In This Week’s Issue:

• Stockscores Webinar – How to Profit from the Stockscores Indicators
• Stockscores’ Market Minutes Video – Risk Management Matters
• Stockscores Trader Training – Return on Capital
• Stock Features of the Week – Opportunities in ETFs 

Stockscores Webinar – How to Profit from the Stockscores Indicators

There are a number of unique indicators offered through the Stockscores Market Scan and for use on Tradestation. During the presentation, Stockscores founder Tyler Bollhorn will demonstrate their use and power, and provide the back story on how they came to be.  http://www.stockscores.com/trader-training/upcoming-events/#events

Stockscores Market Minutes – Risk Management Matters

It is more important to manage risk on your trades than it is to make the right trades. You won’t be right all of the time so it is essential to limit the size of your losses. When you have a winner, let it run since the winning trades have to pay for the losers. Trade of the week on $FDX. Click Here to Watch

To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel

Trader Training – Return on Capital

A Stockscores user asked me a question that I think many people have, “If you have more trade opportunities than capital, how do you pick which trades to take?”

 The short and simple answer is to take the trades that give you the most bang for your buck. Let me explain.

We size our trade positions based on the risk of the trade. The risk of the trade is the difference between the entry price and the stop loss price. Divide the risk in to your risk tolerance amount and you have the number of shares you can buy.

Consider two trade possibilities, each with strong charts that show the same potential for price appreciation. The first has an entry price of $5 with support, and therefore our stop loss point, at $4.50. That means there is $0.50 of downside, or the potential for a 10% drawdown.

The second trade has an entry price of $20 with a $19 support price and stop loss point. On this trade, if wrong, we stand to lose $1 per share or 5% drawdown, since $1/$20 is 5%.

If we are willing to risk $500 on each trade, we will buy 1000 shares of the $5 stock for a total cost of $5,000 and 500 shares of the $20 stock for a total cost of $10,000. Each trade has the same amount of risk but the second trade requires more capital because the stock is less volatile. That also means the expectation for percentage gain on the second position is also less. The price volatility on the entry signal is a good predictor of what price volatility will be in the trend.

Clearly, the first trade gives more bang for the buck. We can use less capital for the same profit potential. We may believe both trades have the potential to make $1000 but the first trade will do it with half as much money invested. For a trader with limited capital, the first trade is the one to take.

Generally, lower priced stocks will be more volatile on a percentage basis, making them a source of greater percentage gain potential. You can place less capital in to a low priced stock to get the same dollar upside as a higher priced stock trade.

I did a quick survey of this week’s best gainers to confirm this fact. I ranked the 2000 most actively traded stocks in the US last week by percentage gain and focused on the top 20 gainers. Of the top 20, 17 were under $10. The other 3 were under $20.

The lesson here is to focus on lower priced stocks if you have less capital to trade with. Many will argue that these lower priced stocks are riskier and maybe dangerous for a risk averse trader. They are actually not riskier, they are more volatile. That means you have to take a smaller position size in them so that the risk of the trade does not exceed your risk tolerance.

By adjusting position size based on the difference between the entry price and stop loss price, you can make every stock trade have the same amount of risk. If the stock is volatile buy less. If your amount of capital is insufficient for all the trades you find, focus on the lower priced stocks.

There is one caveat to this style of risk management. Lower priced stocks tend to have an added element of risk because they have a greater potential for price gaps. Lower priced stocks tend to have less established or diversified businesses which means a problem with one of their businesses can have a major impact on share price. It is much easier for a small Biotech stock to gap down 30% on bad news than it is for Pfizer to. That means the low priced stocks you trade could blow through your stop loss point if bad news brings a big price gap.

That makes it important to not put all of your capital in to just a few low priced stocks. If you are going to focus on relatively cheap stocks then you must own a number of them so that a larger than expected loss on one of them does not bring your portfolio performance down significantly.

If you have less capital to trade with than what you would like, focus on the lower priced stocks. You can adjust your Stockscores Market Scans to include a price filter for stocks under $10 or even lower if you like. Just remember to size your positions based on the volatility of the stock, the difference between the entry price and support on the chart, where you will put your loss limit. By doing that, you can match the risk of the trade to your risk tolerance and use less capital to gather the same dollar profit potential.

I am working on a developing a new strategy for investors who want to trade Exchange Traded Funds. This will utilize weekly charts and seek abnormal action through trendlines. Here is a sneak peak at the sort of ETFs that this strategy will seek out, using either the Stockscores Market Scan on the Stockscores indicators for Tradestation.

1. T.XIU
T.XIU is an ETF based on the TSX 60 index. This market has underperformed the US but the action last week indicates that T.XIU is ready to catch up to its south of the border peers. Support at $22.

2. T.XEG
T.XEG is another recent underperformer, the Canadian Energy sector ETF may finally be turning higher after drifting lower the past 7 months. Support at $10.80.

References

• Get the Stockscore on any of over 20,000 North American stocks.
• Background on the theories used by Stockscores.
• Strategies that can help you find new opportunities.
• Scan the market using extensive filter criteria.
• Build a portfolio of stocks and view a slide show of their charts.
• See which sectors are leading the market, and their components.

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.