TheRumpledOne
6,411 posts
msg #48489
- Ignore TheRumpledOne |
12/9/2006 12:20:46 PM
Things to Look For
Stockscores.com Perspectives for the week ending December 8, 2006
There are a lot of things to consider when buying stocks. Since we are making our Christmas shopping lists, here is a list of things to look for in the stocks you are considering for your portfolio.
Breakdown of Market Efficiency
Most people, most of the time can not beat the stock market. The stock market is efficient at pricing in the fundamentals so success for most traders is random. Those who outperform the overall market do so by seeking opportunities where the efficiency of the stock market is breaking down.
Market efficiency can break down in two ways. First, some investors can be trading on information that the general public does not know about and therefore have an advantage in predicting future price movement.
Second, investors can be trading with emotion which affects their judgement of the stock, causing the market price to be too low or high for what the stock is really worth.
Both of these breakdowns create opportunity. Where you see evidence of new information or emotion affecting price there may exist an opportunity. Abnormal price and volume activity is often the evidence of new information and price volatility is often a sign of emotion.
Worthwhile Risk: Reward Ratio
A good trading opportunity is not being able to predict the stock is likely to go higher. Good trading opportunities come when the upside potential is better than the downside risk. We are never going to be right all of the time so we must learn to trade opportunities where the cost of being wrong is at least half of the reward for being right.
High Probability Chart Pattern
We may see breakdowns in market efficiency but this only becomes effective in picking stocks if we identify a high probability chart pattern that improves our potential for profit. Patterns like ascending triangles, pennants and flags are predictive, particularly when coupled with the abnormal activity component that is at the core of the Stockscores Approach.
Good Liquidity
Liquidity is a measure of how actively the stock is traded. The more shares that trade, the more times the stock trades, the more opinions are being cast in the market. It is easier, and cheaper, to go in and get out of a stock that is actively traded. The picture painted by the market in the form of a stock chart is more reliable when the stock is more actively traded.
Inner Strength
Your greatest enemy as a trader is yourself. Without the ability to be disciplined and follow a trading plan, most traders will fail even if they are very good at picking the right stocks. When you are considering a trade, make sure you make a plan and have the emotional control to follow the plan. If you don't, stay out of the market.
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