cruel and everyone that participates in it wants your money. When trading, there is no room for being nice. Be nice to your kids, your friends, a stranger who needs your help or a lost puppy. Don't be nice to the people trying to hurt you every day in the stock market.
6. Learn to control your emotions - people who are normal can not beat the stock market. The more you care about your money the more you will succumb to your emotions and buy and sell at the wrong times. You have to be one step ahead of the crowd and the crowd tends to trade irrationally.
7. Understand the mechanics of buying and selling a stock - you can lose a lot of money if you hit the wrong button on the trading platform that your broker provides you. Know all of the ins and outs of that trading platform, its power and its limitations.
8. Realize that information is biased - never trust the information that you receive, too much of it has a bias. Always confirm facts for yourself and assume that the source of the information has some self interest in giving it to you.
9. Learn to make money paper trading - how can you expect to make real money in the market if you can not paper trade for a profit?
10. Realize that paper trading success does not ensure success with real money - something happens when you take your hard earned cash and buy a stock. Fear and greed take a role in your decisions where they did not before. That often leads to mistakes.
11. Make sure you enjoy stock trading - I believe you will do best at those things which you enjoy. Trading is too challenging to be done by someone that hates it. You will work harder toward success if you enjoy the process.
12. Learn to be disciplined - since everyone around you in the market is trying to take your money, you have to have the discipline to fight them for every penny.
You can make a lot of money by trading well and it is an occupation that can also give you a lot of freedom and self satisfaction. I don't know of any overnight success stories in trading, it takes time to learn and master. Make sure you take the time to get there, it is worth the effort.
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This week, I ran the Stockscores Simple market scan to uncover some buying opportunities. This scan seeks out stocks that have a Sentiment Stockscore above 60 and a Signal Stockscore above 80. It looks for stocks that may have good chart patterns.
The stock market in general is not looking very good so I did not expect to uncover many opportunities with this scan since it looks for stocks that are more likely to go up than down. For this strategy to work in these market conditions, it would have to find a stock that is likely to trade counter to the traditionally slow summer market conditions.
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SAM is a maker of beer, and a lot more beer is consumed in the summer than the rest of the year. Perhaps that is the motivation for the stock breaking to new highs this week after trading sideways for most of the year. That breakout to a new high from low price volatility implies that the perceptions of fundamentals are improving. Provided support can hold at $26.50, I think the stock can move higher from here.
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