The Importance of Trading Less - Strategy of the Week

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Posted by Tyler Bollhorn - StockScores

on Tuesday, 14 November 2017 05:54

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perspectives commentary

In this week's issue:

Stockscores Free Webinars

What are the Economics of Stock Trading?

Nov 15, 2017 6:00 PM PST

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Whether you are a long term investor or a short term active trader, it is essential to understand the economics of trading. How should you measure your returns? What are the risks? How much capital does it take to trade? What are the potential gains? These questions and more will be addressed during this webinar. I will show performance data for my day, swing and position trading over the last few months.

Stockscores Market Minutes – Expect Failure

Whether it is the development of a new trading strategy or just the trades you make day to day, expect to fail often. Trading is simple, but it is not easy. Learn from your mistakes and don't let failure stop you from achieving success. That plus this week's Market Analysis and the trade of the week on RLOG.

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Trader Training – The Importance of Trading Less

It's better to miss a good trade than to take a bad one. Missing a good trade doesn't deplete your capital-it only fails to add to it. A bad trade will not only reduce the size of your trading account, it will eat up emotional capital and your confidence. 

 A losing trade is not a bad trade. Bad trades are simply taking the trade that doesn't meet your requirements. Bad trades come from working hard to see something that's not there, guided by your need to trade rather than the market offering a good opportunity.

I have read very few books about the stock market, but one that I've read more than once and that I think is a must-read for every investor is Reminiscences of a Stock Operator by Edwin Lefevre. Here is a wonderful quote from that book that captures the essence of what this chapter is about:

"What beat me was not having brains enough to stick to my own game-that is, to play the market only when I was satisfied that precedents favored my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily-or sufficient knowledge to make his play an intelligent play." 
-Reminiscences of a Stock Operator

I advise all my students that they will make more money by trading less, at least so long as trading less is the result of having a high standard for what they trade. If you tell yourself you're limited to only making 20 trades a year, you're probably going to be very fussy about what trades you take. With less than two trades to be made each month, only the very best opportunities will pass your analysis. All of the "maybes" or "pretty goods" will get thrown out.

We take the pretty good trades because we're afraid of missing out. It's painful to watch a stock you considered buying but passed on go up. You remember this pain and the next time you see something that looks pretty good, you take it with little regard for the expected value of trading pretty good opportunities.

Pretty good means the trade will make money some of the time and lose some of the time, and the average over a large number of trades may be close to breaking even. The fact that one pretty good trade did well is reasonable and expected. In the context of expected value, taking those pretty good trades many times will lead to less than stellar results when the losers offset the winners.

You shouldn't judge your trading success one trade at a time. You must look at your results over a large number of trades. To maximize overall profitability requires you to have a high standard for what trades you make. Maintaining that standard will be easier if you take the trades that stand out as an ideal fit to your strategy, not by taking those that are marginal and require a lot of hard work to uncover.

Ran the Abnormal Breaks Market Scans for the US and Canada today, did not find too much I like but there is one stand out, listed on both the TSX and Nasdaq.

Three months of sideways trading on T.APS and APTO with a break to new highs today on strong volume. Support at $1.60 on the US listing and $2 on the Canadian.

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This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Foundation 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 this newsletter 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.


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