January 13th - Dipping My Toe In

Greetings and salutations (done in my best Christian Slater voice).

After markets closed on January 12th, I spent a considerable amount of time at the Stockscores website running market scans. Market scans are scans of the market done by the Stockscores server for stocks that meet certain criteria for different strategies. I have identified the following strategies as ones I can do when I buy long:

Day Trading
Superheroes
Hitting Into The Gap
Interday Pull Backs

Swing Trading
Hitting Floors
Overnight Holds
Pull Back Plays

Position Trading
Optomistic Consolidations
Abnormal Reversals
Sentiment Crossover
Bottom Fishing
Long-term Breakouts
Stockscores Simple

I avoided the Day Trading strategies since my proficiency must go up first. Many of the Position Trading strategies are for strong bull markets but I did review the stocks matching the Sentiment Crossover strategy. On Swing Trading strategies, since the market was closed when I did my scans, Overnight Holds was out - plus it is more of a bull market strategy which we are definitely not in at the moment - but I did review the Hitting Floors and Pull Back Plays candidates.

The procedure is to look at the candidates for each strategy that come up when you run the market scan and then identify those stocks out of those that meet all of the criteria for the strategy. The market scan only selects stocks which may be good candidates, by the way. The onus is still on us to review the charts to determine if all the strategy criteria exist.

By the way, I was planning on paper trading only for a week or so - Trade Freedom allows you to use a demo version of the trading platform to paper trade $1000. Ah well, the best laid plan's of mice and idiots. I fell in love with a stock during my market scan and had to jump in for real.

In running the Pull Back Plays market scan, I came across two stocks which were strong candidates for consideration.

The Pull Back Play strategy simply looks for stocks that are trending upwards that are bouncing off their trend lines.

Some clarification for you:

Up trends tend to follow a trend line, basically a line of best fit drawn across the pull backs of each move a stock makes. A move is just that, a move in one direction (up or down). Eventually the stock stops moving in that direction and reverses course. If it stops moving up, a peak is formed. If it stops moving down, a valley is formed. If a stock makes a series of moves in the same direction, a trend is formed. The line of best fit, aka the trend line, of an up trending stock is drawn across the lows of the pull backs - you might think of them as the valleys at the start of each individual move up.

The Pull Back Play looks for stocks that are experiencing pull backs to their trend lines, which they then bounce off of. This indicates the stock is likely to go higher.

So I identified two stocks, EGY and TSYS, which looked good to bounce up and had high reward to risk ratios. Risk is the distance the stock is from Support (downside) and reward is the distance the stock is from its likely Resistance (upside).

Support is a value of the stock below which you will know your prediction of the stock's performance has been incorrect.

Resistance is the value of the stock where you think it is likely to stop going up.

If you have at least twice as much distance to resistance as you do to support, then the trade is favourable.

By the way, a fundamental law of the Stockscores Approach is "Plan Your Losses". This means, know where Support is located and respect it. If the stock moves below support, sell and take your loss. By admitting defeat when proven wrong, you save yourself much larger possible losses when the stock moves lower. Not admitting defeat is one of the reasons I lost so much of my money during Lesson #2 (See My Trading Strategy for more info).

So, after identifying the two stocks mentioned, I had a closer look at them. I determined that they both had about a 4-1 reward to risk ratio (good stuff) but TSYS was set up better to go higher because it had pulled back for more days in a row before moving higher that day.

I was so sure of TSYS that I violated my paper trading pledge and vowed to get up early the next day to buy the stock for real. This I did on the morning of January 13th. In the first ten minutes of trading, I bought 300 TSYS @7.73 (Nasdaq stocks are in US funds). I proceeded to watch this stock all day on the 15 minute charts as it followed a nice, leisurely up trend. It closed at 7.93, up about 2.5% on the day.

I went to bed dreaming of sugar plums and daily 2.5% returns. Oh, Madam Market, how you do teach a lesson.

Blissfully yours,
Mike The Naive Trader