Stockscores.com Perspectives
For the week ending Aug 4, 2000
In this week’s issue:
- Commentary: Stopping Losses
- Feature Strategy: Sector Watch for conservative investors
- Tip of the Week: Check the charts intra-day
- How to subscribe to the Stockscores.com Perspectives Daily Edition
***Stockscores.com Commentary***
Successful traders rarely have big losses. Typically, this skill is learned by
paying a lot of tuition to Stock Market University, where the best education is
provided by making mistakes and not having the discipline to keep the loss to a
minimum. They probably have a picture of me on the wall for all the donations I
have made.
While I believe it is silly to set profit targets for stocks that you buy,
simply because you don’t know where the market will show signs of breaking
down, you should make a habit of setting stop loss targets. Most importantly,
you need to have the discipline to stick to them.
It is easier to have this discipline if the stop loss point makes sense. I tend
to calculate my loss exits at points just below technical support. When I am
buying a stock, I establish where support is, and quickly calculate the
difference between the price I am buying the stock and the stop loss point so I
can establish the risk I am taking by buying the stock. (For more information
on support and how to calculate it, go to Stocksores.com and read the essay
titled “Support and Resistance” which is found in the School area of the site -
stockscores.com
tance.asp .)
The best way to calculate how many shares you should buy of a particular stock
is to take the risk amount per share and divide it in to the maximum loss you
are willing to take on the trade. So, if you are buying a stock at $11, and
plan to take a loss if it penetrates support at $10, you are risking $1 per
share. Willing to lose no more than $1000? Then you would buy 1,000 shares.
This example ignores commissions and potential slippage on the trade, but you
get the idea.
Many people have asked me if I set stop loss orders after I buy a stock. For
me, the answer is no. I don’t do them because I have the time to watch the
market and can make the trade manually. Sometimes, a stop loss order can be
filled at a much lower price than you expect because liquidity is poor, and I
find that I can avoid this problem by watching the market. However, if you have
a life and don’t stare in to a computer screen all day, stop loss orders may
make sense. I suggest only using them on stocks that are quite liquid, and set
the stop loss at an amount just below a psychological threshold. For example,
if you have support at $10, set your stop loss at $9.90 rather than $10 as
stocks the market tends to stack orders at even dollar amounts and the stock
may bounce off the $10 price level.
Now let me tell you what really happens.
Many traders promise themselves that they are going to sell if the stock goes
below their stop loss point and take the small loss. When it gets to their stop
loss point, they convince themselves that the stock is going to turn around and
that they should hang on. They may go to a message board, look for some
comments and find lots of positive remarks, which of course confirms that they
should hang on and wait for the stock to bounce back. Of course, most people
who post on message boards own the stock and are trying to get others to own it
so the stock will stop going down.
Stocks go down because there is either something wrong, or the market’s
psychology turns negative. Either way, you don’t want to be around. So long as
you are smart in where you set your stop loss, you must always have the
discipline to take the loss and walk away.
Trading stocks is a probability game, as you can’t be right all the time. When
you are wrong, limit your losses. When you are right, let the profits run until
the market tells you it is time to hit the eject button. Sounds easy, but doing
it is hard. Having the discipline to do so separates those who beat the market
from those who wish they could.
Enough Said.
***Stockscores.com Feature Strategy ***
If you are looking for a more conservative investment, I recommend using the
Sector Watch tool as it considers the larger and more established names of a
particular sector. Plus, it is very easy to use, as the cream rises to the top
with this tool, and you can quickly apply basic chart analysis to stocks that
have strong technical scores.
For example, as of Friday the US sector with the highest average Stockscores is
Security Brokers and Dealers. I find this by clicking on Sector Watch along the
tool bar, click on the Sector Watch Tool logo and look at the grid of sectors
that shows up. I can then look at a grid of the individual stocks that make up
the sector by simply clicking on the name of the sector. When I click on
Security Brokers and Dealers I see that there are 12 stocks making up this
average, and each stock’s Stockscore is shown in the grid.
Visual inspection of charts is essential now, so I click on the View in Chart
Viewer link to look at a slide show of the sector’s component stocks. I want to
find stocks that are breaking out of some kind of consolidation and through
resistance. This is the best way to find stocks that may make market leading up
trends in the near term. I also want to make sure that the stock has not made
considerable gains already as these stocks are too risky.
Here are some brief comments on each of the stocks in this sector”
Bear Stearns (NYE:BSC) great uptrend, but we missed it and should leave it
alone now.
Donaldson, Lufkin and Jenrette (NYE:DLJ) breaking from a rising bottom, this
stock has excellent potential to move higher.
E-Trade (NSD:EGRP) ugggh. Leave it as there is too much pessimism here.
AG Edwards (NYE:AGE) good if you own it, but we missed it so let it go.
Goldman Sachs (NYE:GS) gapped up through resistance, this stock looks very
good.
Legg Mason (NYE:LM) bouncing from support and has pretty good potential.
Lehman Brothers (NYE:LEY) a bit risky, but looks very good and should go
higher.
Merrill Lynch (NYE:MER) pretty nice, worth considering.
Morgan Stanley Dean Witter (NYE:MWD) breaking through long standing
resistance, this stock looks good too.
Paine Webber Group (NYE:PWJ) I have no idea if this is true, but this chart
looks like that of a company that is being bought at about $70 a share. No
upside potential if that is the case so leave it to the arbitrageurs.
Raymond James Financial (NYE:RJF) kind of skittish, we can do better than
this.
Charles Schwab (NYE:SCH) decent, and should do better, but not as good as the
others that I have pinpointed as strong.
***Stockscores.com Site Tip of the Week***
The charts that are shown on Stockscores.com are updated with a 20-minute
delay, as are the quotes. The scores are calculated based upon the market
activity of the most previous closed trading session. If you want to check out
how your stock is doing during the day, use Stockscores.com as you will be able
to see how the chart looks as well. But remember that the Score will not
reflect the current trading activity until after the market is closed and our
database is updated.
***Stockscores.com Perspective Daily Edition***
Each day, we scan the market for opportunities and reveal only the best to our
Daily Edition subscribers by email. Plus, we provide comments on past features
with regular updates, helping you understand how to trade these features.
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***References***
To get the Stockscore on any of over 20,000 North American stocks:
stockscores.com
For a background on the theories used by Stockscores:
stockscores.com
For strategies that can help you find new opportunities:
stockscores.com
To scan the market using extensive filter criteria:
stockscores.com
To build a portfolio of stocks and view a slide show of their charts:
stockscores.com
To see which sectors are leading the market, and the stock components:
stockscores.com
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Disclaimer
__________
This is not an investment advisory, and should not be used to make investment
decisions. Information in Stockscores Perspectives is often opinionated and
should be considered for information purposes only. No stock exchange anywhere
has approved or disapproved of the information contained herein. There is no
express or implied solicitation to buy or sell securities. The writers and
editors of Perspectives may have positions in the stocks discussed above and
may trade in the stocks mentioned. Don't consider buying or selling any stock
without conducting your own due diligence. |
